Annual Report (ESEF) • Apr 25, 2024
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SFA_EN.pdf 097900BGGW0000048796-20231231-EN-CON.pdf SFA_Annual_2023_cons_Declaration_by_responsible_directors_EN.pdf Annual consolidated financial statements of “Sopharma” AD as of 31 December 2023 Contents: Consolidated annual financial statements according to IFRS Notes to the consolidated financial report according to IFRS Management report Corporate governance declaration Non-financial declaraction Declaration by responsible persons Auditors’ report Audtors’ declaration Sopharma AD | 16 Iliensko Shose Str. | 1220 Sofia, Bulgaria | tel: +35928134200 | fax: +35929360286 | [email protected] sopharmagroup.com SOPHARMA GROUP 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 Preparer: Lyudmila Bondzhova Head of Legal Department Alexander Yotov Registered Address: Sofia 16, Iliensko Shousse Str. Lawyer: Ventsislav Stoev Stefan Vachev Servicing Banks: KBC Bank Bulgaria AD DSK Bank EAD Eurobank Bulgaria AD ING Bank N.V. - Sofia Branch UniCredit Bulbank AD Citibank Europe AD, Bulgaria Branch Municipal Bank AD Auditors: Baker Tilly Klitou and Partners EOOD SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 CONSOLIDATED ANNUAL STATEMENT OF COMPREHENSIVE INCOME 1 CONSOLIDATED ANNUAL STATEMENT OF FINANCIAL POSITION 2 CONSOLIDATED ANNUAL STATEMENT OF CASH FLOWS 3 CONSOLIDATED ANNUAL STATEMENT OF CHANGES IN EQUITY 4 NOTES TO THE CONSOLIDATED ANNUAL FINANCIAL STATEMENTS 1. BACKGROUND INFORMATION ON THE GROUP 5 2. MATERIAL ACCOUNTING POLICIES OF THE GROUP 24 3. REVENUE FROM CONTRACTS WITH CUSTOMERS 81 4. OTHER OPERATING INCOME AND LOSSES 82 5. MATERIALS AND CONSUMABLES USED 83 6. HIRED SERVICES EXPENSE 84 7. EMPLOYEE BENEFITS EXPENSE 84 8. OTHER OPERATING EXPENSES 85 9. IMPAIRMENT OF ASSETS 85 10. IMPAIRMENT OF NON-CURRENT ASSETS OUTSIDE THE SCOPE OF IFRS 9 86 11. FINANCE INCOME 86 12. FINANCE COSTS 86 13. GAINS/LOSSES FROM ASSOCIATES AND JOINT VENTURES 87 14. INCOME TAX EXPENSE 87 15. OTHER COMPREHENSIVE INCOME 89 16. PROPERTY, PLANT AND EQUIPMENT 90 17. INTANGIBLE ASSETS 93 18. INVESTMENT PROPERTY 95 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES 97 20. OTHER LONG-TERM EQUITY INVESTMENTS 104 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES 106 22. OTHER LONG-TERM RECEIVABLES 107 23. INVENTORIES 108 24. TRADE RECEIVABLES 110 25. RECEIVABLES FROM RELATED PARTIES 113 26. OTHER SHORT-TERM RECEIVABLES AND ASSETS 115 27. CASH AND CASH EQUIVALENTS 117 28. EQUITY 117 29. LONG-TERM BANK LOANS 120 30. DEFERRED TAX ASSETS AND LIABILITIES 124 31. NON-CURRENT PAYABLES TO RELATED PARTIES 126 32. LONG-TERM EMPLOYEE BENEFIT OBLIGATIONS 126 33. LEASE LIABILITIES 130 34. GOVERNMENT GRANTS 131 35. OTHER NON-CURRENT LIABILITIES 132 36. SHORT-TERM BANK LOANS 132 37. TRADE PAYABLES 133 38. PAYABLES TO RELATED PARTIES 134 39. PAYABLES UNDER FACTORING AGREEMENT 135 40. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY 135 41. TAX PAYABLES 135 42. OTHER CURRENT LIABILITIES 138 43. CONTINGENT LIABILITIES AND COMMITMENTS 138 44. SEGMENT REPORTING 140 45. FINANCIAL RISK MANAGEMENT 142 46. ACQUISITIONS AND INCREASING INTERESTS IN SUBSIDIARIES 156 47. DISPOSAL OF SUBSIDIARIES AND JOINT VENTURES 157 48. RELATED PARTY TRANSACTIONS 159 49. EVENTS AFTER END OF THE REPORTING PERIOD 161 SOPHARMA GROUP CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 31 December 2023 2023 2022 Notes BGN'000 BGN'000 Revenue from contracts with customers 3 1 875 304 1 663 016 Other operating income/(losses), net 4 20 821 13 042 Changes in inventories of finished products and work in progress 11 866 9 713 Raw materials and consumables used 5 (103 861) (99 129) Hired services expense 6 (88 579) (70 126) Employee benefits expense 7 (170 740) (147 829) Depreciation and amortization expense 16, 17 (55 872) (52 099) Carrying amount of goods sold (1 376 508) (1 214 333) Other operating expenses 8 (14 321) (14 374) Profit from operations 98 110 87 881 Impairment of non-current assets outside the scope of IFRS 9 (1 890) (20 783) Finance income 11 4 406 3 304 Finance costs 12 (13 901) (9 417) Finance income / (costs), net (9 495) (6 113) Gain from associates and joint ventures, net 13 24 473 22 635 Gain on acquisition and disposal of subsidiaries - 1 456 Profit before income tax 111 198 85 076 Income tax expense 14 (11 324) (8 743) Net profit for the year 99 874 76 333 Other comprehensive income: Items that will not be reclassified to profit or loss: Remeasurement of property, plant and equipment 33 (991) Remeasurement of defined benefit pension plans (1 472) 1 498 Net change in the fair value of other long-term equity investments 15 1 766 (1 047) Income tax relating to items of other comprehensive income that will not be reclassified (3) 99 324 (441) Items that may be reclassified to profit or loss: Exchange differences on translating foreign operations (1 302) (4 637) Share of other comprehensive income of associates 4 893 (790) 15 3 591 (5 427) Other comprehensive income for the year, net of tax 3 915 (5 868) TOTAL COMPREHENSIVE INCOME FOR THE YEAR 103 789 70 465 Net profit for the year attributable to: Equity holders of the parent 95 977 71 121 Non-controlling interests 3 897 5 212 Total comprehensive income for the year attributable to: Equity holders of the parent 99 976 65 110 Non-controlling interests 3 813 5 355 Basic net earnings per share 28 BGN 0.73 0.59 Diluted net earnings per share 28 BGN 0.69 0.57 The accompanying notes on pages 5 to 162 form an integral part of the consolidated financial statements. Digitally signed by Ognian Ognian Ivanov Ivanov Donev Executive Director: Date: 2024.04.24 17:40:14 Donev Ognian Donev, PhD +03'00' Digitally signed by Boris Anchev Boris Anchev Borisov Finance Director: Date: 2024.04.24 17:48:11 Borisov Boris Borisov +03'00' LYUDMILA KRUMOVA Digitally signed by LYUDMILA Preparer: KRUMOVA BONDZHOVA Lyudmila Bondzhova BONDZHOVA Date: 2024.04.24 17:54:58 +03'00' Audit company Baker Tilly Klitou and Partners EOOD № 129: Digitally signed by Galina Dimitrova Galina Dimitrova IVAYLO Digitally signed by Lokmadjieva- Lokmadjieva-Nedkova IVAYLO YANCHEV Date: 2024.04.25 YANCHEV YANCHEV Nedkova Date: 2024.04.25 11:23:29 +03'00' YANCHEV 11:13:46 +03'00' Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD 1 SOPHARMA GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION as at 31 December 2023 Notes 31 December 31 December 2023 2022 BGN'000 BGN'000 ASSETS Non-current assets Property, plant and equipment 16 357 624 376 407 Intangible assets 17 57 829 48 151 Goodwill 17 3 439 3 522 Investment property 18 11 198 10 568 Investments in associates and joint ventures 19 231 292 162 844 Other long-term equity investments 20 3 942 4 778 Long-term receivables from related parties 21 53 353 67 471 Other long-term receivables 22 5 604 5 694 Deferred tax assets 30 2 818 2 052 727 099 681 487 Current assets Inventories 23 339 333 278 583 Trade receivables 24 264 955 224 442 Receivables from related parties 25 14 905 12 909 Other short-term receivables and assets 26 38 991 36 702 Cash and cash equivalents 27 128 879 19 855 787 063 572 491 TOTAL ASSETS 1 514 162 1 253 978 EQUITY AND LIABILITIES Equity attributable to equity holders of the parent Share capital 172 591 134 798 Reserves 167 987 47 503 Other equity components (reserve on warrant issue) 1 857 12 488 Retained earnings 395 897 509 869 28 738 332 704 658 Non-controlling interests 15 294 11 976 TOTAL EQUITY 28 753 626 716 634 LIABILITIES Non-current liabilities Long-term bank loans 29 56 462 27 759 Deferred tax liabilities 30 4 415 6 397 Non-current liabilities to related parties 31 16 914 24 494 Retirement benefit obligations 32 8 352 6 541 Lease liabilities 33 54 729 52 058 Government grants 34 4 931 6 155 Other non-current liabilities 35 5 543 6 594 151 346 129 998 Current liabilities Short-term bank loans 36 200 478 158 355 Current portion of long-term bank loans 29 6 132 9 758 Trade payables 37 193 932 175 567 Payables to related parties 38 101 063 4 904 Factoring agreement liabilities 39 - 1 875 Current portion of lease liabilities 33 13 424 12 874 Payables to personnel and for social security 40 24 385 21 780 Tax payables 41 8 485 8 436 Other current liabilities 42 61 291 13 797 609 190 407 346 TOTAL LIABILITIES 760 536 537 344 TOTAL EQUITY AND LIABILITIES 1 514 162 1 253 978 The accompanying notes on pages 5 to 162 form an integral part of the consolidated financial statements. The consolidated financial statements on pages 1 to 162 were approved for issue by the Board of Directors and signed on 24 April 2024 by: Digitally signed by Ognian Executive Director: Ognian Ivanov Donev Ivanov Donev Ognian Donev, PhD Date: 2024.04.24 17:40:47 +03'00' Finance Director: Digitally signed by Boris Anchev Borisov Boris Anchev Borisov Boris Borisov Date: 2024.04.24 17:50:00 +03'00' Digitally signed by LYUDMILA LYUDMILA KRUMOVA Preparer: KRUMOVA BONDZHOVA Lyudmila Bondzhova BONDZHOVA Date: 2024.04.24 17:55:48 +03'00' Audit company Baker Tilly Klitou and Partners EOOD № 129: Digitally signed by Digitally signed by Galina Dimitrova IVAYLO Galina Dimitrova IVAYLO YANCHEV Lokmadjieva- Lokmadjieva-Nedkova YANCHEV YANCHEV Date: 2024.04.25 Date: 2024.04.25 Ivaylo Yanchev Galina Lokmadjieva-Nedkova Nedkova YANCHEV 11:24:17 +03'00' 11:14:36 +03'00' Registered auditor Managing director Baker Tilly Klitou and Partners EOOD 2 SOPHARMA GROUP CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 31 December 2023 Notes 2023 2022 BGN'000 BGN'000 Cash flows from operating activities Cash receipts from customers 2 131 026 1 930 323 Cash paid to suppliers (1 832 582) (1 603 177) Cash paid to employees and for social security (165 523) (141 810) Taxes paid (except income taxes) (65 713) (65 217) Taxes refunded (except income taxes) 5 933 8 796 Income taxes paid (13 416) (9 905) Income taxes refunded - 49 Interest and bank charges paid on working capital loans (10 147) (5 921) Foreign currency exchange gains/(losses), net (1 658) (1 599) Other proceeds/(payments), net (2 889) (1 457) Net cash flows from operating activities 45 031 110 082 Cash flows from investing activities Purchases of property, plant and equipment (24 389) (19 347) Proceeds from sales of property, plant and equipment 15 029 1 923 Purchases of intangible assets (18 897) (4 309) Purchases of equity investments (13 440) (675) Proceeds from sales of equity investments 578 628 Proceeds from dividends from investments in associates 1 488 1 215 Proceeds from dividends from other long-term capital investments 26 33 Payments on acquisition of subsidiaries, net of cash received (9 347) (2 338) Proceeds from disposal of subsidiaries, net of the cash provided - 399 Purchases of investments in associates and joint ventures (27 933) (16 480) Proceeds from sale of investments in associates and joint ventures 2 845 - Proceeds/(payments) on transactions with non-controlling interests, net (905) (10 859) Loans granted to related parties (5 689) (13 500) Loan repayments by related parties 19 039 684 Loans granted to third parties (4 696) (1 962) Loan repayments by third parties - 4 Interest received on loans and deposits 3 442 965 Proceeds from guarantorship contracts - 13 Net cash flows used in investing activities (62 849) (63 606) Cash flows from financing activities Proceeds from short-term bank loans (including increases in overdrafts) 43 371 12 Repayment of short-term bank loans (including decreases in overdrafts) (1 187) (59 072) Proceeds from long-term bank loans 36 565 2 163 Repayment of long-term bank loans (11 542) (20 029) Proceeds under factoring agreement 700 30 950 Interest and charges paid under factoring agreement (79) (114) Interest and charges paid under investment purpose loans (379) (354) Proceeds from issued shares 156 084 - Lease payments (18 795) (16 081) Treasury shares (5 252) (1 919) Dividends paid (71 889) (11) Government grants 36 34 Proceeds/(payments) related to other equity components (warrants), net (791) 79 Net cash flows from/(used in) financing activities 126 842 (64 342) Net (decrease)/increase in cash and cash equivalents 109 024 (17 866) Cash and cash equivalents at 1 January 19 851 37 717 Cash and cash equivalents at 31 December 27 128 875 19 851 The accompanying notes on pages 5 to 162 form an integral part of the consolidated financial statements. Ognian Ivanov Digitally signed by Ognian Ivanov Executive Director: Donev Donev Date: 2024.04.24 17:41:12 +03'00' Ognian Donev, PhD Finance Director: Digitally signed by Boris Anchev Borisov Boris Anchev Borisov Date: 2024.04.24 17:50:34 +03'00' Boris Borisov LYUDMILA KRUMOVA Digitally signed by LYUDMILA Preparer: KRUMOVA BONDZHOVA Lyudmila Bondzhova BONDZHOVA Date: 2024.04.24 17:56:25 +03'00' Audit company Baker Tilly Klitou and Partners EOOD № 129: Digitally signed IVAYLO by IVAYLO Galina Dimitrova Digitally signed by Galina YANCHEV Dimitrova Lokmadjieva-Nedkova YANCHEV YANCHEV Lokmadjieva-Nedkova Date: 2024.04.25 11:24:52 +03'00' Date: 2024.04.25 YANCHEV 11:15:13 +03'00' Ivaylo Yanchev Galina Lokmadjieva-Nedkova Registered auditor Managing director Baker Tilly Klitou and Partners EOOD 3 SOPHARMA GROUP CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 31 December 2023 Attributable to owners of the equity of the parent Non-controlling Total interests equity Notes Share Treasury Statutory Revaluation reserve Reserve from Translation of foreign Other equity components Retained Total capital shares reserves - property, plant financial assets at fair operations reserve (reserve on warrants earnings and equipment value through other issue) comprehensive income BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Balance on 1 January 2022 28 134 798 (50 284) 66 201 36 788 1 644 682 12 512 444 634 646 975 11 893 658 868 Changes in owners' equity for 2022 Effect of treasury shares acquisition - (1 919) - - - - - - (1 919) - (1 919) Effects of rights sold under warrant issue - - - - - - - 103 103 - 103 Other equity components, incl.: - - - - - - (24) - (24) - (24) * transaction costs - - - - - - (24) - (24) - (24) Distribution of profit for: - - 2 427 - - - - (2 427) - - - * statutory reserves - - 2 427 - - - - (2 427) - - - Effects assumed by the non-controlling interest on: - - - - - - - (5 587) (5 587) (5 272) (10 859) * increase in the interest in subsidiaries - - - - - - - (5 587) (5 587) (5 272) (10 859) Total comprehensive income for the year, incl.: - - - (892) (1 047) (5 427) - 72 476 65 110 5 355 70 465 * net profit for the year - - - - - - - 71 121 71 121 5 212 76 333 * other comprehensive income, net of taxes - - - (892) (1 047) (5 427) - 1 355 (6 011) 143 (5 868) Transfer to retained earnings - - - (633) (37) - - 670 - - - Balance at 31 December 2022 28 134 798 (52 203) 68 628 35 263 560 (4 745) 12 488 509 869 704 658 11 976 716 634 Balance at 1 January 2023 134 798 (52 203) 68 628 35 263 560 (4 745) 12 488 509 869 704 658 11 976 716 634 Changes in owners' equity for 2023 Share capital issue 37 793 - 128 131 - - - (9 840) - 156 084 - 156 084 Effect of treasury shares acquisition (5 252) (5 252) (5 252) Effects from restructuring - 3 - (131) - - - 94 (34) 34 - Other equity components, incl.: - - - - - - (791) - (791) - (791) * transaction costs - - - - - - (791) - (791) - (791) Distribution of retained earnings from previous years for: (138 625) (138 625) (138 625) * divdiends from profit for 2022 (32 604) (32 604) (32 604) * advence six-month dividends (106 021) (106 021) (106 021) Distribution of profit for: - - - - - - - (77 308) (77 308) - (77 308) * dividends - - - - - - - (40 187) (40 187) - (40 187) * advance six month dividend from the profit for 2023 - - - - - - - (37 121) (37 121) - (37 121) Effects assumed by the non-controlling interest on: - - - - - - - (376) (376) (529) (905) * increase in the interest in subsidiaries - - - - - - - (376) (376) (529) (905) Total comprehensive income for the year, incl.: - - - 30 1 766 3 591 - 94 589 99 976 3 813 103 789 * net profit for the year - - - - - - - 95 977 95 977 3 897 99 874 * other comprehensive income, net of taxes - - - 30 1 766 3 591 - (1 388) 3 999 (84) 3 915 Transfer to retained earnings - - - (5 834) (1 820) - - 7 654 - - - Balance at 31 December 2023 28 172 591 (57 452) 196 759 29 328 506 (1 154) 1 857 395 897 738 332 15 294 753 626 The accompanying notes on pages 5 to 162 form an integral part of the consolidated financial statements. Digitally signed by Ognian Ivanov Donev Executive Director: Ognian Ivanov Donev Date: 2024.04.24 17:41:46 +03'00' Ognian Donev, PhD Digitally signed by Boris Anchev Finance Director: Boris Anchev Borisov Borisov Boris Borisov Date: 2024.04.24 17:51:15 +03'00' Preparer: LYUDMILA KRUMOVA Digitally signed by LYUDMILA KRUMOVA Lyudmila Bondzhova BONDZHOVA BONDZHOVA Date: 2024.04.24 17:57:10 +03'00' Audit company Baker Tilly Klitou and Partners EOOD № 129: IVAYLO Digitally signed by Digitally signed by IVAYLO YANCHEV YANCHEV YANCHEV Galina Dimitrova Galina Dimitrova Ivaylo Yanchev Galina Lokmadjieva-Nedkova Date: 2024.04.25 Lokmadjieva-Nedkova YANCHEV 11:15:48 +03'00' Lokmadjieva- Registered auditor Managing director Date: 2024.04.25 Baker Tilly Klitou and Partners EOOD Nedkova 11:25:22 +03'00' 4 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 1. BACKGROUND INFORMATION ON THE GROUP Sopharma Group (the Group) is comprised of the parent company and its seventy-seven (31 December 2022: seventy-seven) subsidiaries. In addition, the Group has investments in four associates and one joint venture (31 December 2022: in two associates and one joint venture). Parent company Sopharma AD (the parent company) is a business entity registered in Bulgaria with a seat and registered management address: Sofia, 16, Iliensko Shousse St. The Company was registered with court on 15 November 1991 by Decision No 1/1991 of Sofia City Court. Explanation regarding the change in the name of the reporting entity after the end of the previous reporting period: During the year there was no change in the name of the reporting parent company. Subsidiaries The Group subsidiaries as at 31 December 2023 are as follows: • Sopharma Trading AD – a business entity registered in Bulgaria by Decision No. 3594/16.10.1998 of Varna District Court, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Pharmalogistica AD – a business entity registered in Bulgaria by Decision of Sofia City Court dated 12 August 2002, with a seat and management address: Sofia, 16, Rozhen Blvd.; • Electroncommerce EOOD – a business entity registered in Bulgaria by Decision of Sofia City Court under Company File No. 24456 of 1991, with a seat and management address: Sofia, 1, Samokovsko Shousse St.; • Phyto Palauzovo AD – a business entity registered in Bulgaria by Decision No. 20120924105551/24.09.2012 of the Registry Agency, with a seat and management address: Kazanluk, 110, 23rd Pehoten Shipchenski Polk Blvd.; • Sopharmacy EOOD – a business entity registered in Bulgaria by Decision No. 201501191300026/19.01.2015 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 2 EOOD – a business entity registered in Bulgaria by Decision No. 20150617110324/17.06.2015 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 3 EOOD – a business entity registered in Bulgaria by Decision No. 20151202165822/02.12.2015 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; 5 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 4 EOOD – a business entity registered in Bulgaria by Decision No. 20160229093338/29.02.2016 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 5 EOOD – a business entity registered in Bulgaria by Decision No. 20160301155620/01.03.2016 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 6 EOOD – a business entity registered in Bulgaria by Decision No. 20140127170842/27.01.2014 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 7 EOOD – a business entity registered in Bulgaria by Decision No 20170315161212/15.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 8 EOOD – a business entity registered in Bulgaria by Decision No 20170627142803/27.06.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12’; • Sopharmacy 9 EOOD – a business entity registered in Bulgaria by Decision No 20170911100706/11.09.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 10 EOOD – a business entity registered in Bulgaria by Decision No 20170911101412/11.09.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 11 EOOD – a business entity registered in Bulgaria by Decision No 20170302125338 /02.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 12 EOOD – a business entity registered in Bulgaria by Decision No 20170306085236/06.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 13 EOOD – a business entity registered in Bulgaria by Decision No 20170306080850/06.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 14 EOOD – a business entity registered in Bulgaria by Decision No 20170306081205/06.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; 6 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 15 EOOD – a business entity registered in Bulgaria by Decision No 20170302134305/02.03.2017 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 16 EOOD – a business entity registered in Bulgaria by Decision No 20180515105543/15.05.2018 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 17 EOOD – a business entity registered in Bulgaria by Decision No 20180515105543/15.05.2018 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Sopharmacy 18 EOOD – a business entity registered in Bulgaria by Decision No 20190228133836/28.02.2019 of the Registry Agency, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 12; • Veta Pharma AD - a business entity registered in Bulgaria under company file No. 581 dated 05.04.1999 of the Veliko Tarnovo District Court and with its seat and management address - the city of Veliko Tarnovo, 32 "Dulga Laka" Street; • Sopharmacy 19 EOOD (until 27 January 2021 it was called Valentina Vasileva – Lyulin EOOD) a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226110235 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 20 EOOD (until 16 February 2021 it was called Vasilka Lilovska EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518182226 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 21 EOOD (until 4 February 2021 it was called Venera Mutashka EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519084124 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 22 EOOD (until 17 February 2021 it was called Veselka Vassileva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090320091825 dated 20.03.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 23 EOOD (until 17 February 2021 it was called Victoria Angelova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604184353 dated 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; 7 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 24 EOOD (until 4 February 2021 it was called Desislava Yordanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604170149 dated 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 25 EOOD (until 4 February it was called Dimka Vladeva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519080611 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 26 EOOD (until 4 February 2021 it was called Donka Chivganova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226120647 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 27 EOOD (until 18 February 2021 it was called Ekaterina Mihaylova Shumen 1 EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604181926 dated 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 28 EOOD (until 27 January 2021 it was called Elka Neykova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227145039 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 29 EOOD (until 17 February 2021 it was called Emilia Angelova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090605085738 dated 05.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 30 EOOD (until 27 January 2021 it was called Zhuliana Kotova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227160338 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 31 EOOD (until 27 January 2021 it was called Ivan Ivanov 1 EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080630143914 dated 30.06.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 32 EOOD (until 2 February 2021 it was called Iliana Kalushkova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080630143914 dated 30.06.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; 8 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 33 EOOD (until 4 February 2021 it was called Irina Toncheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226112827 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 34 EOOD (until 17 February 2021 it was called Kapka Nikolova – Voenna Bolnitsa EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226165512 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 35 EOOD (until 16 February it was called Kostadin Gorchev EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090513180047 dated 13.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 36 EOOD (until 4 February it was called Krasimira Shunina EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519083827 dated19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 37 EOOD (until 4 February 2021 it was called Lora Doncheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226102708 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 38 EOOD (until 4 February 2021 it was called Lyudmila Zlatkova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519090345 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 39 EOOD (until 16 February 2021 it was called Lyudmila Kovacheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227150054 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 40 EOOD (until 2 February 2021 it was called Manik Burgazyan EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20081220153409 dated 20.12.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 41 EOOD (until 27 January 2021 it was called Mariyks Zhaygarova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519080839 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; 9 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 42 EOOD (until 17 February 2021 it was called Maria Agova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518183127 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 43 EOOD (until 4 February 2021 it was called Maria Gancheva EOOD); a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226105948 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 44 EOOD (until 4 February 2021 it was called Maria Kenova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090605134931 dated 05.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 45 EOOD (until 4 February 2021 it was called Maria Hristova – Motopista EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519091916 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 46 EOOD (until 17 February 2021 it was called Mariyana Markova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519083054 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 47 EOOD (until 17 February it was called Mary Ivanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227154137 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 48 EOOD (until 2 February it was called Nelly Stavreva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227155742 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 49 EOOD (until 4 February 2021 it was called Preslava Becheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518162442 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 50 EOOD (until 27 January 2021 it was called Rayna Madzharova – St. Geori Sofiyski EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227152516 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; 10 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 51 EOOD (until 27 January 2021 it was called Rumyana Ignatova - Gancheva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227153607 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 52 EOOD (until 17 February 2021 it was called Sashka Todorova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090518174837 dated 18.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 53 EOOD (until 7 February 2021 it was called Svetla Harizanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090226101122 dated 26.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 54 EOOD (until 17 February 2021 it was called Svetlana Pirpirova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519085825 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 55 EOOD (until 27 January 2021 it was called Ceiba Blagoevgrad 1 EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090414165833 dated 14.04.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 56 EOOD (until 17 February 2021 it was called Silvia Veneva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090519071228 dated 19.05.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 57 EOOD (until 18 February 2021 it was called Siyana Milanova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090604164039 dated 04.06.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 58 EOOD (until 27 January 2021 it was called Stoyanka Radenkova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090227160132 dated 27.02.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 59 EOOD (until 8 February 2021 it was called Ana Advzhieva EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090114162615 dated 14.01.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; 11 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 60 EOOD (until 2 February 2021 it was called Radina Bekova EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080422121447 dated 22.04.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 61 EOOD (until 2 February 2021 it was called Rumen Raynov EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20090114170550 dated 14.01.2009; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 62 EOOD (until 2 February 2021 it was called Hani Modhi EOOD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080512090050 dated 12.05.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 63 EOOD (until 2 February 2021 it was called CSC Franchise EAD), a business entity registered in Bulgaria by Decision of the Registry Agency, No2008041018022 dated 10.04.2008; with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St., Sopharma Business Towers, Building A, floor 13; • Sopharmacy 64 EOOD (until 6 July 2021 it was called Sanita Franchising AD), a business entity registered in Bulgaria by Decision of the Registry Agency, No 20080411103252 dated 11.04.2008; with a seat and management address: Sofia, 1220, Nadezhda Residential Area, 16, Rozhen Blvd; • Sopharma Poland Z.O.O., Poland, in liquidation – a business entity registered in Poland by Decision No. KRS 0000178554/04.11.2003 of XX Economic Division of Warsaw Regional Court Register, with a seat and management address: Poland, Warsaw, 58, Shashkova St.; • Sopharma Warsaw SP. Z.O.O., Poland – a business entity registered in Poland by Decision No. DSR 0000372245 of 17 December 2010 by XII Economic Division of the State Court Register of Warsaw, with a seat and management address: Poland, Warsaw, 8, Halubinskiego St.; • OOO Sopharma Ukraine, Ukraine – a business entity registered in Ukraine by Decision No. 10691020000029051/07.08.2012 in the Unified State Register of Legal Entities and Physical Entities-Entrepreneurs, with a seat and management address: Ukraine, Kiev, Oblonski Region, prospect Moskovskii No. 9, unit 4, floor 2, office 4-203; • PAO Vitamini, Ukraine – a business entity registered in Ukraine by Decision No. 133/15.04.1994 of Uman City Court, with a seat and management address: Ukraine, Cherkasy Province, Uman, 31, Leninski Iskri St.; • Sopharma Trading, Serbia – a business entity registered in Serbia by Decision No 07829531/ 05.02.1992 of the Business Registers Agency – Serbia, Belgrade, 48b Zorana Djindjica Boulevard; 12 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • TOO Sopharma Kazakhstan, Kazakhstan – a business entity registered in Kazakhstan by Decision No 5286-1910-04-ТОО/06.11.2014 of the Ministry of Justice, Auezov District, with seat and management address: Kazakhstan, Almaty, Auezov District, Mamir-4, home 190; • Pharmachim EOOD, Serbia – business entity registered in Serbia with BD 27219.2020 dated 14.04.2020 by the Business Registry Agency of Belgrade, with seat and management address: Republic of Serbia, Belgrade, 6, Vladimira Popovicha St. • Sopharma Rus OOO, Russia - a trading company registered in Russia with decision No. 1237700691524 dated 13.10.2023 of the Unified State Register of Legal Entities and with its registered office and management address - Russia, Moscow, Letnikovskaya St. no. 10. On 23 August 2023, the merger of Biopharm Engineering into Sopharma AD was entered in the Commercial Register at the Registration Agency. The merger of Biopharm Engineering AD (transforming company) into the parent company Sopharma AD (acquiring company) was implemented through the legal form of transformation regulated in the Commercial Law. As a result of the transaction, all assets of Biopharm Engineering AD are transferred to Sopharma AD, and Biopharm Engineering AD is terminated without liquidation. The purpose of the transaction on the transformation of the two companies was: • restructuring of the companies in the Sopharma group in order to eliminate duplicate activities; • focusing efforts on production and commercial activities, respectively on optimizing administrative costs; • increasing efficiency and achieving a synergistic effect both for the management and execution of production and commercial activities, as well as for cost optimization. Accounting method of accounting the merger For accounting purposes, 01.01.2023 was accepted as the date of the merger. Until that moment, Biopharm Engineering AD was a subsidiary of Sopharma AD. The transaction was treated as a restructuring of the activities of the two companies. On 11 November 2022, the Group divests itself of its participation in the company Rap Pharma International OOD. Joint ventures As at 31 December 2023, the Group’s joint venture is: • Momina Krepost AD – a business entity registered in Bulgaria by Decision No. 3426/1991 of Veliko Tarnovo District Court, with a seat and management address: Veliko Tarnovo, 23, Magistralna St. 13 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Associates The Group’s associates as at 31 December 2023 are as follows: • Doverie Obedinen Holding AD – a business entity registered in Bulgaria by Sofia City Court under Company File No. 13056 of 1996, with a seat and management address: 1594 Sofia, 82, Knyaz Dondukov Blvd; • Sopharma Properties REIT – a business entity registered in Bulgaria by Decision No. 1/24.03.2006 of Sofia City Court, with a seat and management address: Sofia, Izgrev Region, 5 Lachezar Stanchev St. • Sopharma Buildings REIT – a commercial company registered in the Sofia City Court with decision No. 1/14.08.2007 and with its registered office and management address in the city of Sofia at 1756, 5 Lachezar Stanchev Street. • Pharmanova D.O.O., Serbia – a commercial company registered in Serbia with decision No. 20408642 on 15.04.2008 by the Business Register Agency of the city of Belgrade and with its registered office and management address – Republic of Serbia, the city of Belgrade , "Baye Pivlianina" St. No. 1; 1.1. Ownership and management of the parent company Sopharma AD is a public company under the Bulgarian Public Offering of Securities Act. Starting from November 2011, the shares of the company are traded in the Warsaw Stock Exchange. The shareholding structure of the parent company as at 31 December 2023 is as follows: % Donev Investments Holding AD 38.57 Telecomplect Invest AD 16.15 Sopharma AD (treasury shares) 8.30 Other legal entities 22.81 Individuals 14.17 100.00 Sopharma AD has a one-tier management system with a five-member Board of Directors. Company's management in the form of Board of Directors is composed as at 31 December 2023 as follows: Ognian Donev, PhD Chairperson Vessela Stoeva Deputy Chairperson Bisera Lazarova Member Alexander Chaushev Member Ivan Badinski Member The parent company is represented and managed by its Executive Director Ognian Donev, PhD. Pursuant to a business management contract dated 9 June 2020, the Company’s Procurator is Simeon Donev. 14 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The Audit Committee supports the work of the Board of Directors and plays the role of those charged with governance that exercise monitoring and control over the internal control system, risk management and Company's system of financial reporting. The composition of the Audit Committee is as follows: Vasil Naidenov Chairman Tsvetanka Zlateva Member Kristina Atanasova – Elliot Member Name of the Group’s parent: No parent or other controlling entity have been identified other than the parent company exercising control over Sopharma AD. Name of the Group’s ultimate parent: No ultimate parent or other controlling entity have been identified other than the parent company exercising control over Sopharma AD. 1.2. Structure of the Group and principal activities The structure of the Group includes Sopharma AD as a parent company and the subsidiaries stated below: Subsidiaries 31.12.2023 31.12.2022 Date of Date of Interest % Interest % acquisition disposal Companies in Bulgaria of control of control/ Sopharma Trading AD 87.68 87.25 08.06.2006 Pharmalogistica AD 89.39 89.39 15.08.2002 Electroncommerce EOOD 100.00 100.00 09.08.2005 Biopharm Engineering AD - 97.15 10.03.2006 23.08.2023 Phyto Palauzovo AD 95.00 95.00 21.09.2012 Veta Pharma AD 99.98 99.98 11.11.2016 Sopharmacy EOOD 87.68 87.25 19.01.2015 Sopharmacy 2 EOOD 87.68 87.25 17.06.2015 Sopharmacy 3 EOOD 87.68 87.25 02.12.2015 Sopharmacy 4 EOOD 87.68 87.25 29.02.2016 Sopharmacy 5 EOOD 87.68 87.25 01.03.2016 Sopharmacy 6 EOOD 87.68 87.25 03.12.2015 Sopharmacy 7 EOOD 87.68 87.25 15.03.2017 Sopharmacy 8 EOOD 87.68 87.25 27.06.2017 Sopharmacy 9 EOOD 87.68 87.25 11.09.2017 Sopharmacy 10 EOOD 87.68 87.25 11.09.2017 Sopharmacy 11 EOOD 87.68 87.25 07.12.2017 Sopharmacy 12 EOOD 87.68 87.25 07.12.2017 Sopharmacy 13 EOOD 87.68 87.25 07.12.2017 Sopharmacy 14 EOOD 87.68 87.25 07.12.2017 Sopharmacy 15 EOOD 87.68 87.25 07.12.2017 15 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Subsidiaries 31.12.2023 31.12.2023 Date of Date of acquisition disposal Companies in Bulgaria Interest % Interest % of control of control Sopharmacy 16 EOOD 87.68 87.25 15.05.2018 Sopharmacy 17 EOOD 87.68 87.25 15.05.2018 Sopharmacy 19 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 20 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 21 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 22 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 23 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 24 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 25 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 26 EOOD 87.68 87.25 01.10.2020 Sopharmacy 27 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 28 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 29 EOOD 87.68 87.25 01.10.2020 Sopharmacy 30 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 31 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 32 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 33 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 34 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 35 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 36 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 37 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 38 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 39 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 40 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 41 EOOD 87.68 87.25 01.10.2020 Sopharmacy 42 EOOD 87.68 87.25 01.10.2020 Sopharmacy 43 EOOD 87.68 87.25 01.10.2020 Sopharmacy 44 EOOD 87.68 87.25 01.10.2020 Sopharmacy 45 EOOD 87.68 87.25 01.10.2020 Sopharmacy 46 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 47 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 48 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 49 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 50 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 51 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 52 EOOD ** 87.68 87.25 01.10.2020 Sopharmacy 53 EOOD 87.68 87.25 01.10.2020 Sopharmacy 54 EOOD 87.68 87.25 01.10.2020 Sopharmacy 55 EOOD 87.68 87.25 01.10.2020 Sopharmacy 56 EOOD 87.68 87.25 01.10.2020 Sopharmacy 57 EOOD 87.68 87.25 01.10.2020 Sopharmacy 58 EOOD 87.68 87.25 01.10.2020 Sopharmacy 59 EOOD 87.68 87.25 01.10.2020 Sopharmacy 60 EOOD 87.68 87.25 01.10.2020 Sopharmacy 61 EOOD 87.68 87.25 01.10.2020 16 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Subsidiaries 31.12.2023 31.12.2023 Date of Date of acquisition disposal Companies in Bulgaria Interest % Interest % of control of control Sopharmacy 62 EOOD 87.68 87.25 01.10.2020 Sopharmacy 63 EAD 87.68 87.25 01.10.2020 Sopharmacy 64 AD 87.68 87.25 01.10.2020 * effective percentage of interest ** indirect interest Subsidiaries 31.12.2023 31.12.2022 Date of Date of Interest % Interest% acquisition disposal Companies abroad of control of control PAO Vitamini 100.00 100.00 18.01.2008 Sopharma Warsaw SP. Z.O.O. 100.00 100.00 23.11.2010 Sopharma Poland Z.O.O., Poland, in liquidation 60.00 60.00 16.10.2003 ООО Sopharma Ukraine 100.00 100.00 07.08.2012 ТОО Sopharma Kazakhstan 100.00 100.00 06.11.2014 Rap Pharma International OOD - - 14.04.2017 11.11.2022 Sopharma Trading d.o.o. 87.68 87.25 09.08.2017 Pharmachim EOOD 100.00 100.00 14.04.2020 Sopharma Rus OOO 100.00 - 13.10.2023 * effective percentage of interest ** indirect interest • Sopharmacy EOOD is a subsidiary of Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy EOOD; • Sopharmacy 2 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 2 EOOD; • Sopharmacy 3 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 3 EOOD; • Sopharmacy 4 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 4 EOOD; • Sopharmacy 5 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 5 EOOD; • Sopharmacy 6 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 6 EOOD; • Sopharmacy 7 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 7 EOOD; • Sopharmacy 8 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 8 EOOD; 17 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 9 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 9 EOOD; • Sopharmacy 10 EOOD is a subsidiary of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 10 EOOD; • Sopharmacy 11 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 11 EOOD; • Sopharmacy 12 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 12 EOOD; • Sopharmacy 13 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 13 EOOD; • Sopharmacy 14 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 14 EOOD; • Sopharmacy 15 EOOD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 15 EOOD; • Sopharmacy 16 EOOD is a subsidiary through Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 16 EOOD; • Sopharmacy 17 EOOD is a subsidiary thro of Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 17 EOOD; • Sopharmacy 18 EOOD is a subsidiary through Sopharmacy EOOD whereas the latter holds 100% of the capital of Sopharmacy 18 EOOD; • Sopharmacy 19 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 19 EOOD; • Sopharmacy 20 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 20 EOOD; • Sopharmacy 21 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 21 EOOD; • Sopharmacy 22 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 22 EOOD; • Sopharmacy 23 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 23 EOOD; • Sopharmacy 24 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 24 EOOD; • Sopharmacy 25 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 25 EOOD; 18 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 26 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 26 EOOD; • Sopharmacy 27 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 27 EOOD; • Sopharmacy 28 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 28 EOOD; • Sopharmacy 29 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 29 EOOD; • Sopharmacy 30 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 30 EOOD; • Sopharmacy 31 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 31 EOOD; • Sopharmacy 32 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 32 EOOD; • Sopharmacy 33 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 33 EOOD; • Sopharmacy 34 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 34 EOOD; • Sopharmacy 35 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 35 EOOD; • Sopharmacy 36 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 36 EOOD; • Sopharmacy 37 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 37 EOOD; • Sopharmacy 38 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 38 EOOD; • Sopharmacy 39 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 39 EOOD; • Sopharmacy 40 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 40 EOOD; • Sopharmacy 41 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 41 EOOD; • Sopharmacy 42 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 42 EOOD; 19 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 43 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 43 EOOD; • Sopharmacy 44 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 44 EOOD; • Sopharmacy 45 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 45 EOOD; • Sopharmacy 46 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 46 EOOD; • Sopharmacy 47 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 47 EOOD; • Sopharmacy 48 EOOD is a subsidiary through Sopharmacy 61 EOOD whereas the latter holds 100% of the capital of Sopharmacy 48 EOOD; • Sopharmacy 49 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 49 EOOD; • Sopharmacy 50 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 50 EOOD; • Sopharmacy 51 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 51 EOOD • Sopharmacy 52 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 52 EOOD; • Sopharmacy 53 EOOD is a subsidiary through Sopharmacy 40 EOOD whereas the latter holds 100% of the capital of Sopharmacy 53 EOOD; • Sopharmacy 54 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 54 EOOD; • Sopharmacy 55 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 55 EOOD; • Sopharmacy 56 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 56 EOOD; • Sopharmacy 57 EOOD is a subsidiary through Sopharmacy 59 EOOD whereas the latter holds 100% of the capital of Sopharmacy 57 EOOD; • Sopharmacy 58 EOOD is a subsidiary through Sopharmacy 60 EOOD whereas the latter holds 100% of the capital of Sopharmacy 58 EOOD; • Sopharmacy 59 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 59 EOOD; 20 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 60 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 60 EOOD; • Sopharmacy 61 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 61 EOOD; • Sopharmacy 62 EOOD is a subsidiary through Sopharmacy 63 EOOD whereas the latter holds 100% of the capital of Sopharmacy 62 EOOD; • Sopharmacy 63 EAD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 63 EAD; • Sopharmacy 64 AD is a subsidiary through Sopharma Trading AD whereas the latter holds 100% of the capital of Sopharmacy 64 AD; • Sopharma Trading D.o.o., Serbia is a subsidiary through Sopharma Trading AD - Sopharma Trading AD owns 100% of the capital of Sopharma Trading D.o.o. The main subject of activity of the companies of the Group is concentrated in the pharmaceutical sector, with the exception of individual companies whose subject of activity is in the field of investments in securities. The parent company holds a license to manufacture medicinal products/import No. BG / MIA - 0384 dated 28.06.2023, issued by the BDA. The subject of activity of the companies of the Group is as follows: • Sopharma AD - production and trade of medicinal substances (active ingredients) and medicinal forms; scientific-research and engineering-implementation activity in the field of medicinal products; production and trade of veterinary medical products and performance of laboratory services related to the examination of animal blood samples; • Sopharma Trading AD - trade in pharmaceutical products; • Pharmalogistika AD - secondary packaging of pharmaceutical products and leasing of real estate; • Electroncommerce EOOD. - trade, transportation and packaging of radioactive materials and nuclear equipment for medicine, household electronics and electrical engineering; • Fito Palauzovo AD – production, collection, purchase, extraction and sale of herbs and medicinal plants; • Veta Pharma AD - production of medicinal, non-medicinal and other products; • Sopharmacy EOOD – franchising, know-how, property rental, trade and others; • Sopharmacy 2 EOOD - Sopharmasi 62 EOOD (with the exception of Sopharmasi 6 EOOD) – retail trade in medicinal products; • Sopharmacy 6 EOOD – online and offline retail trade of medicinal products; 21 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharmacy 63 EAD and Sopharmacy 64 AD - retail trade in medicinal products, franchising and other services; • PAO Vitamini, Ukraine - production and trade of pharmaceutical products; • OOO Sopharma Ukraine, Ukraine - trade in pharmaceutical products and market and public opinion research; • Sopharma Trading D.o.o. - wholesale trade in medicinal products; • Sopharma Poland Z.O.O., Poland, in liquidation - research of the market and public opinion; • Sopharma Warsaw SP. Z.O.O., Poland - wholesale trade in pharmaceutical and medical goods and market research and public opinion; • Sopharma Kazakhstan LLP, Kazakhstan - trade in pharmaceutical products; • Farmahim EOOD, Serbia – consulting activity. • Sopharma Rus OOO, Russia - wholesale trade in pharmaceutical products and market and public opinion research. The parent company and the subsidiaries Sopharma Trading AD, Pharmalogistica AD, Electroncommerce EOOD, Biopharm Engineering AD, Phyto Palauzovo AD, Sopharmacy EOOD, Sopharmacy EOOD, Sopharmacy 62 EOOD, Sopharmacy 63 EAD and Sopharmacy 64 AD perform their activities in Bulgaria. Sopharma Poland Z.O.O. (in liquidation) and Sopharma Warsaw SP. Z.O.O. operate in Poland; PAO Vitamini, OOO Sopharma Ukraine – in Ukraine; Sopharma Trading d.o.o. and Pharmachim EOOD – in Serbia; TOO Sopharma Kazakhstan – in Kazakhstan; Sopharma Rus OOO – in Russia. As at 31 December 2023, the interest of the Group in joint ventures is as follows: • Momina Krepost AD – 37.46% interest of Sopharma AD. The principal activities of the joint venture include development, implementation and production of human and veterinary medical products. It has been a Joint venture for the Group since 10 March 2021. As at 31 December 2023, the interest of the Group in associates is as follows: • Doverie Obedinen Holding AD – 23.46% interest of Sopharma AD. The principal activities of the company include acquisition, management, assessment and sale of shares in Bulgarian and foreign companies – legal entities. • Sopharma Properties REIT – 45.65% interest of Sopharma AD. The principal activities of the company include investing cash raised by issues of securities in real estate through purchase pf right of ownership and other rights in rem over real estate, construction and enhancements in order to provide the real estate for management, lease and/or sale. 22 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Sopharma Buildings REIT – 31.47% participation of Sopharma AD. The subject of the company's activity is the investment of funds raised through the issuance of securities in real estate (real estate securitization) through the purchase of ownership rights and other real rights over real estate, renting, leasing, leasing and/or selling. them • Pharmanova D.O.O. – 25% participation of Sopharma AD. The subject of the company's activity is the production of pharmaceutical products. As of the date of these consolidated annual financial statements, the average number of Group's personnel was 4,721 workers and employees (2022: 4,764 workers and employees). 1.3. Main indicators of the economic environment Currency exchange rates are among the main economic indicators of the business environment that have affected the activities of the Group companies throughout the period 2021 – 2023. The relevant exchange rates are presented in the table below: Indicator 2021 2022 2023 USD/BGN average for the year/period 1.65419 1.86030 1.79134 USD/BGN at end of the year/period 1.72685 1.83371 1.76998 PLN/BGN average for the year/period 0.42841 0.41760 0.43095 PLN/BGN at end of the year/period 0.42547 0.41784 0.45070 RSD/BGN average for the year/period 0.01663 0.01665 0.01668 RSD/BGN at end of the year/period 0.01663 0.01667 0.01669 UAH/BGN average for the year/period 0.06065 0.05795 0.04945 UAH/BGN at end of the year/period 0.06329 0.05022 0.04633 EUR/BGN average for the year/period 1.95583 1.95583 1.95583 EUR/BGN at end of the year/period 1.95583 1.95583 1.95583 1 BYN/BGN average for the year/period 0.65183 - - 1 BYN/BGN at end of the year/period 0.67921 - - KZT/BGN average for the year/period 0.00388 0.00404 0.00397 KZT/BGN at end of the year/period 0.00401 0.00397 0.00389 RUB/BGN at end of the year/period - - 0.02140 RUB/BGN at end of the year/period - - 0.01985 MDL/BGN average for the year/period 0.09352 0.09835 - MDL/BGN at the end of the year/period 0.09736 0.09597 - Source: BNB, National Banks of Ukraine, Poland, Serbia, Belarus, Kazakhstan and Moldova. 1.4. Macroeconomic situation The parent company and a large part of the subsidiaries in the Group carry out their activities in the conditions of increasing inflation. The management managed to maintain a good financial condition of the companies in the Group by indexing the income and expenses within reasonable limits. The group maintains a stable capital base and debt ratio. 23 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 1.5. War in Ukraine – impact and effects On 24 February 2022, a military conflict began between Russia and Ukraine. As a result, many countries imposed sanctions on certain natural persons and legal entities in Russia, as well as on the state itself. The Russia-Ukraine conflict and the related economic sanctions and other measures taken by governments around the world have had a significant effect both on the local economies of the counties, and on the global economy. Usually, in such conflicts, pharmaceuticals are not subject to sanctions or other restrictions, in order to avoid a humanitarian crisis. The Group has investments in two subsidiaries in Ukraine. As of the date of preparation of these consolidated financial statements, the assets of these subsidiaries are not physically affected by hostilities. 1.6. Climate matters The Group considers environmental protection and the slowing down of climate change to be part of its corporate social policy and develops its activities in accordance with environmental protection requirements. The Groups applies measures for: separate waste collection, minimizing, utilization and recycling of manufacturing and general waste; providing appropriate training to staff on matters related to environmental protection and pollution prevention. The Group actively invests in renewable energy sources for own use. As of December 31, 2023, the Group has not identified significant risks caused by climate change that would affect the Group's assets and liabilities. The Group is monitoring changes in legislation resulting from climate issues and at this stage has not identified a possible direct impact on the Group's future cash flows, financial results and financial position. 2. MATERIAL ACCOUNTING POLICIES OF THE GROUP 2.1. Basis for preparation of the consolidated financial statements The consolidated financial statements of Sopharma Group for the year ended 31 December 2023 have been prepared in accordance with all International Financial Reporting Standards (IFRS), which comprise Financial Reporting Standards and the International Financial Reporting Interpretations Committee (IFRIC) interpretations, approved by the International Accounting Standards Board (IASB), as well as the International Accounting Standards (IAS) and the Standing Interpretations Committee (SIC) interpretations, approved by the International Accounting Standards Committee (IASC) and have been accepted by the Commission of the European Union. IFRSs as adopted by the EU is the commonly accepted name of the general-purpose framework – the basis of accounting equivalent to the framework definition introduced by § 1, p. 8 of the Additional Provisions of the Accountancy Act "International Accounting Standards" (IASs). The Group’s consolidated financial statements have been prepared on a going-concern basis, which assumes that the Group will continue its existence for the foreseeable future. 24 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 For the current financial year, the Group has adopted all new and/or revised standards and interpretations, issued by the International Accounting Standards Board (IASB) and respectively, by the International Financial Reporting Interpretations Committee (IFRIC), which have been relevant to its activities. The adoption of these standards and/or interpretations, applicable to entities in Bulgaria for annual reporting periods beginning on 1 January 2023 at the earliest, has not caused changes in Group’s accounting policies with the exception of some new and the expansion of already introduced disclosures, without leading to other changes in the classification or measurement of individual reporting items and transactions. The new and/or amended standards and interpretations include: • Amendments to IFRS 1 “Business Combinations” (in force for annual periods beginning on or after 1 January 2023, endorsed by EC). The changes: a) require disclosure of material information about accounting policies instead of significant accounting policies. b) explain how entities can identify material information about accounting policies and give examples of when information about accounting policies is likely to be material; c) clarify that information about accounting policies may be material by nature even when the amounts involved are immaterial; d) clarify that information about accounting policies is material if it is necessary for users of the entity's financial statements to understand other material information in the financial statements; and e) clarify that if the entity discloses immaterial information about accounting policies, this should not lead to the concealment of material information about accounting policies. Earlier application is allowed. • Amendments to IFRS 8 Accounting policy, changes in accounting estimates and errors (effective for annual periods from 01.01.2023, adopted by the EC). The changes are mainly aimed at estimates and relate to: a) "definition of changes in estimates" has been replaced by "definition of estimates". According to the new definition, estimates are values in the financial statements that are subject to uncertainty regarding their valuation; b) the entity develops estimates if the accounting policies require items in the financial statements to be valued in a manner that involves uncertainty regarding their valuation; (c) a clarification that a change in an estimate that results from new information or a new development does not constitute a correction of an error; and d) a change in estimate may have an impact on profit or loss for the current period or on profit and loss for the current and future periods. Earlier application is allowed. • IFRS 12 Income taxes (effective for annual periods from 01.01.2023, adopted by the EC). Amendments to IFRS 12 Income taxes – Deferred taxes relating to assets and liabilities arising from a single transaction. The amendments limit the scope of the exemption from recognition of deferred tax liabilities, as a result of which it does not apply to transactions 25 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 where, upon initial recognition, equal taxable and deductible temporary differences arise. Such transactions are the recognition of a right-of-use asset and lease obligations by lessees on the date of commencement of the lease, as well as the accrual of obligations for dismantling, relocation and restoration included in the cost of the relevant asset. On entry into force of the amendments, businesses should recognize each deferred tax asset (to the extent that it is probable that taxable profit will exist against which the deductible temporary differences can be utilised) and deferred tax liability (for all taxable temporary differences) in accordance with the criteria of IFRS 12 for transactions related to assets and liabilities arising from single transactions on or after the beginning of the earliest comparative period presented in the financial statements. Entities recognize the cumulative effect of the initial application of the amendments as an adjustment to the opening balance of retained earnings or another component of equity, if appropriate at that date. • IFRS 12 Income Taxes - International Tax Reform - Model Second Pillar Rules (effective immediately upon issue as well as for annual periods from 01.01.2023, adopted by the EC). The amendments clarify that IAS 12 applies to income taxes arising from tax laws enacted or substantially enacted to implement second pillar model rules issued by the Organization for Economic Co-operation and Development (OECD), including . tax laws introducing permissible minimum national additional taxes described in these rules, called second- pillar legislation or second-pillar income taxes. The amendments introduce a temporary exception to the standard's requirement to allow entities not to recognize deferred tax assets and liabilities related to second pillar income taxes and not to disclose information related to them. Enterprises should disclose the fact that they have applied the exception for non- recognition of deferred tax assets and liabilities related to second pillar taxes and for non- disclosure of related information. As of the date of this financial statement, the following amended standards and interpretations have been issued, but are not in force (and/or have not been adopted by the EC): • Changes in IFRS 1 Presentation of financial statements (effective for annual periods from 01.01.2024, adopted by the EC). These changes are aimed at the criteria for classifying liabilities as current and non-current. According to them, an entity classifies its liabilities as current or non-current depending on the rights that exist at the end of the reporting period and is not affected by the probability of whether it will exercise its right to defer settlement of the liabilities. The amendments clarify that "settlement" of liabilities means the transfer to a third party of cash, equity instruments, other assets or services. The classification does not apply to derivatives in convertible liabilities, which are themselves equity instruments. Changes are applied retrospectively. Earlier application is permitted, but simultaneously with the application of the changes in IFRS 1 Presentation of financial statements regarding the classification of liabilities as current and non-current. • Changes in IFRS 1 Presentation of financial statements, non-current liabilities bound by restrictive conditions (effective for annual periods from 01.01.2024, adopted by the EC). 26 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 These changes specify that only restrictive covenants that the entity is required to comply with at or before the end of the reporting period affect the entity's right to defer settlement of the relevant liabilities for at least twelve months after the reporting date and accordingly only those should be taken into account in assessing the classification of liabilities as current or non-current. These agreements affect whether the right exists at the end of the reporting period, even if compliance with the conditions is assessed afterwards (for example, a restrictive covenant based on the entity's financial position at the end of the reporting period but assessed after the end of the period). Restrictive conditions that are calculated on the basis of the financial position of the enterprise after the end of the reporting period (for example, on the basis of the financial position of the enterprise six months after the reporting date) should not be taken into account when determining the classification of liabilities and the right to postpone them. However, entities should disclose information on restrictive covenants covering an observable period within twelve months after the end of the reporting period in order to assess the risk of whether the obligations would become due. Changes are applied retrospectively. Earlier application is permitted, but simultaneously with the application of the changes in IFRS 1 Presentation of financial statements regarding the classification of liabilities as current and non-current. • Changes in IFRS 7 Statement of cash flows and IFRS 7 Financial instruments: disclosure: supplier financing arrangements (effective for annual periods from 01.01.2024, not adopted by the EC). The changes are intended to increase the transparency of the reporting of supplier financing arrangements and to help users of financial statements assess their effect on the liabilities, cash flows and liquidity risk to which an entity is exposed by adding additional disclosures in relation to this type of arrangements. IFRS 7 proposes changes to add information to assess the effects of these arrangements on liabilities and cash flows as follows: a) order and conditions of the arrangements; b) the balance sheet value and the corresponding line from the statement of financial position of the obligations that are part of the arrangements; c) the book value and the corresponding line from the statement of financial position of the amounts that the supplier has already received from the financing provider (the financial institution); (d) the time range of payment terms for financial obligations under supplier financing arrangements and comparable terms for financial obligations not forming part of those arrangements; e) the nature and effect of non- monetary changes in the carrying amount of financial liabilities that are part of supplier financing arrangements. IFRS 7 adds requirements to disclose an assessment of the entity's exposure to liquidity risk and what effect termination of arrangements may have on the entity. The changes are applied retrospectively, with relief on non-disclosures for periods prior to the start date of the period in which the changes are first applied, and on certain quantitative disclosures relating to the start date of the period of initial application. Earlier application is allowed. 27 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Changes in IFRS 16 Leasing – Lease obligation upon sale and leaseback (effective for annual periods from 01.01.2024, adopted by the EC). The changes aim to further develop the requirements for the seller-lessee when measuring the lease liability in "sale-leaseback" transactions. They require that, after the commencement date of the lease (the date of delivery of the underlying asset), the seller-lessee determines "lease payments" and "revised lease payments" in a manner that does not recognize a gain or loss that relates to the right-of-use. held by him. The changes do not apply to the recognition of gains and losses in connection with partial or full termination of the lease agreement. Changes are applied retrospectively. Earlier application is allowed. • Changes in IFRS 21 Effects of changes in exchange rates: no exchange rates (effective for annual periods from 01.01.2025, not adopted by the EC). These changes clarify and require businesses to apply a consistent approach in determining: a) when a currency can be exchanged for another currency and when it cannot, as they introduce definitions for this. One currency can be exchanged for another when the entity can acquire the other currency within normal time limits, including normal administrative delays and a market mechanism that allows the currency exchange transaction to give rise to enforceable rights and obligations. If the entity can obtain only a minor part of the other currency on the valuation date for the specified purpose, it is considered that the currency cannot be exchanged into the other currency; b) what exchange rate to apply when one currency cannot be exchanged for another, indicating two mechanisms: the first is the use of an observable exchange rate - without further adjustments, an observable rate for another purpose and the first exchange rate at which the exchange can be done; the second is through the use of another evaluation technique; c) the information that the entity should disclose when one currency is not convertible into another to enable users of its financial statements to understand how this affects the entity's financial results, financial position and cash flows. Changes are applied retrospectively. Earlier application is allowed. • IFRS 10 (amended) – Consolidated financial statements and IAS 28 (amended) – Investments in associates and joint ventures – on sales or contributions of assets between an investor and its associates or joint ventures (with a deferred effective date subject to determination by CMSS). These changes are aimed at addressing the accounting treatment of sales or contributions of assets between an investor and its associates or joint ventures. They confirm that the accounting treatment depends on whether or not the assets sold or the non-monetary assets contributed constitute a substantial "business" within the meaning of IFRS 3. If these assets as a whole do not meet the definition of a “business” the investor recognizes a gain or loss up to the percentage corresponding to the interest of the other unrelated investors in the associate or joint venture. In cases where assets are sold or non- monetary assets are contributed that collectively constitute a "business", the investor fully recognizes the profit or loss from the transaction. These changes will be applied 28 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 prospectively. The CMMS postponed the start date of application of these changes indefinitely. The consolidated annual financial statements have been prepared on a historical cost basis except for: a/ the properties, machines and equipment, which are valued at a revalued value; and b/ investment properties and other long-term capital investments that are valued at their fair value as of the date of the consolidated statement of financial position. The Bulgarian subsidiaries of the Group, the associated companies: Doverie Obedinen Holding AD, Sopharma Imoti REIT and Sopharma Buildings REIT and the joint venture Momina Krepost AD keep their accounting records in Bulgarian Lev (BGN), which they accept as their functional and reporting presentation currency. Overseas subsidiaries organize their accounting and reporting according to the requirements of the relevant local legislation: OOO Sopharma Ukraine and PAO Vitamini - legislation of Ukraine, Sopharma Trading D.o.o., Farmahim EOOD and Farmanova OOO - legislation of Serbia, Sopharma Poland Z.O.O - in liquidation, Sopharma Warsaw SP. Z.O.O. - Polish legislation, Sopharma Kazakhstan LLP - legislation of Kazakhstan and Sopharma Rus OOO - legislation of Russia. Companies maintain their accounting records in the respective local currency - Ukrainian hryvnia (UAH), Serbian dinar (RSD), Euro (EUR), Polish zloty (PLN), Kazakhstan tenge (KZT) and Russian ruble (RUB). The data in the consolidated annual financial report and its annexes are presented in thousands of BGN, unless something else is explicitly disclosed, and the Bulgarian BGN is accepted as the Group's presentation currency. The individual financial statements of the foreign companies are recalculated from local currency to Bulgarian Lev for the purposes of each consolidated financial statement according to the Group's policy (Note No. 2.5). Presentation in the consolidated annual financial statements in accordance with International Financial Reporting Standards requires management to make best estimates, accruals and reasonable assumptions that have an effect on the reported amounts of assets and liabilities, income and expenses, and the disclosure of contingent receivables and liabilities at the date of the consolidated financial statements. These estimates, accruals and assumptions are based on information available at the date of the consolidated annual financial statements, therefore future actual results could differ from them (as in conditions of financial crisis, uncertainties are more significant). Items that involve a higher degree of subjective judgment or complexity, or where assumptions and accounting estimates are material to the consolidated financial statements, are disclosed in Note No. 2.32 and NotesNo. 16, 17, 18, 19, 20, 21, 22, 42. 