Hili Properties p.l.c.

Report & Financial Statements

31 December 2022

1

2

Chairman’s Statement

It gives me great pleasure to report that 2022 was another successful year for Hili Properties p.l.c.

After the Initial Public Offering of November 2021, the Company focussed its efforts on the acquisition of new assets, the improvement of our existing ones, and the maximization of existing and new revenues. This was done whilst delivering real value to our tenants, thus ensuring long-term stability.

As planned, we have continued to progress in our strategic objective which remains the acquisition and management of diversified low-risk real-estate assets, to provide stable returns to shareholders through long-term contracted cash flows and asset appreciation.

During 2022, we have increased diversification by completing acquisitions across various asset classes. We have expanded our footprint in our existing markets, by investing in 2 high-quality properties which now generate strong returns for the company. This was achieved in a shorter timeframe than expected, allowing us to surpass the targets published in our IPO Forecast.

The year also presented several challenges. The initial 6 months were marked by the tail end of COVID, which continued to concern our tenants. We mitigated this through individual constant attention, and a strong focus on the long-term value of our customers. February was then marked by the invasion of Ukraine which prompted the subsequent growth of financial markets throughout the region. By the end of 2022, a high inflation was witnessed, and major central banks have increased interest rates as a countermeasure for inflation, consequently this adversely influenced the cost of borrowing to the group.  

Again, a close relationship with all stakeholders allowed us to maintain stable revenues and will prove of great value in 2023.

During 2022 the company’s portfolio grew from Eur124,627,723 to Eur232,298,000 – a growth of 86%. In order to provide timely and efficient decision making, frequent meetings as well as meeting of the Audit committee were required. Due importance was given to ensure that proper Governance was applied throughout.

Our strategic objectives remain unchanged as we navigate the challenges and opportunities that 2023 has brought. We recognize that sustainability as well as social responsibility is a critical component of our business, and we remain committed to promoting sustainable practices in all our operations.

I would like to take this opportunity to thank our shareholders for their continued support, our employees for their dedication and contribution, and our partners for their trust in our capabilities.

Pier Luca Demajo

26 ^th April 2023

3

Statement by the Managing Director

Overview

I am pleased to report that our company had a record performance in 2022, the first full year following our Initial Public Offering. We remained committed to our mission of investing in high-quality assets to generate attractive returns for our shareholders over the long term.

Throughout the year, we continued to focus on expanding our reach in key cities in Europe’s most exciting markets while maintaining our commitment to exceptional property management and customer service to all our tenants operating from our properties. Our teams worked tirelessly to ensure that we leave a positive impact on the communities in which our properties are based, and we were able to enhance our reputation as a trustworthy and reliable commercial real estate owner in the industry.

Financial Performance

In 2022, we generated a record Eur12.2 million in revenues – compared with around Eur8.2million over the previous year. The performance of our portfolio was very strong, resulting in EBITDA of around Eur8.4 million – compared with Eur4.8 million in 2021, while profit before tax reached to Eur6.8 million – compared with Eur3.7 million in 2021.

Portfolio

In the past year, we have seen steady growth in our portfolio of properties, with new acquisitions driving our overall success.

In January, we undertook the management of 19,000 square metres of industrial property in Lithuania that was acquired in end of 2021. It is developed in a 50,000 square metres land plot in Lithuania’s largest free economic zone and the property is leased to REHAU, a leading international provider of solutions to the construction, automotive and industrial industries and a member of the 50 Sustainability and Climate Leaders.

In March, a 7,863 square metres shopping centre was acquired in Riga, Latvia, built on 21,580 square metres of land. The property is situated in one of Riga’s most densely populated residential areas. A top-brand RIMI hypermarket as well as other successful retail operators operate from the shopping centre.

In April, we concluded the full 100% acquisition of 92,000 squares meters parcel of land comprising a number of sites at Benghajsa next to Malta Freeport.

In August, we acquired in Bucharest, Romania, our biggest asset to date, 75% of the MIRO, a newly built A Class mixed-use property developed in the Baneasa area, with approx. 23,000 square metre of leasable area spread out over 5 levels and with a 1,700 square metre outdoor plaza. The remaining 25% has been agreed to be acquired in 2024. MIRO hosts extensive list of reputable companies, such as KPMG Romania, Rovere, COS, Cegeka, Eaton, Neoclinique, Speedwell, Stradale/Mitzu, Jura and Hisky.

In parallel in 2022 we sold three of our real estate shopping centres in Riga, Latvia, in line with our strategy to optimise our portfolio, and introduce more sustainable properties. 

For another consecutive year all our properties have been revalued by independent valuators recording a portfolio value of around Eur232million for our 22 investment properties.

Our ESG journey

We also made significant progress in our sustainability efforts, implementing new green technologies and initiatives that helped us contribute to a more sustainable future. Our company offices across the countries in which we operate are housed in sustainable buildings. Electric vehicle charging stations have been installed in our Malta head-office, while recycling stations were installed in our RIMI shopping centres in Latvia. Solar panel installations are currently underway in MIRO, Romania and our shopping centre DOLE in Latvia. In DOLE shopping centre we also developed and granted facilities to Youth Centre, a non-profit organisation providing emotional support to children aged up to 18 through individual, family, and group sessions with therapists, mentors, clinical psychologists and other specialists.

Our industrial property REHAU in Lithuania holds a BREEAM certification for its sustainability features while MIRO in Romania has achieved both BREEAM “Excellent” and WELL “Platinum” certifications. MIRO is one of the only 248 Platinum certifications issued worldwide and one of the first in Romania, verifying its high standards in employee health, well-being, job satisfaction, and engagement, as well as environmental protections.

Looking ahead

Looking ahead, we will put everything in place to continue building on our success and deliver value to our shareholders. Irrespective of the challenges that commercial real estate currently faces with rising interest rates that result in increased financing costs and affect value of the properties, we own a solid portfolio of property assets which provide strong cash flows.

Committed to our core values of integrity, care, ambition, innovation, and impact for good, we will continue to monitor market conditions and identify sales or acquisitions of assets that will build further resilience for our company, with a long-term view of delivering sustainable value to our shareholders.

I would like to thank our dedicated team of employees, whose hard work and commitment have been instrumental in our success. I would also like to express my gratitude to our shareholders and partners for their ongoing support and confidence in our company.

Georgios Kakouras

26 ^th April 2023

4

Directors' report

The directors present their report and the audited financial statements of the Hili Properties p.l.c. group and holding company for the year ended 31 December 2022.

Principal activities

The principal activity of the Hili Properties plc. group is to hold and rent immovable property. Hili Properties p.l.c. also acts as a holding company. The details of subsidiaries of the holding company are listed in note 20.