29 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 2.2. Definitions Parent company This is a company that has control over one or more other companies, in which it has invested. Having control means that the investor is exposed, or has rights, to variable returns from its involvement with the investee, and has the ability to affect those returns through its power over the investee. The parent company is Sopharma AD, Bulgaria (Note 1). Subsidiary A subsidiary is a company, or another entity, that is controlled directly or indirectly by the parent company. The subsidiary companies are consolidated as from the date on which the effective control over them has been acquired by the Group and are de-consolidated as from the date when the control over them ceases and is transferred outside the Group. The full consolidation method is applied for their consolidation. The subsidiaries are presented in Note 1.2. Joint venture A joint venture is a company or another entity established by virtue of a contractual arrangement between the parent company as an investor and one or more other parties (companies) that start a common business undertaking, and on which the joint venturers (including the parent, which also has such a status) have a joint control. Joint control exists when it is contractually agreed that the strategic financial and operating decisions, relating to the joint venture, shall require mandatory unanimous consent of the joint venturers. The latter have rights to the net assets of the joint venture. The joint venture is included in the consolidated financial statements of the Group by applying the equity method – as from the date on which the joint control has been acquired by the venturer (the parent company) and its consolidation under this method is ceased when the joint venture is transformed into a subsidiary or when the joint control is transferred from the venturer to third parties. The joint venture is Momina Krepost AD (Note 1.2). Associate An associate is a company in which the investor (the parent company) exercises significant influence but is neither a subsidiary nor a joint venture with the investor. Significant influence is the right of participation in decision-taking with regard to financial and operating policies of the investee but is not control or joint control over these policies. Usually it exists in case of: (a) possession by the investor, directly or indirectly, of 20% to 50% of the shares in the capital of the investee company (including by virtue of an agreement between shareholders), and (b) in addition, the investor is represented in the managing body of the investee and/or participates in the decision-taking process with regard to the policy and strategy of the investee, and/or significant transactions exist between the investor and the investee. 30 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The associate is included in the consolidated financial statements of the Group by applying the equity method – from the date on which the investor (the parent company) acquires significant influence and its consolidation under this method is ceased when associate is transformed into a subsidiary or when it is accepted that the significant influence is transferred from the investor to third parties. The associates are Doverie Obedinen Holding AD, Sopharma Properties REIT, Sopharma buildings REIT and Pharmanova OOO. (Note 1.2). 2.3. Consolidation principles The consolidated financial statements include the financial statements of the parent company and the subsidiaries, the joint ventures and the associates, prepared as at 31 December, which is the reporting date of the Group’s financial year. The 'economic entity' assumption has been applied in the consolidation whereas for the measurement of non-controlling interest in business combinations and other forms of acquisition of subsidiaries for which the 'proportionate share of net assets' method has been chosen. For the purposes of consolidation, the financial statements of the subsidiaries, the joint ventures and the associates have been prepared for the same reporting period as the parent company using uniform accounting policies. 2.3.1. Consolidation of subsidiaries In the consolidated financial statements, the financial statements of the included subsidiaries are consolidated under the 'full consolidation' method, line-by-line, by applying accounting policies that are uniform with regard to the significant reporting items. The investments of the parent company are eliminated against its share in the equity of the subsidiaries at the date of acquisition. Intra-group transactions and balances, including unrealised intra-group gains and losses, are eliminated in full. The effect of deferred taxes has been taken into account in these eliminating consolidation entries. The shares of shareholders – third parties in the subsidiaries other than these of the shareholders of the parent company are presented separately in the consolidated statement of financial position, the consolidated statement of comprehensive income and the statement of changes in equity as 'non-controlling interest'. The non-controlling interest includes: (a) the combined share of the shareholders – third parties at the date of initial consolidation in the fair value (deemed cost) of all identifiable assets acquired, liabilities and contingent (crystallised) liabilities of the respective subsidiaries assumed, determined (based on the share) through the proportionate method, and (b) the change in the share of these third parties in the equity of each respective subsidiary from their initial consolidation to the end of the reporting period. 2.3.2. Acquisition of subsidiaries The acquisition (purchase) method of accounting is used on the acquisition of a subsidiary (entity) by the Group in business combinations. The consideration transferred includes the fair value at the date of exchange of the assets transferred, the incurred or assumed liabilities and the equity instruments issued by the acquirer in exchange of the control over the acquiree. It includes the fair value of any asset or liability resulting from a contingent consideration arrangement. 31 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Acquisition-related direct costs are recognised as current expenses when incurred except for the issue costs of debt or equity instruments, which are recognised as equity components. All identifiable assets acquired, liabilities and contingent (crystallised) liabilities assumed in the business combination are measured initially at their fair values at the date of exchange. Any excess of the aggregate consideration transferred (measured at fair value), the amount of non-controlling interest in the acquiree and, in a business combination achieved in stages, the acquisition-date fair value of the acquiree's previously held equity, over the acquired identifiable assets and assumed liabilities of the acquirer, is treated and recognised as goodwill. If acquirer's share in the fair value of acquired net identifiable assets exceeds the cost of acquisition of the business combination, this excess is recognised immediately in the consolidated statement of comprehensive income of the Group in the item 'gains/(losses) on acquisition/(disposal) of subsidiaries'. Any non-controlling interest in a business combination is measured based on the method of the 'proportionate share of the net assets' of the acquiree. When a business combination for the acquisition of a subsidiary is achieved in stages, all previous investments held by the acquirer at the acquisition date are revalued to fair value and the effects of this revaluation are recognised in the current profit or loss of the Group, respectively in 'finance income' and 'finance costs' or 'gains/(losses) from associates and joint ventures', and all previously recorded effects in other comprehensive income are recycled. The Group applies provisionary accounting for the items resulting from business combinations (acquisitions) when the initial reporting is not complete at the end of the reporting period when the business combinations was performed. This provisionary accounting is adjusted in the period of measurement, or additional assets and liabilities are recognised to reflect the new information on facts and circumstances which were already present at the date of acquisition. Adjustments made in the measurement period are stated retrospectively, and the comparatives are adjusted as at the acquisition date. 2.3.3. Disposal of subsidiaries Upon a sale or other form of loss (transfer) of control over a subsidiary: • The carrying amounts of the assets and liabilities (including any attributable goodwill) of the subsidiary are derecognised at the date when control is lost; • The non-controlling interest in the subsidiary is derecognised at carrying amount in the consolidated statement of financial position at the loss of control date, including all components of other comprehensive income related thereto; • The fair value of the consideration received from the transaction, event or operation that resulted in the loss of control is recognised; • All components of equity, representing unrealised gains or losses in accordance with the respective IFRS under the provisions of which these components fall, are reclassified to 'profit or loss for the year' or are transferred directly to retained earnings ; 32 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Any resulting difference as a 'gain or loss from a disposal (sale) of a subsidiary' attributable to the parent is recognised in the consolidated statement of comprehensive income. • The remaining shares held that form investments in associates, joint ventures or other long- term equity investments are initially measured at fair value at the date of sale and subsequently – following the accounting policy adopted by the Group (Note 2.13 and Note 2.14). The acquisition (purchase-and-sale) method is applied also in transactions of uniting and/or restructuring of entities under a common control with companies of the Group, provided that they represent direct acquisitions from the perspective of the parent company. 2.3.4. Transactions with non-controlling interests The Group treats transactions with non-controlling interests as transactions with holders of the common equity of the Group. The effects from sales of parent company’s shares, without loss of control, to holders of non-controlling interests are not treated as components of the current profit or loss of the Group but as movements directly in its equity components, usually to the ‘retained earnings’ reserve. And vice versa, when the parent company purchases additional shares from holders of non-controlling interest, without acquisition of control, the difference between the consideration paid and the relevant share acquired of the carrying amount of net assets of the subsidiary is also directly recognised in the consolidated statement of changes in equity, usually to the ‘retained earnings’ reserve. When the Group ceases to have control, joint control and significant influence, any retained minority investment as interest in the capital of the respective entity, is remeasured to its fair value, with the change in carrying amount recognised in profit or loss. Respectively, any amounts previously recognised in other comprehensive income in respect of that entity are accounted for as if the Group had directly disposed of all components related to the initial investment (in a subsidiary, joint venture or associate). 2.3.5. Consolidation of associates and joint ventures Associates and joint ventures are included in the consolidated financial statements by applying the equity method whereby the investment of the parent company is initially stated at cost and is subsequently recalculated to reflect the changes in investor’s (the parent company) share in the post-acquisition net assets of the associate or joint venture. Group's investment in an associate or joint venture includes also the goodwill identified on their acquisition net of any recognised impairment. The post-acquisition gains or losses for the Group (through the parent company) from associates and joint ventures for the respective reporting period represent its share in the net (post-tax) financial results of their business activities for the period, which share is recognised and presented on a separate line in the consolidated statement of comprehensive income. Analogously, the Group's share in post-acquisition changes in other components of comprehensive income of associates and joint ventures is also recognised and presented as movement in the other components of comprehensive income in the consolidated statement of comprehensive income, and respectively the consolidated reserves of the Group - in the statement of changes in equity. 33 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The Group recognises its share in the losses of associates and joint ventures up to the amount of its investment, including the granted internal loans, unless it has assumed certain obligations or payments on behalf of the associate or joint venture. The internal accounts and balances between the Group and associates and joint ventures are not eliminated. The unrealised gains or losses from transactions between them are eliminated to the percentage of Group's interest in the associates and joint ventures by also making tests for impairment in case of loss. The effect of deferred taxes on these consolidation procedures has also been taken into account. 2.4. Comparatives In these consolidated financial statements, the Group presents comparative information for one prior year. Where necessary, comparative data is reclassified (and restated) in order to achieve comparability in view of the current year presentation changes. 2.5. Functional currency and recognition of exchange differences The functional currency of the Group companies in Bulgaria being also presentation currency for the Group is the Bulgarian Lev. The Bulgarian Lev is fixed to the Euro, under the BNB Act, at the ratio BGN 1.95583:EUR 1. Upon its initial recognition, a foreign currency transaction is recorded in the functional currency whereas the exchange rate to BGN at the date of the transaction or operation is applied to the foreign currency amount. Cash, receivables and payables, as monetary reporting items, denominated in a foreign currency, are recorded in the functional currency by applying the exchange rate as quoted by the Bulgarian National Bank (BNB) for the last working day of the respective month. At 31 December, these amounts are presented in BGN at the closing exchange rate of BNB. The non-monetary items in the consolidated statement of financial position, which are initially denominated in a foreign currency, are accounted for in the functional currency by applying the historical exchange rate at the date of the transaction and are not subsequently re-valued at the closing exchange rate. Foreign exchange gains or losses arising on the settlement or recording of foreign currency commercial transactions at rates different from those at which they were converted on initial recognition, are recognised in the consolidated statement of comprehensive income in the period in which they arise and are presented net under 'other operating income/(losses)'. The functional currency of the companies in Poland (Sopharma Poland Z.O.O. (in liquidation) and Sopharma Warsaw SP. Z.O.O. is the Polish Zloty, of the subsidiary TOO Sopharma Kazakhstan – the Kazakhstan Tenge, of the subsidiaries in Ukraine (PAO Vitamini, OOO Sopharma Ukraine) – the Ukrainian Hryvnia, of the subsidiaries in Serbia (Sopharma Trading d.o.o., Pharmachim EOOD) – the Serbian Dinar, or the subsidiary Sopharma Rus OOO – Russian ruble. For the purposes of the consolidated financial statements, the financial statements of the subsidiaries abroad are restated from the functional currency of the respective subsidiary to the presentation currency (BGN) adopted for the consolidated financial statements, whereas: 34 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 (a) all assets and liabilities are restated to the currency of the Group by applying the closing exchange rate of the local currency thereto at 31 December or at the date of disposal of the company; (b) all income and expenses are restated to the currency of the Group at average rate of the local currency thereto for the reporting period (Note 2.6 and Note 2.7); (c) all exchange differences resulting from the restatements are recognised and presented as a separate component of equity in the consolidated statement of financial position – 'translation of foreign operations reserve', and (d) the exchange differences resulting from the restatement of the net investment in the companies abroad together with the loans and other currency instruments, accepted as hedge of these investments, are presented directly in equity. On disposal (sale) of a foreign operation (company), the cumulative amount of exchange differences that have been directly stated as a separate component of equity, are recognised as part of the profit or loss in the consolidated statement of comprehensive income on the line 'gains/(losses) on acquisition and disposal of subsidiaries, net', obtained on disposal (sale). Goodwill and adjustments to fair value arising on acquisition of a company abroad are treated analogously to the assets and liabilities of this company and are restated to the presentation currency at closing exchange rate. 2.6. Revenue 2.6.1. Recognition of revenue under contracts with customers The Group’s usual revenue is from the activities disclosed in Note 1.2. The Group’s revenue is recognised when control of the goods or services promised in the contract with the customer are transferred to the customer. Control is transferred to the customer upon satisfaction of the contractual performance obligations through transfer of the promised goods and/or provision of the promised services. Valuation of contracts with customers The Group accounts for a contract with a customer only if upon its enforcement: а/ it has commercial substance and rationale; b/ the parties to the contract have approved the contract (in writing, orally or in accordance with other customary business practices) and are committed to perform it; c/ each party’s rights can be identified; d/ the payment terms can be identified; and e/ it is probable that the Group will collect the consideration to which it is entitled upon performing its performance obligations. In assessing whether collectability of an amount of consideration is probable, the Group considers all relevant facts and circumstances of the transaction, including past experience, customary business practices, published rules and declarations made by the Group, collaterals and possibilities for satisfaction. A contract for which any of the above criteria has not yet been met is subject to new assessment in each reporting period. 35 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The consideration received under such contracts shall be recognised as a liability (contract liability) in the statement of financial position, until: а/ all criteria for recognizing a contract with a customer are met; b/ the Group meets its performance obligations and has received all or substantially all of the consideration (which is non-refundable); and/or c/ when the contract is terminated and the consideration received is non-refundable. Upon the initial assessment of its contracts with customers, the Group makes additional analysis and judgement whether two or more contracts should be combined and accounted for as a single contract, respectively whether the goods and/or services promised in each separate and/or combined contract should be accounted for as a single and/or multiple performance obligation(s). Each promise to transfer goods and/or services which are distinct (in nature and in the context of the contract), is accounted for as a separate performance obligation. The Group recognises revenue for each separate performance obligation on an individual contracts basis with customers, by analysing the type, term and conditions of each specific contract. For contracts with similar features, revenue is recognised on a portfolio basis, only if their grouping into a portfolio would not have a materially different impact on the financial statements. When another party is involved in providing goods or services to a customer, the Group shall determine whether the nature of its promise is a performance obligation to provide the specified goods or services itself (i.e. the Group is a principal) or to arrange for those goods or services to be provided by the other party (i.e. the Group is an agent). The Group is a principal and recognises as revenue the gross amount of consideration if it controls the specified goods and/or services prior to their transfer to the customers. If, however, the Group does not obtain control over the specified goods and/or services and its obligation is only to arrange for a third party to provide these specified goods and/or services, the Group is an agent and recognises as revenue the net amount it retains for the goods or services to be provided in its capacity as agent. 2.6.2. Measurement of revenue under contracts with customers Revenue is measured based on the transaction price determined for each contract. The transaction price is the amount of consideration to which the Group expects to be entitled, excluding amounts collected on behalf of third parties. Upon determining the transaction price, the Group takes into consideration the contractual conditions and its customary business practices, including the impact of variable consideration, the existence of a significant financing component in the contract, non- cash consideration, consideration payable to the customer (if any). In contracts with more than one performance obligations, the transaction price is allocated between each performance obligation based on the standalone selling prices of each good and/or service determined based on one of the methods permitted under IFRS 15, priority being given to the method of “observable selling prices”. The change in the scope or price (or both) of the contract is accounted for as a separate contract and/or as part of the existing contract, depending on whether the change is related to the addition of goods and/or services which are distinct, and on the price determined for them. Based on that: 36 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 а) the Group accounts for a contract modification as a separate contract if the scope of the contract increases because of the addition of promised goods or services that are distinct, and the price of the contract increases by an amount of consideration that reflects the entity's stand-alone selling prices of the additional promised goods or services; b) the Group accounts for the contract modification as if it were a termination of the existing contract and the creation of a new contract (future application), if the remaining goods and/or services are distinct from the goods and/or services transferred before the contract modification, but the change in the contract price does not reflect the standalone selling price of the goods and/or services added; c) the Group accounts for the contract modification as if it were a part of the existing contract (cumulative catch-up adjustment) if the remaining goods or services are not distinct and, therefore, form part of a single performance obligation that is partially satisfied. 2.6.3. Performance obligations under contracts with customers Sales of finished goods Wholesale of medicinal substances and medicinal forms are carried out in the country and abroad, both based on the Group’s specification (technology) and based on the customer’s specification (technology). Sales of finished goods based on the Group’s specifications Upon sales of finished goods based on the Group’s specifications, control is transferred to the customer at a point in time. Upon domestic sales, this is usually upon handover of the products and the physical possession of the customer thereof, when the customer has the ability to direct the use of, and by obtaining substantially all of the remaining benefits from, the finished goods. Upon export sales, the judgement at the point in which the customer obtains control over the finished goods sold is made based on the INCOTERMS applicable for the contract. Sales of products based on the customer’s specifications Regarding the finished goods based on the customer’s specifications, the Group has a legal and contractual restriction to direct for other use (sales to another party) and it has no alternative use. In these cases, the method of transfer is determined specifically for each contract with customers (at individual contract basis). For this purpose, it is determined if the Group is entitled to payment for the work performed to date, which should at least compensate for the cost incurred plus a reasonable margin should the contract be terminated for reasons other than the Group’s default (legally enforceable right to payment). If in the specific contract the Group has a legally enforceable right to payment, revenue is recognised over time, and the output method is used to measure the progress (stage of completion) of the contract. This method has been determined to the most appropriate to measure the progress, as the results achieved best depicts the Group’s activity towards complete satisfaction of the performance obligations. The progress is measured based on the units produced versus the total number of units ordered by the customer. 37 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The assessments of revenue, costs and/or stage of progress towards complete satisfaction of the performance obligations are reviewed at the end of each reporting period, incl. in case of change in the circumstance/occurrence of new circumstances. Each subsequent increase or decrease of expected revenue and/or costs is stated within profit or loss for the period in which the circumstances resulted in the review became known to the management. If in the specific contract the Group does not have a legally enforceable right to payment, revenue is recognised at a point in time, when control of the finished goods sold is transferred to the customer: when the finished goods are provided to the customer and it has physical possession thereon (for domestic sales) and in accordance with the contract’s applicable INCOTERMS (for export sales). Sales of pharmaceuticals and medical goods Sales of pharmaceuticals and medical goods by the Group’s distributor companies are to customers which are pharmacies, hospitals and wholesalers (wholesale) in the country and abroad. Wholesale Upon wholesale, the control of the goods sold is assessed to be transferred to the customer at a point in time. This is usually upon handover of the goods and the physical possession of the customer thereon, when the customer has the ability to direct the use of, and by obtaining substantially all of the remaining benefits from, the goods. Retail sales Upon retail sales, control of the goods sold is transferred to the customer upon their handover thereto. Customer loyalty programmes The Group maintains a loyalty programme whereby customers holding a club card may accumulate points for each purchase. The points accumulated may be exchanged for products participating in the programme without payment by the customer within a period set in the programme conditions. The Group management has determined that the loyalty points grant customers with a material right they cannot obtain without concluding a contract for the initial purchase. Therefore, the promise for future discounts through giving points is a separate performance obligation. The transaction price is allocated between the goods and/services already sold and the points which the Group expects to be claimed and compensated, based on the respective standalone selling prices. The standalone selling price of a point reflects the discount that the customer would get, adjusted for the probability of the points being claimed and compensated, determined based on information about the points used (past experience). The stand-alone selling price of the goods and/or services sold is determined based on the price list effective at the sale date. Payables under the loyalty programme are stated as a contract liability in the consolidated statement of financial position. The Group recognises revenue when the loyalty points are claimed or when their validity expires. The Group reviews its estimate of the points to be claimed and compensated at the end of each reporting period, and if necessary, adjusts the payable (contract liability) recognised, respectively the recognised revenue, through cumulative catch-up adjustment. 38 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Medical equipment (appliances) sales The sales of medical equipment usually include delivery, installation, commissioning, operation training and warranty service, and the selling price is total for the respective contract and/or equipment. Revenue from the sales of medical equipment is recognised on an individual contracts basis, and for each contract it is assessed whether the promised goods and/or services are separate performance obligations. This assessment is made based on the timing of transfer of control over the medical equipment and the interrelated components of the contract. Usually, control over the medical equipment (appliances) is transferred to the customer at a point in time, when the equipment is delivered at the agreed location and the physical possession is handed over to the customer. At this point, the Group transfers all risks and rewards related to the medical equipment, subject of the contract with the customer, and the customer has the ability to direct the use of the asset. The distinct installation, commissioning and training services which are sold together with the equipment are usually rendered following its delivery and are relatively independent. These services are accounted for as separate performance obligations, since a/ they may be performed by another supplier; b/ in most cases the services are short-term and not specific in nature; c/ they do not modify the equipment delivered and are not interrelated and integrated therewith. Therefore, it has been determined that in this case, control over the installation, commissioning and training services is transferred over the period of their rendering, since they are performed on an asset controlled by the customer, and the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs the services. The revenue from the services performed is recognised over time, and to measure contract progress (stage of completion), the output method is used. This method has been determined to be the most appropriate to measure progress, as it is most relevant in depicting the scheme of transfer of control and satisfying performance obligations, respectively most accurately reflects the level of all outstanding activities. Warranty service The warranty service usually includes a standard warranty clause that guarantees that the medical equipment sold meets the contractual specifications and quality standards for the usual warranty period (usually 12 months) and is covered by the producer. Transportation of the finished goods and goods sold Usually, upon export sales, the Group is responsible for transporting the goods to the location agreed, and the transportation is organised by the Group, and the cost of transport is included (calculated) as part of the selling price. Depending on the transportation conditions agreed with the customer, it may be carried out also after control over the products sold has been transferred to the customer. Until the transfer of control over the products, the sales of products and the transportation service are accounted for as a single performance obligation, since they constitute parts of an integrated service. 39 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The transportation service following transfer of control over the finished goods sold is accounted for as a separate performance obligation, since the transportation can be provided by another supplier (i.e. the customer may use the finished goods sold with readily available resources), and the transportation service does not modify or amend the finished goods sold in any way. In this case, the consideration the Group expects to be entitled to (the transaction price) is allocated between the separate performance obligations based on their stand-alone selling prices. The stand-alone selling price of the finished goods sold is determined based on the price list effective at the transaction’s date, and the stand-alone selling price of the transportation service is determined as an approximation by using the cost plus margin approach. To render the transportation service, the Group uses transportation companies – subcontractors. The Group has determined it controls the services prior to their provision to the customer and therefore it acts in its capacity as principal, since a/ it is primarily responsible for rendering the services and for the acceptability of the services to the customer (i.e. the Group is responsible for fulfilling the promise in the contract irrespective of whether it performs the services itself or hires a third-party service supplier to perform them); and b/ it has the discretion in establishing the price for the services independently, without interference by the customer. Revenue from the sales of transportation services are recognised over time, since it is not necessary for the work performed to date to be repeated if another party has to perform the remaining work, therefore, the customer simultaneously receives and consumes the benefits provided by the Group’s performance as the Group performs the services. In order to measure the contract progress (stage of completion), the input method is used. This method has been determined as the most appropriate to measure the progress since it best depicts the Group’s activity regarding the transfer of control and satisfaction of obligations; respectively, it most accurately reflects the level of performance of obligations, in as far as the Group’s efforts (costs incurred) are directly related to the transfer of the service to the customer. The progress is measured based on the costs incurred to the total costs planned for contract performance. Bill-and-hold arrangements In certain cases, upon wholesale, the goods sold are physically possessed by the Group. The Group has analysed these arrangements and has determined that although the customer does not have physical possession over the goods, usually they have control thereon, since: a/ the hold is done at the customer’s request; b/ the goods can be identified separately as belonging to the customer; c/ the goods are available for immediate shipment at the customer’s request; d/ the Group does not have the ability to direct the use of the goods or direct them to another customer and e/ a separate consideration is agreed for the storage service. In these cases, the delivery of goods and the storage service rendering are accounted for as separate performance obligations. Respectively: a/ control over the goods sold is transferred to the customer at a point in time, when the goods can be identified separately as belonging to the customer, and the customer has legal title thereon; b/ the obligation to perform the storage services is satisfied over time, while this service is being provided. 40 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Sales of services The services provided by the Group include: storage services (pre-distribution) for customer goods, subscription extra-warranty servicing of medical equipment, medical representation etc. Service revenue is presented as other income in the statement of comprehensive income, in as far as it does not constitute a portion of the Group’s primary business activities. Extra-warranty (maintenance) service A Group’s company provides extra-warranty services under subscription. The extra-warranty service contracts are usually concluded for a period of 2 years. The consideration is fixed and is determined on an annual basis and/or for the entire term of the contract, allocated on a monthly basis. The services performed are usually invoiced on a monthly basis, and the payment period is 30 to 60 days from the date of issuing an invoice to the assignor. The extra-warranty service comprises various tasks/activities of continuous and/or repetitive nature, which are distinct and form part of an integrated service. They constitute a series of distinct services and are therefore a single performance obligation, since: a) the integrated maintenance service covers numerous distinct time periods (usually one month); b) the services are substantially the same, since the customer obtains continuous benefit therefrom for each separate time period (each month) even of the tasks performed differ in their nature and quantity; c) control is transferred over time, since the customer simultaneously receives and consumes the benefits provided by the Group as the Group performs the service and there is no need for another company to substantially repeat the work done by the Group company at a given date if this other company has to perform the remaining portion of the performance obligation. Revenue is recognised over time, and the progress (stage of completion) is measured based on the time passed (on a linear basis – monthly). This method has been determined as the most appropriate one to measure the progress, since services are rendered on a monthly basis and form part of a series, therefore, it best depicts the Group’s activity regarding transfer of control and satisfaction of performance obligations. Other services For the other services performed by the Group, control is transferred to the customer over the period of their rendering, since the customer simultaneously receives and consumes the benefits provided by the Group. The revenue from other sales is recognised over time by measuring the degree of performance of the Group’s obligations (stage of completion). In order to measure the progress (stage of completion), the Group applies the output method based on the quantity of services provided. 2.6.4. Refund obligations under contracts with customers The refund obligation includes the Group’s obligation to reimburse a portion or all of the consideration received (or subject to receipt) from the customer under contracts with a right of return and/or for the expected retrospective discounts, rebates and discount volumes. 41 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The obligation is initially measured at the amount which the Group does not expect to be entitled to and which it expects to reimburse to the customer. At the end of each reporting period, the Group reassess the measurement of the refund obligations, respectively of the transaction price and of the recognised revenue. Refund obligations under contracts with customers are stated within “Other current liabilities” in the statement of financial position. 2.6.5. Transaction price and payment terms Finished goods, pharmaceutical and medical produces The selling prices of the products (finished goods and goods) sold by the Group are usually fixed, based on a common and/or customer-specific price list, and are individually determined for each product. Upon determining the transaction price, the Group also takes into account the various forms of variable consideration and other amounts (consideration) owed to the customer. Variable consideration The variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur. The forms of variable consideration applicable for the Group include: • Volume discounts: Retrospective trade discounts provided to the customer upon reaching monthly, quarterly and/or annual turnover determined in advance, set as a uniform threshold and/or progressive bonus scheme. Upon measuring the variable consideration, the Group determines the customer’s estimated turnover by using the most probable outcome method. The discounts granted are offset against the amounts due by the customer. • Price discounts from the common price list: under the pricing policy adopted, upon wholesale, the selling price from the common price list is reduced by the discount usually applicable for the respective product. The discount applicable for each customer is determined based on the turnover agreed for a certain period as compared to the total potential turnover with the customer. These price discounts are granted to the customer upon each sale and/or at the end of each month. If the customer fails to meet the turnover targets and does not compensate the difference over the next period, the Group is entitled to claiming default compensation set as a percentage of the turnover default. • Price protection: With regards to domestic sales, the Group is obliged, upon price reduction imposed by a state regulatory body, to compensate the buyer and/or its customers for finished goods purchased at a higher price and not yet sold to end clients. The payment of this consideration depends on the state policy on medicinal products price regulation and is beyond the Group’s control. • Compensation for hidden flaws: the customer may claim returns due to hidden flaws (quality claims) throughout the validity period of the finished goods sold, which may vary from one to five years. Quality claims are settled by the provision of new replacement goods or by refund of the amount paid by the customer. 42 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Upon determining the compensations for hidden flaws due at the end of the reporting period, the Group takes into consideration the quality assurance system implemented thereby and the accumulated experience. • Compensations due to the customer: in case of inaccurate performance of contractual obligations by the Group, usually in relation of failure to meet the negotiated delivery deadline. These are included within a decrease of the transaction price only if the payment is very likely. The Group’s experience shows that historically, contract terms are complied with, and the Group has not recorded liabilities for payment of compensations. • Right of return: Some sales contracts allow the customer to return the goods within a given period. The Group accounts for the right of return as a form of variable consideration and recognises revenue from sales only at the amount of consideration it is reasonably assured it is entitled to (considering the goods expected to be returned). Upon determining what proportion of the goods sold is expected to be returned, the Group uses historical data about goods returned by customers over the past year. • Compensations owed by the customer: variable consideration in the form of compensations for delayed payment by the customer. Receiving such consideration depends on the customer’s actions and is beyond the Group’s control. They are included within the transaction price only when the uncertainty regarding their receipt has been resolved. Including compensations (owed by and due to the customer) as part of the transaction price is determined for each individual contract and is subject to reassessment at the end of each reporting period. The variable consideration expected in the form of various discounts, defaults and compensations is determined and measured based on the accumulated experience and is recognised as adjustment of the transaction price only and respectively the revenue (as an increase or a decrease) only to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur, including due to assessment restrictions. Any subsequent changes to amount of the variable consideration are recognised as adjustment of revenue (as an increase or a decrease) at the date of change and/or resolving the uncertainty. At the end of each reporting period, the Group updates the transaction prices, including whether the estimated price contains restrictions, so as to accurately present circumstances existing and occurring during the reporting period. Upon assessing the variable consideration, the Group uses the most likely outcome approach. Discounts accrued but not settled at the end of the reporting period, to which the customer still does not have unconditional right, are presented as refund liabilities in the statement of financial position. Consideration due to the customer The consideration due to the customer includes amounts that the Group companies pay and/or have promised to pay to the customer. It is included as a component of the transaction price, unless the payment to the customer is in return to distinct goods and/or services which the customer transfers and/or grants to the Group companies and the fair value of these distinct goods and/or services does not exceed the amount of consideration paid by the Group. If the latter is higher than the fair value of the goods and/or service received by the customer, only the excess is included within the transaction price. 43 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The consideration paid to the customer is recognised as contract assets and are included within the transaction price, respectively in a decrease of revenue from contracts with customers, upon transfer of control over the goods sold or when the Group promises to pay, whichever occurs later. Significant financing component Upon wholesales the usual credit period is 30 to 270 days following the delivery of goods. In certain sales transactions, the payments can be partially in advance and the amounts paid in advance are refunded if the contract is terminated. The advance payments collected from customers are presented in the statement of financial position as contract liabilities. As a result of the financial condition and credit risk of some of the customers which are hospitals, the customer pays for the goods delivered with a significant delay compared to the payment period agreed, and in some cases, the period between the date of transfer of control over the goods and the date of payment by the customer may reach and exceed 2 years. The Group has determined that contracts with such customers do not contain a financing component, since: a) the payment term agreed with the customer does not differ from the usual payment term for such transactions, and upon concluding the sales contract, no explicit deferred payment scheme has been agreed; b) the selling prices do not include a financing component (interest). They are legislatively regulated and do not significantly deviate from the selling price of the same goods and/or services upon sales to other customers and/or upon sale to the same customer by another distributor of medicinal products and medical consumables. The differences (if any) result from variable consideration granted in the form of discounts, rather than from the agreed and/or expected payment period; c) the delay in payments results from the financial condition and credit risk of some of the customers which are hospitals; d) upon delay by the customers, the Group charges an interest (penalty) at the amount of the statutory interest, as from the date of delay; e) the financing element arises on the date of delay starting from which the Group charges a delay interest; f) the customer (hospital) pays the interest charged (penalties) and they reflect the time value of money. The interest income recognised due to not paying within the agreed payment period by customers, which are hospitals, are presented as finance income in the statement of comprehensive income (Note 11 ). Upon retail sales, payment is due at the time of sale. Exceptions are retail sales in Bulgaria for which NHIF reimburses a portion of the price. This portion of the selling price is paid by NHIF within 60 days. Medical equipment (Appliances) The agreed selling price related to contracts for sale of medical equipment (appliances) is usually aggregated for the specific contract and/or equipment is aggregate. As a result, the consideration which the Group expects to be entitled is allocated to each separate performance obligation on the basis of stand- alone selling prices determined approximately by using the cost plus a margin approach. 44 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Significant financing component Upon the sale of medical equipment, the payment terms for the transaction price are determined individually for each contract. The customer usually makes an advance payment of up to 20% of the contracted consideration, and the remaining part is paid after performance of the contractual obligations, at a later date or in accordance to a payment schedule. Deferred payment is usually made after 30 days to 2 years. For contracts with deferred payment of over 1 year, the Group has determined that a financing component exists which is significant for revenue. In these cases the transaction price is adjusted so as to reflect the impact of the time value of money by using a discount rate reflecting the credit characteristics of the counterparty receiving the financing (the customer). The payments collected in advance from the customer are presented in the statement of financial position as contract liabilities, and the interest charged – as finance income in the statement of comprehensive income (Note 11). For contracts where the period for transferring the control of the promised goods and services to the customer and the payment is up to 12 months, the Group does not adjust the transaction price to reflect the effect of the financing component. Sales of services The selling prices of services are usually fixed. The consideration upon extra-warranty (maintenance) service is fixed and determined on an annually and/or for the entire duration of the contract, and it is allocated equally on a monthly basis. The services performed are most often invoiced monthly, and the payment period is within 30 to 60 days from the date of the invoice issuance to the customer. 2.6.6. Contract costs The Group states as contract costs the following: • the incremental and directly related expenses it incurs upon concluding a contract with a customer, which it expects to recover over a period longer than twelve months (costs to obtain a contract with a customer) and • the expenses it incurs to fulfil a contract with a customer and which are directly related to the specific contract, enhance the generation of resources to be used in the contract fulfilment and the Group expects to recover them over a period longer than twelve months (costs of fulfilling contracts with customers). The Group in its primary business activity does not incur direct or specific costs to obtain contracts with customers and costs of fulfilling such contracts, which would have not been incurred if the contracts had not been obtained. 2.6.7. Contract balances Trade receivables and contract assets 45 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 A contract asset is the Group's right to receive consideration in exchange for goods or services that it has transferred to a customer but is not unconditional (receivable accrual). If by transferring the goods and/or providing the services the Group performs its obligation before the customer to pay the respective consideration and/or before the payment is due, a contract asset is recognised for the consideration earned (which is conditional). Recognised contract assets are reclassified as trade receivables when the right to consideration becomes unconditional. A right to consideration is unconditional if only the passage of time is required before payment of that consideration is due. Contract liabilities The Group presents as a contract liability the consideration received from the customer and/or the unconditional right to receive consideration before it has performed its contractual obligations. Contract liabilities are recognised as revenue when (or as) the performance obligations are satisfied. Contract assets and contract liabilities are presented in other receivables and payables in the statement of financial position. They are included in current assets when their maturity is within 12 months or within the Group’s usual operating cycle, and the others are stated as non-current. Assets and liabilities from a single contract are presented on a net basis in the statement of financial position, even if they result from difference performance obligations in the contract. Following their initial recognition, trade receivables and contract assets are subject to review for impairment in accordance with the requirements of IFRS 9 Financial Instruments. Right of return assets from contracts with customers The right of return is the Group’s right to receive sold goods which are expected to be returned by the customers (Note 23). This right is initially measured at the carrying amount of the goods which are expected to be returned, less any expected costs to recover the goods, including any potential decreases in the value of products returned, including due to passage of their expiry date. At the end of each reporting period the Group reassess the measurement of right of return assets recognised related to changes in expectations about the volume of goods returned and other decreases in their value. Right of return assets are presented in inventories in the statement of financial position and are separately disclosed in the notes to the annual financial statements. 2.7. Expenses Expenses are recognised in the Group when they are incurred based on the accrual and matching concepts (to the extent that this would not lead to recognition of an asset or liability not satisfying the definitions for assets and liabilities in the Framework and IFRS themselves). Deferred expenses are put off and recognised as current expenses in the period when the contracts, whereto they refer, are performed. Losses from revaluation of investment property to fair value are presented in the consolidated statement of comprehensive income (within profit or loss for the year) on the line 'other operating income/(losses)'. 46 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 2.8. Finance income and costs 2.8.1. Finance income Finance income is included in the statement of comprehensive income (within profit or loss for the year) when earned and comprises: interest income on granted loans and term deposits, interest income on receivables under special contracts, interest income on past due receivables, income/gains from deals with investments in available-for-sale securities at fair value through profit or loss, or through other comprehensive income, including dividends, net gains on exchange differences under loans in foreign currency, income from debt settlement transactions, gain on fair value measurement of available-for-sale investments in securities at fair value through profit or loss, or through other comprehensive income, gains from fair value measurement of investments in the acquisition of a subsidiary performed in stages. Interest income is calculated by applying the effective interest rate on the gross carrying amount of financial assets, with the exception of financial assets, which are credit-impaired (Stage 3), for which interest income is calculated by applying the effective interest rate on their amortised cost (i.e. the gross carrying amount after deducting the impairment allowance) 2.8.2. Finance costs Finance costs are included in the consolidated statement of comprehensive income (within profit or loss for the year) when incurred separately from finance costs and comprise: interest expenses under loans received, bank fees and charges under loans and guarantees, foreign exchange net loss from loans in foreign currencies, leases, and impairment losses on granted loans. 2.9. Property, plant and equipment Property, plant and equipment, including permanent plants (fixed tangible assets) are presented in the consolidated financial statements at revalued amount less the accumulated depreciation and impairment losses in value. Initial acquisition Upon their initial acquisition, property, plant and equipment are valued at acquisition cost (cost), which comprises the purchase price, including customs duties and any directly attributable costs of bringing the asset to working condition for its intended use. The directly attributable costs include the cost of site preparation, initial delivery and handling costs, installation costs, and professional fees for people involved in the project, non-refundable taxes, expenses on capitalised interest for qualifying assets, etc. Property, plant and equipment of acquired subsidiaries are measured at fair value at the transaction (business combination) date which is accepted as acquisition price for consolidation purposes. Upon acquisition of property, plant and equipment under deferred settlement terms, the purchase price is equivalent to the present value of the liability discounted on the basis of the interest level of the attracted by the Group credit resources with analogous maturity and purpose. The Group has set a value threshold of BGN 500, below which the acquired assets, regardless of having the features of fixed assets, are treated as current expense at the time of their acquisition. 47 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Subsequent measurement The chosen by the Group approach for subsequent measurement of property, plant and equipment, is the revaluation model under IAS 16, i.e. measurement at revalued amount less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The revaluation of property, plant and equipment is accepted to be performed by certified appraisers normally in a period of five years. Where the fair value changes materially in shorter periods, revaluation may be performed more frequently. Subsequent costs Repair and maintenance costs are recognised as current expenses as incurred. Subsequent costs incurred in relation to property, plant and equipment having the nature of replacement of certain components, significant parts and aggregates or improvements and restructuring, are capitalised in the carrying amount of the respective asset whereas the residual useful life is reviewed at the capitalisation date. At the same time, the non-depreciated part of the replaced components is derecognised from the carrying amount of the assets and is recognised in the current expenses for the period of restructure. Depreciation methods The Group applies the straight-line depreciation method for property, plant and equipment. Depreciation of an asset begins when it is available for use. Land is not depreciated. The useful life of the groups of assets is dependent on their physical wear and tear, the characteristic features of the equipment, the future intentions for use and the expected obsolescence. The useful life per group of assets is as follows: • buildings – 20-70 years; • installations – 5-30 years; • machinery and equipment – 6-35 years; • computers and mobile devices – 2-5 years; • motor vehicles – 5-17 years; • servers and systems – 4-18 years; • furniture and fixtures – 3-13 years; • other tangible assets – 3-12 years. • for biological assets (carriers) – 10-12 years The useful life set for any tangible fixed asset is reviewed by the management of each company within the Group and respectively, by the parent company, at the end of each reporting period and in case of any material deviation from the future expectations of their period of use, the latter is adjusted prospectively. 48 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Impairment of assets The carrying amounts of property, plant and equipment are reviewed for impairment when events or changes in circumstances indicate that the carrying amount might permanently differ from their recoverable amount. If any indications exist that the estimated recoverable amount of an asset is lower than its carrying amount, the latter is adjusted to the recoverable amount of the asset. The recoverable amount of property, plant and equipment is the higher of fair value less costs to sell or the value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market conditions and assessments of the time value of money and the risks, specific to the particular asset. Impairment losses are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) unless a revaluation reserve has been set aside for the respective asset. Then the impairment is treated as a decrease in this reserve (through other comprehensive income) unless it exceeds its amount and the excess is included as expense in the consolidated statement of comprehensive income (within profit or loss for the year). Gains and losses on disposal (sale) Tangible fixed assets are derecognised from the consolidated statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or on sale. The gains or losses arising from the sale of an item of 'property, plant and equipment' group are determined as the difference between the consideration that the Group expects to be entitled to (sales revenue) and the carrying amount of the asset on the date when the recipient obtains control thereon. They are stated net under 'other operating income/(losses), net' on the face of the consolidated statement of comprehensive income (within profit or loss for the year). The part of 'revaluation reserve' component attributable to the asset sold is directly transferred to 'retained earnings' component in the consolidated statement of changes in equity. 2.10. Biological assets Biological assets are measured at fair value less the estimated costs to sell. The fair value of biological assets is determined on the basis of their present location and condition based on a price quoted in an active market or other alternative sources of current prices. Gain or loss on initial recognition of a biological asset at fair value less estimated costs to sell and changes in fair value less estimated costs to sell is recognised in the consolidated statement of comprehensive income (within profit or loss for the year) in the period in which it arises and is presented in 'other operating income/(losses), net'. When the fair value of a biological asset cannot be reliably measured, it is measured at cost less accumulated depreciation or impairment losses. Subsequently, when the fair value of this biological asset becomes reliably measurable, the Group changes its approach and switches to measuring the asset at fair value less the estimated costs to sell. 2.11. Intangible assets Goodwill 49 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Goodwill represents the excess of the cost of an acquisition (the consideration given) over the fair value of Group's share in the net identifiable assets of the acquired company at the date of acquisition (the business combination). Goodwill is initially measured in the consolidated financial statements at acquisition cost (cost) and subsequently – at cost less accumulated impairment losses. Goodwill is not amortised. Goodwill arising on the acquisition of a subsidiary is presented in the consolidated statement of financial position in the group of 'intangible assets' while goodwill arising on the acquisition of a joint venture or an associate (entities) is incorporated in the total amount of the investment and is stated in the group of 'investments in joint ventures' or respectively 'investments in associates'. The goodwill on the acquisition of joint ventures and associates (entities) is tested as part of the total balance (amount) of the investment. The individually recognised goodwill on the acquisition of subsidiaries (entities) is mandatory tested for impairment at least once in a year. Impairment losses on goodwill are not subsequently reversed. Gains or losses on the sale (disposal) of a particular subsidiary (entity) of the Group include the carrying amount of the goodwill relating to the entity sold (disposed of). On the realisation of a particular business combination, each recognised goodwill is allocated to a particular cash generating unit and this unit is used for impairment testing. The allocation is made to those cash generating units that are expected to benefit from the business combination in which the goodwill arose. Impairment losses on goodwill are presented in the consolidated statement of comprehensive income (within profit or loss for the year) in the item 'impairment of non-current assets'. Other intangible assets Intangible assets are stated in the consolidated financial statements at acquisition cost less accumulated amortisation and any impairment losses in value. The intangible assets include mainly intellectual property rights, software and complex intangible assets (licences and pharmacy chain locations). The Group applies the straight-line amortisation method for the intangible assets with determined useful life from 3 to 18 years. The carrying amount of the intangible assets is subject to review for impairment when events or changes in the circumstances indicate that the carrying amount might exceed their recoverable amount. Then impairment is recognised as an amortisation expense in the consolidated statement of comprehensive income (within profit or loss for the year). Intangible assets are derecognised from the consolidated statement of financial position when they are permanently disposed of and no future economic benefits are expected therefrom or on sale at the date of transfer of control to the asset recipient. The gains or losses arising from the sale of an item of intangible assets are determined as the difference between the consideration that the Group expects to be entitled to (sales revenue) and the carrying amount of the asset on the date when the recipient obtains control thereon. 50 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 They are stated net within “other operating income/(losses) on the face of the statement of comprehensive income (within profit or loss for the year). 2.12. Investment property Investment property is property lastingly held by the Group to earn rentals and/or for capital appreciation. They are presented in the consolidated statement of financial position at fair value (Note 18). Gains or losses arising from a change in the fair value of investment property are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) as 'other operating income/(losses), net' for the period in which they arise. The income gained on investment property is presented in the same item of the consolidated statement of comprehensive income. Investment properties are derecognised from the consolidated statement of financial position when they are permanently withdrawn from use and no future economic benefits are expected therefrom or on disposal. Gains or losses arising from the disposal of investment property are determined as the difference between the consideration that the Group expects to be entitled to (sales revenue) and the carrying amount of the asset on the date when the recipient obtains control thereon. They are presented under 'other operating income/(losses), net' in the consolidated statement of comprehensive income (within profit or loss for the year). Transfers to, or from, the group of 'investment property' is made only when there is a change in the functional designation and the use of a particular property. In case of a transfer from 'investment property' to 'owner-occupied property', the asset is recognised in the new group at deemed cost, which is its fair value at the date of transfer. To the opposite, in case of a transfer from 'owner-occupied property' to 'investment property' the asset is measured at fair value at the date of transfer while the difference to its carrying amount is presented as a component of the consolidated statement of comprehensive income (within other comprehensive income) and within 'revaluation reserve – property, plant and equipment' in the statement of changes in equity. 2.13. Investments in associates and joint ventures Long-term investments, representing shares in associates and joint ventures, are presented in the consolidated financial statements under the equity method – value that includes the acquisition cost being the fair value of the consideration paid, including the direct costs on investment acquisition adjusted by investor's share of profits or losses and respectively the other reserves of the joint ventures and associates after the dates of their acquisition. The share of profits and losses after the date of acquisition of an associate and a joint venture is presented on a separate line in the consolidated statement of comprehensive income (within profit or loss for the year) while the share of other components of comprehensive income – on the respective line of the consolidated statement of comprehensive income (within other comprehensive income) and as a separate movement of the individual components of reserves in the consolidated statement of changes in equity. 51 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The investments in associates and joint ventures held by the Group together with the included goodwill are subject to review for impairment at the date of the financial statements. Where conditions for impairment are identified and its amount is determined, the impairment is included in the consolidated statement of comprehensive income (within profit or loss for the year) in the item 'gain/(loss) from associates and joint ventures'. In purchases and sales of investments in associates and joint ventures the date of trading (conclusion of the deal) is applied. Investments in associates and joint ventures are derecognised when the rights related thereto are transferred to third parties as a result of occurrence of legal rights for that and thus the significant influence over or joint control of the economic benefits from the investments is being lost. The income from their sale is presented in 'gain/(loss) from associates and joint ventures' of the consolidated statement of comprehensive income (within profit or loss for the year). 2.14. Other long-term equity investments The other long-term equity investments are non-derivative financial assets in the form of shares in the capital of other companies (minority interest), held for a long term. Initial measurement Equity investments are initially recognised at cost, being the fair value of the consideration given including the direct expenses associated with the investment (financial asset) acquisition (Note 2.25). All purchases and sales of equity instruments are recognised at the transaction’s “trade date”, i.e. the date on which the Group undertakes to purchase or sell the asset. Subsequent measurement The equity investments held by the Group are subsequently measured at fair value (Note 2.31) determined with support by an independent licensed valuator. The effects from subsequent revaluation to fair value are carried within a separate component of the statement of comprehensive income (in other comprehensive income), respectively in the reserve for financial assets at fair value through other comprehensive income. These effects are transferred to retained earnings upon disposal of the respective investment. Dividend income Dividend income related to long-term investments constituting shares in other entities (non- controlling interest) is recognised as current income and stated in the statement of financial position (within profit or loss for the year) in the “finance income” item. Upon derecognising shares at disposal or sale, the weighted-average price method is used, applying the price determined at the end of the month when the derecognition is performed. 52 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 2.15. Inventories Inventories are valued in the consolidated financial statements as follows: • raw materials, consumables and goods – at the lower of acquisition cost and net realisable value; • finished products, semi-finished products and work in progress – at the lower of production cost and net realisable value. Expenses incurred in bringing a certain product within inventories to its present condition and location, are included in the acquisition cost (cost) as follows: • raw materials, materials and goods – all delivery costs, including the purchase price, import customs duties and charges, transportation expenses, non-refundable taxes and other expenses, incurred for rendering the materials and goods ready for usage (sale); • finished products, semi-finished products and work in progress – all necessary expenses on production that constitute the production cost, which includes the cost of direct materials and labour and the attributable proportion of production overheads (both variable and fixed), but excluding administrative expenses, exchange rate gains and losses and borrowing costs. The inclusion of fixed production overheads in the production cost of finished products, semi- finished products and work in progress is based on normal production capacity. They are allocated to finished products on the following bases chosen by the Group: • for production of medicinal products – the standard rate of man-hours of directly engaged staff in the production of the particular unit; • for production of infusion solutions – quantity of manufactured finished products; • for production of plastic medical disposable products – planned cost of manufactured finished products. The parent company applies 'standard production cost' for current valuation of finished products, semi-finished products and work in progress, and respectively, 'standard purchase cost' for basic raw materials and other production materials. At the end of each reporting period the management performs analysis of factors leading to variances on: (a) the supply of raw materials and other production materials – by comparing the actual and standard acquisition costs, and (b) the production of finished products, semi- finished products and work in progress – by comparing the actual and standard production costs. Where necessary, the value of inventories, included in the financial statements, is adjusted. On the basis of research on the good reporting practices in the pharmaceutical industry, the Company has adopted materiality thresholds regarding: (a) variance on supply of raw materials and other production materials – up to 2%, and (b) variance on production – up to 1%, within which the current value of the existing closing stocks of raw and other materials, finished products and work in progress are not adjusted for the purposes of the consolidated financial statements. 