Performance review

2022 is the first full year for the group following the successful IPO issue in October 2021. As already stated in the Chairman’s and Statement by the Managing Director, the current year has significantly surpassed all expectations both in terms of results and also in terms of acquisitions made.

As a result, the current year group results significantly exceed the reported figures in the previous year. In fact, operating profit for the year ended December 2022 is almost double that reported in the previous year, reaching Eur8,399,022 as compared to Eur4,856,825 in the preceding year. The increase in profitability is attributable to the full year of operations of subsidiaries acquired in 2021 together with the results of our newly acquired subsidiaries in 2022.

In connection with the IPO listing of the group towards the end of 2021, the group has once again engaged external independent valuators for the assessment of all the investment properties in its portfolio. Following this valuation, the group registered net investment income of Eur3,041,205 (2021:  Eur2,124,055) .

The group registered a profit before tax from continuing operations of Eur6,798,302 (2021: Eur3,759,648 ). The net assets of the group at the end of 2022 amounted to Eur124,929,650 (2021: Eur110,880,921 ).

During 2022, the company registered a loss before tax of Eur2,369,104 (2021: profit before tax of Eur9,081,823 ). No dividends were paid in the current year by the subsidiaries to the company, explaining the significant movement in results.

The net assets of the company at the end of the year amounted to Eur91,845,836 (2021: Eur94,261,840 ).

Financial performance

The group measures the achievement of its objectives through the use of the following other key performance indicators:

The group measures its performance based on EBITDA, which is defined as the group’s profit before depreciation and amortisation, finance income/costs, net investment income/losses and taxation. The EBITDA for the year under review was Eur8,447,778 (representing 69% of revenues) as compared to Eur4,903,707(representing 60% of revenues) in the previous year. The increase in EBITDA in the current year arises primarily from EBITDA generated through the full year operation of the Lithuanian subsidiary acquired in December last year, together with acquisitions made in 2022.

Interest cover for the group is at 1.8 times in 2022 (2021: 1.4 times).

The gearing ratio of the group is monitored on an ongoing basis. The group’s gearing ratio, defined as total debt less cash divided by total equity, stands at 46% compared to 31% in the previous year.

Non-financial performance

With reference to our properties held for rental, occupancy was at 99% as of 31 December 2022 (2021: 99%). This refers to the ratio of leased investment properties in square meters to the total owned rental properties in square meters. The WALT (Weighted Average Lease Term) for the whole portfolio stands at 9.6 years (2021: 8.9 years).

Listing and IPO Issue in 2021

Hili Properties plc, as the parent company of the Hili Properties plc group, was successfully listed on the Malta Stock Exchange on the 26th of October 2021, with the first trading day of its ordinary shares being on 22 December 2021 (“IPO”).

The IPO has resulted in the listing of the Company’s equity and an increase of the issued share capital, with the total number of shares issued of 100,892,700. All shares of the Company are ordinary shares, with a nominal value of Eur0.20 each, and all have the same shareholders’ rights.

The authorised share capital of the Company was increased from Eur60,000,000 to Eur120,000,000 and the issued and called up share capital of the Company was increased from Eur40,400,000 to Eur60,000,000.

Result and dividends

The result for the year ended 31 December 2022 is shown in the statement of profit or loss and other comprehensive income on page 37. The group registered a profit after tax of Eur5,972,270 (2021: Eur3,169,199 ). The holding company registered a loss after tax of Eur2,416,005 (2021: profit after tax Eur8,371,462 ). No dividends were declared by the Company during the years ended 31 December 2022 and 2021.

Effects of Ukraine Conflict

The invasion of Ukraine by the Russian Federation just over a year ago has undermined the stability of Europe whilst adversely impacting food and energy security throughout the world. These stresses come just as economies are navigating their way out of the fiscal and demographic issues endemic to the Covid-19 pandemic. Although based on available insights to date, the Company and the Group are not expected to be directly negatively impacted by the ongoing invasion, the global inflation and interest rate risks associated with the conflict are liable to negatively impact the Company and the Group’s profitability and ability to finance.

Based on the available insights to date, the Company and the Group are not expected to be directly negatively impacted by the ongoing conflict in Ukraine, considering that the Company and the Group hold a portfolio of prime real estate assets.

The fact that all assets reside in NATO countries provides extra safeguards, however, management together with the directors, continue to actively monitor all developments taking place internationally in order to take any action that might be necessary in the eventuality that developments in the conflict, start to impact the company’s turnover and business activity.

Likely future business developments

The directors consider that the year-end financial position was satisfactory and that the group and the holding company are well placed to sustain the present level of activity in the foreseeable future.

Principal risks and uncertainties

Successful management of risk is essential to enable the group to achieve its objectives. The ultimate responsibility for risk management rests with the company’s directors, who evaluate the group’s risks on a regular basis and identify actions to prevent the risk or remediate the impact. The principal risks and uncertainties facing the group and the mitigating factors are included below:

Dependence on tenants

The Group is dependent on tenants fulfilling their obligations under their lease agreements. The business, revenue and projected profits of the Group would be negatively impacted if tenants failed to honour their respective lease obligations. There can be no assurance that the tenants will honour their obligations, for different reasons such as insolvency, market or economic downturns, operational failure or other reasons which are beyond the Group’s control. Such failure may negatively affect the financial condition of the Group.

The Group is subject to termination of lease agreements.

The Group is subject to the risk that tenants may terminate or elect not to renew their respective lease, either due to the expiration of the lease term or due to an early termination of the lease. In cases of early termination by tenants prior to the expiration of the lease term there is a risk of loss of rental income if the tenant is not replaced in a timely manner and/or on similar conditions which in turn could have a material negative effect on the Group’s results of operations.

The Group is subject to increases in operating and other expenses.

At present, operating expenses incurred by the Group are partially recharged to the tenants occupying the Group’s properties. Nonetheless, in future, the Group’s operating and other expenses could increase without a corresponding increase in revenue, especially provided the current inflationary environment surrounding the operations of the group.

The factors which could materially increase operating and other expenses include: (i) unforeseen increases in the costs of maintaining the property; and (ii) material increases in operating costs driven by inflation or other parameters that may not be fully recoverable from tenants.

The Group may be impacted by changes in laws and regulations.

Changes in laws and regulations relevant to the Group’s business and operations could have an adverse impact on the Group’s business and results of operations.

Market and competition

The Group is exposed to risks inherent in the commercial real estate market and particularly to changes in market conditions in the commercial real estate market in the Baltics, Romania, Malta and any other market where the Group might invest going forward. Such risks may lead to an oversupply of space or a reduction in tenant demand for a particular type of property. Risks inherent in the commercial real estate market may also have an impact on the quality of property available; the ability of the Group to maintain its service charges and other expenditure and to control the cost of these items; the Company being able to buy, sell, operate or lease existing or new properties on favourable terms; and/or the potential illiquidity of property investments, particularly in times of economic downturn. All of the aforesaid risks may have a material adverse impact on the revenues of the Company, its financial performance and its overall financial condition.