53 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Upon use (putting into production or sale) of inventories, they are currently expensed by applying the weighted average cost (cost) method. The net realisable value represents the estimated selling price of an asset in the ordinary course of business less the estimated cost of completion and the estimated costs necessary to make the sale. 2.16. Trade receivables Trade receivables constitute the Group’s unconditional entitlement to consideration under contracts with customers and other counterparties (i.e. it is only dependent on the passage of time before payment of the consideration). Initial measurement Trade receivables are initially recognised and carried at fair value based on the transaction price, which is usually equal to the invoice amount, unless they contain a significant financial component, which is not additionally charged. In this case they are recognised at their present value determined by applying a discount rate which is equal to the interest rate specific to the customer-debtor. Subsequent measurement The Group holds trade receivables only for the purpose of collecting contractual cash flows and subsequently measures them at amortised cost less the amount of impairment accumulated for expected credit losses. (Note 2.25 Financial instruments). Impairment The Group applies the expected credit losses model for the entire term of all trade receivables, using the simplified approach under IFRS 9, and based on the matrix model for loss percentage (Note 24). 2.17. Interest-bearing loans and other financial resources granted All loans and other financial resources granted are initially recognised at acquisition cost (nominal amount), which is accepted to be the fair value of the consideration received on the transaction, net of the direct costs related to these loans and granted resources. After the initial recognition, the interest-bearing loans and other granted resources are subsequently measured and presented in the consolidated financial statements at amortised cost by applying the effective interest rate method. They are classified in that category as the business model of the Group is solely to collect contractual cash flows of principal and interest. Amortised cost is calculated by taking into account all types of charges, commissions, and other costs, associated with these loans. Gains and losses are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) as 'finance income' (interest) or 'finance costs' throughout the amortisation period, or when the receivables are settled, derecognised or reduced. Interest income is recognised in accordance with the stage in which the respective loan or other receivables has been classified based on the effective interest method. 54 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Interest-bearing loans and other financial resources granted are classified as current ones unless (and for the relevant portion thereof) the Group has unconditionally the right to settle its obligation within a term of more than 12 months after the end of the reporting period (Note 2.25). 2.18. Cash and cash equivalents Cash includes cash on hand and cash at current accounts, and cash equivalents – bank deposits with original maturity up to three months, and funds in deposits with longer maturity which are readily available to the Group under its agreements with the banks over the deposits’ terms (Note 2.25). Subsequent measurement Cash and cash equivalents at banks are subsequently measured at amortised cost, less the impairment accumulated for expected credit losses. For the purposes of the statement of cash flows: • cash proceeds from customers and cash paid to suppliers are presented at gross amount, including value added tax (20%); • interest on investment purpose loans received is reported as payments for financial activities while the interest on loans for current activities (for working capital) is included in the operating activities; • interest received on overdue trade receivables is reported as receipts from customer in cash flows from operating activities; • interest received from bank deposits is included within cash flows from investing activities; • VAT paid on fixed assets purchased from foreign suppliers is presented on the line 'taxes paid' while that paid on assets purchased from local suppliers is presented as 'cash paid to suppliers' in the cash flows from operating activities as far as it represents a part of the operating flows of the Group companies and is recovered therewith in the respective period (month). • overdraft proceeds and payments are stated net by the Company. • permanently blocked funds for a period of more than 3 months are not treated as cash and cash equivalents. • proceeds under factoring agreements are stated within cash flows from financing activities. 2.19. Trade and other payables Trade and other current amounts payable are carried to the consolidated financial statements at original invoice amount (acquisition cost), which is the fair value of the consideration to be paid in the future for goods and services received. In case of payments deferred over a period exceeding the common credit terms, where no additional interest payment has been envisaged or the interest considerably differs from the common market interest rates, the payables are initially valued at their fair value based on their present value at a discount rate applicable for the Group, and subsequently – at amortised cost (Note 2.25). 55 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 2.20. Interest-bearing loans and other borrowings All loans and other borrowings are initially recognised in the consolidated financial statements at cost (nominal amount), which is accepted to be the fair value of the consideration received on the transaction, netted of the direct costs related to these loans and borrowings. After the initial recognition, the interest-bearing loans and other borrowings are subsequently measured and presented in the consolidated financial statements at amortised cost by applying the effective interest rate method. Amortised cost is calculated by taking into account all types of charges, commissions and other costs, including any discount or premium on settlement, associated with these loans. Gains and losses are recognised in the consolidated statement of comprehensive income (within profit or loss for the year) as finance income or costs (interest) throughout the amortisation period, or when the liabilities are derecognised or reduced (Note 2.25). Interest costs are recognised for the term of the financial instrument based on the effective interest method. Interest-bearing loans and other borrowings are classified as current ones unless (and for the relevant portion thereof) the Group has unconditionally the right to settle its obligation within a term of more than 12 months after the end of the reporting period. 2.21. Capitalisation of borrowing costs Borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset of the Group are capitalised as part of the cost of that asset. A qualifying asset is an asset that necessarily takes a period of at least 12 months to get ready for its intended use or sale. The amount of borrowing costs eligible for capitalisation to the value of a qualifying asset is determined by applying a capitalisation rate. The capitalisation rate is the weighted average of the borrowing costs applicable to the borrowings that are outstanding during the period, other than borrowings made specifically for the purpose of obtaining a qualifying asset. The capitalisation of borrowing costs as part of the cost of a qualifying asset commences when the following conditions are met: expenditures for the asset are being incurred, borrowing costs are being incurred and activities that are necessary to prepare the asset for its intended use or sale are in progress. Borrowing costs are also reduced by any investment income earned on the temporary investment of those borrowed funds. 2.22. Leases At the lease inception, which is the earlier of the date of a lease agreement and the date of commitment by the parties to the principal terms and conditions of the lease, the Group performs analysis and assesses whether the contract is, or contains, a lease. A contract is, or contains, a lease, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration. 56 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Lessee The Group applies a uniform model for recognition and measurement of all leases, except for short- term leases (leases with a lease term of 12 months or less and which do not contain a purchase option) and leases of low value assets (such as tablets, personal computers, telephones, office equipment, etc.). The Group has not elected to apply the practical expedient of IFRS 16, which allows a lessee, by class of underlying asset, not to separate non-lease components from lease components, and instead account for each lease component and any associated non-lease components as a single lease component. For contracts that contain a lease component and one or more additional lease or non-lease components, the Group allocates the consideration in the contract to each lease component on the basis of the relative stand-alone price of the lease component and the aggregate stand-alone price of the non-lease components. а) right-of-use assets The Group recognises right-of-use assets in the statement of financial position at the commencement date of the lease, i.e. the date on which a lessor makes an underlying asset available for use by the lessee. Right-of-use assets are presented in the statement of financial position at acquisition cost, less the accumulated depreciation, impairment losses and adjustments resulting from revaluation and adjustments to the lease liability. The acquisition cost includes: • the amount of the initial measurement of the lease liability; • any lease payments made at or before the commencement date, less any lease incentives received; • any initial direct costs incurred by the Group in its capacity as lessee; • costs for dismantling and removing the underlying asset, restoring the site on which the asset is located or restoring the underlying asset to the condition required by the terms and conditions of the lease. The Group depreciates the right-of-use asset to the earlier of the end of the useful life of the right- of-use asset or the end of the lease term. If ownership of the asset is transferred under the lease by the end of the lease term, the Group shall depreciate it to the end of the useful life. Depreciation shall be charged from the commencement date. The depreciation terms by types of underlying assets are as follows: • land – 3 to 15 years • buildings – 1 to 10 years • for equipment and transmission devices – 2-10 years • motor vehicles – 1 to 5 years • furniture and fixtures – 2 to 4 years The Group has elected to apply the acquisition cost model for all of its right-of-use assets. 57 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Right-of-use assets are tested for impairment in accordance with IAS 36 Impairment of Assets, by applying an impairment determination and reporting policy analogous to the one for property, plant, and equipment. The recoverable amount of right-of-use assets is the higher of the fair value less disposal costs, or value in use. To determine assets’ value in use, future cash flows are discounted to their present amount, by applying a pre-tax discount rate reflecting the market conditions and time value of money and the risks inherent to the respective asset. Impairment losses are determined as the difference between the recoverable and carrying amount (when the recoverable amount is lower than the carrying amount) and are carried to the statement of comprehensive income as impairment of non-current assets. Right-of-use assets are presented within property, plant and equipment in the consolidated statement of financial position, and depreciation thereof – within depreciation and amortization expenses in the consolidated statement of comprehensive income. b) lease liabilities The Group companies recognise lease liabilities at the commencement date, measured at the present value of the lease payments that are not paid at this date. They include: • fixed lease payments (including in-substance fixed payments), less any lease inceptives receivable; • variable lease payments that depend on an index or rate, initially measured using the index or rate at the commencement date; • the exercise price of the purchase options, if the lessee is reasonably certain to exercise this option; • payments of penalties for terminating the lease, of the lease term reflects the exercise of an option to terminate the lease; • the amount expected to be payable by the Group to lessor under residual value guarantees. Variable lease payments that do not depend on an index or a rate, but are dependent on performance or use of the underlying asset, are not included in the measurement of the lease liability and the right-of- use asset. They are recognised as current expenses in the period when the event or circumstance resulting in these payments arises. Lease payments are discounted using the interest rate implicit in the lease, of that rate can be readily determined, or the Company’s incremental borrowing rate, which it would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. Lease payments (instalments) contain a certain ratio of the finance cost (interest) and the respective portion of the lease liability (principal). Interest costs for the lease are presented in the statement of comprehensive income (within profit or loss for the year) for the lease period on a periodic basis, so as to achieve constant periodic rate of interest on the remaining balance of the lease liability, and are presented as “finance costs”. 58 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Lease liabilities are stated on separate lines in the consolidated statement of financial position: Lease liabilities – non-current portion of liabilities, current portion of lease liabilities – for the current portion of liabilities, non-current payables to related parties – non-current portion, and payables to related parties – current portion. The Group subsequently measures the lease liability by: • increasing the carrying amount to reflect the interest on the lease liability; • reducing the carrying amount to reflect the lease payments made; • remeasuring the carrying amount to reflect any reassessment or lease modifications of the lease; • residual value guarantees are reviewed and if necessary, adjusted, at the end of each reporting period. The Group remeasures the lease liabilities (and makes corresponding adjustments to the related right-of-use assets) whenever: • the lease term has changes or there is a significant event or change in circumstances resulting in a change in the assessment of exercise of a purchase option, in which case the lease liability is remeasured by discounting the revised lease payments using a revised discount rate; • the lease payments change due to changes in an index or rate or a change in expected payment under a residual value guarantee, in which cases the lease liability is remeasured by discounting the revised lease payments using an unchanged (original) discount rate (unless the lease payments change is due to a change in a floating interest rate, in which case a revised discount rate is used); • a lease contract is modified and the lease modification is not accounted for as a separate lease, in which case the lease liability is remeasured based on the lease term of the modified lease by discounting the revised lease payments using a revised discount rate at the effective date of modification. c) Short-term leases and leases of low-value assets The Group has elected the exemption from recognition of right-of-use assets and lease liabilities under IFRS 16 for short-term leases of buildings and motor vehicles and for low-value assets constituting printers and other equipment which the Group considers to be at a low value when new and are independently used at the Group without dependence or close relation to other assets. Payments related to short-term leases and leases of low-value assets are recognised directly as current expenses in the statement of comprehensive income (within profit or loss for the year) on a straight- line basis over the lease term. 59 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Lessor Leases for which the Group is a lessor are classified as finance or operating leases. Whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee, the contract is classified as a finance lease; all other leases are classified as operating leases. Operating lease Rental income from operating leases is recognised on a straight-line basis over the term of the relevant lease. Initial direct costs incurred in obtaining an operating lease are added to the carrying amount of the leased asset and recognised on a straight-line basis over the lease term. The underlying asset which is subject to the lease shall remain and be stated within the Group’s consolidated statement of financial position. Finance lease The Group recognises and presents the assets held under finance leases in its statement of financial position as lease receivables whose amount is equal to the net investment in the lease. The Group recognises finance income (lease interest) over the lease term based on a pattern reflecting a constant periodic rate of return on the lessor's net investment in the lease. Interest income is included in the statement of comprehensive income (within profit and loss for the year) as finance income based on the Effective Interest Method. When the contract contains both lease and non-lease components, the Company applies IFRS 15 to allocate the total consideration between the separate components. 2.23. Pensions and other payables to personnel under the social security and labour legislation The employment and social security relations with workers and employees of the Group are based on the Labour Code and the provisions of the effective social security legislation for the companies operating in Bulgaria, the Polish Code – for the companies in Poland, the employment legislation and the Collective Labour Agreement – for the companies in Ukraine, the employment legislation, the General Collective Labour Agreement and the effective Employment Rules and Regulations – for the companies in Serbia, and the Social Security Law of the Republic of Kazakhstan – for the company in Kazakhstan. Short-term benefits Short-term benefits to hired personnel in the form of remuneration, bonuses and social payments and benefits (due for payment within 12 months after the end of the period when the employees have rendered the service or have satisfied the required terms) are recognised as an expense in the statement of comprehensive income (within profit or loss for the year) for the period when the service thereon has been rendered and/or the requirements for their receipt have been met, unless a particular IFRS requires capitalisation thereof to the cost of an asset, and as a current liability (less any amounts already paid and deductions due) at their undiscounted amount. 60 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 At each date of consolidated balance sheet, the companies of the Group measure the estimated costs on the accumulating compensated absences, which amount is expected to be paid as a result of the unused entitlement. The measurement includes the estimated amounts of employee's remuneration and the statutory social security and health insurance contributions due by the employer thereon. Tantieme In accordance with the Group companies’ Articles of Association and upon a decision of the General Meeting of Shareholders, the Executive Director and/or other management are entitled to one-off remuneration (tantieme), usually determined as a percentage of the Company’s net profit. These remuneration expenses are recognised in the statement of comprehensive income (within profit or loss) within “employment benefit expenses”. When a certain portion is required to be deferred for a period of more than 12 months, this portion is measured at present value at the reporting date and is stated within non-current liabilities in the statement of financial position in the item 'payables to personnel'. Bonus schemes The amounts payable to staff, including key management members, under different bonus schemes applied in the Group, are usually accrued for the reporting year to which the achieved results refer. These remuneration expenses are recognised in the statement of comprehensive income (within profit or loss) within “employment benefit expenses” and in the statement of financial position as “payables to personnel” and are usually short-term. Long-term retirement benefits Defined contribution plans For Bulgaria The major duty of the companies - employers in Bulgaria is to make the mandatory social security contributions for the hired employees to the Pensions Fund, the Supplementary Mandatory Pension Security (SMPS) Fund, to the General Diseases and Maternity (GDM) Fund, the Unemployment Fund, the Labour Accident and Professional Diseases (LAPD) Fund, and for health insurance. The rates of the social security and health insurance contributions are regulated in the Social Security Code (SSC), as well as in the Law on the Budget of State Social Security and the Law on the Budget of National Health Insurance Fund for the respective year. The contributions are split between the employer and employee in line with rules of the SSC. These pension plans, applied by the Group in its capacity as an employer, are defined contribution plans. Under these plans, the employer pays defined monthly contributions to the government funds as follows: Pensions Fund, GDM Fund, Unemployment Fund, LAPD Fund as well as to universal and professional pension funds – on the basis of rates fixed by law, and has no legal or constructive obligation to pay further contributions if the funds do not hold sufficient means to pay the respective individuals the benefits they have worked-out over the period of their service. The obligations referring to health insurance are analogous. 61 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 For companies abroad The rates of the social security contributions in Poland are approved by the Law on the National Social Security System, in Ukraine – Law on Pension Provision, in Serbia – the Law on Labour in the Republic of Serbia, and in Kazakhstan – Law of the Republic of Kazakhstan on Social Security Obligations. The social security contributions are being apportioned between an employer and employees at ratios regulated by the relevant local laws. There is no established and functioning private voluntary social security scheme at the Group. The contributions, payable by the companies of the Group under defined contribution plans for social security and health insurance, are recognised as a current expense in the statement of comprehensive income (within profit or loss for the year) unless a particular IFRS requires this amount to be capitalised to the cost of an asset, and as a current liability at their undiscounted amount along with the accrual of the respective employee benefits to which the contributions refer and in the period of rendering the underlying service. Defined benefit plans In accordance with the Labour Code, the Group in its capacity as an employer in Bulgaria is obliged to pay an indemnity at the amount of the respective employee’s gross remuneration for two months upon termination of employment relations due to retirement. If the employee has acquired within the company of the same Group ten years’ service over the last twenty years, the indemnity amounts to the gross remuneration for six months. In their nature these are unfunded defined benefit schemes. In accordance with the Labour Law in Serbia, the employer of the Serbian company is obliged to pay to its personnel on coming of age for retirement an indemnity at the amount of at least three average salaries calculated at the time of payment. In accordance with the employment legislation in Ukraine and the Collective labour Agreement of the Ukrainian company, the employer is obliged to pay to its personnel on coming of age for retirement an indemnity, which depending on the length of service with the entity may vary between UAH 250 and UAH 500 (between BGN 14 and BGN 29). Also, the company in Ukraine accrues social indemnities, which are paid prior to retirement of employees due to specific labour conditions. According to the employment legislation in Poland, the employer is obliged to pay upon retirement one gross monthly salary. In their nature these are unfunded defined benefit schemes. The calculation of the amount of these liabilities necessitates the participation of qualified actuaries in order to determine their present value at the date of the financial statements, at which they are presented in the consolidated statement of financial position, and respectively, the change in their value – in the consolidated statement of comprehensive income as follows: (a) current and past service costs, interest costs and the gains/losses on a curtailment and settlements are recognised immediately when incurred and are presented in current profit or loss under 'employee benefits expense'; and (b) effects from revaluation 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 'revaluation of defined benefit 62 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 pension plans'. Actuarial gains and losses arise from changes in the actuarial assumptions and experience adjustments. At the date of issue of the consolidated financial statements, the companies of the Group assign certified actuaries who provide their report with calculations regarding the long-term retirement benefit obligations upon termination of employment relations due to retirement. For this purpose, they apply the Projected Unit Credit Method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows, which are expected to be paid within the maturity of this obligation, and using the interest rates of long-term government bonds of similar term, quoted in the respective country where the company itself operates. Share based payments Share based payments to employees and others providing similar services are measured at fair value of the equity instruments as of the grant date. Form remunerations related to share based payments with conditions which have not vested rights the fair value as of the grant date is measured in a way to reflect these conditions and not to account for differences between expected and actual results. Termination benefits In accordance with the local provisions of the employment and social security regulations of the Group companies, the employer is obliged, upon termination of the employment contracts of employees prior to retirement, to pay certain types of indemnities. The Group recognises employee benefit obligations on employment termination before the normal retirement date when it is demonstrably committed, including based on an announced plan (for instance, for restructuring), to terminating the employment contract with the respective individuals without possibility of withdrawal or in case of formal issuance of documents in the case of voluntary redundancy. Termination benefits due more than 12 months are discounted and presented in the consolidated statement of financial position at their present value. 2.24. Share capital and reserves Sopharma AD (the parent company) is a joint-stock company and is obliged to register with the Commercial Register a specified share capital, which should serve as a security for the creditors for execution of their receivables. Shareholders are liable for the obligations of the Group up to the amount of the capital share held by each of them and may claim returning of this share only in liquidation or bankruptcy proceedings. The parent company reports its share capital at the nominal value of the shares registered in the court. According to the requirements of the Commercial Act and the Articles of Association, the parent company is obliged to set aside a Reserve Fund (statutory reserve) by using the following sources: • at least one tenth of the profit, which should be allocated to the Fund until its amount reaches one tenth of the share capital or any larger amount as may be decided by the General Meeting of Shareholders; 63 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • any premium received in excess of the nominal value of shares upon their issue (share premium reserve); • other sources as provided for by a decision of the General Meeting. The amounts in the Fund can only be used to cover annual loss or losses from previous years. When the amount of the Fund reaches the minimum value specified in the Articles of Association, the excess may be used for share capital increase. The treasury shares are presented in the consolidated statement of financial position at acquisition cost (cost) and Group's equity is decreased by their gross purchase price. Gains or losses on sales of treasury shares are at the expense of retained earnings and are carried directly to Group's equity in the 'retained earnings' component. Revaluation reserve – property, plant and equipment is set aside from: • the revaluation surplus between the carrying amount of property, plant and equipment and their fair values at the date of each revaluation; • the revaluation surplus between the carrying amount of property stated as owner-occupied property and their fair values at the date when they are transferred to investment property. Deferred tax effect on the revaluation reserve is directly carried at the account of this reserve. Revaluation reserve is transferred to accumulated profits when the assets are derecognised from the consolidated statement of financial position of the Group or are fully depreciated. The revaluation reserve covers the impairment of the assets to which it relates. It may be used in the implementation of Group's dividend and capital policies only after it is transferred to the 'retained earnings' component. The reserve for financial assets at fair value through other comprehensive income is formed by the effects of fair-value measurement of other long-term equity investments. Upon derecognition of these investments, the reserve form is not recycled through the statement of comprehensive income (through profit or loss for the year). The translation of foreign operations reserve includes the effects of restating the financial statements of the companies abroad from local currency to the presentation currency of the Group. This reserve is recognised as a separate component of equity in the consolidated statement of financial position and as part of the profit or loss in the consolidated statement of comprehensive income on the line 'gains/(losses) on acquisition and disposal of subsidiaries, net' on disposal (sale) of a foreign operation (company). The other equity components constitute a reserve on warrants issued, which is formed by the difference between the issue value of the registered warrants and the transaction costs related to the issue. The warrants are issued and registered at a fixed price, denominated in BGN, and grant future rights to 64 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 conversion into a fixed number of ordinary, dematerialised, registered, freely transferrable parent company shares, and are therefore classified as an equity instrument. 2.25. Financial instruments A financial instrument is any contract that simultaneously gives rise to a financial asset at one entity and a financial liability or equity instrument at another entity. Financial assets Initial recognition, classification and measurement At initial recognition, financial assets are classified in three groups, as subsequently measured: at amortised cost; at fair value through other comprehensive income, and at fair value through profit or loss. The Group initially measures financial assets at fair value, and in the case of financial assets which are not stated at fair value through profit and loss, the direct transaction costs are added. An exception to this rule are trade receivables that do not contain a significant financing component – they are measured based on the transaction price determined under IFRS 15 Revenue from contracts with customers (Note 2.6.2). Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognised on the trade date, i.e., the date that the Group commits to purchase or sell the asset. The classification of financial assets at their initial recognition depends on the characteristics of the contractual cash flows of the respective financial asset and on the Group’s business model for management thereof. In order for a financial asset to be classified and measured at amortised cost or fair value through OCI, it needs to give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result solely from collecting contractual cash flows, selling the financial assets, or both. Subsequent measurement For the purpose of subsequent measurement, financial assets are classified in the following categories: - Financial assets at amortised cost (debt instruments) - Financial assets at fair value through other comprehensive income without “recycling” of cumulative gains or losses (equity instruments) Classification groups Financial assets at amortised cost (debt instruments) 65 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The Group measures a financial asset at amortised cost if both of the following conditions are met: - the financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows and - the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Financial assets at amortised cost are subsequently measured using the effective interest method. They are subject to impairment. Gains and losses are recognised in the statement of comprehensive income (within profit or loss for the year) upon asset disposal, modification or impairment. The Group’s financial assets at amortised cost include: cash and cash equivalents at banks, trade receivables, including from related parties, loans to related and third parties (Note 21, Note 22, Note 24, Note 25, Note 26 and Note 27). Financial instruments at fair value through other comprehensive income (equity instruments) At initial recognition, the Group companies may make an irrevocable election to classify certain equity instruments as financial instruments at fair value through other comprehensive income, but only if they meet the equity definition under IAS 32 Financial Instruments: Presentation and are not held for trading. The classification is determined at an individual level, on an instrument by instrument basis. At derecognition of these assets, gains and losses from measurement to fair value, recognised in other comprehensive income, are not transferred to (recycled through) profit or loss. Dividends are recognised as “financial income” in the statement of comprehensive income (within profit or loss for the year) when the right of payment has been established, except when the Group benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in other comprehensive income. Equity instruments designated as financial instruments at fair value through other comprehensive income are not subject to impairment test. The Group has made an irrevocable election to classify into this category minority equity investments which it holds in the long term and in relation to its business interests in these entities. Significant part of these instruments are listed. They are presented in the consolidated statement of financial position within the „Other long-term equity investments” item. Derecognition A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognised (i.e., removed from the Group’s consolidated statement of financial position) when: - the rights to receive cash flows from the asset have expired, or - the Group has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass- through’ arrangement; and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the 66 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 asset, but has transferred control of the asset When the Group has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control of the asset, the Group continues to recognise the transferred asset to the extent of its continuing involvement. In that case, the Group also recognises an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Group has retained. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay. Impairment of financial assets The Group recognises an allowance (impairment provision) for expected credit losses for all debt instruments which are not held at fair value through profit or loss. Expected credit losses are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms To calculate the expected credit losses for loans to related and third parties, incl. cash and cash equivalents at banks, the Group applies the general impairment approach defined by IFRS 9. Under this approach, the Group applies a 3-stage impairment model based on changes at the initial recognition of the credit quality of the financial instrument (asset). Expected credit losses are recognised at two stages: а. A financial asset which is not credit impaired at its initial recognition/acquisition is classified in Stage 1. These are loans granted to debtors with low risk of default, classified as performing and not overdue. Since its initial recognition, its credit risk and characteristics are subject to continuous monitoring and analyses. The expected credit losses for the financial assets classified in Stage 1 are determined based on credit losses resulting from probable events or default that are possible in the next 12 months of the respective asset’s lifetime (12-month expected credit losses for the instrument). b. When there has been a significant increase in credit risk since the initial recognition of a financial asset, and as a result its characteristics deteriorate, it is classified in Stage 2. Expected credit losses for financial assets classified in Stage 2 are determined for the remaining lifetime of the respective asset, irrespective of the point of default (lifetime expected credit loss (ECL)). 67 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The Group’s management has developed a policy and a set of criteria to analyse, ascertain and assess the occurrence of a condition of “significant increase in credit risk”. The main points of the policy and set of criteria are disclosed in Note 45. In the cases when the credit risk of a financial instrument increases to a level that indicates default, the financial asset is considered to be impaired, and is classified in Stage 3. At this stage, the losses incurred for the lifetime of the respective asset are identified and calculated. The Group’s management has performed the respective analyses, based on which it has determined a set of criteria for default events. One of them is delay in contract payments by over 90 days, unless circumstances exist for a certain instrument that make such claim refutable. Along with that, there are other events, based on internal and external information, which indicate that the debtor is not able to repay all contracted amounts due, including in consideration of all loan collaterals and credit enhancements held by the Group. The main points of the policy and set of criteria are disclosed in Note 45. The Group adjusts expected credit losses determined based on historical data, with forecasted macroeconomic indicators for which it has been established that correlation exists and which are expected to impact the amount of expected credit losses. In order to calculate expected credit losses for trade receivables and contract assets the Group has elected and applies a simplified approach based on an expected credit losses calculation matrix and does not monitor subsequent changes in their credit risk. In this approach, it recognises an allowance (impairment provision) based on lifetime expected credit losses at each reporting date. The Group has developed and applies a provisioning matrix based on its historical experience with credit losses, adjusted with forecast factors specific for debtors and the economic environment, for which a correlation has been established with the percentage of credit losses (Note 45). Derecognition Impaired financial assets are derecognised when there is no reasonable expectation of recovering the contractual cash flows. Financial liabilities Initial recognition, classification and measurement The Group’s financial liabilities include trade and other payables, loans and other borrowings, including bank overdrafts. All financial assets are initially recognised at fair value, and in the case of loans and borrowings and trade and other payables, net of direct transaction costs. The Group’s financial liabilities include trade and other payables, loans and borrowings, including bank overdrafts, derivative financial instruments. Subsequent measurement 68 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The subsequent measurement of financial liabilities depends on their classification as described below: Classification groups Loans and borrowing After initial recognition, the Group measures interest-bearing loans and borrowings at amortised cost, applying the effective interest method. Gains and losses are recognised in the statement of comprehensive income (within profit or loss for the year) when the respective financial liability is derecognised, as well as through amortisation based on the effective interest rate. The amortised cost is calculated by taking into consideration any discounts or premiums at acquisition, as well as fees or costs that constitute an integral part of the effective interest rate. Amortisation is included as a “finance expense” in the statement of comprehensive income (within profit or loss for the year). Derecognition Financial liabilities are derecognised when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognised in the statement of profit or loss. Offsetting (netting) of financial instruments Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognised amounts and there is an intention to settle on a net basis, to realise the assets and settle the liabilities simultaneously. This requirement results from the concept of the economic substance of the Group’s relations with a given counterparty stating that in the simultaneous presence of these two requirements the expected actual future cash flow and rewards for the Group is the net flow, i.e. the net amount reflects the Group’s actual right and obligation resulting from these financial instruments – in all cases to only receive or pay the net amount. If the two conditions are not simultaneously met, it is assumed that the Group’s rights and obligations with respect to these offsetting financial instruments are not exhausted in all situations by only the payment or receipt of the net amount. The offsetting policy is also related to the measurement, presentation and management of actual credit risk and the liquidity risk pursuant from these offsetting instruments. The criteria applied to establish the “current and legally enforceable entitlement to offsetting” are: • lack of dependence on a future event, i.e. it should not only be applicable upon the occurrence of a future event; 69 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • the offsetting should be enforceable and legally defendable during (cumulatively): - the usual business operations; - in case of default/delay, and - 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”. 2.26. Financial guarantee contracts A financial guarantee contract is a contract that requires the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the original or modified terms of a debt instrument Financial guarantee contracts are initially recognised as a financial liability at fair value determined based on the present value of the difference in cash flows between contract payments required under the debt instrument, and payments that would be required without a guarantee payable to a third party upon commitment. The subsequent measurement of financial guarantee liabilities is the higher of the following: • the amount determined in accordance with the expected credit losses model, and • the initially recognised amount, less, when applicable, the cumulative amount of the revenue recognised under the principles of IFRS 15 Revenue from Contracts with Customers. The provision for expected credit losses on financial guarantee contracts is included in the consolidated statement of financial position as ‘other current liabilities”. 2.27. Income taxes Current income taxes of the Bulgarian companies of the Group are determined in accordance with the requirements of the Bulgarian tax legislation – the Corporate Income Taxation Act (CITA). The nominal income tax rate in Bulgaria for 2023 is 10% (2022: 10%). The subsidiaries and joint ventures abroad are charged in accordance with the requirements of the respective local tax regulations by applying the following tax rates: Tax rate Country 2023 2022 Ukraine 18% 18% Serbia 15% 15% Poland 19% 19% Kazakhstan 20% 20% Moldova n/a 12% Russia 20% n/a 70 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Deferred income taxes are determined using the liability method on all temporary differences of each consolidated company existing at the consolidated financial statements date, between the carrying amounts of the assets and liabilities and their tax bases, including for those arising from consolidation adjustments. Deferred tax liabilities are recognised for all taxable temporary differences, with the exception of those originating from recognition of an asset or liability, which has not affected the accounting and the taxable profit/(loss) at the transaction date. Deferred tax assets are recognised for all deductible temporary differences and the carry-forward of unused tax losses, to the extent that it is probable they will reverse and a taxable profit will be available or taxable temporary differences might occur, against which these deductible temporary differences can be utilised, with the exception of the differences arising from the recognition of an asset or liability, which has affected neither the accounting nor taxable profit /(loss) at the transaction date. The carrying amount of all deferred tax assets is reviewed at each reporting date and reduced to the extent that it is probable that they will reverse and sufficient taxable profit will be generated or taxable temporary differences will occur in the same period, whereby they could be deducted or compensated. Deferred taxes, related to items directly credited or charged as other components of comprehensive income or as an equity item in the consolidated statement of financial position, are also reported directly in the respective component of the comprehensive income or the equity item in the statement of financial position. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply to the period and type of operations when the asset is realised or the liability – settled (repaid) on the basis of the tax laws that have been enacted or substantively enacted, and at tax rates of the country under the jurisdiction of which the respective deferred asset or liability is expected to be recovered or settled. Deferred tax assets of a Group company are presented net against the deferred tax liabilities of this company when it is the tax payer in the respective jurisdiction, and this is only in cases where the company is legally entitled to perform or receive net payments of current tax liabilities or income tax receivables. 2.28. Government grants Government grants represent various forms of providing gratuitous resources by a government (local and central authorities and institutions) and/or intergovernmental agreements and organisations. Government grants (from municipal, government and international institutions, including under the procedure of using the European funds and programmes) are initially recognised as deferred income (financing) when there is reasonable assurance that they will be received by the Group and that the latter has complied and complies with the associated thereto requirements. A government grant that compensates the Group for expenses incurred is recognised in current profit or loss on a systematic basis in the same period in which the expenses are recognised. 71 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 A government grant that compensates investment expenses incurred to acquire an asset is recognised in current profit or loss on a systematic basis over the useful life of the asset usually proportionately to the amount of the recognised depreciation charge. 2.29. Net earnings or losses per share Basic net earnings or losses per share are calculated by dividing net profit or loss attributable to ordinary equity holders of the parent company by the weighted average number of ordinary shares outstanding during the period. The weighted average number of ordinary shares outstanding during the period is the number of ordinary shares outstanding during at the beginning of the period, adjusted by the number of ordinary shares bought back or issued during the period multiplied by a time-weighting factor. This factor represents the number of days that the shares are outstanding as a proportion of the total number of days in the period. In case of a capitalisation, bonus issue or splitting, the number of the outstanding ordinary shares as at the date of such event, is adjusted as to reflect the proportional change in the number of outstanding ordinary shares as if the event has occurred in the beginning of the earliest presented period. Diluted net earnings or losses per share are calculated dilutive potential ordinary shares (warrants) have been issued by the parent. Upon the calculation of diluted net earnings or loss per share for the period attributable to the parent, adjustment is made to the net profit or loss for the period which is subject to distribution to shareholders – holders of ordinary shares of the parent, and the average weighted number of shares in circulation, with the effect of all dilutive potential ordinary shares, comprising warrants. The potential ordinary shares are aimed to offset the decrease in the net earnings per share when the conversion thereof would increase the net earnings per share or would decrease loss per share from continuing operations. The profit or loss for the period which is subject to distribution to shareholders – holders of ordinary shares in the parent is increased by adding the amount of dividends and post-tax interest recognized in the period in relation to the dilutive potential ordinary shares, and is adjusted for any other changes to profit or loss that might arise as a result of the conversion of dilutive potential ordinary shares. The options and warrants have a decreasing value only when the average market price of ordinary shares for the period exceeds the price upon exercising the options or warrants (i.e. they generate profit). Earnings per share reported in prior periods are not adjusted retrospectively to account for changes in the prices of ordinary shares. Diluted net earnings or losses per share is calculated based on the calculated base net earnings or loss per share, adjusted as follows: (a) the profit or loss for the period attributable to holders of ordinary shares of the parent, is increased by the amount of post-tax dividend and interest recognised in the period in relation to the dilutive potential ordinary shares, and is adjusted for all other changes in profit and loss that might arise as a result of the conversion of dilutive potential ordinary shares; and 72 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 (b) The average weighted number of ordinary shares in circulation in the period is increased by adding the average weighted number of the additional ordinary shares that would be in circulation upon conversion of all dilutive potential ordinary shares. 2.30. Segment reporting The Group identifies its reporting segments and discloses segment information in accordance with the organisational and reporting structure used by the management of the parent company for current general monitoring and management of the Group and its components. Operating segments are business components, which are regularly measured by members of the management who take operating decisions by using financial and operating information prepared specifically on the segment for the purposes of current monitoring and assessment of results and allocating Group's resources. Group's operating segments are currently monitored and directed separately as each of them represents a separate business area that offers various products and bears various business risks and rewards. The operating segments that the Group’s management monitors, measures and controls risks and return therefrom are defined based on the main business operations performed on pharmaceutical products, namely: production and trade. Information by operating segments The Group uses one basic measuring unit – gross margin (profit) for measuring the results in the operating segments and allocation of resources between them. It is defined as the difference between segment revenue and segment expenses directly attributable to the respective segment. Segment assets, liabilities, respective revenue, expenses and results include those that are and can be directly attributable to the respective segment as well as such that can be allocated on a reasonable basis. Usually they include: (a) for revenue - sales of finished products; (b) for expenses - raw materials and consumables used, depreciation and amortisation and production staff remuneration, cost of goods sold; (c) for assets - property, plant and equipment and inventories, receivables from related parties, trade receivables and cash and cash equivalents; (d) for liabilities - payables to personnel and for social security, payables to related parties, trade payables and bank loans for direct financing (long-term and short-term). Capital expenditures (investments) by business segments are differentiated expenses incurred in the period of acquisition or construction of segment non-current assets, which are expected to be used for more than one period. The Group manages its investments in securities, trade accounts and financial resources granted/received as well as taxes at Group and entity level and they are not allocated at segment level. The results of the operations regarded as accidental ones compared to the main types of operations (activities) of the Group as well as revenue, expenses, liabilities and assets that are not subject to allocation are stated separately in the item 'total at Group level'. In general, these amounts include: other operating income unless originating from the operation of a particular segment, administrative expenses, interest income and expenses, realised and unrealised gains and losses from foreign currency transactions and 73 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 investments, investments in other companies, trade and other receivables, trade payables and loans received, tax accounts, general-purpose production and administrative equipment. Inter-segment transfers: segment revenue, expenses and results, include internal transfers between business segments. These transfers are accounted for at competitive market prices charged to third party customers of similar goods, and are eliminated at consolidated financial statements level. Investments in joint ventures and associates, accounted for by using the equity method, are excluded from segment assets and segment revenue. They are stated within non-allocated assets, and revenue therefrom is presented within the item “gains/(losses) from joint ventures and associates, net”. The applied accounting policy for segment reporting is based on that used by the Group for the preparation of its statutory financial statements for public purposes. Additionally, the Group discloses information about important customers when the amount of revenue realised from the respective client exceeds 10% of the total amount of Group’s consolidated operating revenue. 2.31. Fair value measurement Some of Group's assets and liabilities are measured and presented and/or just disclosed at fair value for financial reporting purposes. These include: (a) on a recurring (annual) basis – other long-term equity investments, investment property, bank loans granted and received and loans to/from third parties, certain trade and other receivables and payables, receivables and payables under finance leases, etc. (b) on a non- recurring (periodical) basis – non-financial assets such as property, plant and equipment. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between independent market participants at the measurement date. Fair value is an exit price and is based on the assumption that the sale transaction will take place either in the principal market for this asset or liability or in the absence of a principal market – in the most advantageous market for the asset or liability. Both the designated as a principal market and the most advantageous market are markets to which the Group companies must have an access. Fair value is measured from the perspective of using the assumptions and judgments that potential market participants would use when pricing the respective asset or liability assuming that market participants act in their economic best interest. In measuring the fair value of non-financial assets the starting point is always the assumption what would be the highest and best use of the particular asset for the market participants. The Group applies various valuation techniques that would be relevant to the specific features of the respective conditions and for which it has sufficient available inputs while trying to use at a maximum the publicly observable information, and respectively, to minimize the use of unobservable information. It uses the three acceptable approaches – the market approach, the income approach and the cost approach – whereas the most frequently applied valuation techniques include direct and/or adjusted quoted market 74 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 prices, market comparables (analogues) and discounted cash flows, including based on capitalised rental income. All assets and liabilities that are measured and/or disclosed in the consolidated financial statements at fair value, are categorised within the following fair value hierarchy, namely: • Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities; • Level 2 — Valuation techniques that use inputs other than directly quoted prices but are observable, either directly or indirectly, including where the quoted prices are subject to certain adjustments; and • Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised at fair value in the consolidated financial statements on a recurring basis, the Group determines at the date of the consolidated financial statement whether transfers between levels in the fair value hierarchy are deemed to be made for a particular asset or liability depending on the inputs available and used at that date. Internal rules and procedures for measuring the fair value of various types of assets and liabilities have been developed centrally in the parent company. For the purpose, a specifically designated individual, subordinated to the Finance Director of the Group, organised the performance of the overall valuation process and also coordinates and observes the work of the external appraisers. The Group uses the expertise of external certified appraisers to determine the fair value of the following assets and liabilities: other long-term equity investments Level 2 and Level 3, investment properties – Level 1, property, plant and equipment – Level 2. The choice of such appraisers is made on an annual basis using the following criteria: applied professional standards, professional experience and knowledge, reputation and market status. The need for rotation of external appraisers is periodically assessed – every three to five years. The applied valuation approaches and techniques as well as the used inputs for each case of fair value measurement are subject to mandatory discussion and coordination between the external experts – appraisers and the specifically designated individual, engaged with measurements, and so is the acceptance of the issued appraiser's reports – especially with regard to the significant assumptions and the final conclusions and proposals for the fair value amount. The final fair value measurements are subject to approval by the Finance Director and/or Chief Accountant, Executive Director and the Board of Directors of the respective company and the Finance Director of the Group. In accordance with Group accounting policy, at the end of each reporting period the specifically designated individual, engaged with measurements, performs a general analysis of collected in advance information about the movement in the values of assets and liabilities of the Group companies that are subject to valuation or to a disclosure at fair value, the type of available data and the possible factors for the observed changes, and proposes for approval to the Finance Director, the approach for measuring the 75 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 fair value of the respective assets and liabilities at that date. Where necessary, this is explicitly consulted with the involved external appraisers. The results of the assessment of the fair value measurement procedure are presented to the audit committee and to the independent auditors of the respective companies as well as to the Finance Director and the independent auditors of the Group. For the purposes of fair value disclosures, the Group has classified the respective assets and liabilities on the basis of their nature, basic characteristics and risks as well as of the fair value hierarchical level. 2.32. Critical accounting judgments on applying the Group's accounting policies. Key estimates and assumptions of high uncertainty. Revenue from contracts with customers Upon revenue recognition and preparation of the consolidated annual financial statements, the management performs various judgements, estimates and assumptions that impact the revenue, costs, assets and liabilities accounted for and the respective disclosures thereto. As a result of the uncertainty regarding these assumptions and estimates, significant adjustments may occur in the carrying amount of the assets and liabilities concerned in the future, respectively the costs and revenue recorded. The key judgements and assumptions that materially impact the amount and term for recognition of revenue from contracts with customers, including the timing, transfer of the control of the promised finished goods, goods and/or services, the estimation of variable consideration for returned assets and volume rebates, are disclosed in Note 2.6.1. Fair value measurement of equity investments When the fair value of equity investments carried in the statement of financial positions cannot be obtained based on quoted prices on active markets, their fair value is determined by using other valuation models and techniques, including the discounted cash flows model. The input used in these models is obtained from observable markets, where possible, but when this cannot be done, significant judgement is applied to determine fair values. Such judgement involves the review, analysis and assessment of input, for instance regarding liquidity risk, credit risk, and volatility. The changes in assumptions for these factors may impact the amount of the fair value of financial instruments stated. Calculation of expected credit losses for loans and guarantees granted, trade receivables, including from related parties, and cash and cash equivalents The measurement of expected credit losses for financial assets stated at amortised cost (loans granted, trade receivables and contract assets, cash and cash equivalents), as well as for financial guarantees granted is an area that requires the use of complex models and material assumptions for future economic conditions and the credit behaviour of customers and debtors (for instance, the probability of counterparties not meeting their obligations and the pursuant losses). 76 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 In order to apply these requirements, the Group’s management makes a number of material judgements, such as: (a) determining criteria to identify and measure significant credit risk increases; (b) selection of suitable models and assumptions to measure expected credit losses; (c) establishing groups of similar financial assets (portfolios) for the purpose of measuring expected credit losses, (d) establishing and assessing the correlation between historical default rates and the behaviour of certain macro indicators to reflect the effects of forecasts for these macro indicators in the calculation of expected credit losses. (Note 45). Regarding trade receivables, including from related parties The Group uses provisioning matrixes calculate expected credit losses from trade receivables and contract assets. The provision rates are based on days past due for groups from different customer segments (portfolios) sharing similar loss models (type of client sector). Each provisioning matrix is initially based on detailed historical observation of default rates in the Group companies’ receivables and the movement of receivables by delay groups. Usually, historical data is used for at least three years as per the financial statement’s date. Moreover, the Company calibrates the matrix so as to adjust historically ascertained dependence for credit losses with forecast information by also using probability scenarios. If certain forecast economic conditions, measured by means of certain macro indicators, are expected to aggravate or improve in the next year, which might result in established correlational increase in payment delays for a certain sector (type of client), the historic default rates are adjusted. At each reporting date, the observable historical default rates are updated and the effects of changes in the estimates are accounted for. The assessment of the relation between observable historical default rates, the forecast economic conditions and expected credit losses is a significant accounting judgement. The amount of expected credit losses is sensitive to changes in circumstances and forecast conditions. The Group’s historical credit closes and the forecast economic conditions may deviate from actual collection rates in the future. Regarding loans and guarantees granted: The Group has adopted the general approach for calculating impairment based expected credit losses of the loans granted, pursuant to IFRS 9. For this purpose, the Group applies a model of its choice. Its application goes through several stages. First, the debtor’s credit rating is determined by means of several rating agencies’ methodologies for the respective economic sectors and ratios, quantitative and qualitative parameters and indicators of the entity. Second, by using statistical models including historical default probability data (PD), transfer between ratings, macro-economic data and forecast, the relevant marginal PD are calculated by year for each rating. 77 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Third, based on this analysis and the determined rating, and based on a set of indicators for the instrument’s characteristics at the date of each financial statements, the following parameters are determined: instrument stage (Stage 1, Stage 2 or Stage 3), PD needed for the instrument’s lifetime, as well as loss given default (LGD). The main formula used to calculate expected credit losses is: ЕCL=EADxPDxLGD, where: ECL is the expected credit losses indicator; ЕAD is the exposure at default indicator; PD is the probability of default indicator; LGD is the loss given default indicator. Upon determining losses, all guarantees and/or collaterals and/or insurances are taken into consideration. Thus, in the final step, by using all these parameters and following discount, the expected credit loss for the respective period of the respective financial assets is calculated. Stage 1 includes loans granted which are classified as “regular” according to the internal risk classification scheme developed. These are loans granted to debtors with low default rates, regular servicing, without considerable aggravation of key indicators (financial and non-financial), and without amounts past due. The expected impairment loss for such loans is calculated based on default probability for the next 12 months and the Group’s expectation for loss amount upon exposure default over the next 12 months. Stage 2 includes granted loans classified as “renegotiated”. These are loans with respect to which (based on a set of indicators) a significant aggravation of the credit risk related to the debtor has been established as compared to the exposure’s initial recognition. The expected impairment loss for these loans is calculated based on the default probability for the lifetime of the loan which is considered to be credit- unimpaired, and the Group’s expectations for loss amount upon exposure default over the lifetime. Stage 3 includes granted loans which are classified as “underperforming”. These are loans for which evidence exists that the asset is credit-impaired, i.e. a credit event has occurred (according to the policy on default event eligibility). Therefore, an analysis is performed of a system of indicators used to identify the occurrence of credit losses. Impairment losses for such loans are calculated based on probability-weighted scenarios for the Group’s expectations for the loss amount of the non-performing credit-impaired exposure throughout its lifetime. A granted loan is credit-impaired when one or more events have occurred which have an adverse effect on expected future cash flows from this loan, accordingly financial assets. The Group applies the same model with respect to expected credit losses from guarantees granted and certain individual receivables. Cash To calculate expected credit losses for cash and cash equivalents at banks, the Group applies the general “three-stage” impairment model under IFRS 9. For this purpose, it applies a model based on the 78 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 bank’s public ratings as determined by internationally recognised rating firms like Moody’s, Fitch, S&P, BCRA and Bloomberg. Based on this, on the one hand, PD (probability of default) indicators are set by using public data about PD referring to the rating of the respective bank, and on the other hand, through the change in the rating of the respective bank from one period to the next, the Company assesses the presence of increased credit risk. Loss given default is measured by using the above formula. Upon determining LGD, the presence of secured and/or insured amounts in the respective bank accounts is taken into consideration. Recognition of tax assets Upon recognition of deferred tax assets, the Group’s management assesses the probability of future reversal of individual temporary differences and the abilities of each Group’s company to generate sufficient profit to compensate such reversal. With respect to subsidiaries which have continued to state losses over the last few years, the Group’s management has identified as at the date of issuance of the consolidated financial statement significant uncertainty about whether and to what extent these companies would be able to generate sufficient taxable profit within the period designated under the respective local tax legislation on tax losses carry forward. . Inventories Normal capacity Group's normal production capacity is determined on the basis of management assessments (made after relevant analyses) for optimum load of the production facilities and return on the investments made therein, with structure of the manufactured finished products accepted as being common for the Group. Impairment At the end of each financial year, the Group companies review the state, useful life and usability of the existing inventories. In case of identified inventories bearing a potential of not being realised at their current carrying amount in the following reporting periods, the Group companies impair these inventories to net realisable value. Revaluation of property, plant and equipment As at 31 December 2021, a thorough review was performed of the changes which have occurred in the fair value of the Group companies’ non-current tangible assets, as well as of the physical and technical condition thereof, operation means and residual useful lives. Respectively, revaluation was carried out, since at this date the five-year period for revaluation adopted in accordance with the policy expires. The review and revaluation were performed with the professional support of independent licensed appraisers. The management has performed detailed analysis of the licensed appraisers’ reports, incl. the sensitivity tests. As a result, it has stated revaluation, and has recognized new revaluation reserve at the amount of BGN 9,466 thousand, net of impairment and deferred tax (Note 15) and deferred tax and has stated current impairment expense at the amount of BGN 9,779 thousand. In addition, a current expense for impairment was stated at the amount of BGN 697 thousand of PPE in process. 79 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The Group has decided to not revalue the following groups of assets: a/fully depreciated assets acquired before 31 December 2006, as far as the potential additional depreciation costs thereon are already offset by the increased maintenance costs; b/ assets acquired in 2021 – as far as these asset’s acquisition cost was close to their fair value; c/ right-of-use assets for which under agreements for consideration the right of control over the use of assets for a certain period of time is obtained, which as at 31 December 2021 is between 2 and 4 years; and d/ assets from all groups (with the exception of properties) for which the market analyses show that the changes in the value of these assets are not affected by price or market changes over the period, but result from differences in assumptions regarding useful life. The outcomes of the fair value measurement process are presented to the Group auditors. In 2023, impairment of property, plant and equipment amounting to BGN 1,890 thousand (2022: BGN 9,589 thousand) was charged. Actuarial calculations Calculations of certified actuaries have been used every year when determining present value of long-term payables to personnel upon retirement on the basis of assumptions for mortality rate, staff turnover rate, future salaries level and discount factor. Cash pool In 2021 a cash pool scheme was introduced at Sopharma Trading Group for the purpose of more effective short-term management of the group’s cash flows by gathering the bank balances of domestic subsidiaries within a single bank account. Participants’ balances are transferred on a daily basis to a main bank account managed by the cash pool leader – the subsidiary Sopharma Trading AD. Litigation provisions With regard to the pending litigations against companies of the Group, the management of respective companies have judged, jointly with their lawyers, that at this stage the probability and risks of a negative outcome therefrom is still below 50% and therefore, no provisions for payables under litigations have been included in the consolidated annual statement of financial position as at 31 December 2023 (31 December 2022: none). 80 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 3. REVENUE FROM CONTRACTS WITH CUSTOMERS Group revenue from contracts with customers includes: 2023 2022 BGN'000 BGN'000 Revenue from sales of goods 1,555,753 1,379,123 Revenue from sales of finished products 319,551 283,893 Total 1,875,304 1,663,016 Contract balances are as follows: 2023 2022 BGN ‘000 BGN ‘000 Receivables under contracts with customers – third parties, net of impairment (Note 24) 233,979 195,208 Receivables under contracts with customers – related parties, net of impairment (Note 25) 2,072 250 Contract liabilities under contracts with customers – third parties (Note 42) 3,274 2,664 Contract liabilities at 31 December 2023 include advance payments received for the delivery of medical equipment, at the amount of BGN 3,621 thousand (31 December 2022: BGN 2,652 thousand) and for delivery of medicinal and medical products – BGN 13 thousand (31 December 2022: BGN 12 thousand). The change in contract liabilities for the period from 1 January to 31 December 2023 is as follows: 2023 2022 BGN'000 BGN'000 Balance at 1 January (Note 42) 2,664 978 Revenue stated, which was recognised as contract liabilities, incl.: (2,512) (978) - Advance payments received (2,512) (978) Payments from clients (excluding those recognised as revenue 3,122 2,664 in the period) Balance at 31 December 3,274 2,664 The reimbursement obligations as at 31 December 2023 amount to BGN 9,942 thousand (31 December 2022: BGN 7,877 thousand) and include liabilities under retrospective trade volume discounts payable under contracts with customers which have been or will be reimbursed over the next reporting period. (Note 42). 81 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 4. OTHER OPERATING INCOME AND LOSSES Other operating income and losses, net include: 2023 2022 BGN'000 BGN'000 Services rendered 11,893 7,535 Gain on sale of property, plant and equipment 4,533 498 Government grants 1,419 841 Loss from foreign exchange differences (1,259) (180) Rentals 1,044 1,312 Written-off liabilities and reversed provisions 873 426 Gain from a change in the fair value of investment properties (Note 18) 446 1,125 Social activities and events 229 239 Gain on sale of materials 215 128 Interest on current accounts 204 149 Gain on leases 132 73 Other 1,092 896 Total 20,821 13,042 The services rendered include: 2023 2022 BGN'000 BGN'000 Subcontractor services 5,650 1,701 Fees to National Health Insurance Fund 2,119 1,933 Advertising and marketing 1,576 1,333 Pre-distribution income 776 980 Gamma irradiation 272 301 Subscription technical service 243 196 Secondary packaging 161 233 Transport services 146 146 Lab analysis services 139 377 Other 811 335 Total 11,893 7,535 82 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 5. MATERIALS AND CONSUMABLES USED 2023 2022 BGN'000 BGN'000 Basic materials 70,289 63,331 Electricity 8,730 10,682 Spare parts, laboratory and technical materials 8,719 6,863 Heating 4,732 7,078 Fuels and lubricating materials 3,772 4,418 Advertising materials 2,269 2,050 Work clothing and PPE 1,287 1,234 Stationery 1,237 999 Auxiliary materials 1,002 871 Water 541 479 Assets below materiality threshold 398 331 Impairment of materials 287 385 Samples 279 172 Other 319 236 Total 103,861 99,129 Expenses on basic materials include: 2023 2022 BGN'000 BGN'000 Substances 28,297 28,339 Liquid and solid chemicals 12,911 10,099 Packaging materials 12,903 12,143 Foil 3,490 2,835 Sanitary-hygienic and dressing materials 3,138 3,054 Herbs 2,946 1,065 Vials 2,494 2,144 Ampoules 2,277 2,347 Tubes 1,151 862 Polypropylene, polyethylene, polystyrene 290 266 Other 392 177 Total 70,289 63,331 83 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 6. HIRED SERVICES EXPENSE Hired services expense includes: 2023 2022 BGN'000 BGN'000 Advertising 35,482 23,815 Consulting services 7,555 7,523 Crafting 6,418 4,509 Forwarding and transportation services 5,138 4,721 Buildings and equipment maintenance 4,609 3,781 Rentals and utilities 4,126 3,040 Communications 3,919 2,144 Subscription fees 3,864 4,517 Bank and regulatory charges 3,220 2,280 Security 2,233 2,010 Local taxes and charges 2,185 2,066 Insurances 1,249 1,269 Commissions 903 1,228 Vehicle repair 885 842 Other 6,793 6,381 Total 88,579 70,126 The accrued expenses for the year for the mandatory audit of the individual and consolidated annual financial statements are in the amount of BGN 750 thousand (2022: BGN 677 thousand) In 2023 and 2022, the statutory auditors of the parent company did not provide any other services. 7. EMPLOYEE BENEFITS EXPENSE 2023 2022 BGN'000 BGN'000 Current wages and salaries 135,181 117,776 Social security contributions 23,310 20,537 Social benefits and payments 6,968 4,918 Accruals for unused paid leaves 2,418 2,129 Tantieme 1,262 737 Accruals for long-term retirement benefits to personnel (Note 32) 1,196 1,344 Social security/health insurance contributions on leaves 405 388 Total 170,740 147,829 84 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 8. OTHER OPERATING EXPENSES 2023 2022 BGN'000 BGN'000 Depreciation of goods, production and work in progress 4,085 1,465 Representative events 2,341 1,991 Business trips 1,860 1,095 Scrap and lack of goods 1,716 1,542 Donations 859 438 Net change in the allowance for impairment of credit losses on receivables, incl. from related parties (Note 9) 744 3,399 Unrecognised tax credit 560 620 Trainings 292 225 Scrap of finished products and work in process 225 220 Fines and penalties to suppliers 173 1,155 Payments to the budget for taxes and interest on taxes 154 155 Scrap of fixed assets 126 928 Receivables written-off 85 93 Other 1,101 1,048 Total 14,321 14,374 9. IMPAIRMENT OF ASSETS 2023 2022 BGN'000 BGN'000 Accrued impairment for credit losses from receivables, including from related parties 4,350 6,811 Reversed impairment for credit losses from receivables, including from related parties (3,606) (3,412) Net change in allowance for impairment of credit losses on receivables, incl. from related parties (Note 8) 744 3,399 Impairment of goods, finished products and works in process (Note 8) 4,085 1,465 Impairment of inventories (Note 5) 287 385 Total 5,116 5,249 85 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 10. IMPAIRMENT OF NON-CURRENT ASSETS OUTSIDE THE SCOPE OF IFRS 9 2023 2022 BGN'000 BGN'000 Impairment of property, plant and equipment (Note 16) 1,890 9,589 Impairment of goodwill (Note 17) - 9,601 Impairment of investments in joint ventures (Note 19) - 1,593 Total 1,890 20,783 11. FINANCE INCOME Finance income includes: 2023 2022 BGN'000 BGN'000 Interest income on loans granted 2,603 2,223 Income from interest on bank deposits 954 4 Interest income on overdue trade receivables 347 558 Interest income on assignment contracts 127 71 Income from interest on receivables under special contracts 117 149 Reimbursed provision for financial guarantees 105 - Net gain from exchange differences on foreign currency loans and leases 77 - Income from provided sureties and guarantees 51 52 Equity income (dividends) 25 33 Net gain from exchange differences on receivables from securities - 214 transactions Total 4,406 3,304 12. FINANCE COSTS Finance costs include: 2023 2022 BGN'000 BGN'000 Interest expense on loans received 8,454 4,403 Interest expense on leases 1,759 1,141 Bank fees and charges on loans and guarantees 1,528 1,365 Net change in the allowance for impairment for credit losses on receivables under business loans granted 1,256 1,856 Expense for other interest 687 391 Net loss from exchange differences on receivables from securities transactions 128 - Interest expense on factoring agreements 80 84 Expenses related to the payment of dividends 6 - Net change in the impairment allowance for credit losses on receivables under provided guarantees 3 - Net loss from exchange differences on foreign currency loans and leases - 161 Provision for financial guarantees - 16 Total 13,901 9,417 86 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 13. GAINS/LOSSES FROM ASSOCIATES AND JOINT VENTURES 2023 2022 BGN'000 BGN'000 Gains from associates, net 24,644 22,866 (Losses)/gains from joint ventures, net (171) (231) 24,473 22,635 The gains from associates include: 2023 2022 BGN'000 BGN'000 Group’s share in the current profit of associates 22,386 22,866 Net gain on sale of shares 2,258 - Total 24,644 22,866 The (losses)/gains from joint ventures, net include: 2023 2022 BGN'000 BGN'000 Group’s share in the current loss of joint venture (166) (224) Effect of transactions with Group companies (5) (7) Total (171) (231) 14. INCOME TAX EXPENSE Consolidated statement of comprehensive income 2023 2022 (profit or loss for the year) BGN'000 BGN'000 Taxable profit of the Group companies for the year 121,365 99,808 Revaluation reserve included as an increase in the annual tax return (1,512) (1,299) Taxable profit for the year 119,853 98,509 Current income tax expense for the year (Note 2.27) 13,811 11,399 Tax adjustment for past periods 39 143 Deferred income taxes Origination and reversal of temporary differences (2,526) (2,799) Total income tax expense carried to the consolidated statement of comprehensive income (within profit or loss for the year) 11,324 8,743 87 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Reconciliation of income tax expense applicable to the consolidated accounting profit or loss 2023 2022 BGN'000 BGN'000 Accounting profit for the year 111,198 85,076 Income tax for the year (Note 2.27) 11,693 8,259 Unrecognised amounts under the tax return Related to increases 3,740 4,266 Related to decreases (4,854) (5,837) Tax loss for the current year on which no deferred tax assets are recognised 668 2,157 Decreases related to tax losses for which no tax asset was recognised in prior periods 77 (102) Total income tax expense carried to the consolidated statement of comprehensive income (within profit or loss for the year) 11,324 8,743 Second Pillar income taxes The Second Pillar legislation, which introduces a minimum global tax rate of 15% for multinational enterprises with consolidated revenues above EUR 750 million (additional tax), has been adopted in Bulgaria from 1 January 2024. The current nominal corporate tax rate in Bulgaria is 10% , and the effective tax rate under the Second Pillar is 15%. Sopharma AD is the ultimate parent company of a multinational Group with consolidated revenues of over 750 million euros and falls within the scope of the requirement to supplement the tax under the Second Pillar, as well as the other companies of the Group. The Group applies the exemption for the recognition and disclosure of information on deferred tax assets and liabilities related to income taxes under the Second Pillar, as provided for in the amendments to IAS 12 issued in May 2023 and approved by the EU in November 2023. Since the legislation is not in force as of 31.12.2023, the Group has no current tax exposure at the reporting date. The Group is in the process of assessing the potential impact of second pillar income taxes. If the additional tax were implemented in 2023, then the estimated effective tax rate in 2023 would be more than 10% and the top-up tax rate would be the difference to 15%. In addition, the share of profit before taxes and the effective tax rates in the financial year commencing on 1 January 2024 will depend on factors such as the Group's income/expenses and the provisions of the Bulgarian Corporate Income Tax Code . 88 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The tax effects regarding items of other comprehensive income are as follows: 2023 2022 BGN'000 BGN'000 Tax Tax Pre-tax benefit/ Amount Pre-tax benefit/ Amount amount (expense) net of tax amount (expense) net of tax Items that will not be reclassified to profit or loss (Loss)/gain on revaluation of 33 (3) 30 (991) 99 (892) property, plant and equipment Net change in the fair value of other 1,766 - 1,766 (1,047) - (1,047) long-term equity investments (1,472) - (1,472) 1,498 - 1,498 Revaluation of defined benefit 327 (3) 324 (540) 99 (441) pension plans Items that may be reclassified to profit or loss Exchange differences on translating (1,302) - (1,302) (4,637) - (4,637) foreign operations Share of other comprehensive income 4,893 - 4,893 (790) - (790) of associates 3,591 - 3,591 (5,427) - (5,427) Other comprehensive income for 3,918 (3) 3,915 (5,967) 99 (5,868) the year 15. OTHER COMPREHENSIVE INCOME Other components of comprehensive income include: Items of other Items of other Total items of other comprehensive income comprehensive income comprehensive income attributable to the Group attributable to non- controlling interests 2023 2022 2023 2022 2023 2022 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Items that will not be reclassified to profit or loss Revaluation of property, plant and equipment 33 (991) - - 33 (991) Net change in the fair value of equity investments measured at fair value through other comprehensive income 1,766 (1,047) - - 1,766 (1,047) Revaluation of defined benefit pension plans (1,388) 1,355 (84) 143 (1,472) 1,498 Income tax related to other comprehensive income (3) 99 - - (3) 99 Items that may be reclassified to profit or loss Foreign exchange differences from restatement of foreign operations (1,302) (4,637) - - (1,302) (4,637) Portion of other comprehensive income of associates 4,893 (790) - - 4,893 (790) Other comprehensive income for the year 3,999 (6,011) (84) 143 3,915 (5,868) 89 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 16. PROPERTY, PLANT AND EQUIPMENT Land Plant Other Assets Total and buildings and equipment in progress 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 333,813 305,758 279,086 269,771 53,508 51,271 5,513 4,798 671,920 631,598 Additions 17,695 54,257 5,769 3,602 9,324 5,892 13,592 17,256 46,380 81,007 Effect from revaluation - - 20 - 13 - - - 33 - Effects from translation of foreign currency (312) (1,155) (470) (1,593) (115) (384) (6) (20) (903) (3,152) Disposals (21,215) (18,824) (7,861) (2,121) (5,864) (3,965) (330) (2,230) (35,270) (27,140) Written-off book value of assets upon disposal of subsidiaries - (503) - (47) - (254) - - - (804) Impairment - (9,589) (34) - - - - - (34) (9,589) Transfer to property, plant and equipment 3,937 3,869 7,102 9,474 655 948 (11,694) (14,291) - - Transfer to/(from) investment properties (354) - (107) - (86) - - - (547) - Balance at 31 December 333,564 333,813 283,505 279,086 57,435 53,508 7,075 5,513 681,579 671,920 Accumulated depreciation and impairment Balance at 1 January 89,957 78,719 172,578 160,348 32,978 30,138 - - 295,513 269,205 Depreciation charge for the year 21,871 20,602 16,710 15,041 7,150 6,723 - - 45,731 42,366 Impairment 1,726 991 130 - - - - - 1,856 991 Effects from translation of foreign currency (113) (349) (275) (859) (91) (253) - - (479) (1,461) Written-off depreciation (5,637) (9,552) (7,239) (1,918) (5,427) (3,437) - - (18,303) (14,907) Depreciation written-off upon disposal of subsidiaries - (454) - (34) - (193) - - - (681) Transfer to/(from) investment properties (204) - (87) - (72) - - - (363) - Balance at 31 December 107,600 89,957 181,817 172,578 34,538 32,978 - - 323,955 295,513 Carrying amount at 31 December 225,964 243,856 101,688 106,508 22,897 20,530 7,075 5,513 357,624 376,407 Carrying amount at 1 January 243,856 227,039 106,508 109,423 20,530 21,133 5,513 4,798 376,407 362,393 90 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 As at 31 December 2023, the tangible fixed assets of the Group within “land and buildings” include: land amounting to BGN 51,219 thousand (31 December 2022: BGN 60,252 thousand) and buildings of carrying amount BGN 174,745 thousand (31 December 2022: BGN 183,604 thousand). Tangible fixed assets in progress as at 31 December include: • expenses on new buildings construction – BGN 1,116 thousand (31 December 2022: BGN 1,495 thousand); • buildings reconstruction – BGN 1,741 thousand (31 December 2022: BGN 813 thousand); • supply of equipment – BGN – 355 thousand (31 December 2022: BGN 488 thousand); • advances granted – BGN 3,842 thousand (31 December 2022: BGN 2,567 thousand); • other – BGN 21 thousand (31 December 2022: BGN 150 thousand). The total cash outflow from leases in 2023 amounts to BGN 18,795 thousand (2022: BGN 16,081 thousand). As at 31 December 2023, the Group has leased fixed tangible assets with carrying amount of BGN 1,172 thousand (31 December 2022: BGN 1,260 thousand). As at 31 December 2023 Property, plant and equipment include right-of-use assets with carrying amounts respectively: in the group of “land and buildings” – BGN 76,608 thousand (31 December 2022: BGN 78,470 thousand), in the group of Machinery, plant and equipment - BGN 1,002 thousand (31 December 2022: BGN 97 thousand), within “others” – BGN – 9,071 thousand (31 December 2022: BGN 6,449 thousand). Right-of-use assets are disclosed in detail in Note 33. Other data The following encumbrances have been constituted on tangible fixed assets of the Group as at 31 December 2023 in relation to received loans (Notes 29 and 36) as follows: • Land and building with a carrying amount respectively of BGN 27,474 thousand and BGN и 54,121 thousand (31 December 2022: respectively, BGN 27,459 thousand and BGN 58,194 thousand); • Pledges on equipment, transportation vehicles and furniture and fixtures with carrying amount of BGN 22,686 thousand (31 December 2022: BGN 30,045 thousand); • Pledges on facilities – none (31 December 2022: BGN 131 thousand). Periodical revaluation to fair value • Revaluation of property, plant and equipment was performed as at 31 December 2021 with the assistance of an independent certified appraiser for the purpose of determining the fair value of the assets in accordance with the requirements of IFRS 13 and IAS 16. • During this revaluation, the following main approaches and valuation methods were applied to measure the fair value of the different types of tangible assets: • ‘market approach’ and ‘market comparables’ approach – for regulated land plots and agricultural land for which an actual market exists, there are market comparables and transactions therewith and there is basis for comparison – the fair value adopted is the market value determined using the comparative method; 91 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • ‘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 revaluation as at 31 December 2021 are as follows: • Measurement to fair value as at 31 December 2021, carried to the statement of comprehensive income (within profit or loss for the year) at the amount of BGN 10,476 thousand, incl. 697 thousand for property, plant and equipment in process (Note 10); • Measurement to fair value carried to the statement of comprehensive income (within other comprehensive income) at the amount of BGN 10,616 thousand, incl. effect of measurement to fair value in a joint venture (Note 15). 92 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Intellectual property 17. INTANGIBLE ASSETS Goodwill Software rights 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 31,011 31,308 36,983 33,265 60,793 61,638 2,757 2,847 131,544 129,058 Additions - - 3,790 2,624 12,402 81 3,230 1,442 19,422 4,147 Effects from translation of foreign currency (83) (257) (9) (25) 565 19 - - 473 (263) Transfer - - 1,177 1,134 495 51 (1,672) (1,185) - - Written-off book value of assets upon disposal of subsidiaries - (40) - - - (643) - - - (683) Disposals - - (221) (15) (14) (353) (59) (347) (294) (715) Balance at 31 December 30,928 31,011 41,720 36,983 74,241 60,793 4,256 2,757 151,145 131,544 Accumulated amortisation and impairment Balance at 1 January 27,489 17,888 19,052 15,707 33,330 27,622 - - 79,871 61,217 Amortisation charge for the year - - 3,901 3,366 6,332 6,496 - - 10,233 9,862 Impairment - 9,601 - - - - - - - 9,601 Effects from translation of foreign currency - - (11) (17) 19 20 - - 8 3 Asset amortisation written-off upon disposal of subsidiaries - - - - - (473) - - - (473) Amortisation written-off - - (221) (4) (14) (335) - - (235) (339) Balance at 31 December 27,489 27,489 22,721 19,052 39,667 33,330 - - 89,877 79,871 Carrying amount at 31 December 3,439 3,522 18,999 17,931 34,574 27,463 4,256 2,757 61,268 51,673 Carrying amount at 1 January 3,522 13,420 17,931 17,558 27,463 34,016 2,757 2,847 51,673 67,841 93 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Intangible assets in progress as at 31 December include: • expenses on acquiring licenses and permits for use of medicinal products – BGN 1,153 thousand (31 December 2022: BGN 1,117 thousand); • expenses on acquisition of software – BGN 2,717 thousand (31 December 2022: BGN 1,356 thousand); • advances granted – BGN 107 thousand (31 December 2022: BGN 99 thousand); • costs for the acquisition of copyright - BGN 162 thousand. (31.12.2022: none); • other – BGN 117 thousand (31 December 2022: BGN 185 thousand). As at 31 December 2023 there are pledges in relations to loans obtained by the Group on software with carrying amount BGN 2,385 thousand (31 December 2022: BGN 2,856 thousand) (Notes 29 and 36). The rights on intellectual property include products of development activities related to medicinal substances (active ingredients) and dosage forms, acquired patents and trademarks and complex intangible assets (licences and pharmacy chain locations). Within the total intellectual property owned by the Group the largest share belongs to internally created trademarks, which have not been capitalised in the consolidated statement of financial position. The Group holds a patent for production of dosage forms containing Ranitidin. The intangible assets acquired through business combinations mainly in Serbia, include the exclusive contracts with counterparts, licences and a distribution network. Goodwill impairment The management of the Group performed the necessary procedures for the mandatory test for impairment of the goodwill, recognised in the consolidated statement of financial position, on the acquisition of a subsidiary. For the purpose, each individual company was accepted as a 'cash-generating unit'. The (pre-tax) projected cash flows were based on the financial budgets, developed by the management of the respective companies and of the Group as a whole, that covered 3 to 5-year period as well as other medium-term and long-term plans and intents for the development and restructuring of the activities within the Group. The recoverable amount of each cash generating unit was determined on the basis of the 'value in use'. The key assumptions used in the calculations had been determined specifically for each goodwill bearing company, treated as a separate cash-generating unit, and in line with the characteristic features of its operations, the business environment and risks. The tests and judgments of Group's management for impairment of recognised goodwill were made through the prism of its projections and intents as to the future economic benefits, expected by the Group from its subsidiaries including through the use of their internally created trademarks, commercial and industrial experience and the generated thereby and expected for the future volumes of revenue, ensuring position in the Bulgarian and international markets (development and retaining), the expectations for future sales and restructuring of the activities, etc. As a result of the analyzes performed by the Group's management, as of 31.12.2023 no impairment of goodwill was recognized (31.12.2022: BGN 9,601 thousand). 94 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 18. INVESTMENT PROPERTY 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 10,568 9,446 Transfer of property, machinery and equipment (Note No. 16) 184 - Net gain from adjustment to fair value through profit or loss (Note 4) 446 1,125 Disposals - (3) Balance at 31 December 11,198 10,568 Investment property represents buildings and the land they stand on, differentiated parts of buildings for independent use, intended for long-term lease. By group they are as follows: Group of assets 31.12.2023 31.12.2022 BGN '000 BGN '000 Warehouse premises 5,313 5,139 Production buildings 2,915 2,720 Offices 2,272 2,199 Social objects 513 510 Retail objects 185 - Total 11,198 10,568 Fair value measurement Fair value hierarchy The fair values of the groups of investment properties are categorised as Level 2 fair values based on the inputs to the valuation technique used. The investment property revaluation to fair value is recurring and is due to the application of the fair value model under IAS 40. It is performed regularly at the end of each reporting period. Fair value is determined with the assistance of independent certified appraisers. The table below shows reconciliation between the opening and closing balances of the fair values of investment properties measured at Level 2 and Level 3: 95 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Warehouse Production Social Retail premises Offices buildings premises stores Total Balance at 1 January 2022 4,534 1,825 2,639 448 - 9,446 Fair value gain through profit or loss – unrealised 608 374 81 62 - 1,125 Written-off (3) - - - - (3) Balance at 31 December 2022 5,139 2,199 2,720 510 - 10,568 Fair value gain through profit or loss – unrealised 174 73 195 3 1 446 Transfer to/from property, plant and equipment (Note 16) - - - - 184 184 Balance at 31 December 2023 5,313 2,272 2,915 513 185 11,198 Valuation techniques and significant unobservable inputs The table below shows a description of the valuation techniques, used in measuring the fair value of all groups of Level 2 investment properties as well as the used significant unobservable inputs: Groups of assets Valuation approaches and techniques Significant unobservable inputs (Level 2) Valuation Approach: Income Approach a) comparative rental values for Appraisal technique: Appraisal based on the analogues present value, corresponding to a methodology b) rate of return related to the fulfillment of the requirements of c) term for realization of rental Offices BSO 2018, including valuation based on transactions Retail stores capitalized rental income, as a scheme for applying the method of discounted cash flows, Social premises using data, parameters and calculation results resulting from the application of valuation techniques from the approach of market comparisons and from the approach based on the costs of creation/ replacement. Valuation Approach: Income Approach a) comparative rental values for Appraisal technique: Appraisal based on the analogues present value, corresponding to a methodology b) rate of return related to the fulfillment of the requirements of c) term for realization of rental BSO 2018, including valuation based on transactions capitalized rental income, as a scheme for Warehouse premises applying the method of discounted cash flows, using data, parameters and calculation results resulting from the application of valuation techniques from the approach of market comparisons and from the approach based on the costs of creation/ replacement. 96 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Groups of assets Valuation approaches and techniques Significant unobservable inputs (Level 3) Valuation Approach: Income Approach Appraisal technique: Appraisal based on the a) comparative rental values for present value, corresponding to a methodology analogues Shops and related to the fulfillment of the requirements of b) rate of return production - warehouse BSO 2018, including valuation based on c) term for realization of rental bases capitalized rental income, as a scheme for transactions (including land, buildings, applying the method of discounted cash flows, structures and construction using data, parameters and calculation results equipment) resulting from the application of valuation techniques from the approach of market comparisons and from the approach based on the costs of creation/ replacement. Valuation Approach: Cost Approach Appraisal technique: Appraisal based on the a) comparative values for new present value, corresponding to a methodology analogues related to the fulfillment of the requirements of b) user modification indices BSO 2018, including valuation on an as-needed prices according to NSI data Facilities, installations, basis - the inherent costs of acquisition or equipment and furniture replacement (acquisition of an alternative asset of for real estate equal utility) of a relevant asset, as of the valuation date, i.e. formation of replacement value of the asset in its status as new, using data, parameters and calculative results arising from valuation techniques related to the approach of market comparisons 19. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES 31.12.2023 31.12.2022 BGN '000 BGN '000 Investments in associates 231,292 162,678 Investments in joint ventures - 166 Total 231,292 162,844 19.1. Investments in associates As at 31 December 2023, the Group has significant influence in % interest Carrying amount Date of shares acquisition BGN'000 Doverie Obedinen Holding AD 23.46% 121,691 21.12.2016 г. Sopharma Properties REIT 45.65% 76,918 8.12.2021 г. Sopharma Buildings REIT 31.47% 28,707 8.9.2023 г. Pharmanova D.O.O. 25.00% 3,976 10.11.2023 г. 231,292 97 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 As at 31 December 2022, the Group has significant influence in: % interest Carrying amount Date of shares acquisition BGN'000 Doverie Obedinen Holding AD 24.998% 99,557 21.12.2016 г. Sopharma Properties REIT 41.05% 63,121 8.12.2021 г. 162,678 The principal activities of Doverie Obedinen Holding AD include acquisition, management, valuation and disposal of shares/interest in Bulgarian and foreign companies. Doverie Obedinen Holding Group includes 17 subsidiaries. They perform operations mainly in the following sectors and areas: trade in DIY goods, insurance medical services, and textile industry. The shares of Doverie Obedinen Holding AD are traded on the stock exchange, and the average monthly price of transactions realised in December 2023 is BGN 8,56 per share (December 2022: BGN 7,94). The book value per share based on accounting net assets in 2023 is BGN 2,19 (2022: BGN 2,14). Sopharma Properties REIT is an associate whose principal activities include investment of cash raised by issue of securities in real estate by means of purchasing right of ownership and other rights in rem over real estate, lease and/or sale. The shares of Sopharma Properties REIT are traded on the stock exchange, and the average monthly price of transactions realised in December 2023 is BGN 8,87 per share (December 2022: BGN 9,42). The book value per share based on accounting net assets in 2023 is BGN 4,04 (2022: BGN 3.66). Sopharma Buildings REIT is an associate since 8 September 2023. Its principal activities include investment of cash raised by issue of securities in real estate by means of purchasing right of ownership, construction and improvements for the purpose of managing them, lease, rent and/or sale. The shares of Sopharma Buildings REIT are traded on the stock exchange, and the average monthly price of transactions realised in December 2023 is BGN 19,45 per share (December 2022: BGN 3,08). The book value per share based on accounting net assets in 2023 is BGN 1,86 (2022: BGN 2,15). Pharmanova DOO, Serbia is an associate since 10 November 2023 with principle activities of pharmaceutical production. 98 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The movement of the investments in associates is presented below: 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 162,678 125,337 Share in the current profit for the period 22,386 22,866 Acquisition of shares 27,933 16,480 Share in other comprehensive income 4,893 (790) Dividends (1,488) (1,215) Transfer from other non-current equity investments 15,463 - Share sale (573) - Balance at 31 December 231,292 162,678 Group's share in the assets, liabilities, revenue and results of associates is as follows: Share in Share in Share in Share in Share in other assets liabilities revenue current 31.12.2023 comprehensive Interest profit for the income period BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 % Doverie Obedinen 23.46% Holding AD 606,909 494,037 132,090 17,795 4,893 Sopharma Properties 45.65% REIT 44,075 3,570 7,433 5,401 - Sopharma buildings 31.47% REIT 2,985 699 13 (27) - Pharmanova D.O.O. 10,784 - 25.00% 3,785 1,030 (783) Share in Share in Share in Share in Share in other assets liabilities revenue current 31.12.2022 comprehensive Interest profit for the income period BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 % Doverie Obedinen 24.998 Holding AD 509,302 413,448 124,274 18,651 (790) Sopharma Properties 41.05 REIT 37,935 4,956 5,884 4,215 - 19.2. Investments in joint ventures As at 31 December 2023 the Group exercises joint control over Momina Krepost AD: Carrying Date of acquisition % interest amount of interest BGN'000 Momina Krepost AD 37.46% - 10.3.2021 г. 99 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 As at 31 December 2022 the Group exercises joint control over Momina Krepost AD: Carrying Date of acquisition % interest amount of interest BGN'000 Momina Krepost AD 37.46% 166 10.3.2021 г. Momina Krepost AD is a joint venture whose principal activities include development, implementation and production of medicinal products for human and veterinary medicine. As from 10 March 2021 the company has been a joint venture. The movement of investments in joint ventures is presented below: 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 166 1,983 Impairment - (1,593) Share in current profit for the period (166) (224) Balance at 31 December - 166 19.3. General information about associates The table below presents summarised financial information on Group’s associates. Doverie Sopharma Sopharma Pharmanova Financial indicators Obedinen Properties buildings D.O.O. Holding AD REIT REIT Summarised information 31.12.2023 31.12.2023 31.12.2023 31.12.2023 from the statement of BGN’000 BGN’000 BGN’000 BGN’000 financial position Current assets 2,162,096 2,533 8,545 5,030 Non-current assets 1,218,923 94,016 940 38,104 Current liabilities (1,360,730) (7,791) (2,220) (6,658) Non-current liabilities (1,391,493) (30) - (8,481) Net assets 628,796 88,728 7,265 27,995 including Non-controlling interest (147,671) - - - 481,125 88,728 7,265 27,995 100 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Summarised information 2023 2023 2023 2023 from the statement of BGN’000 BGN’000 BGN’000 BGN’000 comprehensive income Revenue 563,044 16,283 41 4,119 69,927 11,831 (87) Net profit for the year (3,132) Other comprehensive income - for the year, net of tax 20,857 - - - Adjustment to fair value 5,925 - - Total comprehensive income for the year 96,709 11,831 (87) (3,132) Consolidated indicators Doverie Obedinen Sopharma Properties Financial indicators Holding AD REIT 31.12.2022 31.12.2022 Summarised information from the statement of financial position BGN’000 BGN’000 Current assets 1,689,098 2,502 Non-current assets 1,028,694 89,910 Current liabilities (1,117,533) (10,436) Non-current liabilities (1,082,352) (1,637) Net assets 517,907 80,339 including Non-controlling interest (128,533) - Adjustment to fair value (5,925) - 383,449 80,339 Summarised information from the statement of 2022 2022 comprehensive income BGN’000 BGN’000 Revenue 497,137 14,334 Net profit for the year 71,775 10,267 Other comprehensive income for the year, net of tax (3,159) - Adjustment to fair value 2,835 - Total comprehensive income for the year 71,451 10,267 Consolidated indicators The table below presents the reconciliation between the summarised financial information on the material interests in associates and their carrying amount at 31 December, included in these consolidated financial statements: 101 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Doverie Sopharma Sopharma Pharmano Obedinen Properties buildings va D.O.O. Holding REIT REIT AD 31.12.2023 31.12.2023 31.12.2023 31.12.2023 BGN’000 BGN’000 BGN’000 BGN’000 Net assets 481,125 88,728 7,265 27,995 Group’s share (%) 23.46% 45.65% 31.47% 25.00% Group’s share in net assets 112,872 40,504 2,286 6,999 Goodwill and other adjustments 8,819 36,414 26,421 (3,023) Carrying amount of investment 121,691 76,918 28,707 3,976 Doverie Sopharma Obedinen Properties REIT Holding AD 31.12.2022 31.12.2022 BGN’000 BGN’000 Net assets 383,449 80,339 Group’s share (%) 24.998% 41.05% Group’s share in net assets 95,855 32,979 Goodwill and other adjustments 3,702 30,142 Carrying amount of investment 99,557 63,121 19.4. General information about joint ventures The table below presents summarised financial information on Group’s joint ventures. Momina Krepost Momina Krepost Financial indicators AD AD 31.12.2023 31.12.2022 Summarised information from the statement of financial BGN’000 BGN’000 position Current assets, including 5,520 5,345 Cash and cash equivalents 22 61 Non-current assets 10,341 10,860 Current liabilities (7,664) (6,707) Non-current liabilities (6,697) (6,753) Net assets 1,500 2,745 102 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Summarised information from the statement of 2023 2022 comprehensive income BGN’000 BGN’000 Revenue 1,320 3,097 Amortisation expense (325) (334) Interest cost (223) (183) Income tax (expense)/saving 8 (5) Net profit/(loss) for the year (1,230) (598) Other comprehensive income for the year, net of tax (15) 13 Total comprehensive income for the year (1,245) (585) The table below presents the reconciliation between the summarised financial information on the material interests in joint ventures and their carrying amount at 31 December, included in these consolidated financial statements: Momina Krepost Momina Krepost AD AD 31.12.2023 31.12.2022 BGN’000 BGN’000 Net assets 1,500 2,745 Group’s share (%) 37.46% 37.46% Group’s share in net assets 562 1,028 Goodwill and other adjustments (562) (862) Carrying amount of investment - 166 19.5. Cash flows from acquisition of interest/shares in associates 31.12.2023 31.12.2022 Cash flows from acquisition of interest/shares: BGN'000 BGN'000 Cash flows on acquisition of shares (27,933) (16,480) Cash flows on sale of shares 2,845 - (25,088) (16,480) 103 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 20. OTHER LONG-TERM EQUITY INVESTMENTS Other long-term equity investments include shares in the following companies: Country 31.12.2023 Interest 31.12.2022 Interest BGN '000 % BGN '000 % Traded securities Lavena AD Bulgaria 3,638 13.14 3,788 13.22 MFG Invest AD Bulgaria 148 0.46 169 0.46 Achieve Life Sciences Inc. USA 13 0.01 8 0.01 Chimimport AD Bulgaria 11 0.01 367 0.19 Bulgarian Stock Exchange AD Bulgaria - - 202 0.34 Sopharma Buildings REIT Bulgaria - - 111 10.25 3,810 4,645 Non-traded securities Balkanpharma Razgrad AD Bulgaria 70 0.33 70 0.33 Imventure 1 KDA Bulgaria 50 1.36 50 1.36 Other 12 - 13 - 132 133 Total 3,942 4,778 As at 31 December 2023, within “others” are stated long-term equity investments at the amount of 12 thousand (31 December 2022: BGN 13 thousand) in Group’s non-controlling interest in a total of four companies (31 December 2022: four companies). The fair value per share at 31 December 2023 and 31 December 2022 by companies is as follows: 104 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Number of Fair value Number of Fair value 31.12.2023 31.12.2022 shares per share shares held per share BGN '000 BGN '000 Equity investments 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 Sciences 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 Central Cooperative Bank AD - - - 1 1.64 - Total 3,810 4,645 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 Chimimport AD 11 11 - Achieve Life Sciences Inc. – USA 13 - 13 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 - 3,788 367 - Bulgarian Stock Exchange AD 202 202 - MFG Invest AD 169 169 - Sopharma Buildings REIT 111 - 111 Achieve Life Sciences Inc. – USA 8 8 - Total 4,645 746 3,899 105 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The table below shows the movement between the opening and closing balances of the fair values at Level 1 and Level 2: 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) included in other comprehensive income (Note 15) 55 (1,102) (1,047) Balance at 31 December 2022 746 3,899 4,645 Purchases 38 12,782 12,820 Issue of capital - 620 620 Sales (557) (21) (578) Transfer to investments in associates - (15,463) (15,463) Unrealised gain/(loss) included in other comprehensive income (Note 15) (55) 1,821 1,766 Balance at 31 December 2023 172 3,638 3,810 21. LONG-TERM RECEIVABLES FROM RELATED PARTIES The long-term receivables from related parties as at 31 December include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Long-term loans granted to related parties 49,071 63,355 Impairment for credit losses (118) (157) Long-term loans granted to related parties, net 48,953 63,198 Receivable under cession agreements 3,884 3,757 Deposits placed under leases 580 580 Impairment for credit losses (64) (64) Deposits placed under leases, net 516 516 Total 53,353 67,471 The long-term loans are granted to an associate and to companies controlled by an associate. (31.12.2022: to associated company and companies controlled by an associated company). 106 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The movement in the allowance for impairment of receivables to related parties under long-term loans granted is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 157 97 (Decrease)/ Increase in the allowance for credit losses recognised in profit or loss for the year (39) 60 Balance at 31 December 118 157 The terms and conditions of the long-term loans granted to related parties are as follows: Currency Contracted Maturity Interest % 31.12.2023 31.12.2022 amount '000 BGN'000 BGN'000 BGN'000 BGN'000 including including interest interest BGN 83,400 31.12.2025 3.00% 40,901 484 51,147 731 BGN 14,939 31.12.2025 4.36% 8,052 152 10,040 40 BGN 2,000 31.12.2024 3.09% - - 2,011 11 48,953 636 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 on securities (shares) and promissory notes. 22. OTHER LONG-TERM RECEIVABLES The other non-current receivables of the Group include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Receivables on transactions in securities 3,540 3,668 Impairment for credit losses (183) (142) Receivables from transactions in securities, net 3,357 3,526 Loans granted 1,956 1,956 Impairment for credit losses (436) (459) Loans granted, net 1,520 1,497 Deposits on long-term rental agreements 712 642 Other 15 29 Total 5,604 5,694 The receivables on transactions in securities constitute receivables on a sold investment in a subsidiary maturing on 30 September 2025, which is related to the completion of statutory actions on registration of medical product permits. 107 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The movement in the allowance for impairment of loans granted is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 459 6 Increase in the allowance for credit losses recognised in profit or loss for the year 436 459 Transfer of the allowance to other short-term receivables (459) (6) Balance at 31 December 436 459 The movement in the allowance for impairment of receivable from an transactions in securities is as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Balance at 1 January 142 216 Decrease in the allowance for credit losses recognised in profit or loss for the year 41 (74) Balance at 31 December 183 142 The terms and conditions of the long-term loans granted to third parties are as follows: Contracted Currency Maturity Interest % 31.12.2023 31.12.2022 amount '000 BGN'000 BGN'000 EUR 1,000 22.12.2024 0.10% 1,520 1,497 1,520 1,497 108 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 23. INVENTORIES Inventories include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Goods 225,034 192,795 Materials 56,983 45,168 Finished products 41,690 28,097 Work in progress 13,450 10,540 Semi-finished products 2,176 1,983 Total 339,333 278,583 Materials by type are as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Basic materials 50,577 41,570 Materials in transit 3,846 1,257 Spare parts and consumables 1,353 1,194 Supplementary materials 424 392 Technical materials 399 344 Other 384 411 Total 56,983 45,168 Basic materials by type are as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Substances 25,725 20,729 8,061 Chemicals 9,615 3,411 Vials, tubes and ampoules 5,579 3,294 PVC and aluminium foil 4,176 1,875 Packaging materials 2,169 2,341 Herbs 1,824 1,785 Sanitary-hygienic and dressing materials 1,423 74 Other 66 Total 50,577 41,570 As at 31 December 2023, there were established special pledges on inventories at the amount of BGN 222,605 thousand (31 December 2022: BGN 167,446 thousand) as collateral under received by the Group bank loans and issued bank guarantees (Notes 29, 36 and 43). 109 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 24. TRADE RECEIVABLES Trade receivables include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Receivables from customers 240,177 201,500 Impairment for credit losses (6,198) (6,292) Receivables from customers, net 233,979 195,208 Advances and other receivables from suppliers 26,142 24,511 Impairment for credit losses - (167) Advances granted and other receivables from suppliers, net 26,142 24,344 Receivables under assignment agreements 4,890 4,890 Allowance for credit losses (56) - Receivables under assignment contracts, net 4,834 4,890 Total 264,955 224,442 The receivables from customers are interest-free and are mainly denominated in BGN, RSD and EUR. Usually the Group companies negotiate with their clients payment terms within the range of 30 to 180 days for receivables under sales unless there are determined specific conditions for maturity for particular clients or in the cases where new markets and products are developed and new trade counterparts are attracted. The Group has set a common credit period of 180 days for which no interest is charged to clients, with the exception of cases of restructured receivables under a special agreement, setting a longer period and interest rates. In case of sale of medical equipment to hospitals, the credit period could exceed 2 years, due to the specific financial characteristics of counterparts. The movement in the allowance for impairment of trade receivables from third parties is as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Balance at 1 January 6,459 4,681 Increase in the allowance for credit losses recognised in profit or loss for the year, net 278 3,999 Effect of foreign currency restatements (13) (42) Transfer of the allowance to court and awarded receivables (20) 150 Transfer to Receivables from Related parties (158) - Amounts written-off as uncollectable (292) (1,803) Impairment written-off upon sale of subsidiary - (526) Balance at 31 December 6,254 6,459 110 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 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 136,119 80,282 from 31 to 90 days 69,391 80,029 from 91 to 180 days 6,034 3,057 from 181 to 365 days 765 750 from 1 to 2 years 126 2,496 over 2 years 8,238 3,002 Gross amount of non-matured (regular) trade receivables 220,673 169,616 Expected credit losses (471) (325) Non-matured (regular) trade receivables, net 220,202 169,291 The allowance for impairment of non-matured (regular) trade receivables is as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 up to 30 days 304 196 from 31 to 90 days 104 100 from 91 to 180 days 28 26 from 1 to 2 years - 1 over 2 years 35 2 Total 471 325 The age structure based on 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 6,850 18,101 from 91 to 180 days 5,530 6,248 from 181 to 365 days 3,120 3,623 from 1 to 2 years 1,627 2,804 over 2 years 2,377 1,108 Gross amount of past due trade receivables 19,504 31,884 Impairment for credit losses (5,727) (5,967) Past due trade receivables, net 13,777 25,917 111 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The allowance for impairment of credit losses from past due trade receivables is as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 from 31 to 90 days 178 47 from 91 to 180 days 618 14 from 181 to 365 days 1,289 2,231 from 1 to 2 years 1,303 2,634 over 2 years 2,339 1,041 Total 5,727 5,967 Most past due receivables are from state hospitals. It is the Group’s policy, with respect to all past due receivables, to accrue, invoice and collect default interest, by means of which it fully compensates for the payment delayed and the expense/losses incurred, both for special agreements with the respective debtor – hospital, and for litigation. The Group applies the simplified approach under IFRS 9 to measure expected credit losses from trade receivables, by recognising expected credit losses for the life term of all trade receivables (Note 2.16). Based on this, the loss allowance at 31 December 2023 and 31 December 2022 has been determined as follows: Current Up to 90 90-365 days Over 365 Total days past past due days past 31 December 2023 due due Expected % of credit losses 0.21% 4.22% 24.55% 96.25% 2.58% Trade receivables (gross BGN'000 220,673 7,791 8,195 3,518 240,177 carrying amount) Expected credit loss BGN'000 (471) (329) (2,012) (3,386) (6,198) (impairment allowance) Current Up to 90 90-365 days Over 365 Total days past past due days past 31 December 2022 due due Expected % of credit losses 0.19% 0.28% 23.03% 95.34% 3.12% Trade receivables (gross BGN'000 169,616 18,136 9,946 3,802 201,500 carrying amount) Expected credit loss BGN'000 (325) (51) (2,291) (3,625) (6,292) (impairment allowance) 112 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 As at 31 December 2023, there are established special pledges on trade receivables at the amount of BGN 151,913 thousand (31 December 2022: BGN 82,262 thousand). They are established as collateral under received by the Group bank loans and issued bank guarantees (Notes 29, 36 and 43). The advances granted to suppliers are regular and are mainly denominated in BGN and EUR and are for the purchase of: 31.12.2023 31.12.2022 BGN'000 BGN'000 Goods 19,405 19,214 Services 4,580 3,026 Raw materials and consumables 2,157 1,957 Other - 314 Impairment of credit losses - (167) Total 26,142 24,344 25. RECEIVABLES FROM RELATED PARTIES Receivables from related parties by type are as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Trade loans granted 14,961 13,996 Impairment for credit losses (2,154) (1,340) Trade loans granted, net 12,807 12,656 Receivables under contracts with customers 2,220 307 Impairment for credit losses (148) (57) Receivables under contracts with customers, net 2,072 250 Advances granted 26 - Receivables under guarantorships and guarantees granted 4 4 Impairment for credit losses (4) (1) Receivables under guarantorships and guarantees granted, net - 3 Other receivables 160 - Impairment for credit losses (160) - Other receivables - - Total 14,905 12,909 113 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The trade loans granted to related parties are unsecured and are as follows: Currency Contracted Maturity Interest amount 31.12.2023 31.12.2022 BGN '000 % BGN '000 BGN '000 BGN '000 '000 includin including g interest interest to companies controlled by associates BGN 10,997 31.12.2024 3.10% 8,740 692 8,512 463 BGN 4,000 31.12.2024 3.33% 4,067 67 4,144 144 Total: 12,807 759 12,656 607 The receivables from contracts with customers are interest-free and denominated in BGN. The Group companies usually negotiate payment terms between 90 and 180 days for receivables on sales of finished products and up to 30 days for receivables on sales of materials (including substances – active ingredients). The Group applies the simplified approach under IFRS 9 to measure expected credit losses from trade receivables, by recognising expected losses for the life term of all trade receivables (Note 2.16). The movement in the loss allowance for impairment of receivables from related parties is as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Balance at 1 January 1,398 47 Increase in the allowance for credit losses recognised in profit or loss for the year 951 1,351 Transfer of trade receivables 158 - Amounts written off for bad debts (44) - Effect of currency and exchange rate recalculations 3 - Balance at 31 December 2,466 1,398 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 31 250 from 31 to 90 days 20 - from 91 to 180 days 71 - from 181 to 365 days 2,085 - Gross value of outstanding (regular) receivables from related enterprises 2,207 250 Provision for impairment for credit losses (135) - Total 2,072 250 114 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The age structure based on invoice date of past due but not impaired trade receivables from related parties is as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 From 1 to 2 years 13 57 Gross amount of past due trade receivables from related parties 13 57 Impairment of credit losses (13) (57) Total - - 26. OTHER SHORT-TERM RECEIVABLES AND ASSETS Other receivables and prepayments of the Group include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Taxes refundable 15,759 13,019 Loans granted to third parties 13,242 8,320 Impairment of credit losses on loans to third parties (507) (3) Loans granted to third parties, net 12,735 8,317 Court and awarded receivables 7,877 13,649 Impairment of court and awarded receivables (1,313) (1,002) Court and awarded receivables, net 6,564 12,647 Prepayments 2,258 2,236 Funds provided for dividends 424 - Receivables under deposits placed as guarantees 342 147 Receivables under investment transactions - 46 Other 909 290 Total 38,991 36,702 Taxes refundable include: 31.12.2023 31.12.2022 BGN'000 BGN'000 VAT 10,406 6,984 Excise tax 4,749 4,823 Income tax 591 1,188 Local taxes and charges and other taxes 13 24 Total 15,759 13,019 115 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Prepayments include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Subscriptions 868 970 Insurance 733 540 Bank fees and commissions 196 135 Licence and patent fees 89 126 Rentals 84 64 Advertisement 45 227 Vouchers 16 19 Other 227 155 Total 2,258 2,236 The loans granted to third parties, amounting to BGN 12,735 thousand (31 December 2022: BGN 8,317 thousand), are granted to two entities – counterparts, with the purpose of supporting the financing of these entities for common strategic objectives. The annual interest agreed for these loans for 2023 was between 0.1% and 4.7% (2022: between 3.05% and 4.7%). The movement in the allowance for impairment of court and awarded receivables is as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Balance at 1 January 1,002 1,639 (Decrease)/Increase in the allowance for credit losses recognised in profit or loss for the year 291 (488) Transfer from trade receivables 20 - Transfer to trade receivables - (150) Effect of currency and exchange rate recalculations - 1 Balance at 31 December 1,313 1,002 The movement of the adjustment for impairment of loans granted to third parties is as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Balance on 1 January 3 - Increase / (decrease) in credit loss allowance recognized in profit or loss during the year, net 45 (3) Transfer from other long-term receivables 459 6 Balance on 31 December 507 3 116 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 27. CASH AND CASH EQUIVALENTS 31.12.2023 31.12.2022 BGN'000 BGN'000 Short-term deposits 106,305 4,155 Cash at current bank accounts 17,393 12,318 Cash on hand 5,093 3,304 Short-term blocked funds 84 74 Cash and cash equivalents presented in the consolidated statement of cash flows 128,875 19,851 Blocked cash under court cases and issued bank guarantees 4 4 Cash and cash equivalents presented in the consolidated statement of financial position 128,879 19,855 The available cash and cash equivalents of the Group are mainly denominated in BGN, UAH and EUR (31 December 2022: BGN, RSD, UAH). As at 31 December 2023, short-term blocked cash at the amount of BGN 84 thousand (31 December 2022: BGN 74 thousand) represent mainly blocked funds under performance guarantees. 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 nos. BGN '000 Balance at 1 January 2022 121,742,899 84,514 Treasury shares (424,188) (1,919) 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) (5,252) Balance at 31 December 2023 158,262,242 115,139 The shares of Sopharma AD are ordinary, non-cash, with right of dividend and liquidation share and are registered for trade in the Bulgarian Stock Exchange AD and Warsaw Stock Exchange . 117 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 On 6 October 2023, the increase in the capital of Sopharma AD was entered in the Commercial Register through the issuance of 37,792,679 ordinary, registered, voting shares, with a nominal value of BGN 1 each and an issue value of BGN 4,13 per share. Shares from the capital increase were subscribed by warrant holders. he new shares from the company's capital increase were admitted to trading on the Bulgarian Stock Exchange on 18.10.2023. The repurchased own shares are 14,328,336 in the amount of BGN 57,452 thousand. (31.12.2022: 13,479,188 numbers in the amount of BGN 52,203 thousand). In the current year, 850,000 shares were purchased (2022: 424,188 shares were purchased). Legal reserves in the amount of BGN 196,759 thousand. (31.12.2022: BGN 68,628 thousand) were formed from the distribution of the profit of the parent company for the "Reserve" fund and from the premium reserve, which arose as a positive difference between the issue and nominal value of the issued shares during the merger of subsidiaries in Sopharma AD, as well as from the subscribed and paid shares and exercised rights under warrants by warrant holders, in the amount of BGN 136,916 thousand. (31.12.2022: BGN 8,785 thousand). The revaluation reserve - for property, machinery and equipment in the amount of BGN 29,328 thousand. (31.12.2022: BGN 35,263 thousand) is formed by the positive difference between the balance sheet value of the properties, machines, equipment of the Group companies and their fair values as of the dates of the respective regular revaluations. The effect of deferred taxes on the revaluation reserve is reported directly through other components of comprehensive income for the year. The reserve for financial assets at fair value through other comprehensive income in the amount of BGN 506 thousand. - a positive amount (31.12.2022: BGN 560 thousand) is formed by the effects of valuation at fair value of other long-term capital investments (including the consolidated share of the change in this reserve in associated companies when valuing them using the equity method ). When these investments are written off, the reserve formed is not recycled through the statement of comprehensive income (through profit or loss for the period). The reserve from recalculation in the currency of presentation of foreign activities in the amount of BGN 1,154 thousand. - negative amount (31.12.2022: BGN 4,745 thousand - negative amount) is formed by the exchange rate differences that arose as a result of the recalculation of the currency of the financial statements of the foreign companies in the presentation currency of the Group. Other capital components (warrants issue) Pursuant to Art. 25 of the Articles of Association of Sopharma AD on 21.05.2021, the Board of Directors determines the parameters and makes a decision to issue warrants during the primary public offering. With Decision No. 804 – E of 04 November 2021. The Financial Supervision Commission approves the Prospectus for the issue of 44,932,633 non- cash, freely transferable and registered warrants, with an issue value of BGN 0.28, issued by "Sopharma" 118 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 AD pursuant to Art. 112 b, para. 11 of LPOS. The underlying asset of the issued warrants are future ordinary, registered, non-deductible, freely transferable shares, giving the right to one vote in the General Meeting of Shareholders, which will be issued by the company under a condition, solely for the benefit of the owners of the warrants. Each subscribed warrant entitles its holder to subscribe for one share of a future issue. Warrant holders can exercise their right to subscribe for the corresponding number of shares from a future increase in the company's capital within a 3-year period at a fixed price of BGN 4.13 per share. The right to exercise arises from the date on which the issue of warrants was registered in "Central Depository" AD - 16 November 2021. The warrants are admitted to trading on the BSE main market of the Bulgarian Stock Exchange-Sofia AD, as of 17 November 2021. The funds raised from the issue of warrants, which are not excercised amounting to BGN 1,857 thousand. (31.12.2022: BGN 12,488 thousand) are presented as other capital components in the statement of financial position, net of issue costs. The "Retained earnings" reserve includes the "other reserves" component, which contains distributed amounts of realized profits from past years of Group companies and the "accumulated profits and losses" component. As of 31 December, retained earnings amounted to BGN 395,897 thousand. (31.12.2022: BGN 509,869 thousand), includes the recognized accumulated actuarial loss in the amount of BGN 2,637 thousand. (31.12.2022: BGN 1,249 thousand), reported in subsequent assessments of plans with defined pension benefits in connection with the change in IAS 19 Pension and other benefits of employed persons. Basic net earnings per share 2023 2022 Weighted average number of shares 130,696,402 121,495,503 Net profit for the year, attributable to the equity holders of the parent (BGN’000) 95,977 71,121 Net earnings per share (BGN) 0.73 0.59 119 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Diluted net earnings per share 31.12.2023 31.12.2022 Average weighted number of shares in circulation 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, attributable to the equity holders of the parent (BGN’000) 95,977 71,121 Dilluted earinings per share 0.69 0.57 29. LONG-TERM BANK LOANS Contracted loan 31.12.2023 31.12.2022 Currency amount Maturity Non-current Current Non-current portion portion portion Current portion BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Credit lines and working capital loans EUR 15,000 31.08.2025 27,021 - 27,021 - - - Serbian dinar/EUR 8,100 31.08.2025 15,800 - 15,800 15,797 - 15,797 EUR 5,210 31.03.2026 2,543 1,690 4,233 4,233 1,693 5,926 EUR 1,100 31.10.2025 2,152 - 2,152 2,151 - 2,151 EUR 2,062 30.04.2025 269 804 1,073 1,075 797 1,872 BGN 4,330 10.07.2028 - - - 1,860 416 2,276 EUR 12,000 25.06.2024 - 1,777 1,777 1,779 3,755 5,534 BGN 16,000 30.04.2024 - 1,007 1,007 801 2,667 3,468 Investment-purpose loans BGN 9,544 25.12.2029 8,677 854 9,531 - - - EUR 583 27.02.2023 - - - 63 378 441 BGN 4,250 16.04.2023 - - - - 52 52 Total 56,462 6,132 62,594 27,759 9,758 37,517 The Group has gradually established a policy for annual re-negotiation of the terms and conditions of initially agreed long-term credit lines, including maturity terms. Starting from the date of re-negotiation, the extended credit lines are presented as short-term bank loans (Note 36). The received bank loans in euro are mainly agreed at an interest rate determined on the basis of EURIBOR plus a surcharge of up to 2.6%, for leva loans - up to 1.91% fixed, for Serbian dinar - an interest rate determined on the basis of BELIBOR plus a surcharge of up to 2.75% ( 2022: for euros - EURIBOR plus a surcharge of up to 2.1%, for leva loans - up to 2.8% fixed). Loans are for working capital. Investment-purpose loans are intended for purchase of tangible fixed assets and expanding of activities. 120 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The following collateral has been established in favour of the creditor banks: • Real estate mortgages (Note 16); • Special pledges on: - machinery and equipment (Note 16); - inventories (Note 23); - trade receivables (Note 24). 121 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Reconciliation of liabilities arising from financial activities The table below details changes in liabilities arising from financial activities, including both cash and non-cash changes. Liabilities arising from financing activities are those for which cash flows were, or future cash flows will be, classified in the statement of cash flows as cash flows from financing activities. 01/01/2023 Changes in cash flows Newly arising Offsetting with Recognised Other 31/12/2023 from liabilities in the year receivables under income from changes financing factoring government activities() agreements grants BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 Bank loans (Notes 29 and 36) 195,872 66,828 - - - 372 263,072 Factoring agreements (Note 39) 1,875 621 - (2,496) - - - Lease liabilities (Note 33) 85,548 (18,795) 23,987 - - (2,961) 87,779 Dividends 456 (71,889) 215,933 - - (1,882) 142,618 Government grants 6,902 36 - - (1,419) 9 5,528 Total 290,653 (23,199) 239,920 (2,496) (1,419) (4,462) 498,997 Proceeds from issue of capital - 156,084 - - - (146,244) 9,840 Treasury shares (Note 28) (52,203) (5,252) - - - 3 (57,452) Reserve on warrant issue 12,488 (791) - - - (9,840) 1,857 Net cash flows from financing activities 250,938 126,842 239,920 (2,496) (1,419) (160,543) 453,242 122 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Changes in cash Non-cash changes Other flows Disposal of Newly arising Offsetting Recognized changes from financing subsidiaries (Note liabilities in the with revenue 01/01/2022 activities() 47) year receivables from 31/12/2022 under government factoring grants agreements BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 BGN‘000 Bank loans (Notes 29 and 36) 269,766 (77,280) - 3,686 - - (300) 195,872 Factoring agreements (Note 39) 6,370 30,836 - - (35,331) - - 1,875 Lease liabilities (Note 33) 54,486 (16,081) (48) 56,018 - - (8,827) 85,548 Dividends 608 (11) - - - - (141) 456 Government grants 7,596 34 - - - (841) 113 6,902 Total 338,826 (62,502) (48) 59,704 (35,331) (841) (9,155) 290,653 Treasury shares (Note 28) (50,284) (1,919) - - - - - (52,203) Warrant rights sold - 103 - - - - (103) - Reserve on warrant issue 12,512 (24) - - - - - 12,488 Net cash flows from financing activities 301,054 (64,342) (48) 59,704 (35,331) (841) (9,258) 250,938 123 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 30. DEFERRED TAX ASSETS AND LIABILITIES The total change in deferred tax assets and liabilities of the Group for the respective financial year is as follows: 2023 2022 BGN'000 BGN'000 Balance at 1 January (4,345) (7,422) including: Deferred tax assets 2,052 1,050 including: Deferred tax liabilities (6,397) (8,472) Recognised in profit or loss for the year 2,526 2,799 Recognised in other comprehensive income (3) 99 Derecognised on disposal of a subsidiary - (41) Recognised in the statement of changes in equity and the current tax return 151 130 Reserve from restatement into the presentation currency 74 90 Balance at 31 December (1,597) (4,345) including: Deferred tax assets 2,818 2,052 including: Deferred tax liabilities (4,415) (6,397) As of 31 December 2023, the Group has not recognized deferred tax assets in the amount of BGN 829 thousand. (31.12.2022 for BGN 2,327 thousand) for temporary differences with accumulation, incl. tax losses to be carried forward for BGN 7,517 thousand (31.12.2022 for BGN 15,115 thousand). On recognising deferred tax assets, the probability of a reversal of the individual differences and the abilities of the Group companies to generate sufficient taxable profit in the future, have been taken into account (Note 2.27). 124 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The change in the balance of deferred tax assets/(liabilities) for 2023 by items of temporary differences is as follows: Deferred tax assets (by temporary Balance at 1 January Recognised in Recognised in Recognised in the Reserve from Balance at 31 differences) 2023 profit or loss for other statement of changes restatement December 2023 the year comprehensive in equity and the into income current tax return presentation currency Assets/(Liabilities) Assets/(Liabilities) BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Intangible assets 111 (27) - - (5) 79 Inventories 1,761 (181) - - 30 1,610 Trade receivables 1,210 823 - - (3) 2,030 Retirement benefits obligation 1,464 176 - - (5) 1,635 Other current liabilities 1,484 188 - - - 1,672 Property, plant and equipment (6,552) 1,140 (12) 151 55 (5,218) Intangible assets acquired in business combinations (2,820) 608 - - 1 (2,211) Leases 112 32 - - 1 145 Investment property (1,115) (233) 9 - - (1,339) (4,345) 2,526 (3) 151 74 (1,597) The change in the balance of deferred tax assets/(liabilities) for 2022 by items of temporary differences is as follows: Deferred tax assets (by temporary Balance at 1 January 2022 Recognised in profit Recognised in other Derecognised on Recognised in the Reserve from Balance at 31 differences) or loss for the year comprehensive disposal of a statement of changes restatement December 2022 income subsidiary in equity and the into current tax return presentation currency Assets/(Liabilities) Assets/(Liabilities) BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Intangible assets 89 46 - - - (24) 111 Inventories 1,953 (185) - - - (7) 1,761 Trade receivables 729 548 - (65) - (2) 1,210 Retirement benefits obligation 1,407 75 - - - (18) 1,464 Other current liabilities 764 725 - - - (5) 1,484 Property, plant and equipment (8,152) 1,213 99 4 130 154 (6,552) Intangible assets acquired in business combinations (3,483) 646 - 20 - (3) (2,820) Leases 87 30 - - - (5) 112 Investment property (816) (299) - - - - (1,115) (7,422) 2,799 99 (41) 130 90 (4,345) 125 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 31. NON-CURRENT PAYABLES TO RELATED PARTIES Non-current payables to related parties at 31 December include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Lease liabilities 16,914 17,906 Payables related to share purchase - 6,588 Total 16,914 24,494 The lease payments due within 12 months are presented in the annual consolidated statement of financial position within current payables, within “payables to related parties” (Note 38). 