Cybersecurity risk

Failures or breaches of the electronic systems of the Company, its advisers and other service providers have the ability to cause disruptions, negatively impact the Company’s business operations and/or potentially result in financial losses to the Company. Irrespective of the business continuity plans and risk management systems in place that address system breaches or failures, there are inherent limitations in such plans and systems. Furthermore, the Company cannot control the cybersecurity plans and systems of any of the Company’s advisers and other service providers.

Fluctuations in property values

The Group is involved in the acquisition and disposal of immovable property. Property values are affected by and may fluctuate, inter alia, as a result of changing demand, changes in general economic conditions, changing supply within a particular area of competing space and attractiveness of real estate relative to other investment choices. The value of the Group’s property portfolios may also fluctuate as a result of other factors outside the Group’s control, such as changes in regulatory requirements and applicable laws (including in relation to taxation and planning), political conditions, the condition of financial markets, potentially adverse tax consequences, interest and inflation rate fluctuations and higher accounting and control expenses. The Group’s operating performance could be adversely affected by a downturn in the property market in terms of capital values.  

The valuation of property and property-related assets is inherently subjective. Moreover, all property valuations are made on the basis of assumptions which may not prove to reflect the true position. There is no assurance that the valuations of the properties and property-related assets will reflect actual market process.  

International exposure risk

The group operates in many countries with differing economic, social and political conditions. Changes in current conditions may adversely affect the tenant’s business performance, portfolio fair value, results of operations, financial conditions, or prospects. The group manages such risks by incorporating this risk into its business strategy, i.e., diversification in terms of geography as well as type of industries/sectors.

Real estate investments are illiquid.

As property is a relatively illiquid asset, such illiquidity may affect the Group’s ability to vary its portfolio or dispose of or liquidate part thereof in a timely manner and at satisfactory prices in response to changes in economic, banking, real estate market or other conditions or the exercise by tenants of their contractual rights such as those which enable them to vacate properties occupied by them prior to, or at, the expiration of the lease term. These factors could have an adverse effect on the Group’s financial condition and results.

Risks relating to the potential inability to conclude real estate investments, and/or sales.

The Group operates in a competitive environment and therefore the Company’s financial performance and future growth is partly dependent on the Group’s ability to acquire, sell and operate its assets on attractive and sustainable commercial terms. There can be no assurance that the Group will continue to be able to identify and acquire target assets on attractive commercial terms or even at all. Timing of deals is also critical, together with the ability to secure attractive financing. The above may have a material adverse impact on the Company’s future growth and prospects, as well as on its financial performance and its overall financial condition.

The Group’s level of debt

The Group’s ability to implement its respective business strategies is dependent upon, amongst other things, their ability to generate sufficient funds internally and to access continued financing at acceptable costs.

Issuer’s dependence on payments due from Subsidiaries may be affected by factors beyond the Issuer’s control

The Issuer is primarily a holding company and, as such, its assets consist primarily of loans granted to and investments held in Subsidiaries. Consequently, the Issuer is largely dependent on income derived from dividends from Subsidiaries and the receipt of interest and loan repayments from Subsidiaries. In this respect, the operating results of the Subsidiaries have a direct effect on the Issuer’s financial position and therefore the risks intrinsic in the business and operations of the Subsidiaries have a direct effect on the financial prospects of the Issuer.

The dividends, interest payments and loan repayments to be affected by Subsidiaries are subject to certain risks. More specifically, the ability of Subsidiaries to effect payments to the Issuer will depend on the cash flows and earnings of the Subsidiaries, which may be restricted by changes in applicable laws and regulations, by the terms of agreements to which they are or may become party, including the indenture governing their existing indebtedness, if any, or by other factors beyond the control of the Issuer

Significant judgement and estimates

Note 3 to the financial statements provides details in connection with the inherent uncertainties that surround the preparation of the financial statements which requires significant estimates and judgements.

Non-Financial Statement

Environmental matters

The group is committed to environmental responsibility, and all subsidiaries within the group has a role to play in living up to that commitment. Efforts are made in areas where the group can have significant impact on critical environmental issues, including climate change, natural resource conservation and waste management. The group invests in innovations that can improve our environmental footprint, besides collaborating with other organizations to raise environmental awareness and work with key suppliers to promote environmentally responsible practices in their operations.

Employee matters

The group provides opportunity, nurtures talent, develops leaders and rewards achievement. The group believes that a team of individuals with diverse backgrounds and experiences, working together in an environment that fosters respect and drives high levels of engagement, is essential to its continuing business success. Performance evaluation systems are employed across the group, using multistage training systems to monitor individual’s development, and set training requirements.

Each of the group’s employees deserves to be treated with fairness, respect, and dignity, providing equal opportunity for employees and applicants. All the group’s employees have the right to work in a place that is free from harassment, intimidation, or abuse, sexual or otherwise, or acts or threats of physical violence. It is committed to diversity and equal opportunities for everyone, respecting the unique attributes and perspectives of every employee, and rely on these diverse perspectives to help the group build and improve the relationships with customers and business partners. The group embraces the diversity of its employees, customers and business partners, and works hard to make sure everyone within the group feels welcome.

The group provides equal treatment and equal employment opportunity without regard to race, colour, religion, sex, age, national origin, disability, sexual orientation, gender identity or any other basis protected by law. In addition, it is committed to providing a safe and healthful working environment for its employees, requiring all employees to abide by safety rules and practices and to take the necessary precautions to protect themselves and their fellow employees. For everyone’s safety, employees must immediately report accidents and unsafe practices or conditions to their immediate supervisors.

Respect for human rights

The group conducts its activities in a manner that respects human rights, taking the responsibility seriously to act with due diligence to avoid infringing on the human rights of others and addressing any impact on human rights if they occur. The group’s commitment to respect human rights is defined in the code of business conduct, which applies to all employees of the group.

The group is committed to provide a safe work environment that fosters respect, fairness, and dignity.  Group employees are trained annually on the standard of business conduct.

Anti-corruption and bribery matters

The group’s employees must comply with the group Code of Conduct and Whistle-blower Policy to ensure that all employees are discouraged from any corrupt practices or bribery as well as are incentivized to report any such activities in a direct line with the responsible group supervisor, without fearing reprisals.  Every employee is introduced to these policies upon employment and are mandatory to be adhered to it.