32. LONG-TERM EMPLOYEE BENEFIT LIABILITIES The long-term employee benefits as at 31 December include: 31.12.2023 31.12.2022 BGN '000 BGN '000 Long-term retirement benefit liabilities 8,097 6,306 Long-term benefit liabilities for tantieme 255 235 Total 8,352 6,541 Long-term retirement benefit obligations The long-term payables to personnel include the present value of the obligation of the Group companies, operating mainly in Bulgaria and Ukraine, to pay indemnities to the hired personnel at the date of the statement of financial position on coming of age for retirement. In accordance with the Labour Code in Bulgaria each employee is entitled to indemnity on retirement at the amount of two gross monthly salaries, and if he or she has worked for at least the last 10 years of the service period for the same employer – six gross monthly salaries at the time of retirement (Note 2.23). Employer's obligations to personnel on retirement for the companies abroad are as follows: • Ukraine – the employer is obliged to pay between UAH 250 and 500 (BGN 12 and BGN 25) depending on the length of service as well as a social pension, which the company accrues after employees' retirement due to specific work conditions; • Kazakhstan – according to the Kazakhstani legislation, the employer does not have a legal obligation to personnel upon retirement; • Serbia – the employer is obliged to pay 3 average salaries. • Russia - under Russian legislation, the employer has no legal obligation to the personnel upon retirement. 126 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The 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 6,306 7,300 Current service cost for the year 735 1,367 Interest cost for the year 420 85 Net actuarial (gain) recognised for the period 28 (108) Expenses from past service in relation to staff cuts 13 - Effect of recalculation (25) (101) Payments made in the year (852) (739) Revaluation gains or losses for the year, including: 1,472 (1,498) Actuarial (gains) arising from changes in financial assumptions 934 (1,705) Actuarial (gains) arising from changes in demographic assumptions (53) (61) Actuarial losses arising from experience adjustments 591 268 Present value of the obligation at 31 December 8,097 6,306 The amounts of long-term retirement benefits of personnel accrued in the consolidated statement of comprehensive income are as follows: 2023 2022 BGN'000 BGN '000 Current service cost 735 1,367 Interest cost 420 85 Net actuarial (gain) recognised for the period 28 (108) Expenses from past service in relation to staff cuts 13 - Components of defined benefit plan costs recognised in profit or loss (Note 8) 1,196 1,344 Revaluation gains or losses on the retirement benefit obligations, including: Actuarial (gains) arising from changes in financial assumptions 934 (1,705) Actuarial (gains) arising from changes in demographic assumptions (53) (61) Actuarial losses arising from experience adjustments 591 268 Components of defined benefit plans cost recognised in other comprehensive income (Note 15) 1,472 (1,498) Total 2,668 (154) The following actuarial assumptions were used for calculating the present value of the liabilities for the companies in Bulgaria as at 31 December 2023: 127 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • The discount factor is calculated by using 4,5% annual interest rate as basis. (2021: 0.6%). The assumption is based on yield data for long-term government securities with 10-year maturity; • The assumption for the future level of the salaries is based on the information provided by the Company's management and amounts to between 0% and 6% annual growth compared to the prior reporting period (2022: 0% and 5,5%); • Mortality rate – in accordance with the table on the total mortality rate of the population in Bulgaria, issued by the National Statistics Institute for the period 2020 – 2022 (2022: 2019 – 2021); • Staff turnover rate – from 0% to 20% for the five age groups formed (2022: between 0,03% and 20%). This defined benefit plan exposes the Group companies to the following risks: investment risk, interest risk, longevity risk and salary growth related risk: The management of the parent defines them as follows: • investment risk – as far as this is unfunded plan, the Group companies should monitor and balance currently the forthcoming payments under it with the ensuring of sufficient cash resources. The historical experience and the liability structure show that the annual resource required is not material compared to the commonly maintained liquid funds; • interest risk – any increase in the yield of government securities with similar term will increase the plan liability; • longevity risk – the present value of the retirement benefit liability is calculated by reference to the best estimate and updated information about the mortality of plan participants. An increase in life expectancy would result in a possible increase in the liability. A relative stability of this indicator has been observed in the recent years; and • salary growth related risk – the present value of the retirement benefit liability is calculated by reference to the best estimate of the future increase in plan participants' salaries. Such an increase would increase the plan liability. The sensitivity analysis of the main actuarial assumptions is based on the reasonably possible changes of these assumptions at the end of the reporting period, assuming that all other assumptions are held constant. The effects of the change (increase or decrease) by 1% of salary growth, discount rate and staff turnover rate on the amount of the stated current service cost and interest cost for 2023 and respectively, on the present value of the obligation for payment of defined retirement benefits, are assessed as follows: Effects of changes in the basic assumptions on the amount of stated expenses for 2023: Increase Decrease BGN '000 BGN '000 110 (93) Change in salary growth (28) 31 Change in discount rate (57) 65 Change in staff turnover rate 128 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Effects of changes in the basic assumptions on the amount of the stated liability as at 31 December 2023: Increase Decrease BGN '000 BGN '000 Change in salary growth 563 (498) Change in discount rate (500) 572 Change in staff turnover rate (334) 374 The weighted average duration of the defined benefit obligation to personnel is from 1.9 to 25.8 years. The expected indemnity payments upon retirement under the defined benefit plan for the following five years are as follows: Forecast payments Old age and Poor health Total length of service retirement retirement BGN '000 BGN '000 BGN '000 Payments in 2024 1,524 27 1,551 Payments in 2025 647 25 672 Payments in 2026 583 26 609 Payments in 2027 655 25 680 Payments in 2028 573 24 597 3,982 127 4,109 Long-term benefit obligations for tantieme As at 31 December 2023, the long-term benefit obligations to personnel include also the amount of BGN 255 thousand (31 December 2022: BGN 235 thousand), representing a payable to personnel related to tantieme payment for a period of more than 12 months – until 2026 (2022: until 2025). 129 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 33. LEASE LIABILITIES The lease liabilities to third and related parties included in the consolidated statement of financial position are stated net of the future interest due and are as follows: 31.12.2023 31.12.2022 Lease Lease Lease liabilities to Lease liabilities to Total Total liabilities related parties liabilities related parties (Note 31) (Note 31) Term BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 13,424 2,712 16,136 12,874 2,710 15,584 Up to one year Over one year 54,729 16,914 71,643 52,058 17,906 69,964 68,153 19,626 87,779 64,932 20,616 85,548 Lease liabilities to related parties are stated within Non-current payables to related parties (Note 31) and Payables to related parties (Note 38). Minimum lease payments to third and related parties are due, as follows: 31.12.2023 31.12.2022 Third Related Third Related Total Total parties parties parties parties BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Term Up to one year 14,879 2,944 17,823 14,036 2,779 16,815 Over one year 58,279 17,722 76,001 55,057 18,179 73,236 73,158 20,666 93,824 69,093 20,958 90,051 Future finance cost on leases (5,005) (1,040) (6,045) (4,161) (342) (4,503) Present value of the lease liabilities to third and related parties 68,153 19,626 87,779 64,932 20,616 85,548 130 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Right-of-use assets are included in the statement of financial position within property, plant and equipment, as follows: Land and buildings Machines and equipment Others 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 102,508 69,379 259 166 12,707 11,409 115,474 80,954 Increases/additions 16,911 52,839 1,130 97 5,946 3,082 23,987 56,018 Decreases/written-off (6,909) (19,710) (179) (4) (4,483) (1,784) (11,571) (21,498) Balance at 31 December 112,510 102,508 1,210 259 14,170 12,707 127,890 115,474 Accumulated depreciation Balance at 1 January 24,038 21,253 162 76 6,258 5,202 30,458 26,531 Depreciation charge for the period 14,174 12,927 186 86 3,148 2,739 17,508 15,752 Depreciation written-off (2,310) (10,142) (140) - (4,307) (1,683) (6,757) (11,825) Balance at 31 December 35,902 24,038 208 162 5,099 6,258 41,209 30,458 Carrying amount at 31 December 76,608 78,470 1,002 97 9,071 6,449 86,681 85,016 Carrying amount at 01 January 78,470 48,126 97 90 6,449 6,207 85,016 54,423 34. GOVERNMENT GRANTS The government grants to Group companies as at 31 December include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Government grants, non-current portion 4,931 6,155 Government grants, current part (Note 42) 597 747 Total 5,528 6,902 The government grants received as at 31 December are to the following Group companies: 31.12.2023 31.12.2022 BGN'000 BGN'000 Sopharma AD 5,368 4,007 Biopharm Engineering AD 160 179 Veta Pharma AD - 2,716 Total 5,528 6,902 131 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The government grants are received by the Group companies under European Operational Programmes mainly in relation to the acquisition of machinery and equipment (Note 16). The current portion of the grants, amounting to BGN 597 thousand (31 December 2022: BGN: 747 thousand), will be recognised as current income over the following 12 months from the date of the annual consolidated statement of financial position and is presented as 'other current liabilities' (Note 42). 35. OTHER NON-CURRENT LIABILITIES Other non-current liabilities as at 31 December include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Payables related to share purchase 5,543 6,594 5,543 6,594 36. SHORT-TERM BANK LOANS The short-term bank loans of the Group as at 31 December are as follows: Currency Contracted Maturity amount 31.12.2023 31.12.2022 Bank loans (overdrafts) '000 BGN'000 BGN'000 BGN 41,500 31.07.2024 37,773 32,704 BGN 35,000 24.09.2024 34,921 - BGN 20,000 05.09.2024 19,759 - BGN 19,558 05.09.2024 19,574 - BGN 20,000 05.09.2024 15,536 5 05.4.2024- RSD/EUR 7,600 27.12.2024 14,865 7,158 EUR 34,200 01.04.2024 14,033 63,030 EUR 5,000 25.07.2024 9,757 9,757 BGN 9,779 05.09.2024 9,678 - EUR 3,000 25.07.2024 5,858 5,859 EUR 2,488 27.03.2024 4,693 2,934 EUR 1,000 01.03.2024 1,956 1,956 EUR 10,000 01.04.2024 44 - BGN 20,000 31.07.2024 6 - Ukrainian hryvnia 128,000 20.01.2023 - 1,212 188,453 124,615 132 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Currency Contracted Maturity amount 31.12.2023 31.12.2022 BGN'000 BGN'000 BGN'000 Credit lines EUR 7,500 25.07.2024 12,025 12,025 BGN 20,000 31.03.2024 - 11,729 BGN 10,000 31.07.2023 - 9,986 12,025 33,740 Total 200,478 158,355 The received bank loans in euro are mainly agreed at an interest rate determined on the basis of EURIBOR plus a surcharge of up to 2.9%; for BGN loans – the bank's reference interest rate plus a surcharge of up to 2.75% and fixed up to 2.65%; for Ukrainian hryvnias 22% fixed; for dinar interest rate determined on the basis of BELIBOR 1.95% (2022: EURIBOR plus surcharge up to 2.55% or fixed up to 3%; for left loans – reference interest rate of the bank's condition plus surcharge up to 1.35% and fixed up to 1.45% ; for dinars – interest rate determined on the basis of BELIBOR 1.95% for Ukrainian hryvnias 22% fixed). Loans are for working capital. The following special pledges have been established as collateral for the above loans in favour of the creditor banks: - machinery and equipment (Note 16); - raw materials, consumables and finished products (Note 23); - trade receivables (Note 24). As at 31 December 2023, there are special pledges on receivables from related parties, subject to consolidation and eliminated for the purpose of the consolidated financial statements, at the amount of BGN 62,085 thousand (31 December 2022: BGN 48,531 thousand), established as collateral under received by the Group bank loans and issued bank guarantees (Notes 29, 36 and 43). 37. TRADE PAYABLES Trade payables include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Payables to suppliers 193,391 152,483 Advances from clients 541 23,084 Total 193,932 175,567 133 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The payables to suppliers refer to: 31.12.2023 31.12.2022 BGN'000 BGN'000 Suppliers outside Bulgaria 136,307 105,634 Suppliers from Bulgaria 57,084 46,849 Total 193,391 152,483 The payables to suppliers are regular, interest-free and refer to supplies of materials, goods and services. The average credit period, for which usually no interest is charged on trade payables, is up to 180 days. 38. PAYABLES TO RELATED PARTIES The payables to related parties refer to: 31.12.2023 31.12.2022 BGN'000 BGN'000 Payables to shareholding companies with significant influence 84,982 1,098 Payables to key management personnel 12,991 - Payables to joint ventures and associates 2,742 2,697 Payables to companies related through key management personnel 209 901 Payables to companies controlled by an associate 133 202 Other related parties 6 6 Total 101,063 4,904 The payables to related parties by type are as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Dividend obligations 97,898 - Short-term obligations under leasing contracts 2,712 2,710 Obligations for supplies of goods and materials 348 964 Delivery of services 99 68 Obligations related to the purchase of shares - 1,031 Obligations for advances - 125 Other 6 6 Total 101,063 4,904 The payables to related parties are regular, denominated in BGN, interest-free and are not additionally secured through a special pledge or guarantee by the Group. 134 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 39. PAYABLES UNDER FACTORING AGREEMENT Companies of the Group have entered into factoring agreements with a financial institution (Factor), dated 19 January 2016, for transfer of existing unsalable receivables from debtors. The Factor is entitled to recourse for all amounts paid in advance regardless of whether they are included not in the approved credit limit. The approved credit limit as at 31 December 2023 is BGN 15,000 thousand (2022: BGN 15,000 thousand). The transferred invoices are paid in advance up to 90% (ninety per cent) of their amount with VAT included. The interest for the amounts paid in advance is 1M RIR + 1.55% on an annual basis and is deducted on a monthly basis in the end of each calendar month. As at 31 December 2023 the company has no factoring liabilities (31.12.2022: BGN 1,875 thousand). The financing granted for 2023 amounts to BGN 700 thousand (31 December 2022: BGN 30,950 thousand) (Note 2.17). 40. PAYABLES TO PERSONNEL AND FOR SOCIAL SECURITY Payables to personnel and for social security include: 31.12.2023 31.12.2022 BGN'000 BGN'000 Payables to personnel, including: 20,160 17,949 current wages and salaries 12,291 10,137 accruals on unused compensated leaves 4,401 4,221 tantieme 3,468 3,591 Payables for social security/health insurance, including: 4,225 3,831 current payables for social security contributions 3,523 3,174 accruals on unused compensated leaves 702 657 Total 24,385 21,780 41. TAX PAYABLES Tax payables include: 31.12.2023 31.12.2022 BGN'000 BGN'000 VAT 4,858 6,327 Taxes on dividend 1,240 - Income taxes 1,048 996 Individual income taxes 880 730 Taxes on expenses 434 365 Local taxes and fees 25 16 Taxes at source - 2 Total 8,485 8,436 By the date of issue of these annual consolidated financial statements the following inspections and audits of Group companies have been performed: 135 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Company Full-scope VAT inspection Inspection tax audit under the social security legislation Sopharma AD 31.12.2011 31.12.2011 30.09.2013 Sopharma Trading AD 31.12.2011 31.12.2017 30.04.2018 Biopharm Engineering AD 31.12.2014 31.10.2022 30.04.2009 Pharmalogistica AD none 31.12.2005 31.12.2007 Electroncommerce EOOD none 31.12.2005 30.04.2006 Veta Pharma AD none 30.11.2023 30.06.2016 Sopharmacy EOOD none 31.07.2020 none Sopharmacy 2 EOOD none 30.06.2019 none Sopharmacy 3 EOOD none 30.11.2017 none Sopharmacy 4 EOOD none 30.06.2022 none Sopharmacy 5 EOOD none 31.08.2020 none Sopharmacy 6 EOOD none 30.05.2023 none Sopharmacy 7 EOOD none 31.05.2019 none Sopharmacy 8 EOOD none 31.08.2020 none Sopharmacy 9 EOOD none 31.12.2020 none Sopharmacy 10 EOOD none 30.11.2022 none Sopharmacy 11 EOOD none 31.07.2022 none Sopharmacy 12 EOOD none 30.06.2023 none Sopharmacy 13 EOOD none 31.07.2022 none Sopharmacy 14 EOOD none 31.12.2018 none Sopharmacy 15 EOOD none 30.06.2022 none Sopharmacy 16 EOOD none 31.12.2019 none Sopharmacy 17 EOOD none 31.12.2020 none Sopharmacy 18 EOOD none 30.10.2021 none Sopharmacy 19 EOOD none 31.08.2023 none Sopharmacy 20 EOOD none 31.12.2013 none Sopharmacy 21 EOOD none none 31.08.2017 Sopharmacy 22 EOOD none 31.12.2012 30.04.2020 Sopharmacy 23 EOOD none 31.05.2014 30.04.2020 Sopharmacy 24 EOOD none none 30.04.2020 Sopharmacy 25 EOOD none 30.09.2023 30.04.2020 Sopharmacy 26 EOOD none 31.08.2017 none Sopharmacy 27 EOOD none 31.12.2013 none Sopharmacy 28 EOOD none 30.04.2023 none Sopharmacy 29 EOOD none 31.07.2023 none Sopharmacy 30 EOOD none 31.07.2023 30.04.2020 136 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Company Full-scope VAT inspection Inspection tax audit under the social security legislation Sopharmacy 31 EOOD none 31.07.2023 30.04.2020 Sopharmacy 32 EOOD 31.12.2010 31.12.2019 30.04.2020 Sopharmacy 33 EOOD none 30.04.2020 30.11.2023 Sopharmacy 34 EOOD none 30.04.2020 none Sopharmacy 35 EOOD none 30.04.2020 31.12.2013 Sopharmacy 36 EOOD none 31.01.2015 31.05.2021 Sopharmacy 37 EOOD none 31.08.2023 30.04.2020 Sopharmacy 38 EOOD none 30.04.2020 29.02.2024 Sopharmacy 40 EOOD none None 30.04.2020 Sopharmacy 41 EOOD none 31.08.2023 31.05.2019 Sopharmacy 42 EOOD none none 30.11.2020 Sopharmacy 43 EOOD 31.12.2016 none 31.05.2019 Sopharmacy 44 EOOD none 31.12.2013 30.04.2020 Sopharmacy 45 EOOD none none 30.04.2020 Sopharmacy 46 EOOD none 31.12.2023 none Sopharmacy 47 EOOD none 31.11.2016 31.03.2020 Sopharmacy 48 EOOD none 30.06.2021 31.08.2017 Sopharmacy 49 EOOD 31.12.2015 31.12.2014 31.05.2020 Sopharmacy 50 EOOD none 31.08.2023 31.03.2020 Sopharmacy 51 EOOD none 30.09.2023 30.04.2020 Sopharmacy 52 EOOD none none 31.12.2015 Sopharmacy 53 EOOD none 30.09.2023 31.08.2017 Sopharmacy 54 EOOD none 31.08.2015 31.03.2020 Sopharmacy 55 EOOD none 31.12.2014 31.03.2020 Sopharmacy 56 EOOD none 31.12.2015 30.04.2020 Sopharmacy 57 EOOD none none 31.05.2020 Sopharmacy 58 EOOD none 31.07.2018 none Sopharmacy 63 EAD 31.12.2012 none 31.12.2019 Sopharmacy 64 AD 31.12.2016 31.07.2023 none PAO Vitamini 31.12.2013 31.12.2013 01.04.2014 ООО Sopharma Ukraine 31.12.2014 31.12.2014 30.06.2016 Sopharma Warsaw SP. Z.O.O. none none 06.07.2017 Sopharma Trading d.o.o., Serbia 31.03.2017 30.06.2017 15.04.2017 Tax audit of the companies in Bulgaria is performed within a 5-year period after the end of the year when the tax return for the respective liability has been submitted. The tax audit confirms ultimately the tax liability of the respective company — tax liable person except in the cases explicitly stated by law. For the companies outside Bulgaria a tax audit is performed as follows: in Ukraine – within a term of three years, in Poland and Kazakhstan – within a term of five years, and in Serbia – within a term of ten years. 137 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The companies Phyto Palauzovo AD, TOO Sopharma Kazakhstan, Pharmachim EOOD, Sopharmacy 59 EOOD, Sopharmacy 60 EOOD, Sopharmacy 61 EOOD, Sopharmacy 62 EOOD and Sopharmacy 39 EOOD have not been subject to full-scope tax audits, VAT audits and inspections under the social security regulations. 42. OTHER CURRENT LIABILITIES Other current liabilities include: 31.12.2023 31.12.2022 Dividend payables 44,720 456 Payables for recovery under contracts with customers 9,942 7,877 Contract liabilities 3,274 2,664 Payables related to share purchase 1,051 1,032 Government grants (Note 34) 597 747 Deductions from wages 164 50 Payables under deposits placed as guarantees 136 144 Provision for financial guarantees 50 158 Amounts awarded in court cases 17 16 Others 1,340 653 Total 61,291 13,797 43. CONTINGENT LIABILITIES AND COMMITMENTS Issued and granted guarantees Sopharma AD The company provided the following collaterals in favour of banks under loans to associates: In favour of Doverie Obedinen Holding AD 31.12.2023 31.12.2022 BGN '000 BGN '000 Buildings 7,483 7,867 Land 6,624 6,624 Total 14,107 14,491 The company is a co-debtor under received bank loans, bank guarantees issued and leases, and is a guarantor to banks and suppliers, of the following companies: Maturity Currency Contracted amount Guaranteed amount Original currency 31.12.2023 BGN'000 BGN'000 Doverie Obedinen Holding AD 2027 BGN 30,000 30,000 16,250 Energoinvestment AD 2024 BGN 2,000 2,000 1,600 Total 17,850 138 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Bank guarantees Sopharma Trading AD Bank guarantees issued for the company as of 31.12.2023 amount to BGN 16,748 thousand. (31.12.2022: BGN 14,716 thousand) and are for guaranteeing payment to suppliers of goods, for good performance - guaranteeing future supplies of medicinal and medical products to hospitals under concluded supply contracts, customs guarantee, participation in tenders and collateral under rental contracts for commercial establishments (pharmacies). Bank guarantees issued by: 31.12.2023 31.12.2022 BGN '000 BGN '000 7,400 7,508 DSK AD 5,062 4,870 KBC Bank Bulgaria EAD ING Bank N.V. 4,286 2,338 16,748 14,716 As of 31 December 2023, Sopharma Trading AD has provided bank guarantees in the amount of BGN 1,785 thousand (31.12.2022: BGN 2,152 thousand) as collateral under lease contracts for commercial establishments (pharmacies) to which its subsidiaries are parties. Sopharma Trading d.o.o. As of 31.12.2023, bank guarantees issued for the company amount to BGN 15,360 thousand. (31.12.2022: BGN 12,247 thousand) and are for guaranteeing payment to suppliers of goods, for good performance - guaranteeing future supplies of medicinal and medical products to hospitals under concluded supply contracts, customs guarantee and participation in tenders. The bank guarantees have been issued by: 31.12.2023 31.12.2022 BGN '000 BGN '000 Raiffeisen AD Belgrade 13,407 8,315 OTP Bank Serbia AD Belgrade (SG Expressbank AD Belgrade) 1,002 1,350 Eurobank AD Belgrade 951 357 Banca Intesa AD Belgrade - 2,225 15,360 12,247 Insurance of performance guarantees Sopharma Trading AD As at 31 December 2023, the company has concluded contracts for instance of performance securities for participation in tenders for supply of medicinal products and consumables for hospitals and the Ministry of Health, at the amount of BGN 10,653 thousand (31 December 2022: BGN 4,813 thousand) . 139 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Assets held under safe custody Sopharma Trading AD According to concluded pre-distribution contracts, the company accepted for safekeeping as of 12.31.2023 goods in the amount of BGN 6,327 thousand. (31.12.2022: at BGN 4,318 thousand). Significant irrevocable agreements and commitments Sopharma AD The Company received three government grants under Operational Programme "Development of the Competitiveness of the Bulgarian Economy" 2007 – 2013 and Operational Programme “Energy Efficiency” (Note 34 and Note 42), related to the acquisition of non-current assets, reconstruction of buildings and technological renovation and modernisation of tablet production facilities and implementation of innovative products in the ampoule production section and implementation of “artificial tears” innovative eye drops (Note 16). The Company undertook a commitment that for a period of 5 years after the completion of the respective projects they shall not be subject to significant modifications affecting the essence and the terms and conditions for their execution or giving rise to unjustified benefits to the company, neither modifications resulting from a change in the nature of ownership over the assets acquired in relation to the grants. 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. Veta Pharma AD The company received three government grants under Operational Programme "Development of the Competitiveness of the Bulgarian Economy" 2007 – 2013 (Notes 34 and 42) related to enhancing the efficiency of companies and developing a favourable business environment (Note 16). The company has undertaken a commitment within 3 years after completion of the respective projects to not undergo significant changes concerning the essence and conditions of performance or resulting in undue benefits for the company, as well as changes resulting from a change in the ownership of the assets acquired in relation to the funding. Upon failure to meet these requirements, the funding is subject to recovery. As at the date of preparation of the statements, all contractual conditions have been met. 44. SEGMENT REPORTING The segment reporting in the Group is organised on the basis of two basic business segments – 'production of pharmaceutical products' and 'distribution of pharmaceutical products (goods)'. The group 'other' includes mainly production and distribution of non-pharmaceutical products. The items of income, expenses and result of business segments determined in the Group include : 140 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Manufacturing of Distribution of Other Elimination Consolidated pharmaceutical products pharmaceutical products (goods) 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 External sales 266,219 245,449 1,586,946 1,401,687 22,139 15,880 - - 1,875,304 1,663,016 Intersegment sales 125,905 128,901 1,925 81 6,464 625 (134,294) (129,607) - - Total revenue 392,124 374,350 1,588,871 1,401,768 28,603 16,505 (134,294) (129,607) 1,875,304 1,663,016 Segment result (margin) 120,319 119,322 227,632 198,378 8,525 3,374 (687) (688) 355,789 320,386 Non-allocated operating income 20,821 13,042 Non-allocated operating expenses (278,500) (245,547) Profit from operations 98,110 87,881 Finance (costs)/income, net (9,495) (6,113) Impairment of non-current assets (1,890) (20,783) Gain on disposal of subsidiaries - 1,456 Profit from associates, net 24,473 22,635 Profit before income tax 111,198 85,076 Income tax expense (11,324) (8,743) Net profit for the year 99,874 76,333 Attributable to owners of the parent 95,977 71,121 Non-controlling interests 3,897 5,212 The assets and liabilities of the business segments include: Assets by business segment Manufacturing of Distribution of Other Total pharmaceutical products pharmaceutical products (goods) 2023 2022 2023 2022 2023 2022 2023 2022 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment 117,056 122,397 137,892 135,586 8,407 18,813 263,355 276,796 Inventories 105,808 85,270 226,746 191,419 6,779 1,894 339,333 278,583 Receivables from related parties 14,783 12,659 51 250 71 - 14,905 12,909 Trade receivables 24,565 20,178 229,353 195,554 8,289 8,710 262,207 224,442 Cash and cash equivalents 107,558 6,521 20,069 12,270 1,252 1,064 128,879 19,855 Segment assets 369,770 247,025 614,111 535,079 24,798 30,481 1,008,679 812,585 Non-allocated assets 505,483 441,393 Total assets 1,514,162 1,253,978 Manufacturing of Distribution of Other Total Liabilities by business segment pharmaceutical products pharmaceutical products (goods) 2023 2022 2023 2022 2023 2022 2023 2022 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Payables to personnel and for social security 2,726 2,424 13,402 11,609 204 497 16,332 14,530 Trade payables 22,076 40,615 165,729 134,712 6,127 240 193,932 175,567 Payables to related parties 96,545 1,412 4,651 3,547 (133) (55) 101,063 4,904 Bank loans 81,390 15,087 181,682 180,785 - - 263,072 195,872 Segment liabilities 202,737 59,538 365,464 330,653 6,198 682 574,399 390,873 Non-allocated liabilities 186,137 146,471 Total liabilities 760,536 537,344 141 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The capital expenditures, depreciation/amortisation and non-monetary expenses other than depreciation/amortisation by business segment include: Manufacturing of Distribution of Other Total pharmaceutical pharmaceutical products products (goods) 2023 2022 2023 2022 2023 2022 2023 2022 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 BGN'000 Capital expenditures 4,640 10,519 48,980 50,157 480 671 54,100 61,347 Depreciation and amortisation 10,928 10,957 33,207 31,132 944 1,477 45,079 43,566 Non-monetary expenses, other than depreciation and amortisation 4,330 1,715 976 17,579 437 267 5,743 19,561 The distribution of Group revenue by type and by geographic area is as follows: Bulgaria Europe Other countries 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 Sales of finished products 119,458 104,175 165,016 151,366 35,077 28,352 319,551 283,893 Sales of goods 1,167,343 1,097,601 387,716 280,760 694 762 1,555,753 1,379,123 1,286,801 1,201,776 552,732 432,126 35,771 29,114 1,875,304 1,663,016 The carrying amount as at 31 December of Group's non-current assets other than financial instruments, distributed by geographic area, is as follows: Bulgaria Europe Other countries Total 2023 2022 2023 2022 2023 2022 2023 2022 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Property, plant and equipment 339,188 356,941 17,389 18,551 1,047 915 357,624 376,407 Intangible assets 40,191 41,199 17,626 6,943 12 9 57,829 48,151 Goodwill 2,159 2,159 1,280 1,363 - - 3,439 3,522 Investment property 11,198 10,568 - - - - 11,198 10,568 392,736 410,867 36,295 26,857 1,059 924 430,090 438,648 45. FINANCIAL RISK MANAGEMENT In the ordinary course of business, the Group can be exposed to a variety of financial risks the most important of which are market risk (including currency risk, risk of a change in the fair value and price risk), credit risk, liquidity risk and risk of interest-bearing cash flows. The general risk management is focused on the difficulty to forecast the financial markets and to achieve minimizing the potential negative effects that might affect the financial results and position of the Group. The financial risks are currently identified, measured and monitored through various control mechanisms in order to establish adequate prices for the finished products and services of the Group 142 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 companies and the borrowed thereby capital, as well as to assess adequately the market circumstance of its investments and the forms for maintenance of free liquid funds through preventing undue risk concentrations. Risk management is currently performed by the management of the parent company and respectively, the managing bodies of the subsidiaries, in line with the policy defined by the Board of Directors of the parent. The Board of Directors has approved the basic principles of general financial risk management, on the basis of which specific procedures have been established for management of the separate specific types of risk such as currency, price, interest, credit and liquidity risk and the risk of use of non-derivative instruments. The structure of financial assets and liabilities at 31 December 2023 is as follows: Categories of financial instruments: 31.12.2023 31.12.2022 BGN '000 BGN '000 Financial assets Financial assets at amortised cost, including: 461,554 326,563 Receivables and loans granted (Notes 21, 22, 24, 25 and 26) 332,679 306,712 Cash and cash equivalents (Note 27) 128,875 19,851 Financial assets at fair value through other comprehensive income, 3,942 4,778 including: Equity investments (Note 20) 3,942 4,778 Total financial assets 465,496 331,341 Financial liabilities Financial assets at amortised cost, including: 699,289 456,168 Short-term and long-term bank loans (Notes 29 and 36) 263,072 195,872 Other loans and payables (Notes 35, 37, 38 and 42) 348,438 174,748 Finance lease liabilities (Note 33) 87,779 85,548 Total financial liabilities 699,289 456,168 The net effect of accrued (reversed) impairment related to financial assets and financial guarantees recognised in the statement of comprehensive income (within profit or loss) is as follows: Impairment losses, net of reversals, related to financial assets and financial guarantees recognised in the statement of comprehensive income, are as follows: 31.12.2023 31.12.2022 BGN '000 BGN '000 Trade and other receivables, including from related parties 1,256 1,856 Loans at amortised cost 456 3,887 Court and awarded receivables 291 (488) Total 2,003 5,255 Credit risk 143 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Credit risk is the risk that any of the Group's clients will fail to discharge in full and within the normally envisaged terms the amounts due under trade receivables. The Group’s credit risks arises both from its business operations, through trade receivables, and from its financing activities, including the granting of loans to related and third parties, commitments undertaken under loans and guarantees and bank deposits. The Group has developed policies, procedures and rules for control and monitoring of credit risk behaviour. Trade receivables In its business practice, the Group has applied various schemes of distribution until arriving at its current effective approach, which considers the market environment, various forms of payments, as well as the inclusion of trade rebates. The Group works with counterparts with whom it has a history on its main markets, and partners with over 70 Bulgarian and foreign licensed distributors of medicinal products. Work with the NHSSO and with distributors working with state hospitals also require the adoption of a deferred payment policy in Bulgaria. In this sense, even though credit risk concentration exists, this risk is controlled by means of selection, ongoing monitoring of the liquidity and financial stability of sales partners, as well as direct communication therewith and seeking quick measures upon indications for problems. The Group’s credit policy envisages assessing each new customer’s creditworthiness before proposing standard delivery and payment conditions. The Group uses provisioning matrixes to calculate expected credit losses from trade receivables and contract assets. The latter are grouped into groups (portfolios) from various client segments sharing similar characteristics, incl. for credit risk. The percentages applied in the provisioning matrix are based on days past due for each portfolio. Each matrix percentage is initially determined based on historical data observed by the Group companies for a period of three years. The method is based on analysis of the history and assessing behaviour for each invoice within a group issued over at least the last three years, including pays past due, going period by period among the different past due ranges, payments and outstanding receivables, etc. Based on that, the loss percentage is determined as bad debt for the given group of factors versus past due invoices by days. The period of occurrence on an economic loss from uncollectability is determined by customer portfolios: wholesalers, pharmacy market, hospital market, and by geographic regions. This period is examined and historically assessed. The Group does not have a practice to request collateral of trade receivables, and does not insure them. Second, the Group makes the impairment provisioning matrixes for each portfolio precise by adjusting certain percentages based on historical data for the behaviour of payments under the invoices issued and historical losses from bad debt, by including scenarios and forecast information about certain macro factors. Historical percentages are adjusted to reflect the effect of the future behaviour of macroeconomic factors for which a statistical dependence has been identified and which are considered to impact the customers’ ability to service and settle their payables. Court and awarded receivables Upon determining the collectability of court and awarded receivables, the management analyses on an individual basis the overall exposure from each counterpart (counterpart type) in order to determine the actual likelihood of their collection. Upon establishing it is highly unlikely to collect a given receivable 144 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 (group of receivables), it is assessed what portion thereof is secured (pledge, mortgage, guarantors, and bank security) to thus guarantee collectability (through potential future realisation of the collateral or payment by the guarantor). The receivables or portion thereof for which the management determines are highly unlikely to be collected, are 100% impaired. Loans and financial guarantees granted The assessment of each credit exposure for the management’s purposes is a process that requires the use of models to reflect impact on exposure by changes in market conditions and the debtor’s operation, estimated cash flows and time left to maturity. The assessment of the credit risk of loans granted leads to further judgement on the possibility of default, on the loss coefficients related to this judgement and to correlation between counterparts. The Company measures credit risk by using probability of default (PD), exposure at default (EAD) and loss given default (LGD). To determine the credit risk of loans and financial guarantees granted, and of certain individual trade receivables, the Group’s management has developed a methodology that includes two main components: determining the debtor’s credit rating, and statistical models for calculating marginal PD by year for each rating. With respect to the rating, it uses internal credit ratings of its counterparts based on the global methodologies of world’s leading rating agencies. The rating reflects financial indebtedness, liquidity, profitability ratios, etc. quantitative (for instance, sales volumes) and qualitative (for instance, financial policy, diversifications, etc.) criteria depending on the respective methodology and industry. By means of statistical models based on historical global data about probability of default (PD) and transitions between different ratings, as well as forecasts for key macroeconomic indicators (GDP growth, inflation, etc.), the necessary marginal PD are determined by year for each rating. Based on the specific rating established and the analysis of the debtor’s characteristics and the loan/guarantee, incl. changes which have occurred therein compared to the prior period, the instrument’s stage is determined (Stage 1, Stage 2, and Stage 3). The Group considers that a certain financial instrument has undergone a significant increase in credit risk when one or more of the following quantitative or qualitative criteria are met: 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; 145 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • Early signs of cash flow/liquidity issues, such as delays in servicing trade creditors/bank loans. The criteria used to identify a substantial increase in credit risk are monitored, and their viability is reviewed on a periodic basis by the Group’s Finance Director. The Company designates a financial instrument as non-performing and the credit loss as incurred, when it meets one or more of the following criteria: Quantitative criteria • The debtor’s contract payments are over 90 days past due • Significant adverse changes have occurred or are expected in the debtor’s business, financial conditions and economic environment, manifest in a serious decrease in the debtor’s main financial and operational indicators; • The debtor states a number of losses and negative net assets; • Significant adverse changes have occurred or are expected in value of the loan’s key collateral, incl. loss of collateral. Qualitative criteria The debtor is unable to pay due to significant financial difficulties. This includes cases when: • The debtor is in default of the financial contract, for instance with respect to interest payments, collaterals and/or another significant contract, including for financing; • Adverse changes in the debtor’s business, market, environment, and regulations; • Concessions and reliefs have been made in relation to the debtor’s financial difficulties; • There is probability that the debtor declares insolvency. The default definition is subsequently applied to modelling the probability of default (PD), the exposure at default (EAD), and the loss given default (LGD) determined through calculation of the Group’s expected credit losses. Expected credit losses have been determined by discounting the product of: the probability of default (PD), exposure at default (EAD), and the loss given default (LGD), determined as follows: • PD is the probability of the debtor not meeting their financial obligations, either over the next 12 months, or over the financial asset’s lifetime (lifetime PD) determined based on public PD data from generally accepted sources and statistical models of the impact of forecast macroeconomic factors. Moreover, the Company’s management has conducted historical analysis and has identified the main economic variables impacting credit risk and expected credit losses per loan (portfolio) type. • EAD is the amount payable to the Company by the debtor at default, over the next 12 months or over the remaining period of the loan, determined in accordance with the specific instrument’s characteristics (amount due, repayment plans, interest, term, etc.). • LGD is the Company’s expectation for the amount of loss from a non-performing exposure. LGD varies depending on the type of counterpart, the type and superiority of the claim and the presence of collateral or other credit support. LGD is measured as a loss percentage for an open exposure at default. 146 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 • The discount rate used to calculate expected credit losses (ECL) is the instrument’s initial effective interest or in the case of financial guarantees and other instruments without an applicable interest rate – the risk-free rate for the respective period, currency, etc. The Group applies a number of policies and practices to lower the credit risk from loans granted. Most frequently, it accepts collateral. The Company assigns valuation to external experts – independent valuators, of the collateral received, as part of the process of granting loans. This valuation is reviewed on a periodic basis, but at least once per year. The table below presents the quality of the Group’s financial assets, contract assets and financial guarantee contracts, as well as the maximum exposure to credit risk according to the credit rating adopted: Note Internal credit risk Gross Impairment Carrying Expected categorisation carrying loss amount 31.12.2023 credit losses amount (allowance) (IFRS 9) BGN '000 BGN '000 BGN '000 Lifetime Initially negotiated Long-term loans to 21 (credit- loans – Stage 1 related parties impaired) 49,071 (118) 48,953 Receivables under assignment contracts Lifetime 21 Regular – Stage 1 from related (credit- enterprises impaired) 3,884 - 3,884 Short-term loans to Lifetime Initially negotiated related parties 25 (credit- loans – Stage 1 impaired) 4,067 - 4,067 Short-term loans to Lifetime related parties 25 Renegotiated Stage (credit- impaired) 10,894 (2,154) 8,740 Long-term loans to Lifetime Initially negotiated third parties 22 (credit- loans – Stage 12 impaired) 1,956 (436) 1,520 Lifetime Short-term loans to 26 Renegotiated Stage (credit- third parties impaired) 4,726 (503) 4,223 Short-term loans to N/A Lifetime third parties 26 (credit- impaired) 8,516 (4) 8,512 Trade and other For a 12- receivables from 21, 25 N/A month period related parties 2,964 (376) 2,588 Trade and other For a 12- receivables from third 22, 24, 26 N/A month period parties 257,942 (7,750) 250,192 (incl. court 26 receivables) 7,877 (1,313) 6,564 Financial assets 344,020 (11,341) 332,679 147 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Note Internal credit risk Gross Impairment Carrying Expected categorisation carrying loss amount 31.12.2022 credit losses amount (allowance) (IFRS 9) BGN '000 BGN '000 BGN '000 Lifetime Initially negotiated Long-term loans to 21 (credit- loans – Stage 1 related parties impaired) 63,355 (157) 63,198 Lifetime Short-term loans to Initially negotiated 25 (credit- related parties loans – Stage 1 impaired) 4,144 - 4,144 Lifetime Long-term loans to Renegotiated Stage 22 (credit- third parties 2 impaired) 9,852 (1,340) 8,512 Lifetime Short-term loans to Initially negotiated 26 (credit- third parties loans – Stage 1 impaired) 1,956 (459) 1,497 Lifetime Short-term loans to Renegotiated Stage 26 (credit- third parties 2 impaired) 8,320 (3) 8,317 Trade and other N/A For a 12- receivables from 21, 25 month period related parties 4,648 (122) 4,526 Trade and other N/A For a 12- receivables from third 22, 24, 26 month period parties 223,954 (7,436) 216,518 (incl. court 26 receivables) 13,649 (1,002) 12,647 Financial assets 316,229 (9,517) 306,712 The table below provides information about the Group’s exposure to credit risk and the impairment of credit losses for loans granted, trade receivables and other receivables as at 31 December 2023: Category Correlation to an external Average Gross Impairment credit rating percentage carrying loss of expected amount (allowance) credit loss BGN '000 BGN '000 Initially negotiated loans – Stage 1 B3 2.22% 47,701 (1,057) Initially negotiated loans – Stage 1 Ba3 0.00% 12,119 - Renegotiated Stage 2 Caa1 19.35% 11,129 (2,154) Renegotiated Stage 2 B3 0.05% 8,281 (4) Regular – Stage 1 Caa1 0.00% 3,884 - Trade and other receivables including related parties (Stage 1) N/A 2.69% 253,029 (6,813) Underperforming trade receivables (court and awarded receivables) N/A 16.67% 7,877 (1,313) Total 344,020 (11,341) 148 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The Group has concentration of receivables from related parties (trade receivables and loans), as follows: 31.12.2023 31.12.2022 BGN'000 BGN'000 Client 1 59.92% 63.63% Client 2 12.80% 12.49% Client 3 11.80% 10.59% The Group manages concentration of receivables from related parties on a current basis by applying credit limits and additional collaterals in the form of pledge on securities and other assets and applying promissory notes. The concentration of the first five clients in the Group’s trade receivables is as follows: 31.12.2023 % credit exposure 31.12.2022 % credit exposure versus the total versus the total amount of trade amount of trade receivables receivables BGN'000 % BGN'000 % Client 1 15,980 7% 17,124 9% Client 2 9,827 4% 7,704 4% Client 3 4,688 2% 5,303 3% Client 4 4,484 2% 4,499 2% Client 5 4,096 2% 4,126 2% Cash The Group’s cash and payment operations are concentrated in different first-class banks. To calculate expected credit losses for cash and cash equivalents, it applies a model based on the bank’s public ratings as determined by internationally recognised rating firms like Moody’s, Fitch, S&P, BCRA and Bloomberg and the reference public data about PD referring to the rating of the respective bank. The management monitors changes in a bank’s rating on an ongoing basis in order to assess the presence of increased credit risk, ensure the current management of incoming and outgoing cash flows and the allocation of cash in the bank accounts and banks. Foreign currency risk The Group companies perform their operations with active exchange with foreign suppliers and clients and therefore, they are exposed to currency risk. The Group through the companies in Belarus, Ukraine and Serbia carries out business in these countries and, therefore, has significant exposure in BYN, UAH and RSD. The currency risk is related with the adverse floating of the exchange rate of these currencies against BGN in future business transactions as to the recognised assets and liabilities denominated in foreign currency and as to the net investments in foreign companies. The rest of the companies abroad perform sales mainly to the local markets, which leads to currency risk to their currencies as well – Polish Zloty (PLN), US Dollar (USD), British Pound (GBP) and Kazakhstani Tenge (KZT). 149 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Most operations of the Group companies are usually denominated in BGN and the fact that the BGN is fixed to the EUR reduces the potential currency volatility for the companies of the Group. To control foreign currency risk, there is an implemented system in the whole Group for planning import supplies, sales in foreign currency as well as procedures for daily monitoring of US dollar exchange rates and control on pending payments. The exposures of almost all subsidiaries in Bulgaria to foreign currency risk are insignificant because almost all sales are performed to the local market in Bulgarian Levs (BGN). The import of goods is performed mainly in Euro (EUR). The loans denominated in a foreign currency have been granted mainly in EUR. The assets and liabilities of the Group denominated in BGN and presented by a foreign currency are as follows: in BGN in EUR in RSD in USD in UAH in other Total 31 December 2023 currency BGN BGN BGN BGN BGN BGN BGN '000 '000 '000 '000 '000 '000 '000 Equity investments 3,929 - - 13 - - 3,942 Financial assets at amortised cost, including 230,784 130,199 75,604 9,099 9,160 6,708 461,554 Loans and receivables, 219,839 25,995 71,041 8,119 3,313 4,372 332,679 Cash and cash equivalents 10,945 104,204 4,563 980 5,847 2,336 128,875 Total financial assets 234,713 130,199 75,604 9,112 9,160 6,708 465,496 in BGN in EUR in RSD in USD in UAH in other Total 31 December 2023 currency BGN BGN BGN BGN BGN BGN BGN '000 '000 '000 '000 '000 '000 '000 Short-term and long-term bank loans 180,976 81,118 978 - - - 263,072 Other loans and liabilities 207,449 77,818 54,999 5,593 541 2,038 348,438 Lease liabilities 65,921 21,157 - 297 44 360 87,779 Total financial liabilities 454,346 180,093 55,977 5,890 585 2,398 699,289 in BGN in EUR in RSD in USD in UAH in other Total 31 December 2022 currency BGN BGN BGN BGN BGN BGN BGN '000 '000 '000 '000 '000 '000 '000 Equity investments 4,770 - - 8 - - 4,778 Financial assets at amortised cost, including 222,660 23,821 60,126 6,790 7,258 5,908 326,563 Loans and receivables, 212,483 21,084 59,343 6,695 3,252 3,855 306,712 Cash and cash equivalents 10,177 2,737 783 95 4,006 2,053 19,851 Total financial assets 227,430 23,821 60,126 6,798 7,258 5,908 331,341 150 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 in BGN in EUR in RSD in USD in UAH in other Total currency 31 December 2022 BGN BGN BGN BGN BGN BGN BGN '000 '000 '000 '000 '000 '000 '000 Short-term and long-term bank loans 123,272 67,555 3,833 - 1,212 - 195,872 Other loans and liabilities 65,480 60,357 45,299 2,697 435 480 174,748 Lease liabilities 65,695 18,997 - 417 141 298 85,548 Total financial liabilities 254,447 146,909 49,132 3,114 1,788 778 456,168 Foreign currency sensitivity analysis The foreign currency sensitivity of the Group exposures is mainly related with the Ukrainian Hryvnia (UAH), and the Serbian Dinar (RSD). With regard to the other currencies in which the Group operates or in which other companies of the Group operate (Polish Zloty, US Dollar and Kazakhstani Tenge) the foreign currency risk of the Group is limited, because their exposures in these currencies are relatively small and are more easily regulated by the managing bodies of the respective subsidiaries. The effect of foreign currency sensitivity to 10% increase/decrease in current exchange rates of BGN to the Serbian Dinar (RSD), Belarusian Ruble (BYN), Ukrainian Hryvnia (UAH), US Dollar (USD) and in general to the other foreign currency exposures, based on the structure of foreign currency assets and liabilities at 31 December and on the assumption that the influence of all other variables is ignored, has been measured and presented as impact on the post-tax consolidated financial result and on the equity of the Group. The impact in 2023 of a 10% increase/decrease in the exchange rates of RSD, UAH, USD against BGN on the Group’s profit (following taxation) is: 31.12.2023 31.12.2022 RSD USD UAH RSD USD UAH BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 BGN '000 Financial result (1,668) (290) (703) (934) (332) (449) Retained earnings (1,668) (290) (703) (934) (332) (449) Mainly included in other currency: BGN 3,727 thousand. in Polish zlotys and BGN 2,141 thousand net financial assets in Kazakhstan tenge (as of 31.12.2022: BGN 3,284 thousand in Polish zlotys and BGN 1,845 thousand in Kazakhstan tenge net financial assets). With a 10% increase/decrease, respectively, in the exchange rate of the Polish zloty and the Kazakh tenge against the Bulgarian lev, the final effect on the Group's profit (after tax) is: 31.12.2023 31.12.2022 PLN MDL PLN MDL BGN '000 BGN '000 BGN '000 BGN '000 Financial result 302 171 266 184 Retained earnings 302 171 266 184 151 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The effect on equity is of the same amount and in a direction of a decrease and reflects in the component 'retained earnings'. The Group analyses currency exposure and takes timely measures to mitigate effects thereof on the Group’s results. Price risk The Group companies are exposed to price risk of inventories based on three main factors: (a) a possible increase of purchase prices of raw materials and consumables, since a significant portion of the raw materials used are imported and they represent a significant share of production costs; (b) a possible increase in supplier prices of goods; and (c) the growing competition on the Bulgarian pharmaceutical market, affecting the prices of pharmaceuticals. For the purpose of mitigating this influence, the management of the Group applies a strategy aimed at optimisation of production costs, validation of alternative suppliers that offer beneficial commercial conditions, expanding product range by means of new generic products development and last but not least, adoption of a flexible marketing and price policy. Price policy is a function of three main factors – structure of expenses, prices of competitors and purchasing capacity of customers. The Group is exposed to a significant price risk also with regard to the shares held thereby, classified as other long-term equity investments, mostly through the parent company. For this purpose, the management monitors and analyses all changes in security markets and also uses consulting services of one of the most authoritative in the country investments intermediaries. In addition, at this stage, the management has taken a decision for a reduction in its operations on stock markets, retaining of the purchased shares for longer periods with current monitoring of the reported by the respective issuer financial and business indicators as well as the development of the operations in the environment of crisis. Liquidity risk The liquidity risk is the adverse situation when the Group encounters difficulty in meeting unconditionally its obligations within their maturity. The Group generates and maintains a significant volume of liquid funds. An internal source of liquid funds for the Group is its main economic activity of its companies generating sufficient operational flows. Banks and other permanent counterparts represent external sources of funding. To isolate any possible general liquidity risk, the group implements a system of alternative mechanisms of acts and prognoses, the final aim being to maintain good liquidity and, respectively, ability to finance its economic activities. This is supplemented by current monitoring of the maturities of assets and liabilities, control over cash outflows and ensuring their current balancing with inflows, including renegotiation of maturities and optimisation of debt structure, increase and internal restructuring of self-generated funds and their investment. 152 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Maturity analysis The table below presents the financial non-derivative liabilities of the Group, classified by remaining term to maturity, determined against the contractual maturity at the consolidated financial statements date. The table is prepared on the basis of undiscounted cash flows and the earliest date on which a payable becomes due for payment. The amounts include principal and interest. Maturity analysis as at up to 1 1 to 3 3 to 6 6 to 12 1 to 2 2 to 5 over 5 month months months months years years years 31 December 2023 Total BGN BGN BGN BGN BGN BGN BGN BGN '000 '000 '000 '000 '000 ’000 ’000 '000 Short-term and long-term bank loans 5,902 18,939 131,673 58,197 50,304 5,433 1,607 272,055 Other loans and liabilities 256,267 78,562 6,038 2,068 1,067 3,352 1,170 348,524 Lease liabilities 1,445 3,064 4,464 8,850 16,331 35,702 23,968 93,824 Total liabilities 263,614 100,565 142,175 69,115 67,702 44,487 26,745 714,403 Maturity analysis as at 31 December 2022 up to 1 1 to 3 3 to 6 6 to 12 1 to 2 2 to 5 over 5 month months months months years years years Total BGN BGN BGN BGN BGN BGN BGN BGN '000 '000 '000 '000 '000 ’000 ’000 '000 Short-term and long-term bank loans 1,804 80,271 5,270 84,122 24,925 3,437 202 200,031 Other loans and liabilities 98,687 51,821 8,543 2,645 2,475 4,675 7,013 175,859 Lease liabilities 1,405 2,923 4,217 8,270 15,182 32,552 25,502 90,051 Total liabilities 101,896 135,015 18,030 95,037 42,582 40,664 32,717 465,941 Risk of interest-bearing cash flows Interest-bearing assets in the structure of the Group are: cash, bank deposits and loans granted at fixed interest rate. On the other hand, the borrowings of the Group in the form of long-term and short-term loans are usually with a floating interest rate. This circumstance makes the cash flows of the Group partially dependent on interest risk. This risk is covered in two ways: (a) optimisation of resources and structure of credit resources for achieving relatively lower price of attracted funds; and (b) combined structure of interest rates on loans comprising two components – a permanent one and a variable one; the correlation between them, as well as their absolute value, are maintained in a proportion favourable for the Group companies. The fixed component has a relatively low absolute value and sufficiently high relative share in the total interest rate. This circumstance eliminates the probability of a significant change in interest rate levels in case of variable component updating. Thus the probability for an unfavourable change of cash flows is reduced to a minimum. 153 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 The managing bodies of the Group companies together with the management of the parent currently monitor and analyse the exposure of the respective company to the changes in interest levels. Simulations are carried out for various scenarios of refinancing, renewal of existing positions, and alternative financing. The impact of a defined interest rate shift, expressed in points or percentage, on the financial result and equity is calculated based on these scenarios. For each simulation, the same assumption for interest rate shift is used for all major currencies. The calculations are made for major interest-bearing positions. with floating with fixed Interest analysis interest-free interest % interest % Total 31 December 2023 BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 3,942 - - 3,942 Financial assets at amortised cost, including: 254,612 5,282 201,660 461,554 Receivables and loans 236,965 15 95,699 332,679 Cash and cash equivalents 17,647 5,267 105,961 128,875 Total financial assets 258,554 5,282 201,660 465,496 with floating with fixed Interest analysis interest-free interest % interest % Total 31 December 2023 BGN '000 BGN '000 BGN '000 BGN '000 Short-term and long-term bank loans 80 261,985 1,007 263,072 Other loans and liabilities 348,436 - 2 348,438 Lease liabilities - 62 87,717 87,779 Total financial liabilities 348,516 262,047 88,726 699,289 with floating with fixed Interest analysis interest-free interest % interest % Total 31 December 2022 BGN '000 BGN '000 BGN '000 BGN '000 Equity investments 4,778 - - 4,778 Financial assets at amortised cost, including: 224,175 5,133 97,255 326,563 Receivables and loans 213,234 15 93,463 306,712 Cash and cash equivalents 10,941 5,118 3,792 19,851 Total financial assets 228,953 5,133 97,255 331,341 Short-term and long-term bank loans 9 191,183 4,680 195,872 Other loans and liabilities 172,851 1,895 2 174,748 Lease liabilities - 4,289 81,259 85,548 Total financial liabilities 172,860 197,367 85,941 456,168 The table below demonstrates Group's sensitivity to possible changes in interest rates by 0.50% based on the structure of assets and liabilities as at 31 December and with the assumption that the influence of all other variables is ignored. The effect is measured and presented as impact on the financial result after taxes and on equity. 154 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Impact on post-tax financial result and Increase / decrease in interest rate equity profit/(loss) 31.12.2023 31.12.2022 BGN’000 BGN’000 Increase (1,179) (888) Decrease 1,179 888 Capital risk management The capital management objectives of the Group are to build and maintain capabilities to continue its operation as a going concern and to provide return on the investments of shareholders and economic benefits to other stakeholders and participants in its business as well as to maintain an optimal capital structure to reduce the cost of capital. Analogous approach is applied also at the level of a separate Group company with regard to its capital structure and financing. The Group currently monitors capital availability and structure on the basis of the gearing ratio. This ratio is calculated as net debt divided by the total amount of employed capital. Net debt is calculated as total borrowings (current and non-current ones) as presented in the consolidated statement of financial position less cash and cash equivalents. Total employed capital is equal the sum of equity (including non-controlling interest) and net debt. It is a characteristic feature for both presented periods that the Group finances its operations both through its own generated profit and by maintaining a certain level of trade and other current payables and loans (bank, commercial ones). The strategy of the parent company's management was to maintain the ratio within 23- 30% at a Group level. The table below shows the gearing ratios based on capital structure: 31.12.2023 31.12.2022 BGN'000 BGN'000 Total borrowings, including: 350,851 283,295 Bank loans 263,072 195,872 Lease liabilities and factoring 87,779 87,423 Less: Cash and cash equivalents (128,875) (19,851) Net debt 221,976 263,444 Total equity of the Group 753,626 716,634 Total capital of the Group 975,602 980,078 Gearing ratio 0.23 0.27 The liabilities shown in the table are disclosed in Notes 29, 31, 33, 36 and 39. Fair value measurement The fair value concept presumes realisation of the financial instruments through sales, based on the position, assumptions and judgements of independent market participants on the main or more profitable market for given assets or liabilities. However, in most cases especially in regard of trade receivables and payables as well as loans and deposits with banks, the Group expects to realise these financial assets also through their total refund or respectively, settlement over time. Therefore, they are presented at amortised cost. 155 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 In addition, a large part of the financial assets and liabilities are either short-term in their nature (trade receivables and payables, short-term loans) or are presented in the consolidated statement of financial position based on market value (deposits placed with banks, investments in securities, loans with floating interest rate) and therefore, their fair value is almost equal to their carrying amount. For receivables and loans with a fixed interest rate, the methodology applied in determining it uses as starting point for calculations Group’s observations of market interest rates. As far as no sufficient market experience, stability and liquidity exist in regards of purchases and sales of certain financial assets and liabilities, still no adequate and reliable quotes of market prices are available thereof, due to which alternative assessment methods and techniques are used. The management of the parent company is of the opinion that the estimates of the financial assets and liabilities presented in the statement of financial position are as reliable, adequate and trustworthy as possible for financial reporting purposes under the existing circumstances. 46. ACQUISITIONS AND INCREASING INTERESTS IN SUBSIDIARIES 46.1 Acquisition of subsidiaries In 2023, the Group did not acquire any new subsidiaries. In 2023, the Group established the following companies: date of effective amount of incorporation interest % capital contribution BGN'000 Sopharma Rus OOO 13.10.2023 100.00% In 2022, the Group did not acquire and establish new subsidiaries. The subject of activity of the acquired subsidiaries is disclosed in Note No. 1.2. In 2023 cash amounting to BGN 9,347 thousand was paid. BGN (31.12.2022: BGN 2,338 thousand) for subsidiaries acquired in 2020. 46.2 Increases in holdings (purchases of non-controlling interests) The group has completed transactions for the purchase of additional shares of the non-controlling interest. In 2023, the Group acquired the following shares: Increases in interests transaction % change acquired net assets date in interest (purchases of non-controlling interest) BGN '000 Sopharma Trading AD 29.12.2023 0.43% 529 529 156 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 In 2022 the Group acquired the following shares: Increases in interests transaction % change acquired net assets date in (purchases of non-controlling interest) interest BGN '000 Sopharma Trading AD 30.12.2022 5.91% 5,564 Rap Pharma International OOD 17.8.2022 20.00% (292) 5,272 The acquisition price of the additional shares purchased in 2023, the effects and cash outflows are as follows: Increases in interests Total (purchases of non-controlling interests) BGN'000 Direct acquisition 905 Total acquisition price 905 Fair value of the acquired net assets (529) Effects undertaken by the Group at the expense of the group reserve – “accumulated profit” 376 Cash outflow on increase in interest (purchasing of non-controlling interest) 905 The acquisition price of the additional shares purchased in 2022, the effects and cash outflows are as follows: Increases in interests Total (purchases of non-controlling interests) BGN'000 Direct acquisition 10,859 Indirect acquisition through a subsidiary 10,859 Fair value of the acquired net assets (5,272) Effects undertaken by the Group at the expense of the group reserve – “accumulated profit” 5,587 Cash outflow on increase in interest (purchasing of non-controlling interest) 10,859 47. DISPOSAL OF SUBSIDIARIES 47.1 Total disposal of subsidiaries and joint ventures In 2023, the Group has not disposed subsidiaries and joint ventures. In 2022, the Group reported the release of its participation in the following subsidiary: 157 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Effective Date of Company interest % disposal disposed of Rap Pharma International OOD 11.11.2022 100.00% The net assets of the exempted companies in 2022 are presented as follows: Disposal with loss of control 11.11.2022 BGN'000 Property, plant and equipment (Note No. 16) 123 Intangible assets (Note No. 17) 170 Inventories 462 Trade receivables 80 Other current receivables and assets 173 Cash and cash equivalents 116 Deferred tax liabilities 41 Trade obligations (2,500) Current lease obligations (48) Other payables (67) Net Assets/(Liabilities) (1,450) The financial result of the release of subsidiaries is as follows: 2022 BGN'000 Income from disposal of Group subsidiary 98 Adjusted with: Negative net assets written-off 1,450 Goodwill (40) Reserve on restatement of foreign operations into the presentation currency (52) Gain on disposal of subsidiaries 1,456 Net cash flows from disposal pf subsidiaries Cash received for subsidiaries sold in 2022 98 Cash received for subsidiaries sold in prior years 417 Less: Cash of the companies disposed of (116) Net cash flows from disposal of subsidiaries 399 158 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 48. RELATED PARTY TRANSACTIONS Related parties Relation type Relationship period Shareholding company with significant Donev Investments Holding AD 2023 2022 influence Shareholding company with significant 2023 2022 Telecomplect Invest AD influence Momina Krepost AD Joint venture 2023 2022 Sopharma Properties REIT Associate 2023 2022 Doverie Ovedinen Holding AD Associate 2023 2022 from Sopharma buildings REIT Associate - 08.09.2023 from Pharmanova D.O.O. Associate - 10.11.2023 DOH Group companies Companies controlled by an associate 2023 2022 Sofprint Group AD Company related through a main shareholder 2023 2022 Company related through key management 2023 2022 Sofconsult Group AD personnel Company related through key management 2023 2022 VES Eectroinvest Systems EOOD personnel Company related through key management 2023 2022 Eco Solar Invest OOD personnel Company related through key management 2023 2022 Alpha In EOOD personnel Company related through key management 2023 2022 Consumpharm OOD personnel Civil societies for the implementation of joint 2023 DZZD "Veterinarna Diagnostica" activity (direct participation) Supplies from related parties: 2023 2022 BGN ‘000 BGN ‘000 Supply of inventories from: Companies related through key management personnel 10,332 10,577 Associates 637 128 Joint ventures 322 298 Companies controlled by an associate 64 43 11,355 11,046 Supply of services from: Companies controlled by an associate 1,177 1,106 Shareholding companies with significant influence 581 425 Associates 472 514 Companies under a common indirect control through key management personnel 213 266 Joint ventures 5 3 2,448 2,314 Supply of property, plant and equipment from: Companies controlled by an associate 3,369 1,558 3,369 1,558 Other supplies from: Companies controlled by an associate 281 261 281 261 159 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 2023 2022 BGN ‘000 BGN ‘000 Interest expenses: Shareholding companies with significant influence 467 9 Associates - 33 467 42 Accrued dividends on: Companies shareholders with significant influence 130,136 - Key management personnel 17,971 - 148,107 - Total supplies 166,027 15,221 Sales to related parties Sales of inventories to: Companies related through key management personnel 1,219 1,109 Companies controlled by an associate 952 1,389 2,171 2,498 Sales of services to: Companies related through key management personnel 226 219 Companies controlled by an associate 125 281 Associates 11 7 362 507 Fees on guarantorships and warranties to: Joint ventures - 7 - 7 Interest on loans granted: Companies controlled by associates 2,170 1,934 Joint ventures 62 46 Associates 31 11 2,263 1,991 Cessions Joint ventures 127 71 127 71 4,923 5,074 Leases In the reporting period the Group recognised assets, liabilities and payments in relation to leases with related parties: Lease liabilities as at 31 December in relation to leases with related parties are as follows: 31.12.2023 31.12.2022 BGN ‘000 BGN ‘000 Recognised lease liabilities at 1 January 20,616 4,314 Increases 1,851 19,305 Lease payments in the period (2,841) (2,462) Lease payments written-off - (541) Lease liabilities at 31 December 19,626 20,616 160 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 Right-of-use assets as at 31 December in relation to leases with related parties are as follows: 31.12.2023 31.12.2022 BGN ‘000 BGN ‘000 Right-of-use assets at 1 January 20,524 4,315 Increases 1,877 19,263 Depreciation accrued (2,996) (2,482) Derecognised carrying amount of right-of-use assets (82) (572) Right-of-use assets at 31 December 19,323 20,524 The newly arisen right-of-use assets and lease liabilities are under a lease concluded with an associate and with a company controlled by an associate. The accounts and balances with related parties are presented in Notes 21, 25, 31 and 38. The composition of key management personnel of the Group includes the disclosed in Note 1.1 Executive Director and the members of the Board of Directors of the parent company. Salaries and other short-term benefits of key management personnel and Executive Directors, members of the Board of Directors and General Managers of the Group’s subsidiaries amount to BGN 3,448 thousand (2022: BGN 3,325 thousand) and include: • current wages and salaries – BGN 2,963 thousand (2022: BGN 3,001 thousand); • tantieme – BGN 485 thousand (2022: BGN 324 thousand); Salaries and other short-term benefits of key management personnel of the parent company amount to BGN 1,857 thousand (2022: BGN 1,927 thousand) and include: • current wages and salaries – BGN 1,463 thousand (2022: BGN 1,684 thousand); • tantieme – BGN 394 thousand (2022: BGN 243 thousand). 