The group prohibits all forms of bribery or kickbacks as detailed in the Code of Conduct. All employees, representatives and business partners must fully comply with anti-bribery legislation. To comply with the group policy and anti-bribery laws, no employee should ever offer, directly or indirectly, any form of gift, entertainment, or anything of value to any government official or his or her representatives.

The group is committed to complying with the applicable laws in all countries where it does business. It adopts a Global Anti-Corruption Policy which sets forth its commitment to ensuring that it carries out business in an ethical manner and abides by all applicable anti-bribery and anti-corruption laws in the countries in which it operates by, among other things, prohibiting the giving or receiving of improper payments in the conduct of the business, and by discouraging such behaviour by its business partners.

Post balance sheet events.

There were no post balance sheet events which merit mention in the directors’ report.

Auditors

Grant Thornton Malta have expressed their willingness to continue in office and a resolution for their reappointment will be proposed at the Annual General Meeting.

Directors

The directors that served during the period were

Pier Luca Demajo (Chairman)

Georgios Kakouras

David Aquilina

Peter Hili

Laragh Cassar

Eddy Vermeir

In accordance with the holding company’ articles of association, all directors are to remain at office.

Going Concern Statement Pursuant to Capital Markets Rule 5.62

As required by rule 5.62 upon reviewing the Group’s and Company’s performance and statement of financial position post to year end and also by reviewing in detail the Group’s and the Company’s budgets and forecasts, the directors confirm the Group’s and the Company’s ability to continue operating as a going concern in the foreseeable future.

Statement of Responsibility Pursuant to Capital Markets Rules5.68

The Directors declare that to the best of their knowledge, the financial statements included in the Annual Report are prepared in accordance with the requirements of International Financial Reporting Standards as adopted by the European Union and as amended from time to time and these statements give in all material aspects a true and fair view of the assets, liabilities, financial position and results of the Group and that this report includes a fair review of the development and performance of the business and position of the Group, together with a description of the principal risks and uncertainties that it faces.

Approved by the board of directors and signed on its behalf on 26 ^th April 2023 by Pier Luca Demajo (Chairman) and Georgios Kakouras (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.

5

Statement of directors' responsibilities

The directors are required by the Companies Act (Cap. 386) to prepare financial statements in accordance with generally accepted accounting principles and practices which give a true and fair view of the state of affairs of the company and its group at the end of each financial year and of the profit or loss of the company and its group for the year then ended.

In preparing the financial statements, the directors should:

The directors are responsible for ensuring that proper accounting records are kept which disclose with reasonable accuracy at any time the financial position of the company and the group and which enable the directors to ensure that the financial statements comply with the Companies Act (Cap. 386). This responsibility includes designing, implementing and maintaining such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. The directors are also responsible for safeguarding the assets of the company and the group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Approved by the board of directors and signed on its behalf on 26 ^th April 2023 by Pier Luca Demajo (Chairman) and Georgios Kakouras (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.

Introduction

Pursuant to the Capital Market Rules as issued by the Malta Financial Services Authority, Hili Properties p.l.c. (the ‘ Company’ ) is hereby reporting on the extent of its adoption of the Code of Principles of Good Corporate Governance (the ‘Code’ or the ‘ Principles’ ) contained in Appendix 5.1 of the Capital Market Rules.

The adoption of the Code is not mandatory in nature. This notwithstanding, the Directors are strongly of the opinion that the adoption of the Code is in the best interest of the Company, its shareholders and other stakeholders since it provides the necessary framework to ensure that the directors, management, and employees of the company work towards the right set of principles and ethical standards.

The Company currently has a corporate decision-making and supervisory structure that is tailored to suit the Company’s requirements and designed to ensure the existence of adequate checks and balances, whilst retaining an element of flexibility, particularly in view of the size and nature of its business. Generally speaking, the Company adheres to the Code, except for those identified instances where there exist particular circumstances that, in the view of the Directors are excessive to the nature and size of the Company. 

Principle 1: The Board

Principle 3: Composition of the Board

The Board of Directors

The Board of Directors is responsible for the overall long-term direction of the Company, in particular being actively involved in overseeing the systems of control and financial reporting and that the Company communicates effectively with the market. 

The Board of Directors meets regularly, with a minimum of four times annually, and is currently composed of six members. Three of the members, being Mr Pier Luca Demajo, Mr David Aquilina and Dr Laragh Cassar are independent from the Company or any other related companies.

The members of the board are the following:

The Board considers that its size is appropriate, taking into account the size of the Company and its operations. Furthermore, the Board is of the view that it has the required diversity of knowledge, judgment and experience to properly complete its tasks. The competencies of the Directors ranges from industry, financial and legal expertise.

As above set out, the Board is composed of a mix of executive and non-executive directors. The presence of Non-Executive Directors on the Board serves to, inter alia, constructively challenge the Executive Directors and management of the Company, and particular focus is made on strategy and the integrity of financial performance and management.

Each presently appointed non-executive director has declared to the Board as stipulated under the Code Provision 3.4 undertaking:

Principle 2: Chairman and Managing Director

The Chairman of the Company (presently, Mr Pier Luca Demajo) leads the Board and sets its agenda and works closely with the Company Secretary. In addition, the Chairman ensures that the directors receive precise, timely and objective information so that they can take sound decisions and effectively monitor the performance of the Company and that effective communication with shareholders is maintained. The Chairman also encourages active engagement by all directors for discussion of complex or contentious issues. Working hand in hand with the Chairman is the Managing Director, (Mr Georgios Kakouras) who leads the executive management of the Company.

Principle 4: The Responsibilities of the Board

The Board has the first level responsibility for executing the four basic roles of Corporate Governance, namely accountability, monitoring, strategy formulation and policy development. The Board has established a clear internal and external reporting system so that it has access to accurate, relevant and timely information and ensures that management constantly monitor performance and report to its satisfaction. The Board, at least on a quarterly basis, evaluates management’s implementation of corporate strategy and financial objectives by reference to a number of criteria, including projected earnings and other anticipated criteria.

The Board has not developed a formal succession plan for its Managing Director and the directors themselves however is in the process of discussing a manner in which a succession planning process can be implemented.

Principle 5: Board Meetings

Each of the directors has applied the necessary time and attention for the performance of his/her duties to the Company. During 2022, the Board met on six (6) occasions:

As a matter of practice, each Board meeting to be held throughout the year is scheduled well in advance of their due date and each director is provided with detailed Board papers relating to each agenda item in good time prior to the actual meetings. Board meetings concentrate mainly on strategy, operational performance and financial performance of the Company. After each Board meeting and before the next, Board minutes that faithfully record attendance, key issues and decisions are sent to the directors.

Audit Committee

The Terms of Reference of the Audit Committee are modelled on the principles set out in the Capital Market Rules, including the roles set out in Capital Market Rules 5.127 to 5.130. In addition, unless otherwise dealt with in any other manner prescribed by the Capital Market Rules, the Audit Committee has the responsibility to, inter alia, monitor and scrutinise, and, if required, approve Related Party Transactions, if any, falling within the ambits of the Capital Market Rules and to make its recommendations to the Board of any such proposed Related Party Transactions. The Audit Committee establishes internal procedures and monitors these on a regular basis.  The Committee also has the authority to summon any person to assist it in the performance of its duties, including the Company’s external auditors.

Whilst the Company does not have a permanent internal auditor function within its organisational structure, the Audit Committee has engaged the services of external audit firms to carry out specific internal audit checks.

The Audit Committee, is currently composed of the following individuals:

This satisfies the requirement established by the Capital Market Rules that the Audit Committee is composed of non-executive directors, the majority of which being independent.     

The Board of Directors assessed the independence of these members and unanimously agreed that in line with good corporate governance, David Aquilina, Peter Hili and Laragh Cassar conduct themselves in an independent and professional manner satisfying the Capital Market Rules.

Furthermore, the Board of Directors considers the Audit Committee, as a whole, to have the relevant experience in the real estate sector, David Aquilina being considered to be an expert in the real estate business and competent in accounting and/or auditing in terms of the Capital Market Rules. The Chief Financial Officer of the Company and the Managing Director is also present during the Audit Committee meetings.

The Audit Committee met four (4) times during 2022.

Communication with and between the Company Secretary, top level management and the Committee is ongoing and considerations that required the Committee’s attention were acted upon between meetings and decided by the Members (where necessary) through electronic circulation and correspondence.

Principle 6: Information and Professional Development

Appointments and changes to senior management are the responsibility of the Managing Director and are approved by the Board. The Board actively considers the professional and technical development of the Board itself, all senior management and staff members.  The Managing Director also has systems in place to monitor management and staff morale.  Management prepares detailed reviews for each Board meeting covering all aspects of the Company’s business.

On joining the Board, a new director is provided with the opportunity to consult with the executive directors and senior management of the Company in respect of the operations of the Group. Each director is made aware of the Company’s on-going obligations in terms of the Companies Act, the Capital Market Rules and other relevant legislation. Directors have access to the advice and services of the Company Secretary and to the legal counsel of the Company.

The Company is also prepared to bear the expense incurred by the directors requiring independent professional advice should they deem it necessary to discharge their responsibilities as directors.

Principle 7: Evaluation of the Board’s Performance

With respect to the year under review, the Board undertook an evaluation of its own performance, the Chairman’s performance and that of its Committees. The Board did not per se appoint a Committee to carry out this performance evaluation but the evaluation exercise was conducted through a questionnaire, copies of which were sent to the Chairman of the Audit Committee and the results were reported to the Chairman of the Board. [No material changes were made to the Company’s structures as a result of the Board evaluation.]

Principle 8: Committees

The required disclosures on the remuneration structure of the Company are found in the annual report under ‘Remuneration Statement’.

Furthermore, reference is made to the Non-Compliance section hereunder where disclosure of the non-compliance with the appointment of a remuneration committee and a nomination committee is made.

Principle 9: Relations with Shareholders and with the Market & Principle 10: Institutional Investors

The Company engages in dialogue with the market through a number of measures, including the issuance of timely and information announcements to the market, the holding of meetings with the local stockbroking community and the issuance of press releases. Until the initial public offering of the Company in Q4 of 2021, the Company’s share capital was held privately and therefore it is only after its successful listing of its equity securities, that communication with its shareholders took place in a more formal manner. The Company intends to ensure that all communications are effectively and through additional channels, such as through its annual general meetings, where shareholders will be given the opportunity to have their questions raised and answered.

Principle 11: Conflicts of Interest

The directors are aware that their primary responsibility is always to act in the interest of the Company and its shareholders as a whole irrespective of who appointed them to the Board. Acting in the interest of the Company includes an obligation to avoid conflicts of interest. In such instances, the Company has strict policies in place which allow it to manage such conflicts, actual or potential, in the best interest of the Company. Each director’s service contract contains provisions which require the director to:

Furthermore, any director that has a conflict (actual or potential) is required to disclose and record the conflict in full and in time to the Board and is also precluded from participating in a discussion concerning matters in such conflicted matters. Under no circumstance is the conflicted director, permitted to vote on the matter. This requirement is reflected in Article 87.3 of the Company’s Articles of Association. Subject to the provisions of the law, the company may in general meeting, by ordinary resolution, suspend or relax the said provisions of the Articles of Association to any extent or ratify any transaction not duly authorised by reason of a contravention of the said provision.

Principle 12: Corporate Social Responsibility

The Directors also seek to adhere to accepted principles of corporate social responsibility in their management practices of the Company in relation to the Group’s workforce and the community in general.

Environmental, Social and Governance Standards Commitment

Hili Properties plc is committed to environmental, social and governance principles and is actively working to optimize its portfolio’s performance, reduce energy consumption and carbon emissions.  Its strategy is focused on the acquisition and development of sustainable buildings. The company is dedicated to supporting and enhancing communities in which it operates as it increases shareholder value and pursue long-term success.  Therefore, a range of ESG initiatives are implemented to benefit tenants and the broader community. Considerable efforts are made to reduce energy consumption, carbon emissions, improve sustainability and promote social responsibility:

Reaching out to the community, tenants support

Hili Properties plc has supported the opening of Pusaudzu Resursu Centrs: a non-profit organization helping children and families by providing support through therapy. The group provided the necessary space for the activities of this organization to be set up, in one of the shopping centres in Riga. The facilities provided include floor space of 95 square metres, with reception area, two rooms for individual therapist consultations and a third room for sessions.

Caring for the Environment

In its commitment to sustainability, Hili Properties plc has launched an electric vehicle charging project for their office building in Malta. In September 2022, the supply, assembly, and installation of an electrical infrastructure system for electric vehicle charging was completed. The result of such installation, there are now 16 electric vehicle charging stations available for employee’s use. These charging stations will help the company reduce carbon emissions, improve public health, and minimise ecological damage, while maintaining a low carbon footprint.

As the continuation of its commitment, Hili Properties plc has already been recognised for efforts made towards acquisitions targeted for properties holding a sustainable footprint, as in the case of the Rehau industrial plant in Lithuania and the most recent acquisition being our MIRO offices in Romania.

Hili Properties’ Rehau industrial plant, located in Lithuania was granted a BREEAM certification for its sustainability features and it has also won a gold medal at the Lithuanian Product of the Year 2022 event organised by the Lithuanian Confederation of Industrialists (LPK). The award, received by YIT Lietuva, the Finnish urban developer responsible for the design and construction of the plant, recognises its commitment to safety, innovation and sustainability. Our tenant Rehau is also a member of the 50 Sustainability and Climate Leaders.