49. EVENTS AFTER END OF THE REPORTING PERIOD On 10 January 2024, the liquidation procedure of the subsidiary Fito Palauzovo AD was entered in the Commercial Register, and the invitation to creditors was entered on 16.01.2024. From 22 January 2024, the payment of the accrued advance dividend from the parent company's profit for 2023, which is BGN 141,896 thousand, began. On 23 January 2024, the parent company submitted documents for consideration to the Financial Supervision Commission in connection with the merger of the subsidiary Veta Pharma AD. On 20 February 2024, the Financial Supervision Commission notified the company by letter No. RG – 05 – 684 – 2 on the basis of Art. 125 in connection with Art. 89 r, para. 2 of the Civil Procedure Code, that it should submit additional information within one month , data and documents regarding the requested merger. 161 SOPHARMA GROUP CONSOLIDATED ANNUAL FINANCIAL STATEMENTS FOR YEAR 2023 On 20 February 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 the Civil Procedure Code notified the parent company that within one month it should submit additional information, data and documents regarding the requested infusion. On 26 January 2024, a General Meeting of the holders of warrants from the issue with ISIN BG9200001212 of the parent company 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 the parent company, by issuing of 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, provided that the shares from the increase are subscribed by the warrant holders. The warrant holders made a request to the Board of Directors to make a decision on a capital increase under the condition that it be carried out on the basis of the Articles of Association of Sopharma AD, art. 195 of the Criminal Code and, accordingly, Art. 113, para. 2, item 2 of the Civil Code, in which warrant holders can exercise their rights under item 2 of the agenda, and under the terms and conditions according to the Prospectus for public offering of warrants, confirmed by the Decision of the Financial Supervision Commission No. 804 – E/04.11.2021. The capital increase was launched with the publication of an announcement under Art. 89t of the Civil Procedure Code on January 26, 2024. After the end of the period for exercising the warrants, 6,509,485 shares of the capital of the parent company were subscribed. Their issue value is BGN 26,884,173.05. The entry of the capital increase of the parent company in the Commercial Register takes place on 05 March 2024. On 7 March 2024, the parent company acquired 1,090,512 shares of the capital of Achieve Life Sciences, Inc., USA (3.18%) worth 4,864 thousand USD and 1,090,512 warrants worth 136 thousand. US dollars. On 20 March 2024, the parent company paid 84,132 bonds issued by Doverie United Holding AD with a total issue value of BGN 9,413,200. The bonds were issued pursuant to a decision of the Board of Directors of Doverie Obedinen Holding AD in accordance with the terms and conditions described in the Prospectus for the public offering of 200,000 registered, bearer, 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-month EURIBOR, increased by a premium to 2.00% per annum and no more than 6.00% per annum, payable in a six-month period, with a maturity of five years, starting from the date of issue the issue. With decision No. 1253/30 November 2023, the Commission for the Protection of Competition of the Republic of Bulgaria authorized the acquisition of nine sites from the Royal Pharmacies chain in Sofia, Pernik, Dupnitsa and Radomir, with the intention of joining them to the Sopharmacy pharmacy chain, in Sopharma Trading AD. The acquisition deal was completed in February 2024. The owner of the new pharmacies, positioned in three new companies (Sopharmasi 66 EOOD, Sopharmasi 67 EOOD and Sopharmasi 68 EOOD) is the subsidiary Sopharmasi EOOD. Additionally, on 13 March 2024, the subsidiary company Sopharmasi EOOD acquired the company Sopharmasi 65 EOOD with two pharmacies in the city of Sofia. No other significant events occurred after 31 December 2023 that require additional adjustments and/or disclosures in the consolidated financial statements as at 31 December 2023. 162 CONSOLIDATED MANAGEMENT REPORT 2023 SOPHARMA GROUP 24 April 2024 This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. CONTENT I. General information about Sopharma Group ................................................................................... 5 1. Main activities ................................................................................................................................... 5 2. Registration and activity of the Company ......................................................................................... 5 3. Controlled companies ....................................................................................................................... 5 4. Board of directors ............................................................................................................................. 7 5. Shareholder structure as at 31 December 2023 ............................................................................... 7 II. Recent developments ................................................................................................................. 8 1. Production activity ............................................................................................................................ 8 2. Products ............................................................................................................................................ 8 3. Distribution ....................................................................................................................................... 8 III. Information under Article 39 of the Accountancy Act ................................................................. 9 IV. An overview of the company's performance and the main risks it faces (art. 39, para 1 of the Accountancy Act) ................................................................................................................................. 9 1. Analysis of financial and non-financial key performance indicators of the Group /Article 39, item 2 of the Accountancy Act/ ..................................................................................................................... 11 2. Significant events occurring after the date of preparation of the annual financial statements /Article 39, paragraph 3 of the Accountancy Act/ .............................................................................. 14 3. Future development of Sopharma Group (article 39, item 4 of the Accountancy Act) and planned economic policy in the following year (Article 247 (3) of the Commerce Act) ................................... 15 4. Research and development (article 39, item 5 of the Accountancy Act) .................................. 15 5. Information on the acquisition of own shares required by Article 187d of the Commerce Act/ Article 39, Item 6 of the Accountancy Act/ .................................................................................................... 19 6. Existence of branches of the Company /Article 39, item 7 of the Accountancy Act/ ............... 20 7. Use of financial instruments /Article 39, item 8 of the Accountancy Act/ ............................... 20 V. Information under Article 247 and Art. 240b of the Commerce Act ........................................... 21 1. Information under Art. 247 of the Commerce Act .......................................................................... 21 2. Information under art. 240b of the Commercial Law on the obligation of Board members to notify in writing the Board of Directors or the Management Board when they or their related parties conclude contracts with the company outside its usual activity or substantially deviate from market conditions ............................................................................................................................................ 24 VI. Information on Annex 2 to art. 10, item 1 of Regulation 2 of LPOS ............................................ 24 1 1. Information given in value or quantitative terms about the main categories of goods, products and / or services provided, including their share in sales revenue of the Group in general and changes in the reporting year ............................................................................................................................... 24 2. Information about the revenues allocated by separate categories of activities, domestic and foreign markets and information on sources for supply of materials needed for production of goods or the provision of services with the degree of dependence on any individual seller or buyer / user, in case their share exceeds 10 per cent of the expenses or sales revenue, provide information for each person for his share in sales or purchases and links with the issuer .................................................. 24 3. Information on significant transactions .......................................................................................... 25 4. Information regarding transactions between the issuer and related parties during the reporting period, proposals for concluding such transactions, as well as transactions that are outside its usual activity or substantially deviate from market conditions when, the issuer or its subsidiary is party, indicating the value of the transactions, the nature of relatedness and any information necessary to assess the impact on the financial position of the issuer .................................................................... 25 5. Information about events and indicators unusual for the issuer that have a significant impact on its activity and realized income and expenses; assessment of their impact on the current year results 25 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 . 25 7. Information on shares of the issuer, its major investments in the country and abroad (in securities, financial instruments, intangible assets and real estate), as well as investments in equity securities outside its group of companies under Accountancy Act and the sources /methods of financing ...... 26 8. Information about the concluded by the issuer, its subsidiary or parent company in their capacity as borrowers, loan contracts specifying the terms and conditions, including the deadlines for repayment as well as information about guarantees and commitmets ............................................. 26 9. Information about the concluded by the issuer, its subsidiary or parent company in their capacity of lenders, loan agreements, including the provision of guarantees of any kind, including related parties, and the specific terms, including the deadlines fr payment and the purpose for which they were granted ....................................................................................................................................... 26 10. Information on the use of funds from the issuance of new issue of securities during the reporting period .................................................................................................................................. 27 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 ............................................. 27 12. Analysis and evaluation of the policy on the management of financial resources, including the ability to meet its obligations, possible threats and measures that the issuer has taken or will take to resolve them ....................................................................................................................................... 27 2 13. Assessment of the feasibility of investment intentions, indicating the amount of available funds and possible changes in the financing structure of this activity ............................................... 27 14. Information about changes in the reporting period in the basic principles of management of the issuer and its group of companies under the Accounting Law ..................................................... 27 15. Information about the main characteristics applied by the issuer in the process of preparing the financial statements, internal control system and risk management .......................................... 28 16. Information about changes in management and supervisory boards during the accounting year 28 17. Information on the amount of remuneration, rewards and / or benefits of each of the members of the management and supervisory bodies for the financial year, paid by the issuer and its subsidiaries, regardless of whether they have been included in the expnses of the issuer, or arising from profit distribution, including: ..................................................................................................... 28 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. ............................................................. 28 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 ....... 29 20. Information about pending legal, administrative or arbitration proceedings relating to liabilities or receivables of the issuer of at least 10 percent of its equity; if total liabilities or receivables of the issuer in all proceedings exceeds 10 per centof its equity, provide information about each case separately ............................................................................................................................................ 29 21. Information about the Investor Relations Director, including telephone number and correspondence address: .................................................................................................................... 29 VII. Information Annex 3 to Article 10, paragraph 2, item 4 of Ordinance 2 of LPOS ........................ 29 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 29 2. Information regarding the direct and indirect ownership of 5 percent or more of the voting rights at the General Meeting of the Company, including details of the Shareholders, the size of their shareholding and the type of shareholding ........................................................................................ 30 3. Information about shareholders with special control rights .................................................... 30 The Articles of Association of “Sopharma” AD do not provide special control rights. ........................ 30 4. Agreements between Shareholders which are known to the Company and which may lead to restrictions on the transfer of shares or voting right .......................................................................... 30 3 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 ..................................................................................................................................... 30 4 I. General information about Sopharma Group 1. Main activities Sopharma Group (the Group) is a leading Bulgarian producer, exporter and local distributor of pharmaceutical products with a strong presence in Eastern and South-eastern Europe, offering a wide range of prescription medicines and OTC products, food supplements, cosmetics and medical devices. The Group operates in the following areas: • production of pharmaceutical products including medicines, primarily generics, herbal-based substances and food supplements, which is mainly done by “Sopharma” AD (the Company); • production of medicinal products and medicinal cosmetics, as plasters, bandages and sanitary- hygiene products focused at the production site in Sandanski city; • distribution of pharmaceuticals, medical supplies, sanitary materials, vitamins, food supplements and cosmetics, which is mainly performed by “Sopharma Trading” in Bulgaria and in Serbia. 2. Registration and activity of the Company “Sopharma” AD is a company registered in Bulgaria under the Provisions of the Commercial Act, with its registered office in Sofia, 16 Iliensko shose Str. “Sopharma” AD was established in 1933. The court registration of the Group is from 15 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. 3. Controlled companies Sopharma Group consists of “Sopharma” AD and the following subsidiaries, directly or indirectly controlled by the Company. Additionally, the Group has investments in four associated companies (“Doverie - obedinen holding” AD - 23.46% stake, “Sopharma Imoti” REIT - 45.65% % stake, “Sopharma buildings” REIT - 31.47% stake and in “Pharmanova” D.O.O. - 25% stake) and in one joint venture (“Momina krepost” AD - 37.46% stake). Company Interest as of 31.12.2023 % “Sopharma Trading” AD 87.68 “Pharmalogistica” AD 89.39 “Elektroncommerce” EOOD 100.00 “Phyto Palauzovo” AD 95.00 “Veta Pharma” AD 99.98 “Sopharmacy” EOOD ** 87.68 “Sopharmacy 2” EOOD ** 87.68 “Sopharmacy 3” EOOD ** 87.68 “Sopharmacy 4” EOOD ** 87.68 “Sopharmacy 5” EOOD ** 87.68 “Sopharmacy 6” EOOD ** 87.68 “Sopharmacy 7” EOOD ** 87.68 5 “Sopharmacy 8” EOOD ** 87.68 “Sopharmacy 9” EOOD ** 87.68 “Sopharmacy 10” EOOD ** 87.68 “Sopharmacy 11” EOOD ** 87.68 “Sopharmacy 12” EOOD ** 87.68 “Sopharmacy 13” EOOD ** 87.68 “Sopharmacy 14” EOOD 87.68 “Sopharmacy 15” EOOD 87.68 “Sopharmacy 16” EOOD 87.68 “Sopharmacy 17” EOOD 87.68 “Sopharmacy 18” EOOD 87.68 “Sopharmacy 19” EOOD ** 87.68 “Sopharmacy 20” EOOD ** 87.68 “Sopharmacy 21” EOOD ** 87.68 “Sopharmacy 22” EOOD ** 87.68 “Sopharmacy 23” EOOD ** 87.68 “Sopharmacy 24” EOOD ** 87.68 “Sopharmacy 25” EOOD ** 87.68 “Sopharmacy 26” EOOD ** 87.68 “Sopharmacy 27” EOOD ** 87.68 “Sopharmacy 28” EOOD ** 87.68 “Sopharmacy 29” EOOD ** 87.68 “Sopharmacy 30” EOOD ** 87.68 “Sopharmacy 31” EOOD ** 87.68 “Sopharmacy 32” EOOD ** 87.68 “Sopharmacy 33” EOOD ** 87.68 “Sopharmacy 34” EOOD ** 87.68 “Sopharmacy 35” EOOD ** 87.68 “Sopharmacy 36” EOOD ** 87.68 “Sopharmacy 37” EOOD ** 87.68 “Sopharmacy 38” EOOD ** 87.68 “Sopharmacy 39” EOOD ** 87.68 “Sopharmacy 40” EOOD ** 87.68 “Sopharmacy 41” EOOD ** 87.68 “Sopharmacy 42” EOOD ** 87.68 “Sopharmacy 43” EOOD ** 87.68 “Sopharmacy 44” EOOD ** 87.68 “Sopharmacy 45” EOOD ** 87.68 “Sopharmacy 46” EOOD ** 87.68 “Sopharmacy 47” EOOD ** 87.68 “Sopharmacy 48” EOOD ** 87.68 “Sopharmacy 49” EOOD ** 87.68 “Sopharmacy 50” EOOD ** 87.68 “Sopharmacy 51” EOOD ** 87.68 “Sopharmacy 52” EOOD ** 87.68 “Sopharmacy 53” EOOD ** 87.68 “Sopharmacy 54” EOOD ** 87.68 6 “Sopharmacy 55” EOOD ** 87.68 “Sopharmacy 56” EOOD ** 87.68 “Sopharmacy 57” EOOD ** 87.68 “Sopharmacy 58” EOOD ** 87.68 “Sopharmacy 59” EOOD ** 87.68 “Sopharmacy 60” EOOD ** 87.68 “Sopharmacy 61” EOOD ** 87.68 “Sopharmacy 62” EOOD ** 87.68 “Sopharmacy 63” EOOD ** 87.68 “Sopharmacy 64” EOOD ** 87.68 PAO “Vitamini” 100.00 “Sopharma” Warsaw Sp. z. o. o 100.00 “Sopharma” Poland Sp. z. o. o - in liquidation 60.00 OOO “Sopharma” Ukraine 100.00 TOO “Sopharma” Kazakhstan 100.00 “Sopharma Trading” D.o.o. 87.68 “Pharmachim” EOOD 100.00 “Sopharma Rus” OOD 100.00 effective interest in percent indirect interest 4. Board of directors “Sopharma” AD has a one tier management system with a Board of Directors of five members as follows: Ognian Donev, PhD – Chairman, Vessela Stoeva – Deputy Chairman and members – Alexander Tchaoushev, Bissera Lazarova and Ivan Badinski. The company has two procurators - Simeon Donev and Ivan Badinski. The company is represented and managed by the Executive Director Ognian Donev, PhD. Members of the key management personnel of the Group include Executive Director and members of the Board of Directors of the Company. Additionally, it includes the executive directors, the board of directors and the managers of subsidiaries of the Group. 5. Shareholder structure as at 31 December 2023 "Donev Investments Holding" AD 5.80% "Telecomplect" AD 22.81% 38.57% Ognian Donev "Sopharma" AD (treasury 8.30% shares) Other legal persons 8.37% 16.15% Other physical persons 7 II. Recent developments 1. Production 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.: o Hard tablets, coated tablets, film-coated tablets, capsules; o Galenic - suppositories, drops, syrups, ointments; o Parenteral - injection solutions, lyophilic powder for injections. • Medical and cosmetic products, incl.: o Plasters; o Bandages; o Sanitary-hygiene products; o Herbal cosmetics; o Concentrates for hemodialysis; o Infusion solutions. 2. Products “Sopharma” AD 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) make a major share to its export market income, while the company's generic products are of major importance for domestic sales, Analgin being the leader among these products. The product portfolio of “Sopharma” AD focuses on the following therapeutic areas: cardiology, gastroenterology, pain management, cough and cold, immunology and dermatology, respiratory tract and asthma, neurology and psychiatry, urology and gynecology, nephrology, surgery, orthopedics and traumatology. The most significant pharmaceutical products in terms of their contribution to the amount of revenues are: • Carsil – traditional plant-based product used to treat gastro-enterology diseases (liver diseases); • Tempalgin – traditional analgesic (painkiller); • Tabex – traditional plant-based smoking cessation drug; • 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; • Methylprednisolon – 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. 3. Distribution “Sopharma Trading” AD The company is a leading distributor of pharmaceutical products and cosmetics in Bulgaria, with a market share in the pharmaceutical products segment of 21.42% (according to IQVIA). “Sopharma Trading” AD is the exclusive distributor on the Bulgarian market of particular pharmaceutical products of 8 several leading international pharmaceutical and other companies in the field of healthcare. In accordance with its market positioning, the company offers its customers: • A variety of over 15,000 pharmaceutical items, including medicinal products, medical consumables, sanitary and hygiene materials, vitamins, nutritional supplements, cosmetics, medical equipment and equipment, a portfolio of internationally established exclusive brands. • Complete solutions for the hospital market - in addition to a distribution service for the delivery of all products, part of the company's portfolio also includes turnkey solutions for the construction of medical and hospital facilities. • 100% national coverage of the territory of Bulgaria and access to any point of the country within 4 hours, thanks to its modern warehouse bases in 2 key cities - Sofia and Varna. • Quality distribution service through our own fleet of over 100 vehicles and the ability for products to reach over 3,500 customers quickly and easily. • Comprehensive logistics solutions for import, storage and distribution of goods to end customers. • Marketing and advertising services for the imposition of products on the Bulgarian market, production of local and international companies. • “Sopharma Trading” imposes and markets its portfolio of exclusive brands on the Bulgarian market. III. Information under Article 39 of the Accountancy Act IV. An overview of the company's performance and the main risks it faces (art. 39, para 1 of the Accountancy Act) Key financial indicators 1-12/2023 1-12/2022 Change Indicators BGN '000 BGN '000 % 1 875 304 1 663 016 12.8% Revenues EBITDA 153 982 139 980 10.0% Operating profit 98 110 87 881 11.6% Net profit 99 874 76 333 30.8% CAPEX 65 802 85 154 -22.7% Non-current assets 727 099 681 487 6.7% Current assets 787 063 572 491 37.5% Owners’ equity 753 626 716 634 5.2% Non-current liabilities 151 346 129 998 16.4% Current liabilities609 190 407 346 49.6% * acquired tangible and intangible long-term assets 9 1-12/2023 1-12/2022 Indicators EBITDA/ Revenues 8.2% 8.4% Operating profit/Sales Revenue 5.2% 5.3% Net profit/ Sales Revenue 5.3% 4.6% 31.12.2023 31.12.2022 Debt/ Equity 1,01 0,75 Net debt/ EBITDA on annual basis 1,4x 1,9x * net debt includes bank loans and leasing and factoring liabilities less cash, taking into account the effects of the adoption of IFRS 16 Leasing, effective from 1 January 2019. Risks related to the Group’s business and the industry the Group operates in • The Group faces significant competition; • Part of “Sopharma Trading's” revenues in Bulgaria is generated from sales to state hospitals, which predetermines a high degree of business risk; • The Group is dependent on regulatory approvals; • Government regulations affecting the Group's business may change, thus possibly increasing compliance costs or otherwise affecting its operations; • Part of the Group’s revenues, in particular in Bulgaria, depends on the inclusion of the Group’s medicines in reimbursement lists; • The Group’s production facilities and processes are subject to strict requirements and regulatory approvals that may delay or disrupt the Group’s operations; • The Company’s ability to pay dividends depends on a number of factors and there can be no guarantee that the Company will be able to pay dividends in accordance with its dividend policy or at all in any given year; • The Group is subject to operational risk, which is inherent to its business activities; • The Group is subject to numerous environmental and health and safety laws and regulations and is exposed to potential environmental liabilities; • Litigations or other out-of-court proceedings or actions may adversely affect the Group’s business, financial position and results of operations. Risks, related to Bulgaria and other markets in which the Group operates • The macroeconomic environment, particularly in Bulgaria, Russia and Ukraine, has a significant effect on the Group’s operations and position; • The political environment in Bulgaria and in the export markets, especially Russia, Belarus and Ukraine, has a significant effect on the Group operations and financial position; • Risks related to the Bulgarian legal system; • Developing legal frameworks in some countries in which the Group sells its products, in particular Russia, Belarus and the Ukraine, may negatively impact the Group’s operations in these countries; • Risks relating to exchange rates and the Currency Board in Bulgaria; • Interpretations of tax regulations may be unclear and tax laws and regulations applicable to the Group may change. 10 Currency risk The Group companies perform their activities in active exchange with foreign suppliers and customers and are therefore exposed to currency risk. Through the companies in Ukraine and Kazakhstan, the group carries out business operations in these countries and, accordingly, has substantial exposures in Ukrainian hryvnia and Kazakh tenge. The currency risk is related to the negative movement of the exchange rates of these currencies against the Bulgarian lev in the future business operations, the recognized assets and liabilities in foreign currency and the net investments in foreign companies. The rest of the companies abroad sell mainly on local markets, leading to currency risk and against their currencies - the Serbian dinar and the Polish zloty. In order to control the currency risk, a system of planning of import deliveries, for foreign currency sales, as well as procedures for daily monitoring of movements in the dollar exchange rate and control of forthcoming payments, is introduced. The exposure of subsidiaries in Bulgaria in foreign currency is insignificant, as almost all sales are made on the local market in Bulgarian leva. Imports of goods are fully realized in euro. Borrowings denominated in foreign currency are mainly denominated in euro. 1. Analysis of financial and non-financial key performance indicators of the Group /Article 39, item 2 of the Accountancy Act/ Operating revenues Sales revenues of the Group increased with BGN 212,3 million or 12.8%, reaching BGN 1 875,3 million in 2023 compared to BGN 1 663 million in 2022. Sales of goods increased by BGN 176,6 million or 12.8%, reaching BGN 1 555,8 million in 2023 compared to BGN 1 379,1 million in 2022. Sales of finished products increased by BGN 35,7 million or 12.6%, reaching BGN 319,6 million in 2023 compared to BGN 283,9 million in 2022. On a consolidated basis, the growth in sales of finished products in Bulgaria for 2023 was 11.3% compared to the previous period. According to IQVIA data "Sopharma" AD by the end of 2023 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 main competitors of the Company in the country are as follows: Roche - 5,29% (0,19% in units), Merck Sharp & Dohme – 4.69% (0.14% in units), Nоvartis – 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 – 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. On a consolidated basis for 2023, sales revenue in Russia increases by 17.4%. Growth was also registered in other traditional markets, with sales revenue increasing in Georgia by 24%, in Azerbaijan by 69.7%, in Uzbekistan by 6.1%, in Vietnam by 111.9%, in Moldova by 72.8% and in Poland by 22.1%. A decrease in sales revenue was registered in Ukraine by 4.1%, in Belarus by 19% and in Kazakhstan by 8.4%. Other operating revenues increased by BGN 7,8 million to BGN 20,8 million in 2023 compared to BGN 13 million in 2022 as a result of sales of fixed assets and an increase in income from services provided. Operating expenses For the current period the expenses of materials increased by BGN 4,8 million to BGN 103,9 million, as the most significant change was registered in the expenses of substances, which increased by BGN 7 million, as well as in the expenses for electricity and heat, decreasing by BGN 2 million and BGN 2,4 million, 11 respectively. The external service expenses increased by BGN 18,5 million to BGN 88,5 million, with the most significant change in advertising costs, which increased by BGN 11,7 million, and in production costs which increase by BGN 1,9 million. Personnel expenses increased by BGN 22,9 million to BGN 170,7 million as a result of updating the current remuneration of the average list staff in the Group. Financial income and expenses Financial income and expenses in 2023 net registered a loss of BGN 9,5 million, which is an increase with BGN 3,4 million compared to the same period of the last year. Financial income increased by BGN 1,1 million. Financial expenses increased with BGN 4,5 million while interest expenses on loans received for the current period increased by BGN 4,7 million. Financial result from the activity 200,000 153,982 139,980 150,000 98,110 99,874 100,000 1-12/2022 87 881 76 333 1-12/2023 50,000 0 EBITDA Operating profit Net profit Earnings before interest, taxes and depreciation (EBITDA) increased by BGN 14 million or by 10%, while in 2023 it amounted to BGN 154 million compared to BGN 140 million in 2022. The main factors for this adjusted growth are the increase in sales in both main business segments. Profit from operating activities increased by BGN 10,2 million or by 11.6%, to BGN 98,1 million in 2023 compared to BGN 87,9 million in 2022. Net profit increased by BGN 23,6 million or 30.8% to BGN 99,9 million in 2023 compared to BGN 76,3 million in 2022. In addition to the effect of the operational activity, the positive impact has an increase in the current period of profits from associated companies by BGN 1,8 million. Assets Non-current assets at the end of 2023 increased by BGN 45,6 million compared to the end of last year. Investments in associated and joint companies increased by BGN 68,5 million as a result of the reported share in the current profit in the associated company “Doverie Obedinen Holding” AD, as well as from the increased participation in “Sopharma Imoti” REIT and in “Sopharma buildings” REIT. Long-term receivables from related enterprises decrease by BGN 14,1 million as a result of loans granted by “Doverie Invest” EAD and “Industrial Holding Doverie” AD. Current assets at the end of 2023 increased by BGN 214,6 million compared to the end of previous year, while the most significant being the impact of the increase in cash and cash equivalents by BGN 109 million as a result of an increase in the Company’s capital. An increase was recorded in inventories by BGN 60,7 million and in trade receivables by BGN 40,6 million. 12 Owners’ equity and liabilities The equity of Sopharma Group increased by BGN 37 million compared to 31 December 2022 as a result of an increase in equity and reserves. The liabilities at the end of 2023 increased by BGN 223,2 million compared to 2022 as a result of the increase in liabilities under bank loans by BGN 67,2 million, as well as a result of accrued liabilities to related and third parties to receive dividends in the amount of BGN 142,6 million. Trade payables increased by BGN 18,3 million compared to the end of last year. Cash flows 31.12.2023 31.12.2022 BGN '000 BGN '000 Net cash flows from operating activities 45 031 110 082 Proceeds of amounts by factoring after interest and fees 621 30 836 Purchases of property, plant and equipment, intangible assets, net (28 257) (21 733) Payments under lease agreements (18 795) (16 081) Free cash flow (normalized) (1 400) 103 218 The free cash flow (normalized with the revenues from factoring and payments under leasing contracts), generated for 2023, amounts to BGN 1,4 million outflow compared to BGN 103,2 million outflow in 2022. The recorded outflow from operating activities during the current period is affected by advance payments received from costumers in 2022, related to the realized sales of production 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 (STI) of waste gases in the atmospheric air are carried out at the Steam Power Plant Installation at sites “A” and “B”. • “Sofiyska Voda” AD measures on a monthly basis emission in wastewater at production sites A and B. • every quarter the drinking water from the production plants is given for testing (short chemical and microbiological analysis) in an accredited laboratory; • twice a year the groundwater and wastewater are given for testing in an accredited laboratory according to the permits for water abstraction and for use of surface water body. The total amount of waste delivered in 2023 is 337,255 tons. In 2023 the separately collected waste increased with 7.14% compared to the previous year while recyclables increased by 10.7% and non- recyclables decreased by 4.37%. Production waste is disposed with licensed recyclers. The annual emissions of waste gases into the ambient air as well as the emissions in the wastewater are within the required standards. The requirements of the Discharge Permit are fulfilled. Once a month, a report is made on the packaging imported and / or marketed by type of material for which a monthly installment is paid to “EcoBulpak Bulgaria” AD, with which “Sopharma” AD has concluded a contract for the recovery of packaging waste. 13 Personnel As at 31 December 2023, the average number of employees of Sopharma Group is 4 721 (compared to 4 764 in 2021). The average number of employees of “Sopharma” AD as at 31 December 2023 is 1 720 (at 1 760 in 2022) and of “Sopharma Trading” AD is 760 (compared to 776 in 2022). 2. Significant events occurring after the date of preparation of the annual financial statements /Article 39, paragraph 3 of the Accountancy Act/ • On 10 January 2024, a liquidation procedure of "Fito Palauzovo" AD was entered in the Commercial Register. • From 22 January 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 23 January 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 26 January 2024, a General Meeting of the holders of warrants from the 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, provided 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 a capital increase under condition that it will be carried out on the basis of the Company's Articles of Association, Art. 195 of the Commercial Act and, accordingly, Art. 113, para. 2, item 2 of 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 Financial Supervisory Commission No. 804 – E/04 November 2021. The capital increase was launched with the publication of an announcement under Art. 89t of LPOS on 26 January 2024. • On 5 March 2024, as a result of the capital increase under the condition through the exercise of warrants, an increase in the capital of "Sopharma" AD was entered in the Commercial Register with number 20240305153305. The new capital of the company amounts to BGN 179,100,063 distributed in 179,100,063 shares. • On 3 July 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 20 March 2024, “Sopharma” AD paid 84,132 bonds issued by “Doverie Obedinen Holding” AD with a total issue value of BGN 9,413,200. The bonds were issued pursuant to a decision of the Board of Directors of "Doverie Obedinen Holding" AD in accordance with the terms and conditions described in the Prospectus for the public offering of 200,000 registered, bearer, interest-bearing, unsecured, freely transferable, convertible bonds, with nominal and issue value on one bond BGN 100, with a floating interest rate equal to the sum of 6-month EURIBOR, increased by a premium to 2.00% per annum and no more than 6.00% per annum, payable in a six-month period, with a maturity of five years, starting from the date of issuance of the issue. • With decision No. 1253/30 November 2023, the Commission for the Protection of Competition of the Republic of Bulgaria authorized the acquisition of nine sites from the Royal Pharmacies chain in Sofia, Pernik, Dupnitsa and Radomir, with the intention of joining them to the Sopharmacy pharmacy chain, in “Sopharma Trading” AD. The acquisition deal was completed in February 2024. The owner of the new pharmacies, positioned in three new companies ("Sopharmacy 66" EOOD, "Sopharmacy 67" EOOD and "Sopharmacy 68" EOOD) is the subsidiary company "Sopharmacy" EOOD. Additionally, on 13 March 2024, 14 the subsidiary company "Sopharmasi" EOOD acquired the company "Sopharmasi 65" EOOD with two pharmacies in the city of Sofia. 3. Future development of Sopharma Group (article 39, item 4 of the Accountancy Act) and planned economic policy in the following year (Article 247 (3) of the Commerce Act) Key moments of the strategy that the Group foresees: • 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 the development of new business segments such as potential contract manufacturing; • continued operation of the production in full accordance with the good manufacturing practices approved in the EU; • to implement new technologies to support the automation of business processes; • to develop its personnel through training in order to increase qualifications and competencies and to preserve and maintain the reputation of a preferred employer with opportunities for career development, as well as to work closely with specialized higher education institutions and offer a career start to personnel; • to implement a diversity policy in order to create a working environment free from prejudice, cultivating an atmosphere of respect and mutual trust, fostering a corporate culture of mutual respect and valuing each individual. Managers and employees carry out their activities professionally, impartially, with dignity and integrity, avoiding conflicts of interest; • implement a green policy in order to reduce the carbon footprint by using energy from renewable sources. • "Sopharma" AD will strive to achieve a stable result of developing eight to ten new products per year for its pharmaceutical business. Apart from Bulgaria, the main markets for finished products continue to be Russia and Ukraine. The Group's plans are to increase its presence in the Russian market through increased investments in marketing and advertising activities and human resources. In addition, expansion of the portfolio and relations with various counterparties is planned. In Ukraine, in view of the military conflict at this stage, the main immediate goal is to maintain market presence through its distribution company for the local market "Sopharma Ukraine" and the production company PAO "Vitamini". In the remaining traditional markets in Poland, Serbia, Belarus, Kazakhstan, Moldova, the countries of the Caucasus region and the Baltic States, the Group continues its presence and plans to strengthen its positions through additional marketing activities and the imposition of products in therapeutic groups where there is potential for growth . The group will continue to look for opportunities for an even more active presence in a highly developing market such as that of Vietnam. 4. Research and development (article 39, item 5 of the Accountancy Act) The Group focuses its research and development mainly on generic products. Research and development projects are focused on finding and developing new formulas and composition or physical properties (such as medicine form or tablet form) of a product in order to adapt it to current market needs. 15 The Parent Company mainly submits applications for new product authorizations including new product forms in Bulgaria and / or export markets and for existing products in new markets. Intellectual Property Although oriented towards generic pharmaceutical products, “Sopharma” AD has been known for years with the traditional production of several unique products based on plant extracts obtained from own-produced technologies. These products are protected not only by trademark, but also by patent or company know-how. Regarding the generic products it produces, for their market distinctiveness, Sopharma Group relies on brand names, all of which are registered trademarks of the Company. In all the years of existence, Sopharma Group has generated and defended its industrial property. As a result, the Group owns a large number of industrial property sites, the majority of which - registered rights (trademarks, patents, designs) and fewer unregistered objects - mainly technology. These assets are the result of the Group's special policy towards product and technological update, and in particular innovation. New developments and products During the reporting period January - December 2023 in the Division "Development and Regulatory Compliance" the following activities were performed: • New medicines During the reporting period, a marketing authorization was obtained for 3 new medicinal products: o Glycerax Pico oral drops solution (Bulgaria); o Suxamethonium Sopharma 10 mg/mL solution for injection (Bulgaria); o Suxamethonium Sopharma 20 mg/mL solution for injection (Bulgaria). • New registrations and re-registrations / changes New registrations of medicinal products Documentation for registration of 27 medicinal products has been submitted: o Paracetamol 500 mg tb. (Belarus); o Paracetamol Sopharma 500 mg tb. (Moldova) o Tempalgin (paracetamol) 500 mg tb.; o Carsil 90 mg caps. – (Belarus); o Molsidomin 8 mg SR tb. (Russia); o Aminophylline sfi (Lithuania); o Digoxin Sveikuva sfi (Lithuania); o Felogel 2.32% gel (Lithuania); o Carsil 22.5 mg film-coated tb. (Azerbaijan); o Carsil 22.5 mg film-coated tb. (Tadzhikistan); o Carsil 22.5 mg film-coated tb. (Georgia) MRP; o Carsil 22.5 mg film-coated tb. – (Moldova); o Tribestan 250 mg film-coated tb.; o Digoxin Sveikuva 0.25 mg/ml sfi (Lithuania); o Pethidine hydrochloride Sveikuva 50 mg/ml sfi (Lithuania); o Amrex 30 mg/5 ml syrup (Lithuania) MRP o Ambrolytin 30 mg tb. (Lithuania) MRP o Ambrolytin 30 mg tb. (Kirgizstan); 16 o Sodium picosulfate oral drops solution (Ukraine); o Carsil 22,5 mg film-coated tb. (Turkmenistan); o Videral 0,5 mg/ml oral drops, solution (Czech Republic); o Deavit Neo 0.5 mg/ml oral drop, solution (Kirgizstan); o Felogel 5 % gel (Kirgizstan); o Felogel 2.32 % gel (Kirgizstan); o Tempalgin 500 mg/20 mg film-coated tb. (Armenia) New manufacturing site; • Licensing o Sophamet XR 500 mg; 750 mg; 1000 mg SR tb. (Bulgaria); o Trachihelp 5 mg/1,5 mg lozenges (Ukraine); • New medical products have been registered for 43 new directions o Verapamil sfi (DCP – Denmark; Sweden; Norway; Finland) o Carsil 110 mg caps. (Georgia); o Isocor 2,5 mg/ml sfi (Malaysia); o Cinnarizine 25 mg tb. (Vietnam); o Carsil 22.5 mg film-coated tb. (Ukraine) o Carsil Forte 90 mg caps. (Kirgizstan); o Pethidine Macure sfi (DCP – Finland; Norway; Sweden; Denmark); o Carsil Max 110 mg caps. (Peru); o Syafen 100 mg/5 mL oral susp. (Georgia) MRP; o Furosemide Sopharma 40 mg tb. (Georgia) MRP; o Zondaron 2 mg/mL sfi (Georgia) MRP; o Digoxin Sopharma 0.25 mg/mL sfi (Georgia) MRP; o Valeriana 30 mg tb. (Georgia) MRP; o Ambrolytin 30 mg tb., (Georgia); o Valeriana Max 200 mg fct, (Georgia); o Valeriana 30 mg film-coated tb. (Georgia); o Feloran Forte 5 % gel (Georgia); o Alergosan (Desloratadin) oral solution (Peru); o Carsil 22.5 mg film-coated tb. (Ukraine); o Tempofen DUO film-coated tb. (Ukraine); o Tempaforte 500 mg effervescent powder; o Tempaforte 1000 mg effervescent powder (Azerbaijan); o Тamoxifen Sopharma 10 mg tb. (Georgia) MRP; o Carsil 35 mg coated tablets (Russia) EAEU; o Carsil Max 110 mg caps. (Russia) EAEU; o Dexketoprofen Sopharma 50 mg/ 2 ml solution for inj/inf (Ukraine); o Carsil 22.5 mg film-coated tb. (Tajikistan); o Persen tb. (Georgia); o Persen tb. (Belarus); o Troxerutin 300 mg caps. (Vietnam); o Talert 1mg/ml syrup (Vietnam); o Diclofenac diethylamine Sopharma 23,2 mg/g gel (Lithuania); o Carsil 22,5 mg film-coated tb. (Moldova); 17 • Licensing o Analgin Max 1000 mg effervescent powder (Georgia); o Sitagliptin/Metformin APC 50 mg/500 mg modified release tablets (Bulgaria); o Sitagliptin/Metformin APC 50 mg/1000 mg modified release tablets (Bulgaria); o Sitagliptin/Metformin APC 100 mg/1000 mg modified release tablets (Bulgaria); • Re-registrations / changes o Renewed Marketing Authorizations for 50 medicinal products. o Submission of documentation for the renewal of the Marketing Authorizations for 71 medicinal products. o 329 changes for medicinal products approved by agencies. o 279 changes for medicinal products submitted to agencies. • Food additives o 14 food supplements 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; o 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 o 7 Medical devices for uploaded into the BDA system; • Developments Pharmaceutical development of 12 new medicinal products / projects: o Cytisine 3.0 mg tablets – Project with company Achieve; o Dexketoprofen 25 mg tb.; o Xylmetazoline/Dexpanthenol nasal spray; o Paracetamol 500 mg tab.; o Molsidomin 4 mg tab.; o Ketorolac 10 mg tab.; o Glauvent 40 mg film-coated tablet; o Vitamin C 200 mg/mL solution for injection; o Butamirate Citrate oral drops; o Simethicone oral drops; o Ibuprofen 200; 400 and 600 mg tb.; o Ibuprofen 100 and 200 mg/5 ml oral suspension; • API – 4 o Valeriana extract/ Maltodextrin; o Glaucine hydrobromide; o Dry extract of milk thistle fruits; o Dry extract of Granny's teeth; • Development of 11 nutritional supplements is underway: o Valeriana/Melatonin oral spray; o Melatonin oral spray; o Propolis nasal spray for children; 18 o Propolis nasal spray for adults; o Propolis throat spray for children; o Propolis throat spray for adults; o Syrup (with bee products and extracts) for children; o Syrup (with bee products and extracts) for adults; o Valeriana Son 50/1 mg tb.; o Valeriana Son 150/3 mg tb.; o Vitamin C 100 mg tab.; • Transfer and validation of technological processes o 4 new medicinal products were transferred - Glycerax Pico oral drops; Felloran 2.32% gel; Duzofarm 200 mg tab.; Dexketoprofen 25 mg tab.; o 42 production processes/technologies have been validated/optimized. • Prepared documentation for qualification / production o Documentation for qualification of raw materials for production - 145; o Production regulations - 163; o Documentation for qualification of finished forms - 267. 5. 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. Equity, net of Shares treasury shares Number BGN '000 Balance at 1 January 2022 121 742 899 84 514 Treasury shares (424 188) (1 909) Expense on 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) (5 252) Balance at 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 General Meeting of Shareholders held on 23 June 2010, the General Meeting of Shareholders of 30 November 2011, the General Meeting of Shareholders of 1 November 2012, the General Meeting of Shareholders of 28 February 2013, the IOSA from 23 February 2018 and the IOSA from 4 August 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. 19 6. Existence of branches of the Company /Article 39, item 7 of the Accountancy Act/ “Sopharma” AD has no branches. 7. Use of financial instruments /Article 39, item 8 of the Accountancy Act/ Overall risk management focuses on the difficulties in predicting financial markets and minimizing potential negative effects that may affect the financial performance and position of the Group. Financial risks are currently identified, measured and monitored by various control mechanisms introduced to determine adequate prices for the group's products and services and borrowed capital and to adequately assess the market circumstances of the investments made by them and forms of maintenance of the free liquid assets, without allowing unjustified concentration of risk. Risk management is carried out on an ongoing basis by the management of the parent company and respectively the management of the subsidiaries in accordance with the policy defined by the Board of Directors. The Board of Directors has adopted basic principles for general financial risk management, on the basis of which specific procedures have been developed for the management of individual specific risks, such as currency, price, interest, credit and liquidity, and the risk of using non-derivative instruments. Credit risk Credit is the risk that the clients of the Group will not be able to pay fully and within the usual time limits the amounts due from them under the trade receivables. Trade receivables are presented in the statement of financial position in net amount after deducting the accrued impairment for doubtful and bad debts. Such impairments are made where and when there are events identifying loss of collectability under previous experience. The Group has developed policies and procedures for assessing the creditworthiness of its counterparties and setting credit rating and credit limits by group of clients. Cash in the Group and the payment operations are concentrated in various premium banks. In the distribution of cash flows between them, the management of the Company and the subsidiaries take into account a number of factors, including the capital, security, liquidity, credit potential and rating of the bank, etc. Liquidity risk The liquidity risk is expressed in the negative situation that the Group will not be able to meet unconditionally all its obligations according to their maturity, including due to the presence of over- inflation, and the indexation of trade accounts for companies operating in such an environment. The Group generates and maintains a sufficient volume of liquidity. An internal source of liquidity for the Group is the main business of its companies generating sufficient operating flows. External sources of funding are banks and other permanent partners. Risk of interest-bearing cash flows In the structure of the Group's assets, interest-bearing assets are represented by the cash at floating rate and the loans granted at a fixed interest rate. On the other hand, the borrowed funds of the Group in the form of long-term and short-term loans are usually with variable interest rates. This circumstance partly puts the cash flows of the Group in line with interest rate risk. The coverage of this risk is achieved in two ways: • Optimizing sources of credit resources to achieve a relatively lower cost of borrowed funds; • 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 affordable rate for the companies in the Group. The fixed component has a relatively low absolute value and a large 20 enough relative share in the total interest rate. This circumstance eliminates the probability of a significant change in interest rates with a possible update of the variable component. This also minimizes the probability of a change in the unfavorable direction of cash flows. The management of the companies in the Group together with the management of the Company are currently monitoring and analyzing its exposure to changes in interest rates. Different scenarios of refinancing, renewal of existing positions and alternative financing are simulated. Based on these scenarios, the effect on financial result and equity is measured when changing with certain points or percentages. For each simulation, the same assumption of interest rate change applies to all major currencies. Calculations are made for significant interest-bearing items. V. Information under Article 247 and Art. 240b of the Commerce Act 1. Information under Art. 247 of the Commerce Act Information concerning the course of activity and the condition of the Company and explanations regarding the annual financial statements Section II, item 2 describes the operations and the position of the Group and explains the annual financial statements. Remuneration received during the year by members of the Board of directors The remuneration and other income of the key management and executive directors, the members of the Board of directors and the managers of the Group's subsidiaries amount to BGN 3 448 thousand (2022: BGN 3 325 thousand), including: • current – BGN 2 963 thousand (2022: BGN 3 001 thousand); • tantieme – BGN 485 thousand (2022: BGN 324 thousand). The remuneration and other short-term income of the Key Management personnel of the Company for 2023 amounting to 1 857 thousand BGN (2022: BGN 1 927 thousand) are as follows: • current – BGN 1 463 thousand (2022: BGN 1 684 thousand); • tantieme – BGN 394 thousand (2022: BGN 243 thousand). Acquired, held and transferred by the members of the Boards during the year shares and bonds of the company The Company's shares acquired, owned and transferred by the members of the Board of Directors in 2023 are as follows: 21 31.12.2023 31.12.2022 Members of the Relative Relative Acquired Transferred Board of share of Shares Shares share of the shares in shares in Change directors the capital capital % 2023 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% - - - Alexander 390 442 0.23% 262 442 0.19% 128 000 - 128 000 Tchaushev Bissera Lazarova - - - - - - - Ivan Badinski 2 030 0.00% 2 030 0.00% Simeon Donev 195 4500.11% 195 4500.14% - - The Company has not issued any bonds. Rights of members of the Board to acquire shares and bonds of the company The Articles of Association of “Sopharma” AD do not contain any restrictions on the right of the members of the Board of directors to acquire shares and bonds of the company. Participation of members of the Board of directors in commercial companies as unlimited liability partners, the holding of more than 25 percent of the capital of another company, as well as their participation in the management of other companies or co-operatives, such as procurators, managers or board members Participation of the members of the Board of Directors by more than 25 per cent of the capital of other companies: Ognian 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: Sofia, 16 Iliensko Shose Str.; • “Energoinvestment” AD, UIC 200929754, with a registered office in Sofia, 9 P. R. Slaveykov Square • “Simba Private Kindergarten” EOOD, UIC 204683684, with seat and headquarters in Sofia, 16 Iliensko Shose Str. • “Selso” EOOD, UIC 206522151, with headquarters in Sofia, 12 Pozitano Str. Vessela Stoeva controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “VES elekroinvest systems” EOOD, UIC 201712700, with headquarters: Sofia, 9 P. R. Slaveykov Square • “Eco Solar Invest” OOD, UIC 201634905, with headquarters: Sofia, 48 Alabin Str. • “Aquatex” OOD, UIC 203934379, with headquarters: Sofia, 9 P. R. Slaveykov Square 22 • “VLS” AD, UIC 175082980, with headquarters in Sofia, 9 P. R. Slaveikov Square. Alexandar Tchaushev controls or owns directly/indirectly a significant share (more than 25%) of the capital of the following companies: • “Alpha In” EOOD, UIC 131156322, with headquarters in Sofia, 1B Dimcho Debelianov Str. • "Assa Asset Management" OOD, UIC: 131156297, with headquarters: Sofia, 1B DIMCHO DEBELYANOV str.; Entrance A; Floor 3; App. 8. Ivan Badinski does not hold a direct / indirect significant share (over 25%) of the capital of companies. Bissera 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 Donev participates in the managing/controlling body in the following companies: • “Sopharma Trading” AD, UIC 103267194, with headquarters in Sofia, 5 Lachezar Stanchev Str. – Chairman of the Board of Directors. • “Donev Investments Holding” AD, UIC 831915121, with headquarters in Sofia, 12 Pozitano Str. – Chairman of the Supervisory Board. • “Telecomplect” AD, UIC 831643753, with address management in Sofia, 5 Lachezar Stanchev Str., Building A – Chairman of the Supervisory Board. • “Doverie Capital” AD, UIC 130362127, with headquarters in Sofia, 82 Knyaz Dondukov Blvd. – Member of the Supervisory Board. • “Sopharma” AD, UIC 831902088, with seat and headquarters in Sofia, 16 Iliensko Shose Str. – Мember of the Board of Directors and Executive Director. Vessela 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 Tchaushev participates in the management/supervisory body of the following companies: • “DK-Domostroene” AD, UIC 102148397, with registered office in Burgas, PO Box 8000, Pobeda area – Мember of the Board of Directors. • “Alpha IN” EOOD, UIC 131156322; with seat and headquarters: Sofia, 1b Dimcho Debelyanov Str. – Manager. • “Sopharma” AD, UIC 831902088, with seat and headquarters: Sofia, 16 Iliensko Shose Str. – Member of the Board of Directors. Ivan Badinski participates in the management/supervisory body of the following companies: 23 • “Sopharma” AD, UIC 831902088, with seat and headquarters: 16 Iliensko Shose Str. – Member of the Board of Directors and Procurator. Bissera 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 Law on the obligation of Board members to notify in writing the Board of Directors or the Management Board when they or their related parties conclude contracts with the company outside its usual activity or substantially deviate from market conditions In 2023 there are no contracts outside the ordinary business of the company or significantly deviate from market conditions. VI. Information on Annex 2 to art. 10, item 1 of Regulation 2 of LPOS 1. Information given in value or quantitative terms about the main categories of goods, products and / or services provided, including their share in sales revenue of the Group in general and changes in the reporting year The information is included in Section III, item 2 of this document. The Group does not publish quantitative information due to the specifics of the production. 2. Information about the revenues allocated by separate categories of activities, domestic and foreign markets and information on sources for supply of materials needed for production of goods or the provision of services with the degree of dependence on any individual seller or buyer / user, in case their share exceeds 10 per cent of the expenses or sales revenue, provide information for each person for his share in sales or purchases and links with the issuer Information about the revenues allocated by separate categories of activities, domestic and foreign markets are provided in Section III item 2 of this report. For 2023, there are no customers whose relative share exceeds 10% of total sales revenue. The raw materials used exceed 3,500 nomenclature numbers that have a dynamic structure and diverse origin (synthetic, vegetable), aggregate (liquid, solid, gaseous). The main share of raw materials is secured by imports. Sources of supply are validated manufacturers, which is in line with regulatory requirements and aims to maintain consistency and traceability in terms of quality. The respective counterparty companies operate according to the requirements of GMP, GDP and other industry standards. “Sopharma” AD is working with a number of Bulgarian and foreign suppliers as their selection is done according to procedure developed in-house and aims to provide an alternative security in the supply and competitive flexibility in trade relations. Non-negotiable conditions that “Sopharma” AD implies in the negotiation process are: consistent quality, competitive prices and attractive payment terms, rhythmic and timely deliveries which prevent the accumulation of inventories on the one hand, while guaranteeing the regularity of the production process. 24 In 2023 none of the suppliers’ share exceeds 10% of the total cost of services rendered and materials. 3. Information on significant transactions The Group has adopted that significant transactions are those that result or may be reasonably assumed to lead to favorable or unfavorable change in the amounts of 5 or more percent of sales revenues or net profit. There are no such transactions. 4. Information regarding transactions between the issuer and related parties during the reporting period, proposals for concluding such transactions, as well as transactions that are outside its usual activity or substantially deviate from market conditions when, the issuer or its subsidiary is party, indicating the value of the transactions, the nature of relatedness and any information necessary to assess the impact on the financial position of the issuer Information regarding the transactions between “Sopharma” AD and related parties during the period is specified in Notes to the Annual Financial Statements “Related Party Transactions”. At the Regular General Meeting of Shareholders, held on 2 June 2023, the following transactions were voted between the Company and related parties: Contract for 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 works in the properties of the Contracting Authority or in those in which the same has the relevant rights, reconstructions, innovations and others, specified by types, volume, prices and terms of execution in requests-specifications, mutually agreed and signed by the parties to this contract. The services under this provision are intended to be performed with the materials of the Contractor, unless otherwise specified in the specification and supplies and services for objects owned by or used by the Contracting Authority; • Lease term: 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 contracting authority and with 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 were no events and indicators of unusual nature for the Group. 6. Information on off-balance sheet transactions - nature and business purpose, the financial impact of transactions on the activity, if the risks and benefits of these transactions are material to the issuer and the disclosure of this information is essential for assessing the financial position of the issuer The contingent obligations took by the Group as at 31 December 2023 are stated in the annual financial statements in the note "Contingent Liabilities and Commitments". 25 7. Information on shares of the issuer, its major investments in the country and abroad (in securities, financial instruments, intangible assets and real estate), as well as investments in equity securities outside its group of companies under Accountancy Act and the sources /methods of financing The information on shareholdings and major investments, domestic and foreign, of “Sopharma” AD are listed in the Notes to the annual financial statements - "Investments in subsidiaries", "Other long-term capital investments" and "Investments in associates". Information regarding investments in intangible assets and real estate is presented in the Notes “Intangible assets”, “Property, plant and equipment” and “Investment property”. 8. Information about the concluded by the issuer, its subsidiary or parent company in their capacity as borrowers, loan contracts specifying the terms and conditions, including the deadlines for repayment as well as information about guarantees and commitments The information on concluded by “Sopharma” AD and its subsidiaries loan agreements are listed in the notes to the annual consolidated financial statements "Long-term bank loans" and "Short-term bank loans." 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 December 2025; balance as of 31 December 2023 – BGN 40, 901 thousand; • Recipient - "Industrial Holding Doverie" AD; Contract amount – EUR 14 939 thousand; interest rate – 4.36%; maturity – 31 December 2025; balance as of 31 December 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. The commercial loans provided by “Sopharma” AD to related parties are as follows: • Beneficiary – “Doverie Capital” AD; Contract amount - BGN 4,000 thousand; interest rate – 3.33%; maturity – 31 December 2024; balance as of 31 December 2023 – BGN 4,067 thousand; • Recipient - Doverie Grizha EAD; Contract amount - BGN 10,997 thousand; interest rate – 3.10%; maturity – 31 December 2024; balance as of 31 December 2023 – BGN 8,740 thousand. The short-term loans granted to related parties are for supporting the financing of activities of these companies for common strategic goals. They are secured by pledges of company shares and securities (shares), pledges of receivables and promissory notes. Information about the loan agreements concluded by subsidiaries of Sopharma AD will be indicated in the consolidated financial statement 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 December 2024; balance as at 31 December 2023 – BGN 187 thousand; • Recipient – "Pharmaplant" AD; Contractual amount BGN 949 thousand; interest rate – 4.70%; maturity – 31 December 2024; balance as at 31 December 2023 – BGN 48 thousand; 26 • Recipient – Sopharmacy MC; Contract amount - 695 thousand euros; interest rate – 3.05%; maturity – 31 December 2024; balance as of 31 December 2023 – BGN 1,610 thousand; • Recipient – Sopharmacy MC; Contract amount – EUR 3,000; interest rate – 3.05%; maturity – 31 December 2024; balance as of 31 December 2023 – BGN 6,667 thousand; • Recepient - "Alliance Energy Companies" AD; Contract amount – BGN 2,740 thousand; interest rate – 4.37%; maturity – 31 December 2024; balance as of 31 December 2023 – BGN 2,691 thousand; The loans granted to third parties are for supporting the financing of activities of these enterprises for common strategic goals. They are secured by pledges of securities (shares). 10. Information on the use of funds from the issuance of new issue of securities during the reporting period On 6 October 2023, an increase in the company's capital was entered in the Commercial Register by issuing 37,792,679 ordinary, registered, dematerialized, voting shares, with a nominal value of BGN 1 each and an issue value of BGN 4,13 per share. 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 100,2 million were invested as a short-term deposit abroad, and the remaining funds were used to reduce the Company's bank liabilities. 11. Analysis of the relationship between the financial results reflected in the financial statements for the financial year and earlier published forecasts for these results There are no published forecasts of financial results. 12. Analysis and evaluation of the policy on the management of financial resources, including the ability to meet its obligations, possible threats and measures that the issuer has taken or will take to resolve them The management of the parent company and respectively the managements of the subsidiaries currently control the collection of receivables, the implementation of financial ratios of banking contracts and ensure regular servicing of their obligations. Financial risk management is fully disclosed in the "Financial Risk Management" as part of the consolidated financial statements of the Company. 13. Assessment of the feasibility of investment intentions, indicating the amount of available funds and possible changes in the financing structure of this activity The planned investment program for 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 under the Accounting Law During the reporting period there were no changes in the main management principles of “Sopharma” AD and its economic group. 27 15. Information about the main characteristics applied by the issuer in the process of preparing the financial statements, internal control system and risk management The information is provided in item 3 of the Corporate Governance Declaration pursuant to Art. 100n para 8 of LPOS, which is a separate report, published together with the management report. 16. Information about changes in management and supervisory boards during the accounting year During the reporting period, there were no changes in the management and supervisory bodies of “Sopharma” AD. 17. Information on the amount of remuneration, rewards and / or benefits of each of the members of the management and supervisory bodies for the financial year, paid by the issuer and its subsidiaries, regardless of whether they have been included in the expenses of the issuer, or arising from profit distribution, including: “Sopharma” AD prepares a separate report on the implementation of the remuneration policy of the members of the Board of Directors. 18. Information on held by members of management and supervisory bodies, the procurators and the senior management of the issuer shares, including the shares held by each of them individually and as a percentage of shares of each class and provided by the issuer options on its securities - type and amount of securities on which options have been set, exercise price of the options, purchase price, if any, and the term of the options. Information about the shares held by the members of the Board of directors of “Sopharma” AD is indicated in Section IV of this report - information under Art 247 par. 2 from Commerce Act. Members of the Audit Committee 31.12.2023 31.12.2022 Rel. share Number Rel. share Number Rel. share of capital of shares of capital % of shares of capital % % Tzvetanka Zlateva - - - - - Vasil Naidenov 386 0.00% 386 0.00% - Kristina Atanasova - Eliot - - - - - By Decision № 804 - Е of 4 November 2021, the Financial Supervision Commission approved a Prospectus for an issue in the amount of 44,932,633 dematerialized, freely transferable and registered warrants, with an issue value of BGN 0,28, issued by “Sopharma” AD under Art. 112 b, para. 11 of the LPOS. The underlying asset of the issued warrants are future ordinary, registered, dematerialized, freely transferable shares, giving the right to one vote in the General Meeting of Shareholders, which will be issued by the company on condition only in favor of the owners of warrants. Each subscribed warrant entitles its holder to subscribe for one share of a future issue. Holders of warrants may exercise their right to subscribe for the respective number of shares from a future increase in the company's capital within 3 years at a fixed price of BGN 4,13 per share. 28 Member of the Board of Directors 31.12.2023 Number of Rel. share of total number of warrants subscribed warrants % Ognian Donev 1 667 000 23.37% Vessela Stoeva - - Alexander Tchaushev - - Bissera Lazarova - - Ivan Badinski - - Simeon Donev - - As of 31 December 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 per cent of its equity, provide information about each case separately There are no pending legal, administrative or arbitration proceedings relating to liabilities or receivables. 21. Information about the Investor Relations Director, including telephone number and correspondence address: Director of Investor Relations of “Sopharma” AD is Pelagia Viatcheva, tel. +359 2 8134 523, correspondence address - Sofia, 5 Lachezar Stanchev Str., Building A, fl. 11. VII. Information Annex 3 to Article 10, paragraph 2, item 4 of Ordinance 2 of LPOS 1. Structure of the capital of the Company, including securities not admitted to trading on a regulated market in Bulgaria or another Member State, indication of the different classes of shares, the rights and obligations of each class of shares and the portion of the total capital represented by each class The total number of shares of “Sopharma” AD as at 31 December 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 the right to one vote in the General Meeting of Shareholders, the right to a dividend and a liquidation share, proportional to the nominal value of the share. Structure of the capital of “Sopharma” AD as at 31 December 2023: Physical persons: 6 348 24 430 701 shares 14.17%; Legal persons: 141 148 129 877 shares 85.83%; 29 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 Shares % „Donev Investments Holding“ AD, UIC: 831915121, Sofia 66 570 976 38.57% „Pozitano“ Str. №12 “Telekomplekt Invest“ AD, UIC: 201653294, Sofia, „P.R. 27 881 287 16.15% Slaveikov“ sq. №9 Ognian Donev 14 441 613 8.37% „Sofarma“ AD, UIC 831902088, Sofia „Iliensko shose“ Str. 14 328 336 8.30% №16 3. Information about shareholders with special control rights The Articles of Association of “Sopharma” AD do not provide special control rights. 4. Agreements between Shareholders which are known to the Company and which may lead to restrictions on the transfer of shares or voting right There are no such agreements. 