On MIRO office building in Bucharest, Romania - the most recent acquisition of Hili Properties plc - the installation of 400 kWp photovoltaic panels is in progress which not only contributes to reduction of the carbon footprint but also serves as cost saving solution for the tenants. MIRO office building has also received the highest level of WELL certificate – the Platinum certificate. The first property in Romania to earn this prestigious rating with only 248 Platinum certificates issued worldwide, MIRO office building is at the forefront of sustainable design and commitment to promoting health and well-being.

Non-compliance with the Code

Principle 4 Responsibilities of the Board: Succession Planning

The Board has not developed a formal succession plan for its Managing Director and the directors themselves however is in the process of discussing a manner in which a formal succession plan can be implemented.

Principle 7: Evaluation of the board’s performance

With respect to the year under review, the Board undertook an evaluation of its own performance, the Chairman’s performance and that of its committees. The Board did not per se appoint a committee to carry out this performance evaluation, but the evaluation exercise was conducted through a questionnaire, copies of which were sent to the Chairman of the Audit Committee and the results were reported to the Chairman of the Board. No material changes were made to the Company’s structures as a result of the Board evaluation.

Principle 8: Committees

Under the present circumstances the Board does not consider it necessary to appoint a remuneration committee and a nomination committee as decisions on these matters are taken at shareholder level.

Internal Control

Organisation

The Company operates through the Board of directors with clear reporting lines and delegation of powers. The Board is responsible for the company’s internal controls as well as their effectiveness and the authority to operate such controls are delegated to the Managing Director.

Control environment

The Company is committed to the highest standards of business conduct and seeks to maintain these standards across all its subsidiaries.

The Company has an appropriate organisational structure for planning, executing, and controlling and monitoring business operations to achieve objectives. Lines of responsibility and delegation of authority are documented.

The Group and the individual companies comprising it have implemented control procedures designed to ensure complete and accurate accounting for financial transactions and to limit the potential exposure to loss of assets or fraud. Measures taken include physical control, segregation of duties and reviews by management and external auditors.

Although the Company has not appointed an internal auditor,  the Board of Directors believes that the combination of checks and balances on the finance function of the Company, including the remit and responsibilities of the Audit Committee the Company’s finance policies and procedures, as well as the Company’s statutory and legal obligations as a listed entity together of the engagement of independent external auditors, provide adequate and suitable controls that are commensurate with the size and complexity of its business and operations. The Board of Directors will retain this matter under review in the coming year.

Risk identification and assessment

Group management and the Board of Directors are responsible for the identification and evaluation of key risks applicable to their areas of business. These risks are assessed on a continual basis and may be associated with a variety of internal or external sources including control breakdowns, disruption in information systems, competition, natural catastrophe, and regulatory requirements.

Information and communication

Group companies participate in periodic strategic reviews, which include consideration of long-term financial projections and the evaluation of business alternatives. 

Monitoring and corrective action

There are clear and consistent procedures in place for monitoring the system of internal financial controls. The Audit Committee plans in advance and meets regularly during the year and, within its terms of reference as approved by the MFSA, reviews the effectiveness of the Group’s systems of internal financial controls. The Audit Committee receives reports from management and the independent external auditors.

General Meetings and Shareholders’ Rights

Conduct of general meetings

It is only shareholders whose details are entered into the register of members on the record date that are entitled to participate in the general meeting and to exercise their voting rights. In terms of the Capital Market Rules, the record date falls 30 days immediately preceding the date set for the general meeting to which it relates. The establishment of a record date and the entitlement to attend and vote at general meeting does not, however, prevent trading in the shares after the said date.

In order for business to be transacted at a general meeting, a quorum must be present. In terms of the Articles of Association, 50% of the total voting rights constitutes a quorum. If within half an hour, a quorum is not present, if convened by or upon requisition of the shareholders, the meeting will be dissolved. In any other case, it shall be adjourned to such time and place as determined by the Chairman (not being less than 14 days nor more than 28 days). If at the adjourned meeting, a quorum is not present within thirty minutes, the members present (being not less than two persons) shall constitute quorum. The company is required to give not less than ten (10) clear days’ notice and the notice is required to specify that the Members present as aforesaid shall form a quorum. At any general meeting, a resolution put to a vote shall be determined and decided by a show of hands, unless a poll is demanded before or on the declaration of the result of a show of hands by;

Unless a poll be so demanded, a declaration by the Chairman that a resolution has on a show of hands been carried or carried unanimously, or by a particular majority, or lost and an entry to that effect in the book containing the minutes of the proceedings of the Company shall be conclusive evidence of the fact without proof of the number or proportion of the votes recorded in favour of or against such resolution: PROVIDED that where a resolution requires a particular majority in value, the resolution shall not be deemed to have been carried on a show of hands by the required majority unless there be present at that meeting, whether in person or by proxy, a number of members holding in the aggregate the required majority as aforesaid.  A demand for a poll may be withdrawn.

A poll demanded on the election of a chairman or on a question of adjournment shall be taken forthwith. 

A poll demanded on any question shall be taken either immediately, at any time during the meeting, or at such subsequent time (not being more than thirty days after the date of the Meeting or adjourned Meeting at which the poll is demanded) and place as the Chairman may direct.  No notice need be given of a poll not taken immediately.  Any business other than that upon which a poll has been demanded may be proceeded with pending the taking of the poll.  The demand for a poll may be withdrawn.  If a poll is duly demanded it shall be taken in such manner (including the use of ballot or voting papers or ticket) as the Chairman of the Meeting directs, and the result of the poll shall be deemed to be the resolution of the meeting at which the poll was demanded.

In the case of an equality of votes, whether on a show of hands or on a poll, the Chairman of the Meeting at which the show of hands takes place or at which the poll is demanded, shall be entitled to a second or casting vote.

Where a poll is taken at a general meeting of the Company and a request is made by a Shareholder for a full account of the poll, the Company is required to publish the following information on its website by not later than fifteen (15) days after the day of the general meeting at which the voting result was obtained: 

Where no Shareholder requests a full account of the voting at a general meeting, it shall be sufficient for the Company to establish the voting results only to the extent necessary to ensure that the required majority is reached for each resolution.  

Where voting on a particular item or resolution is conducted by a show of hands rather than by a poll, it shall not be necessary in the case where a Shareholder requests a full account of the voting at a general meeting for the Company to publish the information required by the Capital Markets Rules and it shall be sufficient for the chairman of the meeting to publish a statement indicating: 

Proxy

The instrument appointing a proxy shall be in writing under the hand of the appointor or of his attorney duly authorised in writing, or if the appointor is a person other than a natural person, the hand of an officer or attorney duly authorised.  The signature on such instrument need not be witnessed nor must a proxy be a Member of the Company.  A Member may not appoint more than one proxy to attend on the same occasion unless such Member is holding shares for and on behalf of third parties in which case he shall be entitled to grant a proxy to each of his clients or to any third party designated by a client. Such Member shall be entitled to cast votes attaching to some of the Shares differently from the others. Proxy forms shall be designed by the Company to allow such split voting. 

Deposit of an instrument of proxy shall not preclude a Member from attending and voting in person at the Meeting or any adjournment thereof. 

An instrument appointing or revoking a proxy and the power of attorney or other authority, if any, under which it is signed, or a notarially certified copy of that power or authority shall either (i) be deposited at the Office or at such other place (if any) in Malta as is specified for that purpose in or by way of note to the notice convening the Meeting, or (ii) be transmitted electronically to an electronic address as is specified for that purpose in or by way of note to the notice convening the Meeting, in each case not less than forty-eight hours before the time for holding the Meeting or, if the Meeting be adjourned, not less than forty-eight hours (or such lesser period as the Chairman who adjourned the Meeting may in his discretion determine) before the time for holding the adjourned Meeting, at which the person named in the instrument proposes to vote, or, in the case of a poll taken otherwise than at or on the same day as the Meeting or adjourned Meeting, not less than twenty-four hours before the time appointed for the taking of the poll at which it is to be used, and in default the instrument of proxy shall not be treated as valid.  

An instrument appointing a proxy shall, unless the contrary is stated thereon, be valid as well for any adjournment of the Meeting to which it relates.  No instrument of proxy shall be valid after the expiration of twelve months from the date of its execution except at an adjourned Meeting or on a poll demanded at a Meeting or adjourned Meeting in cases where the Meeting was originally held within twelve months from that date.  

The instrument appointing a proxy shall be deemed to confer authority to demand or join in demanding a poll. 

A vote given in accordance with the terms of an instrument of proxy shall be valid notwithstanding the previous death or interdiction of the principal or revocation of the proxy or of the authority under which the proxy was executed, or the transfer of the share in respect of which the proxy is given, provided that no intimation in writing of such death, interdiction, revocation or transfer shall have been received by the Company at the Office or such other place (if any) as is specified for depositing the instrument of proxy an hour at least before the commencement of the Meeting or adjourned Meeting or the holding of a poll subsequently thereto at which such vote is given.  

Any person which is not a natural person and is a Member of the Company may by resolution of its directors or other governing body authorise such person as it thinks fit to act as its representative at any Meeting of the Company or of any class of Members of the Company, and the person so authorised shall be entitled to exercise the same powers on behalf of the Member which he represents as that Member could exercise if it were an individual Member of the Company. 

Including items on the agenda

A shareholder or shareholders holding not less than 5% of the issued share capital may include items on the agenda of the general meeting and table draft resolutions for items included on the agenda of a general meeting. Such right must be exercised by the shareholder at least 46 days before the date set for the general meeting to which it relates.

Questions

Shareholders have the right to ask questions which are pertinent and related to the items on the agenda. The Company may provide one overall answer to questions having the same content. An answer to a question is not required where: 

Electronic voting

In terms of the Articles of Association of the Company, a ll General Meetings of the Company may be held virtually in accordance with applicable law and, where applicable, the Capital Markets Rules. The means used for the virtual meeting and the procedure of how Members shall be entitled to attend and vote, and participate in the discussion shall be determined prior to every General Meeting and shall be communicated to all Members in the relevant notice convening such General Meeting.

Further details on the conduct of a general meeting and shareholders’ rights are contained in the Memorandum and Articles of Association of the Company and in line with chapter 12 of the Capital Market Rules.

Signed on behalf of the Board of Directors on the 26 ^th April 2023 by:

_______________________________

David Aquilina

Director and Chairman of Audit Committee

7

In accordance with Capital Market Rule 12.26A, the Company is required to establish a ‘remuneration policy in respect of its directors’ and to grant the right to shareholders to vote on the remuneration policy at the Annual General Meeting (AGM). The Capital Market Rules also require the Company to draw up a remuneration report in accordance with the ‘remuneration policy in respect of its directors’ and with the criteria in Appendix 12.1 ‘Information to be provided in the Remuneration Report’ of the said Capital Market Rules.

Remuneration Policy - Directors

In the absence of a remuneration committee, the Board determines the framework of the remuneration policy for the members of the Board as a whole. The Board is composed of Executive and Non-Executive Directors.

As at the date hereof, the non-executive Directors are party to a director services contract with the Company, pursuant to which their respective role, responsibilities, duties and the applicable remuneration is set out.

The term of such service contracts commences from the date of entry into the said contract and continues in force thereafter until the next annual general meeting of the Company at which the Directors shall be eligible for re-election, or until such time as the Director resigns or until such time as such Director is removed from office.

None of the service contracts contain provisions for termination payments and other payments linked to early termination.

The maximum annual aggregate emoluments that may be paid to the directors is approved by the shareholders in General Meeting. The Board may approve changes to the fees within the aggregate amount approved by Shareholders at the Annual General Meeting. The total fees paid to non-executive directors (in their role as director) is to be entirely represented by a fixed remuneration.

Directors’ emoluments are designed to reflect the directors’ knowledge of the business and time committed as directors to the Company’s affairs.

None of the Non-Executive Directors in their capacity as Non-Executive Directors of the Company shall be entitled to profit sharing, share options, pension benefits, variable remuneration or any other remuneration or related payments from the Company.

Remuneration Policy – Senior Executives

For the purposes of this policy, the senior executives of the Company shall refer to the Managing Director, the Chief Finance Officer (CFO) and the Properties Project Manager (PPM).

The Board shall determine the framework of the overall remuneration policy and individual remuneration arrangements for its senior executives. The Board considers that these remuneration packages, inclusive of a variable and non-variable payment, should be designed to reflect market conditions and to attract appropriate quality executives to ensure the efficient management of the Company. The Board acknowledges that the payment of a variable remuneration has become increasingly important in attracting and maintaining quality staff. 

The terms and conditions of employment of each individual within the senior executive team are set out in their respective contracts of employment with the Company.  The contracts of employment of the senior executive are made on an indefinite basis. The Managing Director is entitled to a to a fixed-based salary together with a variable discretionary performance bonus, based on a pre-defined percentage of the audited consolidated net profit before taxation of the Company. Such bonus scheme is driven by the crucial role of the Managing Director in the oversight of the day-to-day business, and the growth of the Company and its underlying business clusters.