5. Significant contracts of the Company that take effect, are amended or terminated due to a change in control of the company in a mandatory tender offer and the effects thereof, except where disclosure of this information may cause serious damage to the company; exemption under the preceding sentence shall not apply in cases where the company is obliged to disclose information under the Law There are no such contracts. Digitally signed by Ognian Ognian Ivanov Donev Date: 2024.04.24 Ivanov Donev 17:42:59 +03'00' Date: 24 April 2024 Ognian Donev, PhD Executive Director 30 DECLARATION for corporate governance according to art. 40 of the Accounting Act and art. 100n, para 8 of LPOS of SOPHARMA GROUP The undersigned Ognian Ivanov Donev, in his capacity as an Executive Director of “Sopharma” AD, declare the following: I. Information on compliance, as appropriate, with the Bulgarian Corporate Governance Code prepared by the National Corporate Governance Commission (NCGC), approved by the Deputy Chairman of the Financial Supervision and Corporate Governance Commission, which is applied by Sopharma Group in addition to the Code. The public companies in Sopharma Group adopted and continue to comply with the established in October 2007, with subsequent amendments in 2012, 2016 and 2021, National Code of Corporate Governance (NCCU), approved by the Deputy Chairman of the Financial Supervision Commission. Good corporate governance is a set of balanced relationships between the Management bodies of the Group, its shareholders and all stakeholders - employees, business partners, creditors of the company, potential and future investors and society as a whole. Along with the principles of recommendatory nature, public companies in Sopharma Group have established a certain set of requirements for corporate governance, compliance with which is mandatory for their management bodies, namely: • Protection of shareholders' rights; • Ensuring fair treatment of all shareholders, regardless of the number of shares held by them; • Recognition of the rights of the interested parties and promotion of the cooperation between the companies and the interested parties; • Ensuring timely and accurate disclosure of information on all matters related to the companies, including the financial condition, results, ownership and management of the companies; • Supporting the strategic management of the companies, control over the activities of the management and its accountability to the company and the shareholders. The Corporate Governance Code is applied on a "comply or explain" basis. This means that its recommendations are complied with, and whether or not there is a deviation from them, the managements of the public companies in the Group periodically disclose information on corporate governance of the nature and scope provided for in the NCGC, namely: • The actions of their managements are aimed at establishing the principles of good corporate governance, increasing the confidence of shareholders, investors and persons interested in the management and activities of the Group. • The managements of the public companies in the Group complies with Program for corporate governance, which is consistent with existing regulations, internationally recognized standards of good corporate governance and the National Corporate Governance Code. • The managements of these companies in the Group approves the Disclosure Policy in accordance with the legal requirements and the Articles of Association. “Sopharma” AD is a member and participated in the establishment of the National Corporate Governance Commission. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 1 1. MANAGEMENT OF THE PARENT COMPANY “SOPHARMA” AD - BOARD OF DIRECTORS 1.1. Functions and responsibilities The Board of Directors of “Sopharma” AD manages the Company independently and responsibly in accordance with the established vision, goals and strategies of the Company and the interests of the shareholders. The members of the Board of Directors give a guarantee for their management in the amount of their quarterly gross remuneration. During their term of office, the members of the Board of Directors shall be guided in their activities by the generally accepted principles of integrity, loyalty, managerial and professional competence. The Board of Directors complies with the Code of Ethics of the Company's employees, adopted by the Board of Directors on March 26, 2007. The management of “Sopharma” AD, represented by the Board of Directors, also: • monitors the results of the activities in the Parent Company and the Group and, if necessary, initiates changes in the management; • treats all shareholders equally, acts in their interest and with the care of a good trader; • strives to follow the economic, social and environmental priorities of the Company; • encourages the implementation and monitors the compliance of the subsidiaries with the adopted principles of sustainable development at group level, also promotes the establishment of a culture of sustainable development; • ensures and controls the integrated functioning of the accounting and financial reporting systems; • ensures and controls the construction and operation of a risk management system, incl. for internal control and internal audit; • is responsible for the creation and reliable functioning of the financial information system of the Parent Company and the Group; • gives the guidelines, approves and controls the implementation of: the business plan of the Parent Company and the Group, essential transactions and etc.; • reports on its activities to the General Meeting of Shareholders, preparing an annual report and submitting it for approval to the GMS. 1.2. Election and dismissal of members of the Board of Directors The General Meeting of Shareholders elects and dismisses the members of the Board of Directors of “Sopharma” AD, in accordance with the law and the Articles of Association of the Company, observing the principles of continuity and sustainability of the work of the Board of Directors. All members meet the legal requirements for holding office. In case of proposals for election of new members of the Board of Directors, the principles of compliance of the competence of the candidates with the nature of the activity of the Parent Company and the Group. 1.3. Structure and competence The number of members and the structure of the Board of Directors are determined in the Articles of Association of the Company. The company is managed and represented by a Board of Directors, which consists of five individuals meeting the requirements of Article 234 of the CA and Article 116a, paragraph 2 of the Law on public offering of securities. The composition of the Board of Directors elected by the General Meeting is structured in a way that guarantees the professionalism, impartiality and independence of the decisions and actions of its members in connection with the management of the Group. The Board of Directors shall ensure a proper distribution of tasks and responsibilities among its members. The main functions of the members of the Board of Directors and the number of independent This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 2 members are enshrined in the Articles of Association of the Company. The main function of the independent directors is to control the actions of the executive management and to participate effectively in the work of the Company in accordance with the interests and rights of shareholders. There is one independent member of the Board of Directors of “Sopharma” AD. The competencies, rights and obligations of the members of the Board of Directors follow the requirements of the law, the Articles of Association and the standards of good professional and managerial practice. The members of the Board of Directors of “Sopharma” AD have appropriate knowledge and experience, which is required by their position. After their election, the new members of the Board of Directors should be familiar with the main legal and financial issues related to the activities of the Group. The company stimulates the raising of the qualification of the members of the Board of Directors. The members of the Board of Directors have the necessary time to perform their tasks and duties. The Articles of Association of the Company do not specify the number of companies in which the members of the Board of Directors may hold managerial positions, in order not to limit their activities. The election of the members of the Board of Directors of the Parent Company is done through a transparent procedure, which provides, among other things, timely and sufficient information about the personal and professional qualities of the candidates for members. The number of consecutive terms of office of the members of the Board of Directors ensures the effective operation of the Parent Company and compliance with legal requirements. According to the Articles of Association of the Parent Company, the members of the Board of Directors may be re-elected without restriction. 1.4. Remuneration of the members of the Board of Directors The Management of all public companies of the Group have prepared and implements a Remuneration Policy, which is adopted by the General Meeting of Shareholders. The Remuneration Policy has been developed in accordance with Ordinance № 48 of March 20 2013 of the Financial Supervision Commission and the Law on public offering of securities. The amount and structure of the remunerations are determined by the General Meeting. In accordance with the legal requirements and good practice for corporate governance, the amount and structure of remuneration take into account: • The obligations and the contribution of each member of management bodies in the activity and the results of the respective company. The members of the management bodies receive a permanent remuneration in the form of an amount determined by the General Meeting of Shareholders, paid under the terms and conditions of the management contracts concluded between them and the Company. • The possibility for selection and retention of qualified and loyal members of the management bodies. • The need for compliance of the interests of the members of the management bodies, the long- term interests and the sustainable development of the companies. The remunerations of the members are formed on the basis of the results of the company's activity and is in accordance with the business strategy, goals, values and long-term interests of the Group. • The executive member of the Board of Directors receives a permanent remuneration in the form of an amount determined by the General Meeting of Shareholders, paid under the terms and conditions of the management contract concluded between him and the Company. • The remunerations and bonuses of the members of the management bodies and of the Executive Director of the Company must be determined by the General Meeting of Shareholders. According to the Articles of Association of the Parent Company, in case of a positive financial result /profit/ and by decision of the General Meeting, the Executive Director is entitled to receive a one-time remuneration of up to one percent of the net profit of the Company. • The remunerations and bonuses of the members of the management bodies and of the 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 This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 3 and reflects their participation in meetings, as well as the implementation of their tasks to control the actions of the executive management and to participate effectively in the work of the company. So far, the executive member has not been granted shares, stock options or other financial instruments. By qualified majority, the management bodies may decide to determine the range of employees, among which an amount of up to 2% of the value of the Parent Company's profit for each financial year shall be distributed as a bonus. The same is possible only in the presence of a decision of Shareholders to determine the specific amount of the bonus on the General Meeting, which adopts the relevant audited annual financial statements and if there is a positive financial result /profit/. The disclosure of information about the remuneration of the members of the Board of Directors is in accordance with the legal norms and the Articles of Association of the public companies in the Group and the Parent Company. Shareholders have easy access to the adopted company policy for determining the remuneration and bonuses of the members of the Board, as well as to information on the annual remuneration and additional incentives received by them. Information on the remuneration of the members of the Board of Directors is presented in the annual financial report, in the Report on the implementation of the Remuneration Policy of the Board of Directors and is published on the websites of the companies. 1.5. Conflict of interests The members of the management bodies shall endeavor to avoid and prevent any actual or potential conflict of interest. The procedures for avoiding and disclosing conflicts of interest are regulated in the Articles of Association of the companies, internal document and rules. The members of the management bodies have an obligation to immediately disclose conflicts of interest and to provide the shareholders with access to information on transactions between the companies and its subsidiaries and members of management bodies or related persons. Every potential conflict should be disclosed to management bodies. A potential conflict of interest exists when the company intends to enter into a transaction with a legal entity in which a member of the management body or related persons have a financial interest. Art. 114 of the LPOS describes in detail the hypotheses under which the persons who manage and represent a public company, including the persons - representatives of a legal entity that is a member of the management body of the public company, without being expressly authorized by the general meeting of the public company, cannot undertake certain transactions. Article 114 of the Law on public offering of securities and subsequent, provide an opportunity for shareholders to review and approve in advance transactions involving interested parties and related parties in order to avoid conflicts of interest and violate the rights of shareholders. 1.6. Committees The work of the management body is supported by committees, as the management body determines the need for their establishment in accordance with the specifics of the company. In accordance with the requirements of the current legislation and on the basis of the criteria determined by it, the management body proposes to the General Meeting of Shareholders of the company to elect an audit committee that meets the legal requirements and specific needs of the company. Committees are set up on the basis of a written structure, scope of tasks, functioning and reporting procedures. 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. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 4 2. INDEPENDENT FINANCIAL AUDIT AND INTERNAL CONTROL The Audit Committee of “Sopharma” AD and its members, in their capacity as persons in charge of general management, provide supervision of internal audit activities and monitor the overall relationship with the external auditor, including the nature of non-audit services provided by the Group's auditor. The management of “Sopharma” AD, assisted by the Audit Committee, motivates in writing before the General Meeting its proposal for selection of an auditor, guided by the established requirements for professionalism. The management of the companies in the Group ensures compliance with the applicable law regarding the independent financial audit. A rotation principle is applied in the proposals and selection of an external auditor. The auditors are selected by the GMS for each financial year. The companies of Sopharma Group have a system in place for internal control, which includes identifying the risks associated with the activities of the Company and supporting their effective management. It also ensures the effective functioning of reporting and disclosure systems. 3. PROTECTION OF SHAREHOLDERS 'RIGHTS The management of the public companies in Sopharma Group guarantees equal treatment of all shareholders, including minority and foreign shareholders and protects their rights, as well as facilitates their exercise within the limits allowed by applicable law and in accordance with the Articles of Association of the companies. The managements provide information to all shareholders about their rights, financial results of the companyy and corporate events through an information disclosure system and the company's website. 3.1. General meeting of the shareholders Information on the rules according to which general meetings of shareholders are convened and held, including voting procedures, is available to all shareholders. The corporate managements of the public companies in Sopharma Group provide sufficient and timely information on the date and place of the General Meeting, as well as complete information on the issues to be considered and resolved at the meeting. During the General Meeting, the management of the respective public company of the Group ensures the right of all shareholders to express their opinion and ask questions. • Shareholders with voting rights have the opportunity to exercise their voting rights at the General Meeting of the public company in person or through representatives, as well as by correspondence or electronically. The procedure for the participation of the shareholders in the General Meeting is announced in the Invitation. • The management maintains a database of contacts of its shareholders holding 5 or more than 5% of the company's capital, which allows sending direct messages to them or to a specific person. • The management exercises effective control by creating the necessary organization for the voting of the authorized persons in accordance with the instructions of the shareholders or in the ways permitted by law. • The management organizes and conducts regular and extraordinary General Meetings of the company's shareholders in accordance with statutory procedures that ensure equal treatment of all shareholders, including minority and foreign, and the right of each shareholder to express its views on the agenda of the General Meeting. • The management determine the procedures for holding the General Meeting of Shareholders in a manner that does not complicate or increase the cost of voting unnecessarily. • The management takes actions to encourage the participation of shareholders in the General This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 5 Meeting of Shareholders, incl. by providing the opportunity for remote presence through technical means (including the Internet) in cases where this is possible and necessary, and does not contradict the NCCU. • The managements of the public companies in Sopharma Group believe that the prerequisites for sufficient transparency in relations with investors, financial media and capital market analysts have been created. • The processes and procedures for holding General meetings of Shareholders guarantee equal treatment of all shareholders, including minority and foreign shareholders, and protect their interests. All members of the Managements try to attend the General Meetings of the shareholders of the Company. 3.2. Materials of the General Meeting of Shareholders The materials related to the General Meeting of Shareholders are available to the shareholders from the day of announcing the invitation to convene it in the Commercial Register. They are submitted to the Financial Supervision Commission and are published on the company's website, as well as in the relevant media, at least 30 days before the date of the General Meeting and upon request are provided free of charge to shareholders. The texts in the written materials related to the agenda of the General Meeting are specific and clear and do not mislead the shareholders. All proposals regarding major corporate events are presented as separate items on the agenda of the General Meeting, incl. the profit distribution proposal. The public companies of Sopharma Group maintain on their websites a special section on the rights of shareholders and their participation in the General Meeting of Shareholders. The managements of these companies assist the shareholders entitled under the current legislation to include additional issues and to propose decisions on issues already included in the agenda of the General Meeting. 3.3. The managements of the public companies in the Group guarantee the right of the shareholders to be informed about the decisions taken by the General Meeting of Shareholders. The minutes of the General meetings of shareholders are published within the statutory period, subject to the requirements for maximum publicity and transparency of information provided, its simultaneous publication, using sufficiently accessible platforms for information disclosure, including its own website. All materials from the held general meetings of the shareholders shall be kept accessible to the shareholders and all interested parties for a period determined in the LPOS. In 2023 the public companies of Sopharma Group held General Meetings of Shareholders as follows: “Sopharma” AD held three GMS and one General Meeting of warrant holders, “Sopharma Trading” AD held one GMS, “Momina Krepost” AD held three GMS, “Sopharma Imoti” REIT held one GMS, “Sopharma Buildings” REIT held two GMS and “Doverie Obedinen Holding” AD held two GMS. The Board of Directors considers that preconditions have been created for sufficient transparency in the relations with investors, financial media and capital market analysts. 3.4. Equal treatment of shareholders of one class All shareholders in one class are treated equally. All shares within one class give equal rights to shareholders of the same class. 3.5. The management of the public companies in Sopharma Group guarantee the provision of sufficient information to investors regarding the rights granted by all shares of each class before their acquisition. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 6 3.6. Consultations between shareholders on fundamental shareholder rights Within the limits allowed by the current legislation and in accordance with the provisions of the Articles of Association of the respective companies, the managements of the public companies in Sopharma Group do not prevent the shareholders from consulting each other on issues related to their basic shareholder rights allows the commission of abuses. 3.7. Shareholder transactions with controlling rights and abusive transactions The managements of the public companies in Sopharma Group do not allow the implementation of transactions with shareholders with controlling rights, which violate the rights and/or legitimate interests of other shareholders, including under the terms of negotiations with itself. 3.8. Remuneration policy The management bodies of the public companies in the Group prepare 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 managements of the public companies in the Group approve the Policy for disclosure of information in accordance with the legal requirements and the Articles of Association. In accordance with the adopted information disclosure policy, managements establish and maintain a disclosure system. The information disclosure policy guarantees equality of the addressees of the information (shareholders, stakeholders, investment community) and does not allow misuse of inside information and manipulation of the market of financial instruments. The managements of the public companies in Sopharma Group also: • ensure that the disclosure system provides complete, timely, accurate and comprehensible information that allows for objective and informed decisions and assessments; • promptly disclose the capital structure of the companies and agreements that lead to the exercise of control in accordance with its rules for disclosure of information; • within the limits of the current legislation and in accordance with the provisions of the Articles of Association of the companies ensure that the rules and procedures under which the acquisition of corporate control and extraordinary transactions such as mergers and sale of significant assets are clearly and timely disclosed; • approve and control the observance of internal rules for preparation of the annual and interim reports and the procedure for disclosure of information; • have adopted a Disclosure Policy, which ensure the timely disclosure of any material periodic and incidental information about the companies, their managements, their corporate managements, their operational activities, their shareholder structure; • disclose non-financial information on an annual basis in accordance with national law and applicable European law. The non-financial statement is part of the annual report, which includes information on how and to what extent the company's activities can be classified as environmentally sustainable, such as: what part of its turnover is due to products and services related to economic activities which qualify as environmentally sustainable; what part of its capital expenditure, where applicable, and what part of its operating costs are related to assets or processes related to economic activities that qualify as environmentally sustainable. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 7 As part of the disclosure system, Sopharma Group maintain a website with approved content, scope and periodicity of the disclosed information. The Groups website is: www.sopharmagroup.com. The information disclosed through the Groups website includes: Ø basic commercial and corporate information identifying the Group; Ø up-to-date information on the shareholder structure; Ø the rules and the adopted policies related to the activities and functioning of the Group; Ø information on the structure and composition of the management and control bodies of the Parent Company, as well as basic information on their members, including information on their committees; Ø financial statements for the last 10 years; Ø the materials for the forthcoming general meetings of the shareholders of “Sopharma” AD, as well as additional ones, received by law; Ø information on the decisions taken by the general meetings of shareholders for at least the last three years, incl. information on the dividends distributed by the Group for this period; Ø information for auditors; Ø information about upcoming events; Ø information on issued shares and other financial instruments; Ø important information related to the activities of the Group; Ø information on the rights of shareholders, incl. sufficient information on the right of shareholders to request the inclusion of issues and to propose decisions on issues already included in the agenda of the General Meeting under Article 223a of the Commerce Act; Ø contact information with the Investor Relations Director of “Sopharma” AD. The Group also maintains foreign language versions of the corporate website with similar content in the following languages: English, Russian and Polish. The Group periodically discloses information about corporate governance. Disclosure of corporate governance information is in accordance with the "comply or explain" principle. The managements of the public companies in Sopharma Group ensure the disclosure of any material periodic and incidental information about the Group, through channels that provide equal and timely access to relevant information by users. In 2023 the public companies in the Group disclose the publicly regulated information by providing it to the Financial Supervision Commission and to the public. Regulated information is disclosed to the public in a way that ensures it reaches the widest possible range of people at the same time, and in a way that does not discriminate against them. This is done through the X3NEWS information system, the Investor.bg information system, as well as on the Warsaw Stock Exchange, including through the Polish Information Agency (PAP). 5. STAKEHOLDERS. SUSTAINABLE DEVELOPMENT. Sustainable development is the achievement of a balance between social and environmental principles, such as socially justified and environmentally friendly economic development. It aims to meet the needs of the current generation without compromising the ability of future generations to meet their own needs. The Corporate Managements are committed to establishing specific actions and policies regarding the sustainable development of the companies, including the disclosure of information related to climate and social aspects of their activities. In response to the requirements set by Regulation (EU) 2020/852of the European Parliament and of the Council of June 18, 2020 to create a framework to facilitate sustainable investments, the managements of the companies in the Sopharma Group are gradually launching activities related to analysis, data collection and reporting on key material sustainability issues. The Managements ensure effective interaction with stakeholders. This category includes certain groups of persons who are directly affected by the Group and who in turn can influence its activities, incl. suppliers, customers, employees, creditors, public pressure groups and other employees. The companies This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 8 of the Group identify 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, the managements comply with legal requirements and the principles of transparency, accountability and business ethics. The managements of the companies guarantee sufficient information to all interested parties about their legally established rights. In accordance with this policy, the management of the companies in the Group develop specific rules for taking into account the interests of stakeholders, which rules ensure their involvement in resolving certain issues requiring their position. These rules guarantee the balance between the development of the companies in the Group and the economic, social and environmentally friendly development of the environment in which it operates. Corporate managements of the companies in Sopharma Group maintain effective relationships with stakeholders. Periodically, in accordance with the legal norms and the good international practice for disclosure of non-financial information, the Group informs about economic, social and environmental issues concerning the interested parties, such as: fight against corruption; work with employees, suppliers and customers; the social responsibility of the Group; environmental protection and human rights violations. The managements of the companies in the Sopharma Group guarantee the right for timely and regular access to relevant, sufficient and reliable information about the Group when the interested parties participate in the corporate governance process. 6. INSTITUTIONAL INVESTORS, FINANCIAL INSTRUMENTS MARKETS AND OTHER INTERMEDIARIES The corporate managements of the public companies in the Sopharma Group ensure effective interaction of the companies with their shareholders - institutional investors, as well as with the regulated markets of financial instruments and investment intermediaries on these markets. Managements of the companies use the services of investment intermediaries whose recommendations or actions are based on market information and principles. The same applies accordingly to the operators of markets on which financial instruments issued by the Company are traded. “Sopharma” AD encourages the involvement of investment intermediaries and institutional investors in defining corporate governance policies and practices of the Parent Company. The company is listed on the Bulgarian and Warsaw Stock Exchanges, as market operators disclose and document the criteria and procedures for recognizing the requirements for listing on the main market. II. Explanation of which parts of the Corporate Governance Code under item 1, letter “a” or letter “b” of Art. 100 “n” para. 8 are not observed and what are the grounds for this, respectively when the issuer has decided not to refer to any of the rules of the Corporate Governance Code - grounds for this The public companies of Sopharma Group comply with all parts of the Corporate Governance Code under p. 1, letter “a”. III. Description of the main characteristics of the issuer's internal control and risk management systems in connection with the financial reporting process The internal control system of the financial reporting and reporting in the companies of Sopharma Group has been developed as a result of studies of good accounting and control practices in Bulgaria and of large pharmaceutical groups, as well as in compliance with national legal requirements, incl. for companies and groups listed on regulated markets. It is in a constant process of monitoring by the management and of further development and improvement. Most of the parameters that will be provided in this document are from the practice of the This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 9 companies with the most developed internal control systems, namely - “Sopharma” AD and “Sopharma Trading” AD. The internal control system of the financial reporting and reporting of the companies in the Group are set of behavioral and technical principles, rules, means, procedures and control actions, which are specially developed and adapted to the specifics of the companies, its activities and reporting system. It is aimed at: • ensuring current monitoring and directing the reporting activities towards their goals and expectations of its various users, and achieving their necessary efficiency and effectiveness, incl. when using the borrowed resources; and • ensuring adequate and timely addressing of identified business risks that have an impact on financial, management and operational reporting. In particular, it is designed to create leadership comfort that: • the companies in the Group comply with the applicable legal requirements in the field of accounting, reporting and other directly related areas and especially the requirements of the Accounting Act and International Financial Reporting Standards; • the Group follows the instructions and guidelines of the top management regarding the reporting and documentation; • there is the required efficiency and effectiveness of the financial and accounting process, incl. consolidation and documentary justification; • there is a high degree of security in the protection and maintenance of the assets of the companies in the Group, incl. and prevention of fraud and error; and • there is the provision of reliable, high-quality and timely financial and operational information for internal and external users. The main components of the internal control system for financial reporting and reporting include: a) adoption and observance of the ethical principles and rules of conduct, which are adopted by the Code of Ethics of the employees in the companies of Sopharma Group and with regard to financial reporting and accounting and all related processes, procedures and actions of all staff of the company; b) development and determination of an optimal structure of units involved in the processes related to financial reporting, with clearly defined responsibilities and delegations, powers and obligations, incl. through developed written internal documents; c) developing policies for the selection, training and development of staff involved in accounting and financial reporting; d) development, implementation and maintenance of control procedures and rules for each stage of the processes related to accounting, financial reporting and reporting, with priority phased introduction of formalized written procedures; e) development of procedures for identification, monitoring and management of risks related to accounting, financial reporting and accounting, incl. the development of adequate measures and actions for their minimization; and f) development and maintenance of adequate organization of the information system, incl. controls for access, input, processing and retrieval of data, changes in the system, distribution of responsibilities of its employees, as well as storage and protection of the integrity and authenticity of data in the system. Control environment Ethical principles and rules related to the processes of accounting, financial reporting and accounting The managements of the various levels of the companies in the Group has introduced and This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 10 constantly monitor the observance of ethical values such as integrity, independence and objectivity as the foundations of the professional conduct of all persons involved in the processes related to accounting and financial reporting in the Group. They are the framework against which the control environment is built and which have influenced the effectiveness of model design, administration and ongoing monitoring of other components of internal control in the field of accounting and financial reporting. Integrity and ethical behavior are a product of the established general ethical and behavioral standards of the companies in the Group. They are clearly communicated with all financial and accounting and control staff and they are constantly validated in practice. The ethical principles that guide professional conduct that should be followed by all persons directly or indirectly involved in accounting and financial reporting processes are: objectivity; impartiality; independence; conservatism; transparency; methodological justification; consistency and use of independent experts. These principles are applied at all stages of financial reporting when: choosing an accounting policy; accounting closing; the preparation and application of accounting estimates and the preparation of public and management financial statements, other public reports and documents containing financial information. Management bodies responsible for the individual components of the overall accounting and financial reporting process Management bodies that have certain responsibilities and powers regarding the process of financial reporting and resp. other related processes are different for the Group companies. For the Group they include: the Board of Directors, the Audit Committee, the Chief Financial Officer, the Chief Accountant, the Head of the Reporting Department and the Head of the Internal Audit Department. Their functions and responsibilities can be summarized as follows: • The Board of Directors accepts and confirms: the accounting policy and the changes in it for each reporting period, the developed accounting estimates as of the date of each reporting period, incl. the applied methodology; financial statements and other public documents containing financial information; the functions, organization and responsibilities of all structural units and their heads, engaged in the processes of and related to financial reporting; the development, implementation and ongoing monitoring of the functioning of the individual components of the internal control system, incl. the activity of the Internal Audit Department; • The Audit Committee independently monitors the implementation of the financial reporting processes, the applied accounting policies and the effectiveness of the internal control system of the company, incl. risk management, as well as the implementation and results of the external and internal audit; • The CFO is responsible for the overall organization, operation and ongoing control of accounting and financial reporting. He directly manages the whole process, makes all key decisions related to financial statements and other public documents with financial information. It also approves at the first level the accounting policy, the main reporting methodologies and evaluates and accepts the work of used independent experts (appraisers, actuaries, consultants, etc.) involved in the financial reporting process. He monitors on an ongoing basis, together with the Chief Accountant and the Head of the Reporting Department, the effects and risks on the financial statements of the identified business risks for the company; • The Chief Accountant organizes and manages the accounting activities of the company - controls and methodologically directs the current accounting, manages the preparation of financial and management reports; is responsible for the development and implementation of accounting 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; This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 11 • The Reporting Department and its head carry out the overall organization, methodological support and implementation of the process related to the preparation of the consolidated financial statements of the company, incl. the current control, instruction, monitoring and analysis of the financial statements for the purposes of consolidation of the companies of Sopharma Group; • The Internal Audit Department performs ex-post control over the operations and activities related to the preparation of the company's financial statements and compliance with the established internal controls over the individual routine and non-routine processes. Policy and practice related to human resources in the financial and accounting departments The companies of the Group have established policies and rules related to the management of human resources involved in the process of financial reporting and other processes related to it. These include imposed and implemented policies and procedures in the selection and appointment of such staff, aimed at education and professional experience, computer literacy and foreign language skills of the candidates. Personnel management policies also include those related to the continuous additional professional training, updating and expanding the knowledge and skills of the employed specialists. It is obligatory to conduct trainings in case of changes in normative acts, IFRS, tax laws and others, directly related to their work. The purpose of this policy is to increase their expertise and improve their skills to increase efficiency in the performance of their duties. Process of the Group for risk assessment related to financial reporting The Board of Directors, the Audit Committee, the Chief Financial Officer and the Chief Accountant of the Groups public companies have a key role in the process of continuous identification, monitoring and control of business risks, incl. to establish and control the effects of those of them that have a direct impact on individual processes and objects of accounting, financial reporting and reporting of the company. Together, they provide comprehensive monitoring of the risk management process. Risk factors related to sound financial reporting include external and internal events, transactions and circumstances that may arise and adversely affect the entity's ability to create, maintain and process accounting and operational data in a manner that ensures reliable financial statements, reports and reports. The following factors are defined in the Group as main: a) external risks are defined as: change in the business environment and the market environment of the companies and its main products; the activity of competitors; change in the legal and regulatory framework; changes in key suppliers or customers; unscrupulous or malicious actions by outsiders; rapid corporate growth and group growth; development of companies in which it holds significant investments in the form of participations and/or loans. b) the internal risks include: change of the technological base of the companies, the manner and intensity of use of its assets and resources; new products and activities; new accounting policies and IFRS; changes in the staff of the departments responsible for and/or financial reporting; changes in information systems; errors in work and/or insufficient knowledge or skills of staff, rapid expansion abroad; application of multiple estimates - in particular the application of fair values and the calculation of the recoverable amount of certain non-current assets, with the participation of external experts. Risk factors that are recurring and/or related to the application of accounting policies and estimates are currently monitored by the chief accountant of the Group, who proposes management solutions and properly reflects their effects in the financial statements. The new risk factors are identified by the CFO of the Parent Company and are assessed and developed by him, together with the Chief Accountant and the Head of the Reporting Department. If necessary, the help of independent consultants is used, incl. and the application of new IFRSs. The general monitoring of the process of managing the risks related to financial reporting is carried out by the audit committee of the company. Information system of the companies in the Group. Accounting Department - organization of the This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 12 accounting function in the companies in the Group and the financial reporting process Information System information system of “Sopharma” AD includes infrastructure (physical and hardware components), software, people, procedures and data. In 2013, the Company implemented the Microsoft Dynamics AX ERP system. It covers all processes of sales, warehousing, master planning, production and accounting. The system has been adapted and implemented, taking into account the specifics of the company itself, but good practices have been borrowed from the pharmaceutical sector and other industries. In addition to the main information system, the Company also uses the following systems: Hermes - human resources management system, which covers the entire management cycle related to planning, evaluation, remuneration and human capital development in “Sopharma” AD. The connection between them is that Hermes data is entered into Microsoft Dynamics AX. The quality of information generated by Microsoft Dynamics AX and other products provides significant opportunities for management to make adequate, reasonable and timely decisions in the management and control of activities for the preparation of various financial and management reports and other public documents with financial information. The information system of “Sopharma Trading” AD includes infrastructure (physical and hardware components), software, people, procedures and data. The company started in 2014 the phased implementation of the SAP ERP system. It covers all major transaction processes in the Company. The system has been adapted and implemented, taking into account the specifics of the Company itself, but good practices have been borrowed from the pharmaceutical sector and other industries. In addition to the main information system, the Company also uses the following systems: FM + transport planning and management, mobile application for driver management (on SAP mobile platform), KNAPP WMS and SAP WMS - warehouse management, SAP Hybris - online management sales, Hermes - HR management. The connection between them is made through interfaces. The quality of the information generated by the ERP system SAP and other products provides significant opportunities for the Management to make adequate, reasonable and timely decisions in the management and control of the activities for the preparation of various financial and management reports and other public documents with financial information. Given the smaller scale of the other companies in the Group, each of them uses software appropriate to its needs. The information system relevant to the objectives and process of financial reporting covers methods and documentation that: • identify and reflect all valid transactions and operations; • describe transactions and operations in a timely manner in sufficient detail to enable them to be properly classified for financial reporting purposes; • assess the value of transactions and operations in a way that reflects their appropriate monetary value in the financial statements; • determine the time period during which the transactions and operations have occurred in order to allow their recording in the appropriate accounting period; • present the transactions and operations and related disclosures in the financial statements in accordance with the requirements of the reporting framework. The "Information Technology" Department is responsible for the risk-free functioning of the information system in the Parent company and in ”Sopharma Trading” AD – “Business and Technological Development”. In each of the companies in the Group was established “Information technology” department, which is responsible for the smooth functioning of the different types of software. Accounting Department - fulfillment of the accounting function and key role in the financial reporting process The Accounting Department of the Parent Company is directly subordinated to the Executive Director. It is headed by a chief accountant. It consists of: Deputy Chief Accountant, and heads of sectors This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 13 and operational accountants. Structurally, it consists of the following sectors: fixed assets, materials, cost, sales, foreign exchange operations, lev operations, wages. According to its functional characteristics, it covers and fully implements the accounting function in the Company, internal accounting control and preparation of financial statements. His responsibilities include the correct and consistent application of the developed accounting policies, the development and implementation of an internal chart of accounts; accounting methodologies, current accounting; current accounting analysis and control of reporting data and documentation; summarizing and classifying the reporting data for the purposes of the financial statements; the preparation and/or processing of the input data for the accounting estimates together with the engaged experts, as well as the reporting of established deviations and discrepancies to the Financial Director; and compliance with regulatory requirements in the field of accounting, taxes and other related areas. The accounting department of “Sopharma Trading” AD is managed by a chief accountant, who is directly subordinated to the Financial Director. Structurally, the accounting department consists of two structural areas: 1) accounting of Sopharma Trading, which involves one deputy chief accountant and 8 operational accountants and 2) group accounting, which involves one senior accountant and 1 operational accountant. The financial and accounting operations of the company in Serbia and in the Retail segment in Bulgaria are taken care of by two separate accounting teams. In each of the companies in the Group there are respective structures that ensure the good functioning of both the company itself and the control of its financial and accounting activities. The accounting policy of the Parent Company and the Group, respectively, for the purposes of preparing the consolidated financial statements, is subject to annual approval at two levels - by the Financial Director and the Board of Directors of the Parent Company. The most important aspects of it, necessary for the correct understanding of the financial statements, must be disclosed. The choice of the reporting framework is defined on the basis of the requirements of the Accounting Act. The company applies the International Financial Reporting Standards (IFRS) adopted by the European Union. Ongoing control over the proper application of IFRS is performed by the Chief Accountant, the Chief Financial Officer and the Audit Committee. Additional confirmation of the correctness of the application is received from external auditors. The preparation of the financial statements of the Parent Company for public use is the result of a complete process of accounting closing of the reporting period. This process is formalized through documents and rules adopted by the Management. They are related to the performance of certain actions and procedures, and resp. the preparation of certain documents by persons from the Accounting Department or by other officials and these actions and procedures are aimed at: carrying out inventories; analysis of accounts; sending confirmation letters; determining best estimates such as depreciation, revaluation, impairment and accruals based on reasonable assumptions, consolidation and classification of accounting data; studies and analyzes of certain legal documents (contracts, lawsuits, opinions of legal advisers); studies and evaluation of expert reports (appraisers, actuaries, internal auditors, other internal experts and officials); preparation of reports and financial packages for consolidation; preparation, analysis and discussion of draft financial statements. The closing process is led directly by the Chief Accountant and Head of Reporting Department, with the CFO monitoring and finalizing key issues related to the recognition, classification, valuation, presentation and disclosure of certain items, transactions and events, and the overall presentation of the financial statements – individual and consolidated financial statements of the Parent Company. 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 This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 14 current and periodic reviews and analyzes of financial indicators and the input data for them, through which the performance and results of the company's activities are presented in the financial statements. These, in turn, include such reviews and analyzes of actual reported performance data against budgetary, forecast, previous periods and industry. Such financial analyzes are performed with the QlikView platform - upgrading the ERP system Axapta 2009. They can usually contain proposals for optimization or revision of certain budgets. The controls assigned to the Parent Company's information systems cover both the controls of the application programs and the general IT controls, which are policies and procedures that help to ensure the continuous proper functioning of the information systems. The typical controls on the application programs that are set are: checking the mathematical accuracy of records, maintaining and reviewing accounts and turnover sheets, automated controls, such as input checks and checks on the sequence of numbering and non-automatic tracking of exception reports. Common IT controls include: program change controls, controls that restrict access to programs or data, controls on the deployment of new releases of bundled software applications, and controls on system software that restrict access or ongoing monitoring of the use of system utilities that could change financial data or records without leaving a trace for follow-up. At “Sopharma Trading” AD the general controls relevant to financial reporting can be categorized as procedures relating to ongoing and periodic reviews and analyses of financial performance and inputs that are used to present the performance and results of the Company's operations in the financial statements. These, in turn, include such reviews and analyses of actual reported performance data against budget, forecast, prior period and industry data. Such financial analyses are performed using the SAP ERP and SAP Bl platform. For management purposes, separate forms have been established and approved under which monthly reports are prepared. The reports contain actual and budget figures, analysis of variances, comparison of current with previous period. They may also normally contain proposals for optimization or revision of certain budgets. Most of the Group companies have an Information Technology department responsible for implementing control activities. The applied physical controls of the companies of the Group include: a) measures for the physical security of the assets - secure facilities and premises, as well as special conditions for access to assets and documents; b) a special procedure for granting access to computer programs and data files; c) periodic inventories - procedures for organizing and conducting inventories by physical counting /weighing/ sending appropriate letters for confirmation and comparison with the amounts reflected in the control inventories and accounting documents/registers. Procedures have been introduced for the timely analysis of the results of the inventories, development of solutions for their accounting and resp. approval by the Executive Director. The developed and implemented procedures for management, organization and implementation of the main routine processes (supplies and sales), as well as for the processes of preparation and acceptance of complex estimates (depreciation, impairment, revaluation, actuarial calculations and long- term provisions) also provide internal controls. They are aimed at: authorization of the individual operation and the issued primary documents; review and verification of the issued documents and the assets involved in the operation; subsequent recalculation and comparison with other documents (contracts, applications, confirmations, price lists, etc.) and persons, as well as the division of duties and responsibilities of the participating officials at each step of the process, to ensure mutual control between them, as and to reduce the possibility of allowing a person to be in a position to both commit and conceal errors or fraud in the normal course of his or her duties. The Group is in the process of constantly expanding the formalized control procedures and activities. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 15 Ongoing monitoring of controls An important priority goal of the management of the companies in Sopharma Group, in the person of the CFO is to establish and maintain continuous and effective internal control. Ongoing monitoring of controls by management includes an assessment of whether they are operating as intended and whether they are being modified in an appropriate manner to reflect changes in conditions. Ongoing monitoring of controls may include activities such as management review of whether internal management reports are being prepared in a timely manner and whether key data in them are in line with third-party confirmation and its projections, and internal auditors' assessment of compliance with policies and procedures. on the implementation of routine processes (sales and deliveries) by the staff employed in them, incl. the set internal controls, incl. and in comparison, with the contracts with the counterparties, as well as supervision over the observance of the ethical norms or the policy for business practice by the legal department of the companies and the department for relations with the investors. Ongoing monitoring is carried out to ensure that controls continue to be effective over time. Internal auditors, as well as other staff performing supervisory, monitoring or control functions, incl. the accounting department and the reporting department also contribute to the ongoing monitoring of internal controls over the company's processes through their assessments of individual controls or groups of controls. They usually provide such information periodically, in the course of their duties and functions, and their assessments of the functioning of certain internal controls, focusing considerable attention on assessing their effectiveness, communicating with relevant persons information on identified strengths and weaknesses of internal controls and make recommendations for their improvement. Ongoing monitoring activities include the use of external information that identifies problems or identifies areas for improvement. Such countries are customers, suppliers and servicing banks. In addition, the regulatory body, represented by the FSC, may also communicate with the company's management issues that affect the functioning of internal control, for example, exchange of information directly monitored by the Commission related to the implementation of certain actions or transactions of the company or inspections from the FSC itself. Also, in the implementation of ongoing monitoring activities, the management always takes into account the communication with the external auditors related to the internal control and the identified weaknesses and recommendations. IV. Information referred to in Article 10 (1) (c), (d), (e), (h) and (i) of Directive 2004/25/EC of the European Parliament and of the Council of 21 April 2004 on proposals for ingestion 1. Significant direct or indirect shareholdings (including indirect shares through pyramid structures and cross-shareholdings) within the meaning of Article 85 of Directive 2001/34/EC; On February 21, 2023, the shareholder "Donev Investments Holding" AD notified the parent company "Sopharma" AD that it crossed the threshold of 1/3 of the capital, reaching a percentage participation of 35.24%. 2. Holders of all securities with special control rights and description of these rights; There are no securities with special rights for the Parent Company and for the other public companies in the Group. According to the Articles of Association of the companies in the Group, all shares issued by them are of one class, registered, dematerialized, ordinary and indivisible. Each share gives the right to one vote in the General Meeting of Shareholders, the right to dividend and liquidation share, proportional to the nominal value of the share. 3. Any restrictions on voting rights, such as restrictions on the voting rights of holders of a certain percentage or number of votes, deadlines for the exercise of voting rights or systems through which, in cooperation with the company, the financial rights granted to the securities, are separated from the possession of the securities; There are no restrictions on the voting rights in the Parent Company and for the other public companies in the Group. 4. The rules governing the appointment or replacement of members of the board and the This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 16 amendment of the Articles of Association; For “Sopharma” AD the Board of Directors proposes to the General Meeting amendments and/or supplements to the Articles of Association, changes in the composition of the Board of Directors, dismissal and election of a new Board of Directors. Members of the Board of Directors may be natural and legal persons meeting the requirements of Article 234 of the CA and Article 116a, paragraph 2 of the Law on public offering of securities. When a member of the Board of Directors is a legal entity, he/she appoints a representative/s for the performance of his/her duties in the Board. The legal entity shall be jointly and severally liable with the other members of the Council for the obligations arising from the actions of its representative. The natural persons, who represent the legal entities - members of the Board of Directors, must meet the requirements of art. 234, para 2 of the CA. Persons who have been members of the management or supervisory body of a Company terminated due to insolvency during the last two years preceding the date of the decision to declare insolvency may not be members of the Board of Directors if unsatisfied creditors remain. A person who has been a manager, a member of a management or control body of a company for which a non-fulfillment of obligations to establish and maintain the levels of stocks determined by him by an effective penal decree has been established by an effective penal decree may not be a member of the Council stocks of oil and petroleum products. At least one third of the members of the Board of Directors must be independent. The independent member of the council may not be: • employee in the public company; • a shareholder who holds directly or through related parties at least 25 per cent of the votes at the general meeting or is a person related to the company; • a person who is in a lasting commercial relationship with the public company; • member of a management or control body, procurator or employee of a company or other legal entity; • a person related to another member of the management or control body of the public company. The members of the Board of Directors may be re-elected without restriction. In case of changes in the legislation, at the next General Meeting of Shareholders a decision is made to amend the Articles of Association in order to bring its provisions in line with those of the applicable regulations. Until this decision is made, the affected texts of the Articles of Association shall be interpreted in accordance with the Constitution and the laws of the country. The Articles of Association are amended and supplemented by a decision of the 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 № 20240305153305. 5. The powers of the members of the board, and in particular the right to issue or repurchase shares. The powers of the Board of Directors are regulated in the Articles of Association of the Company. The approval for the issuance of bonds is a decision that the Board of Directors may take by a qualified majority of 2/3 of its members. The Board of Directors is authorized to repurchase shares under certain conditions, with the decisions taken by the EGM, held on August 4, 2023. V. Composition and functioning of the administrative, management and supervisory bodies and their committees 1. Composition of the members of the Board of Directors: This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 17 The Parent Company is managed and represented by a Board of Directors, which consists of five individuals meeting the requirements of Article 234 of the CA and Article 116a, paragraph 2 of the Law on public offering of securities. The composition of the Board of Directors may be changed by the General Meeting at any time. The composition of the Board of Directors is described in item I. General information about “Sopharma” AD in the Management Report. According to Article 116a, paragraph 2 of the Law on public offering of securities, at least one third of the members of the Board of Directors must be independent persons. In this case it is: • Alexandar Viktorov Tchaoushev The members of the Board of Directors are acquainted with the rights and obligations related to their position. 2. Procedure for work of the Board of Directors “Sopharma” AD has developed Rules for the work of the Board of Directors, which comply with and are a continuation of the principles set out in the Good Corporate Governance Program. The Articles of Association of the Company are in accordance with the requirements of the Law on public offering of securities and the shareholders have the right to timely notification on various issues. The Board of Directors meets at least once a month. 3. Minutes of meetings Minutes of the decisions of the Board of Directors shall be kept and signed by all members present at the meeting. The minutes shall be kept by the Investor Relations Director of the company in a special register according to the provision of art. 116d, para. 3, item 3 of the LPOS. The protocols are a trade secret. Facts and circumstances thereof may be published, disclosed or brought to the attention of third parties only by decision of the Board of Directors or when required by law. 4. Responsibility The members of the Board of Directors must provide a monetary guarantee for their management in the amount determined by the General Meeting, but not less than their 3-month gross remuneration. The members of the Board of Directors are jointly and severally liable for the damages they have caused to the Company. Each member of the Board of Directors may be released from liability if it is established that there is no fault for the damages. The General Meeting may release from liability a member of the Board of Directors of the Regular Annual General Meeting in the presence of certified by a registered auditor Annual Financial Statements for the previous year and interim financial statements for the period from the beginning of the current year to the General Meeting. The Board of Directors reports to the General Meeting of Shareholders. 5. Role of the Board of Directors for the application of the principles of good corporate governance The Board of Directors makes decisions on all issues related to the activities of the Parent Company, except for those which, according to the current legislation and the Articles of Association, are within the exclusive competence of the General Meeting. According to the structure and composition of the management bodies of each of the companies in the Group, their functions are distributed according to the departments that exist in them. The way of functioning of the management and control bodies is aimed at bringing the management of each company in line with the set strategic goals, both of the company itself and those of the Group. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 18 The Board of Directors assigns the implementation of its decisions and the implementation of the operational management functions of the Company to one of its members /executive director/. The Executive Director may be replaced at any time. The members of the Board of Directors of the public companies in the Group submit a declaration to the Financial Supervision Commission /FSC/, to “BSE” AD and to the Company itself under Art. 114b of LPOS and under Art. 247, item 4 of the Commercial Law. The change in these circumstances shall be declared in the respective terms after its occurrence. In carrying out its activities, the Board of Directors complies with the accepted principles of corporate governance of the Company. The Board of Directors makes the best efforts to ensure easy and timely access to public information in order to exercise the rights of shareholders in an informed manner, respectively to make an informed investment decision by investors. 6. Due care. Avoiding conflicts of interest. The members of the Board of Directors are obliged: • to perform their functions with the care of a good trader, to be loyal to the Company and to act in the best interest of its shareholders; • to perform their duties with the skills, diligence and responsibility inherent in the professional and in a way that they reasonably believe is in the interest of all shareholders of the Company, using only information that they reasonably believe to be reliable, complete and timely; • to prefer the interest of the Company and the investors in the Company to their own interest and not to use for the benefit of themselves or others at the expense of the Company and the shareholders facts and circumstances that they learned in the performance of their official and professional duties; • to avoid direct or indirect conflicts between their interest and the interest of the Company, and if such conflicts arise - to disclose them in a timely and complete manner and not to participate and not to influence other members of the board in making decisions in these cases; • not to disseminate information about the discussions and decisions of the meetings of the Board of Directors, as well as other non-public information about the Company, including after they cease to be members of the Board of Directors, until the public announcement of the relevant circumstances by the Company; • to provide and disclose information to shareholders and investors in accordance with the requirements of the regulations and internal acts of the Company. The Board of Directors is assisted by an Audit Committee, which according to the Independent Financial Audit Act and International Standards on Auditing performs the following functions: • monitors the financial reporting processes in the enterprise; • monitors the effectiveness of the company's internal control systems; • monitors the effectiveness of risk management systems in the enterprise; • oversees the independent financial audit of the enterprise; • reviews the independence of the registered auditor of the company in accordance with the requirements of the law and the Code of Ethics for Professional Accountants, including monitors the provision of additional services by the registered auditor of the audited company. At the Extraordinary General Meeting of Shareholders of “Sopharma” AD, held on November 20, 2008, an Audit Committee was elected consisting of three people: Vasil Naidenov, Tsvetanka Zlateva and Kristina Atanasova with a 3-year term , who was re-elected 4 consecutive times. With a decision of the GMS from June 2, 2023. 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, This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 19 the objectives of this diversity policy, the manner of its implementation and the results during the reporting period Sopharma Group makes every effort to ensure equal opportunities in appointment and to comply with the form and substance of the full range of laws relating to fair practices in the work environment and prevention of discrimination. Discrimination, whether based on race, sex, sex or gender, skin color, beliefs, religion, national origin, nationality, age, disability, genetic information, marital status (including unmarried and civil unions, defined and recognized by applicable law), sexual orientation, culture, pedigree, veteran status, socio- economic status or other legally protected personal characteristics are unacceptable and completely incompatible with the Society's tradition of providing honest, professional and a decent job. Repressive measures against people who complain of discrimination or harassment are also prohibited. The main goals of the Group in the implementation of diversity policies are: • Attracting, hiring and retaining people with a wide range of professional skills. The diverse abilities of managers and employees open new opportunities for innovative and creative solutions, increase creativity and innovation. This, in turn, would lead to a more effective adaptation to the impact of globalization and technological change. A more diverse workforce can increase a company's efficiency in achieving its goals. It can lift the spirits of employees, give access to new market segments and increase productivity. • Promoting a working atmosphere that embraces ethnocultural diversity and in which differences between people are valued and respected. • Solving one of the most important problems for the employer - that of labor shortages, as well as problems related to hiring and retaining highly qualified workers. • Improving the Group's reputation and overall performance to external stakeholders and society. • Creating opportunities for disadvantaged groups and building the unity of society. Sopharma Group strives to achieve the set goals by approving and applying in practice the types of diversity important for the company. Adopting good practices from other companies and institutions, the company's management wants to make diversity management a functioning part of the Group. The Group strives to inform employees, consumers, customers and investors about the importance of diversity for them and their work, aiming to build their trust and desire for support. The policy of diversity provides diversity of the members of the governing bodies, which guarantees a reliable system of management and control, and good corporate governance is a key element of the secure and stable operation of Sopharma Group. They meet the high standards applied by the Group in order to achieve its goals and strategies. The composition of the management bodies of the companies in the Group and the number of persons included in it is consistent with the size, complexity and scope of the Group's activities and ensures a sufficient level of general expertise. The members of management bodies of the companies in the Group have extensive professional experience, both theoretical, acquired through education, training and qualifications, and practical, acquired during previous positions. They are persons with good reputation and managerial abilities, with high professional and moral qualities. The principle of gender equality has been observed, as evidenced by the many women holding senior management positions in the Group. The male-female ratio in most companies in the Group is in favour of women and is dictated by the nature of the production process. The policy of diversity with regard to governing bodies does not allow for age restrictions. The companies of the Group have representatives from various minority ethnic groups. The Company also employs disadvantaged people. The aim is to provide young people with opportunities for professional and personal development. There are no cases of discrimination in the companies of the Group on any grounds. This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 20 In Section V of the Rules of Procedure of “Sopharma” AD regulates the rights and protection of employees with regard to any discriminatory actions by the employer. On the grounds of Ordinance for employment /SG, issue 7/1987, amended and ext. No. 111 of 28.12.2001, amended, SG No. 78 of 30.09.2005, entered into force on 01.10.2005/, Ordinance №8 on determining the jobs suitable for employment of persons with reduced working capacity /SG, issue 52/1987, SG, issue 47/1990/ and Ordinance for amendment and supplement of Ordinance № 8 for determination of the jobs, suitable for employment of persons with reduced working capacity /SG, issue 44/1993/ and according to art. 27 of the Law on Integration of People with Permanent Disabilities, every year an Employment Commission is established in “Sopharma” AD. The Commission shall prepare a list of suitable places and positions for employment of persons with reduced working capacity and with permanent disabilities in accordance with the percentage determined for the branch by the order of art. 315 of the Labor Code and of pregnant and lactating workers. The Commission shall examine the specific employment cases and identify suitable places according to the approved list. Ognian Digitally signed by Ognian Ivanov Donev Ivanov Date: 2024.04.24 17:43:49 +03'00' Donev 24.04.2024 Ognian Donev, PhD Sofia Executive Director This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. 21 Consolidated non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 SOPHARMA GROUP 24 April 2024 This document is a translation form Bulgarian. In case of divergence, the Bulgarian text is prevailing. Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 Contents I.About the Declaration .......................................................................................................................... 2 II.Scope of the Declaration .............................................................................................................. 3 1. Vision, strategy and corporate governance .................................................................................. 3 2. Imprint of the companys activity ................................................................................................ 8 3. Organizational structure ............................................................................................................ 11 III.Strategy for corporate social responsibility ................................................................................ 14 1. Definition .................................................................................................................................. 14 2. CSR management ...................................................................................................................... 17 3. Membership .............................................................................................................................. 17 1 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 1. About the Declaration The Consolidated non-financial declaration (“the Declaration”) describes the commitments that Sopharma Group, as a corporate citizen, fulfills for the shareholders and investors, state and local authorities, consumers, customers and partners, the environment and society. The Group maintains an active dialogue with all of them in defining important decisions and in carrying out its corporate communications at all levels. Group companies monitor and declare the economic, social and environmental footprint that results from their activities. The measures used are in line with the main activity of the companies and are used to minimize the negative and increase the positive impact on their stakeholders. The declaration complies with the reporting requirements of Art. 48 of the Accounting Law and is a description of the policies and enterprises regarding their activities in the fields of ecology, social affairs, employees, anti-corruption, human rights. All companies in the Group strive to introduce good practices followed by the parent company “Sopharma” AD. Our activities In connection with the requirements of Art. 8 Transparency of undertakings in non-financial statements, REGULATION (EU) 2020/852 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 18 June 2020 on the establishment of a framework to facilitate sustainable investments, and amending Regulation (EU) 2019/2088, the Group should disclose whether its activity is eligible under the current Taxonomy, as a qualification system for ecologically sustainable economic activities. The Taxonomy Regulation is a key component of the European Commission's action plan to redirect capital flows towards a more sustainable economy. We considered our activities as a pharmaceutical company in the context of all economic activities meeting the taxonomy criteria listed in the Climate Delegated Act. The Climate Delegated Act focuses on those economic activities and sectors that have the greatest potential to achieve the climate change mitigation objective – i.e. the need to avoid creating greenhouse gas (GHG) emissions, to reduce these emissions or to increase GHG sinks and long-term carbon storage. Sectors covered include energy, selected manufacturing activities, transport and buildings. After a thorough review involving all relevant divisions and functions, we have concluded that our activity as a pharmaceutical manufacturer is not covered by the Climate Delegated Act and is therefore taxonomically ineligible. Our assessment of taxonomy eligibility is focused on economic activities defined as the combination of resources to produce specific goods or services. In this context, we, as a pharmaceutical manufacturer, generate external revenue from our products through only one activity (production and sale of our pharmaceutical products), but we are active in several sectors within the value chain of our products. Activities within the value chain of our products that do not generate revenue but result in assets or processes that are essential to our revenue-generating activities are not accounted as economic activities meeting the requirements of the taxonomy. For instance, transporting our pharmaceutical products to our customers does not count as a taxonomy-eligible activity and is not included in our turnover KPI, as we do not generate external turnover on a stand-alone basis with this activity. We considered our activities also based on the exceptions for the reporting period according to Art. 10 of Delegated Regulation (EU) 2021/2178. As we draw attention to, and in view of the active change and 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. 2 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 To the extent that 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: Ratio of taxonomy-compliant and taxonomy-unacceptable economic activities in total turnover, capital and operating costs Total Share of taxonomically Share of (BGN’000) eligible economic taxonomically- activities (in %) inadmissible economic activities (in %) Turnover1 875 304 0% 100% Capital costs (CAPEX)65 802 0% 100% Operating costs (OPEX)9 620 0% 100% I. Scope of the Declaration The Declaration gives a broad overview of a various aspects of the activity of Sopharma Group as a corporate citizen. It focuses on the activities of the Group for the period 01.01.2023 - 31.12.2023. The declaration contains quantitative data used as impact indicators in the main areas. 1. Vision, strategy and corporate governance 1.1 Mission, values, goals and strategy The mission of Sopharma Group is to play an active role in raising people's living standards by providing constant and easy access to the most important health-related products. To ensure the fulfillment of its mission, Sopharma Group constantly invests in production - new technologies, research and studies; in increasing the efficiency of distribution; in maintaining an active and effective dialogue with all participants in the healthcare system; in participation in significant projects and programs related to the development of society and in environmental protection. The vertically integrated model of companies operating mainly in the field of healthcare supports the application of global and European standards and practices. Synergies within the Group lead to better organization, centralization of core marketing and sales activities, cost optimization and better performance in all markets. The parent company, as a leading pharmaceutical manufacturer, follows the best practices in the field of corporate citizenship. The values that logically determine life in the company and the interaction with the stakeholders are related to the care of people's health not only in the physical aspect, but also in emotional and mental terms. The Sopharma Group's development strategy turns the companies into an attractive investment thanks to the following long-term goals: • Portfolio diversification, expansion of foreign markets, successful acquisition operations; • Sustainable development and strong performance in key markets; • Transparent and efficient management model. 3 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 The results of the Group's work are always in favor of all stakeholders, making it a preferred “partner” in health and investment. The Group is represented in over 45 countries with key markets in Bulgaria, Russia, Ukraine, Kazakhstan and Poland and a strategic plan focused on further market expansion in the region. Values Sopharma Group launched the OneFamily project, which unifies the approach at all levels and in all companies in the Group through common values. Care: We put customer satisfaction at the heart of our decisions and actions Responsibility: We bear personal responsibility and deliver results Continuous 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 Corporate citizenship policies The parent company, as a leading pharmaceutical manufacturer, follows best practices in the field of corporate citizenship. The values that logically determine life in the company and the interaction with the interested parties are related to the care of people's health. The corporate citizenship of the Group operates and develops in accordance with the constitutions, laws and regulations of the countries in which the Group is active. I In all their actions, the companies comply with the regulations of the state, local government and regulatory bodies, keeping an eye on the renewal and strict implementation of the legislation concerning their activities. The Group follows the 10 basic principles of the UN Global compact and works towards the achievement of the Global sustainable development goals SDG 2015 through the active participation of companies in various thematic projects. 1.2 Management systems Corporate governance systems Each of the companies operates following its basic internal rules, such as the regulations, and complies with its management systems in accordance with the imposed legislative and regulatory requirements. More specific management systems, related to pharmaceutical production and distribution are: Corporate governance systems Description Adoption Last date update Good Manufacturing A system of principles and rules that ensure 2003 2023 practice/GMP the proper course of each stage of the production process, providing a quality final product. Good distribution practices The good distribution practices is a system 2003 2023 /GDP of rules and procedures which serves to guarantee the high quality of the medicinal products at every stage of their distribution. The quality of medicinal products may be affected by a lack of adequate controls. 4 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 ICH “Q8 Pharmaceutical Principles, governing the establishment of 20042023 Development” pharmaceutical products. AXAPTA/SAP Integrated information system for the 2013 2023 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. ISO 9001: 2015Quality Management System 20082023 ISO 13485: 2003 Quality management systems for medical 2003 2023 devices СЕ BRAND Conformity of Medical Device Directive 2003 2023 93/42 / EEC Directive Concentration Directive for hemodialysis 20032023 93/42/ЕЕС BDS Standard for laboratory tests of foods of 20062023 INISI/ different origins; water and beverages; IEC 17025 feed; control of technological surfaces and carcasses; diagnosis of diseases in all species of domestic and wild animals; bees and a beehive ISO 14001:2015Environmental management systems2015 2023 ISO 27001:2013 Information security management systems20132023 OHSAS 18001:2007 Occupational health and safety 20072023 management systems WHO Good dissemination WHO Technical statements Series, № 937, 20062023 practices 2006. 5 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 Detailed description of the corporate governance systems: • GMP Good manufacturing practice is a system of rules and procedures which guarantee the high quality of medicinal products at every stage of their manufacturing. Its major purpose is to protect the patient's health. The GMP deal with both the production process and the working conditions, the qualifications of the production personnel, the sales system in use and the method of product withdrawal from the respective market. • GDP GDP include an array of tools used in the activities of wholesale distribution, including preventing counterfelt medicinal products from entering the supply chain. Their implementation ensures control an efficient contor of the distribution chain and the maintenance of the high quality and integrity of the manufactured medicinal products. The GDP is applicable to any and all activities including the supply, storage, delivery or export of medicinal products, excluding the sale to the end users. This system also includes competency of the employees, working conditions and product retention, control at any point in time to the final delivery. • ICH Q8 Pharmaceutical Development The standard applies to the overall process of creating new products, from development to registration. It also includes risk assessment and quality assurance systems as part of product design. It concerns all components of the medicinal product, substances, excipients, active substances, development of the formulation and process of creation, knowledge accumulated during this process, physicochemical and biological properties, development of the manufacturing process and all information that may affect the final result. • ISO 9001:2015 The implementation of the Quality Management System to the requirements of ISO 9001: 2015 ensures the company's ability to continuously provide services that meet the customer's and applicable legal and regulatory requirements. Effective implementation of the system leads to increased customer satisfaction. • ISO 14001:2015 Through the implementation of the standard, the company is committed to the rational use of natural resources to ensure constant control over the identified aspects of the environment that it affects. Measures are implemented to manage the environmental aspects, those that can be controlled and those that are expected to have an impact on the part of the company. • OHSAS 18001:2013 Through the implementation of the standard, the company demonstrates its commitment to the health of its employees by providing a safe working environment, managing and minimizing the risks to the health of the personnel as well as to the staff of the stakeholders who work at the company's premises. • ISO 27001:2013 By applying the requirements of the standard, the company provides adequate and coherent security mechanisms, whose purpose is to protect the information assets of the company and to ensure the confidence of each interested party with special attention to the clients. 6 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 • ISO 13485:2016 The standard specifies the requirements for a quality management system when an organization needs to demonstrate its ability to provide medical devices and related services that consistently meet customer requirements and applicable regulatory requirements. • BDS INISI / IEC 17025 Accredited laboratory according to BIS INISI / IEC 17025 by the Bulgarian Accreditation Service (BSA) and has the right to carry out tests which are recognized by all national and European food control authorities. The scope of accreditation includes tests of foods of different origins; water and beverages; feed; control of technological surfaces and carcasses; Diagnosis of diseases in all species of domestic and wild animals; bees and a beehive. Since 2014, the Lab Unit has been housed in new laboratory premises including Biosafety Level 3 for disease diagnosis as required by the OIE. • СЕ BRAND Conformity of Medical Device Directive 93/42 / EEC. • АXAPTA/SAP Integrated information system for business process management in the corporate activity of the high class company. It improves efficiency, helps to make more precise decisions, and improves interconnections with the supply chain. It supports sales management and planning, production to material planning and production capacity, supply chain management resoursec - stocks, warehouses and links between them, quality management. The system facilitates activities related to accounting, financial management and control, budget control and business analysis capabilities. • World Health Organization Good Distribution practices (WHO Technical Statement Series, No 937, 2006) By applying the requirements of the European Commission described in Directive 2001/83 / EC, the Management Manual of Good Practice of Distributing Practice of 5 November 2013 and the World Health Organization, the companies engaged in distribution declare their expertise and constant control over quality assurance, ensuring that products consistently stored, transported and handled under appropriate conditions as required by the marketing authorization or product specification. 7 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 2. Imprint of the companys activity Economical impact We create added value for our stakeholders Economic and Financial data 2023 2022 % Stakeholders change Decision for payment of dividends by 0.60 - N/A Shareholders the General Meeting in the amount of BGN per 1 share Taxes paid in thousand BGN 79 129 75 122 5.33 State and local Incl: authorities Taxes paid (other) in thousand BGN 65 713 65 217 0.76 Corporate tax paid in thousand BGN 13 416 9 905 35.45 Payments to suppliers in thousand 1 832 582 1 603 177 14.31 Suppliers /including BGN hired services/ Payments for wages and social 165 523141 810 16.72Employees insurance in thousand BGN The economical impact is most clearly tracked through dividend decisions that show the relationship with stakeholders as shareholders; paid taxes, incl. paid corporate tax, which is a contribution to state and local authority; payments to suppliers showing relationships with companies in the supply chain; the cost of labor that shows employee relations as an interested party. 8 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 Social impact Economic and financial data /expenses 2023 2022 Stakeholders thousand BGN/ Number of employees 4 721 4 764 Work places - employees Training courses 292225 Employees /expenses BGN ‘000/ Economic and financial data Stakeholders Social benefits and payments 6 9684 918 Employees /expenses BGN ‘000/ Medical services 721722 Employees /expenses BGN ‘000/ Donations 859438 Local communities /expenses BGN ‘000/ Social activities and events 229239Local communities Projects related to promoting health culture and investing in civil society. The companies of the Group works to increase the economic and social development of society, to promote a healthy lifestyle and to improve the health culture. Sopharma Group adheres to traditions that nurture fundamental values, such as health care in harmony with nature, strengthening the community and nurturing the competitive spirit. • We traditionally support initiatives related to sport and healthy lifestyles by supporting sports events and competitions; • Initiatives under the UN Global Compact Network: "I'm proud of my parents' work" - youth career guidance activity; • A digital platform was created for training and upskilling of the staff, incl. pharmacists; • Donations to hospitals, universities, community centers, Bulgarian Red Cross, nursing homes. 9 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 Ecological impact Indicators 2023 2022 % Cost of materials and energy 17 775 22 657 -21.55 (electricity, headenergy, fuels, water; without main materials and impairment) /expenses BGN ‘000/ Costs for transport services 5 138 4 7218.83 Waste submitted for recylcing 337 t. 314 t. 7.3 Exhaust emissions into the atmosphere 0*0*0 Emissions to wastewater Waste water is treated in WWTP ** Employees trainings and inclusion in Instruction of employees; environmental protection activities Instructions for recovery and separate collection of waste; Instructions on how to deal with waste substances in the units; * The plants of Sopharma AD are certified according to Good Manufacturing Practices (GMP), which also controls the degree of environmental pollution. Emissions of waste gases are less than 50 tons per year, which according to the standards tends to 0. ** For years in the production in the factories of the company no organic substances are used for filming the tablets, which guarantees zero pollution of the wastewater. Projects related to responsible use of resources and environmental protection •Separate waste collection, minimization, utilization and recycling of production and municipal waste; •Providing regular training of personnel on environmental issues and pollution prevention; •Responsible implementation of the mandatory requirements, defined in the Waste Management Act (WMA) and payment of a product fee, according to the Ordinance on Packaging and Packaging Waste (WAO); •Reduction of printed advertising materials by 50% per year by 2025, by switching to digital content; •Emissions of waste gases in the atmospheric air from the Plant for solid dosage forms are measured annually; •Zero pollution of wastewater and the atmosphere, through the use of water film, instead of organic substances for filming the tablets in the production in the company's plants; •Measurement of the annual emissions of waste gases in the atmospheric air from the Phytochemical Plant and the Factory for Dosage Forms - emissions of waste gases are less than 50 tons per year, which according to the standards tends to 0. Employees The companies in Sopharma Group provide equal employment opportunities regardless of gender, age and education. All companies in the Group strictly follow basic principles such as: •Zero tolerance for any kind of discrimination in the workplace; •Ensuring healthy and safe working conditions; •Ensuring opportunities for development based on equality; •Ensuring the right of association and labor protection of employees. 10 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 As of 31 December 2023, the average number of employees of Sopharma Group is 4 721 (compared to 4 764 in 2022). The average number of employees of “Sopharma” AD as of 31 December 2023 is 1 720 (1 760 in 2022) and of “Sopharma Trading” AD is 760 (compared to 776 in 2022). 3.Organizational structure Sopharma Group (the Group) is a leading Bulgarian manufacturer, exporter and distributor of pharmaceutical products with a strong presence in Eastern and Southeastern Europe. The group includes a parent company and its seventy-seven (31 December 2022: seventy-eight) subsidiaries. In addition, the Group has investments in two associate and one joint venture (31 December 2022: in two associate and in one joint). “Sopharma” AD, the parent company, is a commercial enterprise, registered in Bulgaria under the Provisions of the Commercial Law, with its registered office in Sofia, 16, Iliensko shose str., established in 1933. Today “Sopharma” AD is a public company and is among the most successful Bulgarian companies after privatization, with ten consecutive years being among the top 10 in revenues in pharmaceutical sector in Bulgaria. ! Bulgarian)based)mother) company,)pharmaceutical) producer) API$production$ Pharmaceuticals$ Wholesale$and$ Non-pharma$activities$ production$$ distribution$ $ $ "Sopharma" AD, Bulgaria "Sopharma" AD, Bulgaria Group “Sopharma Trading” “Biopharm Engineering” AD, AD, Bulgaria and Serbia Sliven, Bulgaria Extraction of active ingredients Traditional products from herbal origin, Generic products Pre-wholesaling, wholesaling, Veterinary products, sterile retail production “Biopharm Engineering” AD, Subsidiaries in Ukraine, Bulgaria/PAO “Vitamini”, Kazakhstan, Poland and etc. Ukraine Generic products Wholesaling, retail 11 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 4. Products and services The Group operates in the following areas: • Production of pharmaceutical products including medicines, primarily generics, herbal-based substances (phytochemical production); food supplements; infusion solutions; hemodialysis concentrates. • Production of medicinal products and medicinal cosmetics, as plasters, bandages and sanitary- hygene products focused on the production site in Sandanski city; • Distribution of pharmaceuticals, medical supplies, sanitary materials, vitamins, food supplements and cosmetics; • Production and distribution of non-pharmaceutical products, primarily medical supplies such as syringes and other disposables used in medicineand other complementary activities to the production of pharmaceutical products and distribution of pharmaceutical products. Production activity “Sopharma” AD and its manufacturing subsidiaries has nine manufacturing plants, conforming with EU Good Manufacturing Practices (GMP), which are located in Bulgaria, complied with EU Good Manufacturing Practices (GMP), a factory in the Ukraine, certified by local authorities and recognized in all CIS countries. The production activities of the Group are carried out and developed in the following areas: • production of pharmaceutical products; • substances and preparations based on plant raw materials (phytochemical production); • veterinary vaccines; • infusion solutions; • concentrates for hemodialysis; • medical disposable products for human and veterinary medicine; • injection molded products for the industry, agriculture and households. “Sopharma” АD The Company has more than 200 products in its portfolio: incl. nearly 190 medicinal products and 11 groups of medical devices. Medicinal products mainly include generics and 15 traditional products, 12 of which are plant-based. The traditional products of the Group (and in particular Tabex, Carsil and Tempalgin) have a major share to its export market income, while the company's generic products are of major importance for domestic sales, Analgin being the leader among these products. The product portfolio of “Sopharma” AD focuses on the following therapeutic areas: cardiology, gastroenterology, pain management, cough and cold, immunology and dermatology, respiratory tract and asthma, neurology and psychiatry, urology and gynecology, nephrology, surgery, orthopedics and traumatology. At the production site in the city of Sliven, the Group has modern production units and is constantly expanding and modernizing its production facilities, which gives the technological advantages of the products in the following areas: • Manufacturing of infusion solutions; • Manufacturing of injection solutions; • Manufacturing of veterinary medical products and immunological preparations; The produced infusion solutions are marketed through “Sopharma” AD on both the Bulgarian and the international markets. Veterinary medical products are offered in Bulgaria and other European countries. 12 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 PAO “Vitamins”, Ukraine PAO “Vitamins” manufactures and sells medicines, tablets, powders, oil solutions, syrups and tinctures. Production of medicines by PAO “VitaminS” is highly effective, with excellent quality, affordable prices and is sold successfully not only in Ukraine, but also in other CIS countries. Currently, production is carried out in the following production areas: • liquid medicinal forms; • Two production areas for solid dosage forms; • Production site for extraction; • Tincture production; • Production of solutions; • Production of powdered products Distribution “Sopharma Trading” AD is the exclusive distributor on the Bulgarian market of particular pharmaceutical products of several leading international pharmaceutical and other companies in the field of healthcare. In the general pharmaceutical market, Sopharma Trading AD achieves a market share of 21.42% according to IQVIA data for 2023. Within the two market segments, the company's share in value is 18.61% for the pharmacy market and 28.55% for the hospital market. Services provided: In accordance with its market positioning, the company offers its customers: • A variety of over 15,000 pharmaceutical items, including medicinal products, medical consumables, sanitary and hygiene materials, vitamins, nutritional supplements, cosmetics, medical equipment and equipment, a portfolio of internationally established exclusive brands. • Complete solutions for the hospital market - in addition to a distribution service for the delivery of all products, part of the company's portfolio also includes turnkey solutions for the construction of medical and hospital facilities. • 100% national coverage of the territory of Bulgaria and access to any point of the country within 4 hours, thanks to its modern warehouse bases in 2 key cities - Sofia and Varna. • Quality distribution service through our own car fleet of over 100 vehicles and the ability for products to reach over 3,500 customers quickly and easily. • Comprehensive logistics solutions for import, storage and distribution of goods to end customers. • Marketing and advertising services for the imposition of products on the Bulgarian market, production of local and international companies. • “Sopharma Trading” AD imposes and markets its portfolio of exclusive brands on the Bulgarian market. In its activity, “Sopharma Trading” AD follows the highest standards for Good Distribution Practice. Since its establishment, “Sopharma Trading” has continuously invested in the development of its logistics potential. In 2023, “Sopharma Trading” AD has 100% national logistics coverage in Bulgaria. Owned and leased warehouse areas in Bulgaria include 18,276 sq.m., have 14,761 pallet spaces and 10 cold storage rooms with an area of 536 sq.m. In 2015, the company introduced its own SOpharmacy pharmacy retail concept to the Bulgarian market, introducing the best global practices to the local market and providing an innovative approach in serving the health needs of Bulgarian patients. 13 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 SOpharmacy's mission is to become a trusted partner in health care for life. III.Strategy for corporate social responsibility! 1. Definition Sopharma Group has an active and crucial role in raising living standards and human health. The policy of Sopharma Group expresses the views and commitments for the future development and improvement of the business by maintaining high quality products and services, protecting the environment, ensuring healthy and safe working conditions, security of information and responsible corporate behavior of companies to stakeholders - investors, partners and end users. Economic and financial indicators are proof of the success of the business model, complemented by adequate CSR policies, confirming the Group's reputation. The companies in the Group are working to achieve the UN SDG 2015. CSR policies and initiatives are set up in accordance with important stakeholder topics, approved by the Key Management Personnel and reported to shareholders mainly through the Annual Reports and General Meetings. Sopharma Group actively communicates with all stakeholders through the appropriate channels. Policies and specific projects are targeted in four main areas: Markets The group is represented in more than 45 countries, with key markets being Bulgaria, Russia, Ukraine, Kazakhstan and Poland. The strategic plan focuses on expanding the presence in the region. The Group's sales revenue increased by BGN 212.3 million or 12.8%, reaching BGN 1,875.3 million in 2023 compared to BGN 1,663 million in 2022. Sales of goods increased by 176 .6 million BGN or 12.8%, reaching BGN 1,555.8 million in 2023 compared to BGN 1,379.1 million in 2022. Sales of finished products increased by BGN 35.7 million or 12.6%, reaching BGN 319.6 million in 2023 compared to BGN 283.9 million in 2022. Stakeholders For the Sopharma Group, a stakeholder is any group that is directly or indirectly related to the Group's activities, has the potential to influence it and can influence the decision-making process for its business development. Stakeholder relationships are a indicator of the success rate of the Group, its place in the economic and social life of the country, and the correct direction of development. 14 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 The Group maintains a continuous open dialogue with all interested parties through various communication channels depending on the target group: the official website of the group www.sopharmagroup.com, the corporate media of individual companies, official announcements, meetings with investors, social networks, conferences, formu and seminars. • Patients and end users: daily through product sites, official sites of group companies; group site www.sopharmagroup.com; company profiles and their social networking brands; • Shareholders: General Meetings of Shareholders; notifications; meetings; official corporate sites; the Group's site; annual reports; • Government and local authorities: participation in annual meetings of the business; roundtables, discussion forums dedicated to the pharmaceutical sector; official sites of the state and local authorities, control bodies; official corporate media. • Partners in the chain: software solutions for pharmacies and consultancy services; free edition for „Sopharma Trading“ AD customers - "Pharma Premium", intended for owners and pharmacists of pharmacies; sites of the companies in the group. • Employees: intranet page; social networking company profiles; corporate sites; site of the Group. Sopharma Group companies value their employees as their most valuable asset and work towards employer branding. The group encourages employees to continuously learn by providing them with various opportunities for this: trainings, conferences and seminars to increase competence. In the process of implementation are new electronic platforms for training and improving the qualifications of employees in the companies of the Group, which can be accessed at any time from office devices. Investments in learning foreign languages during working hours. All mandatory training and refresher courses are conducted according to the legislation for a certain type of qualification for the high-quality and safe performance of official duties. Workers and employees are entitled to higher additional remuneration required by applicable law for overtime, night shifts and work on Saturdays, Sundays and holidays. Employees who work in specific, harmful or dangerous conditions receive personal protective equipment and allowances. Companies in the Sopharma Group implement different policies aimed at employees, depending on the topics that are relevant 15 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 to the employees of the particular company, which differ due to the specifics of the country in which they operate, as well as the activities of the companies. Environment Sopharma Group upholds and complies with commitments in accordance with national and European legislation in the field of environmental protection. “Sopharma Trading” AD maintains a certified Environmental Management System according to the requirements of ISO 14001: 2015. In parallel with the statutory and certified environmental protection measures, employees from different Group companies are involved in environmental projects. The offices of companies are located in "smart" buildings, such as Sopharma Warsaw, which is housed in a business center with The Leadership in Energy & Environmental Design, with energy saving systems, rainwater use, roofing of bees and Sopharma's office at Sopharma Business Towers, Sofia, whose lifts produce electricity, and the façade is designed to allow a maximum amount of daylight. Employees in the Towers also enjoy the green roof, the "smart" heating/cooling control and the light in the buildings. Society The companies in Sopharma Group are committed to society, and in order to achieve maximum impact, various projects are implemented together with partner organizations and other companies. Corporate responsibility and strategic management Market Employees Environment Society Corporate Citizenship Transparent Zero discrimination Environmental Contribution to Anticorruption corporate regarding the right management economic governance to work, sex systems development Guaranteed Guaranteeing the Reducing the Development of the Work on SDG 2015 quality and right of association environmental healthcare system safety of imprint products and services Resistance Employee Responsible use of Disease prevention Participation in the development: resources and maintaining good development and hierarchically and health implementation of as a qualification international and education standards related to pharmacy Ethical Decent pay for Reduction of direct Providing affordable Working with competition work impact and quality treatment partner organizations Responsible Ensuring health and Reducing indirect Investments in Joint projects of Marketing safety at work impacts education organizations where 16 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 members of the Group are members Responsible Social benefits for Participation in Investments in public Development of the supply employees environmental communications generics industry in projects the country Development of Internal Training of the field of communication employees pharmacy Responsible choice and Transparency Transparent and responsible business is the only way to build a sustainable reputation and to empower the society. In the business strategy of “Sopharma” AD there is zero tolerance for any kind of corruption, employees are expected and required not only to act in a ethical manner, but also to combat corruption. We actively interact with all levels of government in our stakeholders and therefore have a responsibility to openly express our position of a corporate citizen. 2. CSR management Corporate Responsibility is embedded in the Group's mission, vision, and strategy for development and corporate governance documents for the companies. Organizational CSR is the subject of the corporate responsibility, investor relations, marketing, human resources, ecology. 3. Membership For the adequate creation and implementation of sustainable development policies, Sopharma Group works with partner organizations such as CEIBG, BMGD, BCAUSE Foundation, Bulgarian Public Relations Association, European Association of Communication Directors, Association of Investor Relations Directors and others. The companies in Sopharma Group are members of various organizations and associations: • Confederation of Employers and Industrialists in Bulgaria (CEIB). http://krib.bg/ • The German-Bulgarian Chamber of Commerce and Industry (GBITC), which connects the German and Bulgarian economies with more than 450 German, Bulgarian and international companies. http://bulgarien.ahk.de/bg/ • The Bulgarian Generic Pharmaceutical Association (BGFARMA) whose priorities are to harmonize the interests with regard to the common national and international mechanisms regulating the production and use of medicines, to improve the application of the principles of Good Manufacturing Practice and to observe the principles of fair competition. http://www.bgpharma.bg • The Bulgarian National Committee of the International Chamber of Commerce, accepted as a full member of the International Chamber of Commerce (ICC). ICC is the most prestigious organization in the field of international trade and international economic relations that promotes cross-border trade and investment. http://www.icc-bulgaria.bg • The National Commission on Corporate Governance, established for the purpose of promoting the implementation of good corporate governance practices and the development of the Bulgarian National Code 17 Non-financial declaration to the annual consolidated financial statements of Sopharma Group on the requirements of Art. 48-52 of the Accountancy Act - 2023 of Corporate Governance (the Code). The Commission is a permanent independent body set up under the auspices of the Bulgarian Stock Exchange (BSE) and the Financial Supervision Commission (FSC), with the support of the World Bank and the International Financial Corporation (IFC) www.nkku.bg • The Bulgarian UN Global Compact Network http://www.unglobalcompact.bg o As an active member of BMGD, Sopharma is working towards the achievement of the UN sustainable development goals adopted in 2015. • Bulgarian Association of Medicines Wholesalers (“Sopharma Trading” AD) – The mission of the Association is to ensure fair and transparent medicines delivery and provision of services in the pharmaceutical sector in Bulgaria. It protects the branch interests and rights of its members before state authorities, institutions and producers - www.batel.bg • Genezis (“Sopharma Trading” Serbia) – The Genezis Association brings together generic manufacturers of generic medicines and holders of a marketing authorization in the Republic of Serbia - www.genezis.rs • The Serbian Association of Medicines Wholesalers - The mission of the association is to ensure fair and transparent medicines delivery and service provision in the pharmaceutical sector. It protects the branch interests and rights of its members before state authorities, institutions and producers. • Member of the National Alliance for Local Economic Development NALED Serbia Independent, non- financial and non-party organization of companies, municipalities and civil organizations working together to create better working and living conditions in Serbia. • MediReg Pharmaceutical Consulting – supports the efficient launch of new products in the Polish market and ensures regulatory compatibility and pharmacovigilance. • The "FARMACJA POLSKA" " Chamber of Commerce. Digitally signed Ognian by Ognian Ivanov Ivanov Donev Date: 2024.04.24 Donev 17:45:30 +03'00' 24 April 2024 Ognian Donev, PhD Executive Director 18 DECLARATION under art. 100о, par. 4, item. 3 of the Public Offering of Securities Act We, the undersigned Ognian Ivanov Donev, in the capacity of Executive Director, Boris Anchev Borisov, in the capacity of Financial Director, and Lyudmila Krumova Bondzhova in the capacity as Preparer of the Annual Consolidated Financial statements of Sopharma AD, UIC 831902088, entered in the Commercial Register of Sofia City Court under company case № 9359/1991, with seat and address of management: Sofia, Nadezhda district, 16 Iliensko shose Str., DECLARE that to our knowledge: 1. The Annual Consolidated Financial statements for 2023, prepared in accordance with the applicable accounting standards, reflect a true and fair view of the assets and liabilities, financial position and profit of Sopharma AD and the companies, included in the consolidation. 2. The Annual Consolidated Management report for 2023 contains a fair presentation of the development and operating results of Sopharma AD, as well as the state of the companies, included in the consolidation, as well as a description of the main risks and uncertainties, which they are facing. 24 April 2024 DECLARANTS: Digitally signed Ognian Sofia by Ognian Ivanov Ivanov Donev Date: 2024.04.24 Donev 17:44:41 +03'00' ......................................... /Ognian Donev/ Digitally signed by Boris Anchev Boris Anchev Borisov Date: 2024.04.24 Borisov 17:53:12 +03'00' ......................................... /Boris Borisov/ Digitally signed by LYUDMILA LYUDMILA KRUMOVA KRUMOVA BONDZHOVA Date: 2024.04.24 BONDZHOVA 17:58:16 +03'00' ......................................... /Lyudmila Bondzhova/ 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 INDEPENDENT AUDITORS’ REPORT To the Shareholders of Sopharma AD REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Opinion We have audited the accompanying consolidated financial statements of Sopharma AD (“the Group”), which comprise the consolidated statement of financial position as at December 31, 2023, and the consolidated statement of comprehensive income, the consolidated statement of changes in equity and the consolidated statement of cash flows for the year then ended, and notes to the consolidated financial statements, including material accounting policies. In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the financial position of the Group as at December 31, 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 consolidated financial statements section of our report. We are independent of the Group in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code) together with the ethical requirements of the Independent Financial Audit Act (IFAA) that are relevant to our audit of the consolidated financial statements in Bulgaria, and we have fulfilled our other ethical responsibilities in accordance with the IESBA Code and the requirements of IFAA. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. 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. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a consolidated opinion on these matters. Key audit matter How our audit addressed the key audit matter Valuation of trade receivables, receivables In this area our audit procedures performed from related parties and loans granted to third are: parties As disclosed in Notes № 21, 22, 24, 25 and 26 to • We have obtained understanding of the the consolidated financial statements, as of process for the application of IFRS 9, 31.12.2023 the Group has gross trade receivables, with focus on implemented methodology receivables from related parties and loans granted in Groups model for determination of to third parties amounting to BGN 344,020 impairment allowance for credit losses, thousand and impairment loss allowances including the use of key assumptions and amounting to BGN 11,341 thousand. estimates. The Group has applied IFRS 9 “Financial • Inquiries, walkthroughs and obtaining of instruments”, according to which credit losses are understanding of the process, related to determined based on expected credit losses. determination of credit losses for trade receivables, receivables from related The application of the model for determination of parties, and loans granted to third parties. the allowance for credit losses for trade receivables, receivables from related parties and • Assessment and test of design and loans granted to third parties, result in significant operating effectiveness of key controls in complexity and the necessity of key estimates and the process of monitoring and judgements for the Managements final determination of the amount of calculations related to identification of doubtful impairment allowance for credit losses. exposures as well as determination of the amount of credit losses. • Review and assessment of the adequacy To determine the amount of impairment loss of the methodology used by the Group allowance for credit losses, the Group applies for the purposes of identification of credit model based on significant estimates and losses and calculation of impairment loss judgements in: allowance in accordance with the concept and the requirements of IFRS 9. • Interpretation of the requirements for determination of impairment loss • Analysis and assessment of the allowance in accordance with IFRS 9, justification and appropriateness of which is based on the Groups model for calculations for the indicators of determination and calculation of the “probability of default” and “loss given expected credit losses; default” through inspection of the Key audit matter How our audit addressed the key audit matter • Calculation and interpretation of key assumptions used and the output data, as indicators as “probability of default”, “loss well as the approach for inclusion of given default” and “exposure at default”; prospective information in the models. • Assumptions and estimates in a number of scenarios for estimated future cash flows, • Assessment of the completeness, based on past events, current conditions appropriateness and adequacy of the and future economic forecasts; disclosures in the Group’s consolidated • Assumptions, used by Management in the financial statements with regard to credit review of individually significant risk and impairment allowance for credit exposures, related to recent losses, number losses for trade receivables, receivables of probable scenarios for future cash flows from related parties and loan granted to and the results of these scenarios and third parties. future collectability. Because of the significance of the above stated circumstances: a) material amount of trade receivables, receivables from related parties and loans granted to third parties as captions in the consolidated financial statements of the Group and, b) inherent level of uncertainty in the use of multiple estimates and judgements by the management of the Group for the specific calculation of the amount of credit losses, related to trade receivables, receivables from related parties and loans granted to third parties in accordance with the implemented model, resulting from the application of IFRS 9, we have determined this matter as key audit matter. Information Other than the consolidated financial statements and Auditors’ Report Thereon The Management Board of the Group (“the Management”) is responsible for the other information. The other information comprises of the annual consolidated report on activities, corporate governance statement and the consolidated non-financial declaration, prepared by the management in accordance with Chapter Seven of the Accountancy Act, but does not include the consolidated financial statements and our auditors’ report thereon, which we received prior to the date of our auditor’s report. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon, unless it is not specifically stated in our auditors’ report and to the extent it is specifically stated. In connection with our audit of the consolidated financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of Management and Those Charged with Governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with IFRS as adopted by the EU, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so. The Audit Committee (“Those charged with governance”) are responsible for overseeing the Group’s financial reporting process. Auditors’ Responsibilities for the Audit of the consolidated financial statements Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: • Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. • Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group's internal control. • Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. • Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors’ report to the related disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors’ report. However, future events or conditions may cause the Group to cease to continue as a going concern. • Evaluate the overall presentation, structure and content of the consolidated financial statements, including the disclosures, and whether the consolidated financial statements represent the underlying transactions and events in a manner that achieves fair presentation. • Receive adequate and relevant audit evidence regarding the financial information of the companies part of the Group in order to express an opinion on the consolidated financial statements. We bear responsibility for the instruction, supervision and execution of the audit of the consolidated financial statements. We bear the ultimate responsibility for our audit opinion. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding independence, and will communicate with them all relationships and other matters that may reasonably be thought to bear on our independence, and where applicable, related safeguards. From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of such communication. REPORT ON OTHER LEGAL AND REGULATORY REQUIREMENTS Additional matters, required to be reported by the Accountancy Act and Public Offering of Securities Act In addition to our reporting responsibilities according to ISAs described in section “Information Other than the consolidated financial statements and Auditors’ Report Thereon”, with respect to the annual consolidated report on activities, the corporate governance statement and the consolidated non- financial declaration, we have also performed the procedures required by the Guidelines related to new extended audit reports and communication from the auditors of the Professional Organization of Registered Auditors in Bulgaria - Institute of Certified Public Accountants. These procedures include tests over the existence, form and content of the other information in order to assist us in forming an opinion as to whether the other information includes the disclosures and reporting as required by Chapter Seven of the Accountancy Act and the Public Offering of Securities Act (art. 100m, para 10 of POSA in relation to art. 100m, para 8, p. 3 and 4 of POSA), applicable in Bulgaria. Opinion under Article 37, paragraph 6 of the Accountancy Act Based on the procedures performed, in our opinion: • The information included in the annual consolidated report on the activities for the financial year for which the consolidated financial statements have been prepared, is consistent with the consolidated financial statements. • The consolidated report on the activities has been prepared in accordance with the requirements of Chapter Seven of the Accountancy Act and of Art. 100m, paragraph 7 of the Public Offering of Securities Act. • The information required by Chapter Seven of the Accountancy Act and Art. 100m, para 8 of the Public Offering of Securities Act is presented in the corporate governance statement covering the financial year for which the consolidated financial statements have been prepared. • The consolidated non-financial Declaration, covering the financial year for which the consolidated financial statements have been prepared, has been provided and prepared in accordance with the requirements of Chapter Seven of the Accountancy Act. Opinion under Art. 100m, para 10 in relation to art. 100m, para 8, p. 3 and 4 of the Public Offering of Securities Act Based on the procedures performed and as a result of the acquired knowledge and understanding of the entity and the environment in which it operates, acquired during our audit, in our opinion, the description of the main features of the entity’s internal control and risk management systems in relation to the financial reporting process as part of the annual report on activities (as element of the content of the corporate governance statement) and the information under Article 10, paragraph 1, letter "c", "d", "f", "h" and "i" of the Directive 2004/25/EC of the European Parliament and of the EU Council of April 21, 2004 related to takeover bids, included in the corporate governance statement do not contain cases of material misrepresentations. Additional Reporting on the audit of the consolidated financial statements under Art. 100m, para 4, p.3 of the Public Offering of Securities Act Reporting under Art. 100m, para 4, p.3 b) “b” of the Public Offering of Securities Act The information on transactions with related parties is disclosed in Note 48 to the consolidated financial statements. Based on the audit procedures performed on the transactions with related parties, we have not identified any facts or other information, based on which we could conclude that the transactions with related parties are not disclosed in the attached financial statements, in all material aspects, in accordance with the requirements of IAS 24 Disclosure of related parties. The results of our audit procedures regarding transactions with related parties are considered in the context of forming our audit report on the consolidated financial statements taken as a whole, and not with the purpose of expressing the audit opinion on transactions with related parties. Reporting under Art. 100m, para 4, p.3 b) “c” of the Public Offering of Securities Act Our responsibilities for the audit of the consolidated financial statements as a whole, described in the section Auditors’ Responsibilities for the Audit of the consolidated financial statements include assessment whether the consolidated financial statements presents true and fair view of material transactions and events. Based on the audit procedures performed on the material transactions, underlying the consolidated financial statements for the year ended 31 December 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 consolidated financial statements in accordance with the requirements of IFRS, adopted by EU. The results of our audit procedures on the material transactions and events related to the Group are considered in the context of forming our audit report on the consolidated financial statements taken as a whole, and not with the purpose of expressing the audit opinion on these material transactions. Reporting on compliance of the electronic format of the consolidated financial statements, included in the annual consolidated financial statements according to art. 100m, para 4 of the Public Offering of Securities Act with the requirements of the ESEF Regulation We have conducted engagement to express reasonable assurance regarding the compliance of the electronic format of the consolidated financial statements of Sopharma AD for the year ended 31 December 2023, in the attached electronic file “097900BGGW0000048796-20231231-EN-CON.zip", with the requirements of Commission Delegated Regulation (EU) 2018/815 of 17 December 2018 supplementing Directive 2004/109/EC of the European Parliament and of the Council with regard to regulatory technical standards on the specification of a single electronic reporting format (“Regulation ESEF”). Our conclusion is only regarding the electronic format of the consolidated financial statements and does not cover the other information included in the annual consolidated financial statements for the activity under Art. 100m, para. 5 of the POSA. Description of a subject matter and applicable criteria The management has prepared the electronic format of the consolidated financial statements of the Group for the year ended 31 December 2023 under the ESEF Regulation in order to comply with the requirements of the POSA. The requirements for the preparation of consolidated financial statements in this electronic format are contained in the ESEF Regulation and, in our view, have the characteristics of appropriate criteria for forming a reasonable assurance conclusion. Responsibilities of the management and those charged with governance The Group's management is responsible for applying the requirements of the ESEF Regulation when preparing the electronic format of the consolidated financial statements in XHTML. These responsibilities include the selection and application of appropriate iXBRL markups using the taxonomy of the ESEF Regulation, as well as the design and implementation of such internal control system that management determines necessary to prepare the electronic format of the Group's annual consolidated financial statements that does not contain material non-compliance with the requirements of the ESEF Regulation. Those charged with governance are responsible for overseeing the process for preparation the Group's annual consolidated financial statements, including the application of the ESEF Regulation. Auditor's responsibilities Our responsibility is to express a reasonable assurance conclusion as to whether the electronic format of the consolidated financial statements is in compliance with the requirements of the ESEF Regulation. For this purpose, we have complied with the „Guidelines related to issuing of audit opinion in relation to the application of the European single electronic format (ESEF) for the financial statements of entities, which shares are traded on a regulated market in the European union (EU)” of the Professional Organization of Registered Auditors in Bulgaria - Institute of Certified Public Accountants and we have conducted an engagement to express reasonable assurance in accordance with ISAE 3000 (revised) “Assurance Engagements Other than Audits or Reviews of Historical Financial Information" (ISAE 3000 (revised)). This standard requires us to comply with ethical requirements, plan and perform appropriate procedures to obtain reasonable assurance whether the electronic format of the Group's consolidated financial statements has been prepared, in all material respects, in accordance with the applicable criteria mentioned above. The nature, timing and scope of the selected procedures depend on our professional judgment, including the assessment of the risk of material non-compliance with the requirements of the ESEF Regulation, whether due to fraud or error. A reasonable assurance is a high level of assurance, but it does not guarantee that an engagement performed in accordance with ISAE 3000 (revised) will always detect material non-compliance, when such exist. Quality management requirements We apply the requirements of the International Standard on Quality Management (ISQM) 1, which requires development, implementation and maintenance of system for quality management, including policies or procedures regarding compliance with ethical requirements, professional standards and applicable legal and regulatory requirements for registered auditors in Bulgaria. We comply with the ethical and independence requirements of the International Code of Ethics for Professional Accountants (including International Standards of Independence) of the International Ethics Standards Board for Accountants (IESBA Code), adopted by ICPA through the IFAA. Summary of the work performed The purpose of the procedures planned and performed by us was to obtain a reasonable assurance that the electronic format of the consolidated financial statements has been prepared, in all material respects in accordance with the requirements of the ESEF Regulation. As part of our assessment of compliance with the ESEF Regulation's electronic (XHTML) format for reporting on the Group's consolidated accounts, we maintained professional skepticism and used professional judgment. We also: - obtained understanding of the internal control and the processes related to the application of the ESEF Regulation regarding the consolidated financial statements of the Group and including the preparation of the consolidated financial statements of the Group in XHTML format and its marking up in machine readable language (iXBRL); - checked if the applied XHTML format is valid; - checked whether the human readable part of the electronic format of the consolidated financial statements corresponds to the audited consolidated financial statements; - assessed the completeness of the marking up in the consolidated financial statements of the Group using the machine-readable language (iXBRL) in accordance with the requirements of the ESEF Regulation; - assessed the appropriateness of the iXBRL markups selected from the main taxonomy used, as well as the creation of an extended taxonomy element in accordance with the ESEF Regulation where an appropriate element in the main taxonomy is missing; - assessed the appropriateness of anchoring of the elements of the extended taxonomy in accordance with the ESEF Regulation. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our conclusion. Conclusion on the compliance of the electronic format of the consolidated financial statements with the requirements of the ESEF Regulation In our opinion, based on the procedures performed, the electronic format of the consolidated financial statements of the Group for the year ended 31 December 2023, contained in the attached electronic file “097900BGGW0000048796-20231231-EN-CON.zip", has been prepared in all material respects in accordance with the requirements of the ESEF Regulation. Reporting in accordance with Art. 10 of Regulation (EU) No 537/2014 in connection with the requirements of Art. 59 of the Independent Financial Audit Act In accordance with the requirements of the Independent Financial Audit Act in connection with Art. 10 of Regulation (EU) No 537/2014, we hereby additionally report the information stated below. • Baker Tilly Klitou and Partners EOOD were appointed as statutory auditors of the consolidated financial statements of the Group for the year ended December 31, 2023 by the general meeting of shareholders held on June 2, 2023 for a period of one year. • The audit of the consolidated financial statements of the Group for the year ended December 31, 2023 represents seventh statutory uninterrupted audit engagement for that entity carried out by Baker Tilly Klitou and Partners EOOD. • We hereby confirm that the audit opinion expressed by us is consistent with the additional report provided to the Audit committee, in compliance with the requirements of Art. 60 of the Independent Financial Audit Act. • No prohibited non-audit services referred to in Art. 64 of the Independent Financial Audit Act were provided. • We hereby confirm that in conducting the audit we have remained independent of the Group. • We hereby confirm that we have not provided services to the Group, other than the audit services, for the period related to consolidated financial statements for 2023. Audit company №129 Baker Tilly Klitou and Partners EOOD Digitally signed Digitally signed by IVAYLO by IVAYLO Galina Galina Dimitrova YANCHEV YANCHEV Dimitrova Lokmadjieva- YANCHEV Nedkova Date: 2024.04.25 Lokmadjieva- YANCHEV 11:54:50 +03'00' Date: 2024.04.25 Nedkova 11:58:10 +03'00' Ivaylo Yanchev Galina Lokmadjieva - Nedkova Registered auditor, responsible for the audit Managing Director April 25, 2024 Baker Tilly Klitou and Partners EOOD 5, Stara Planina Str., 5th floor 1000 Sofia, Bulgaria TO SHAREHOLDERS OF SOPHARMA AD DECLARATION Art. 100m, para 4, item 3 from Public Offering of Securities Act The undersigned: Ivaylo Yanchev Yanchev, in the capacity of Registered auditor of Baker Tilly Klitou and Partners EOOD, with UIC 131349346, with headquarters and management address: 5, Stara Planina Str.,5, floor 5, Sofia, 1000 and address for correspondence: Sofia, 1000, 5, Stara Planina Str., 5, floor 5, declare that: Baker Tilly Klitou and Partners EOOD was committed to carry out a mandatory financial audit of the consolidated financial statements of Sopharma AD for the year 2023, compiled in accordance with the International Financial Reporting Standard adopted by the EU, a generally accepted name of the accounting base defined in paragraph 8 of the Supplementary part of the Accounting Act under the name "International Accounting Standards". As a result of our audit, we issued an audit report on April 25, 2024. We hereby certify that as reported in our audit report on the annual consolidated financial statement of Sopharma AD for 2023 issued on April 25, 2024: 1. Art. 100m, para. 4, item 3, letter "a" Audit opinion: In our opinion, the accompanying consolidated financial statements give a true and fair view of the financial position of the Group as at 31 December 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 48 to the consolidated financial statements. Based on the audit procedures we performed on related party transactions as part of our audit of the consolidated financial statements as a whole, we have not become aware of the fact, circumstances or other information on the basis of which we may conclude that related party transactions are not disclosed in the accompanying consolidated financial statements for the year ended 31 December 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 consolidated financial statements as a whole, rather than in order to express a separate opinion on related party transactions. 3. Art. 100m, para. 4, item 3, letter "c" Information relating to material transactions. Our audit responsibilities for the financial statements as a whole described in the section of our report "Auditor's Responsibilities for the Audit of the Consolidated Financial Statements" include assessing whether the consolidated financial statements present the material transactions and events in a manner that delivers credible performance. Based on the audit procedures we performed on the material transactions underlying the consolidated financial statements for the year ended 31 December 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. 1 The results of our audit procedures on the Group's transactions and events that are material to the Group's financial statements are reviewed by us in the context of our opinion on the consolidated financial statements as a whole and not for the purpose of obtaining a separate opinion on these material transactions. The representations made by this declaration should be considered only in the context of our audit report as a result of the independent financial audit of the consolidated annual financial statements of SOPHARMA AD for the reporting period ending 31 December 2023, dated 25 April 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 25 April 2024 regarding the issues covered by Art. 100m, para. 4, item 3 of POSA. Baker Tilly Klitou and Partners EOOD: Digitally signed by IVAYLO IVAYLO YANCHEV YANCHEV YANCHEV Date: 2024.04.25 YANCHEV 12:02:45 +03'00' ____ Ivaylo Yanchev Registered auditor 25 April 2024 Sofia 2
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