In the case of the CFO and the PPM, additional performance criteria are considered in the entitlement to a bonus. Additionally, the senior executives are entitled to medical insurance cover, an expensed mobile phone and laptop. Moreover, share options are currently not part of the Company’s remuneration package available to employees of the Company.

During the year, the Directors received the following fees:

The amount paid as directors’ fees is within the limit of €112,000 approved by the Annual General Meeting of the 28 ^th June 2022.

*Mr Peter Hili did not receive any remuneration in respect of their office of director of the Company.

2022 Senior Executives Remuneration

During the course of 2022, the total remuneration paid to the members of the executive management team was €188,089 (excluding the above referred salary paid to the Managing Director).

_________________________

Pier Luca Demajo

Chairman

26 ^th April 2023

8

Share capital structure.

The Company’s authorised share capital is Eur120,000,000 divided into one 600,000,000 ordinary shares of Eur0.20 per share. The Company’s issued share capital is Eur80,178,540 divided into 400,892,700 ordinary shares of Eur0.20 per share.  All of the issued shares of the Company form part of one class of ordinary shares in the Company, which shares are listed on the Malta Stock Exchange.  All shares in the Company have the same rights and entitlements and rank pari passu between themselves.

The following are highlights of the rights attaching to the shares:

Save as otherwise disclosed herein, the provisions of Capital Market Rules 5.64.2, 5.64.4 to 5.64.7 and 5.64.11 are not applicable to the Company. There are no disclosures to be made in terms of Capital Market Rule 5.64.10.

Pursuant to Capital Market Rule 5.70.1

Pursuant to an agreement entered into on the 1 January 2014, the Company entered into a management consultancy agreement with Hili Ventures Limited, the major shareholder in the Company. Pursuant to this agreement, Hili Ventures Limited provides consultancy, legal, GDPR, marketing and PR, administrative, IT, HR and other services to the Company. Mr Peter Hili, is a director of the Company and is an indirect shareholder of Hili Ventures Limited. During the year ended 31 December 2022, Hili Ventures Limited received Eur700,000 in fees as compensation for the services rendered.

Pursuant to Capital Market Rule 5.70.2

Approved by the board of directors and signed on its behalf on 26 ^th April 2023 by Pier Luca Demajo (Chairman) and Georgios Kakouras (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.

9

To the best of the knowledge of the directors:

Signed on its behalf on 26 ^th April 2023 by Pier Luca Demajo (Chairman) and Georgios Kakouras (Director) as per the Directors' Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.

10

The financial statements were approved and authorised for issue by the Board of Directors on 26 April 2023. The financial statements were signed on behalf of the Board of Directors by Pier Luca Demajo (Chairman) and Georgios Kakouras (Director) as per the Directors’ Declaration on ESEF Annual Financial Report submitted in conjunction with the Annual Financial Report.

Notes to the financial statements

Hili Properties p.l.c. (‘the holding company’ or ‘the company’) is a public limited company incorporated and domiciled in Malta with registration number C57954. The principal activity of Hili Properties p.l.c. and its subsidiaries (‘the group’) is to hold and rent immovable property. As disclosed in note 29, the company has issued bonds which are listed on the Malta Stock Exchange. The registered address of the company is Nineteen Twenty-Three, Valletta Road, Marsa.

The financial statements of the holding company and the consolidated financial statements of the group have been prepared on an accrual basis and under the historical cost convention, except for investment properties which are carried at their fair values, and in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU), and in accordance with the Companies Act, Cap 386. They have been prepared under the assumption that the group operates on a going concern basis.

The financial statements are presented in euro (€), which is also the functional currency of the company and the group.

Effects of Ukraine Conflict

The invasion of Ukraine by the Russian Federation just over a year ago has undermined the stability of Europe whilst adversely impacting food and energy security throughout the world. These stresses come just as economies are navigating their way out of the fiscal and demographic issues endemic to the Covid-19 pandemic. Although based on available insights to date, the Company and the Group are not expected to be directly negatively impacted by the ongoing invasion, the global inflation and interest rate risks associated with the conflict are liable to negatively impact the Company and the Group’s profitability and ability to finance.

The fact that all assets reside in NATO countries provides extra safeguards, however, management together with the directors, continue to actively monitor all developments taking place internationally in order to take any action that might be necessary in the eventuality that developments in the conflict, start to impact the company’s turnover and business activity.

The significant accounting policies adopted by the holding company and the group are set out below.

Basis of consolidation

Acquisition of subsidiaries

The group's consolidated financial statements consolidate those of the parent company and all of its subsidiaries as of 31 December 2022. The parent controls a subsidiary if it is exposed, or has rights, to variable returns from its involvement with the subsidiary and has the ability to affect those returns through its power over the subsidiary. The subsidiaries have a reporting date of 31 December.

All transactions and balances between group companies are eliminated on consolidation, including unrealised gains and losses on transactions between group companies. Where unrealised losses on intra-group asset sales are reversed on consolidation, the underlying asset is also tested for impairment losses from the group perspective.

Amounts reported in the financial statements of subsidiaries have been adjusted where necessary to ensure consistency with the accounting policies adopted by the group.

Profit or loss and other comprehensive income of subsidiaries acquired or disposed of during the year are recognised from the effective date of acquisition, or up to the effective date of disposal, as applicable.

The group attributes total comprehensive income or loss of subsidiaries between the owners of the parent and the non-controlling interests based on their respective ownership interests. 

Business combinations

The group applies the acquisition method in accounting for business combinations. The consideration transferred by the group to obtain control of a subsidiary is calculated as the sum of the acquisition-date fair values of assets transferred, liabilities incurred, and the equity interests issued by the group, which includes the fair value of any asset or liability arising from a contingent consideration arrangement. Acquisition costs are expensed as incurred.

The group recognises identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognised in the acquiree’s financial statements prior to the acquisition. Assets acquired and liabilities assumed are generally measured at their acquisition-date fair values. 

Investment in subsidiaries

A subsidiary is an entity that is controlled by the company. The company controls an investee when the company 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.

Investment in subsidiaries, in the company’s financial statements are stated at cost less any accumulated impairment losses. Dividends from the investments are recognised in profit or loss.

At each reporting date, the company reviews the carrying amount of its investment in subsidiaries to determine whether there is any indication of impairment and, if any such indication exists, the recoverable amount of the investment is estimated.  An impairment loss is the amount by which the carrying amount of an investment exceeds its recoverable amount.  The recoverable amount is the higher of fair value less costs to sell and value in use.  An impairment loss that has been previously recognised is reversed if the carrying amount of the investment exceeds its recoverable amount.

An impairment loss is reversed only to the extent that the carrying amount of the investment does not exceed the carrying amount that would have been determined if no impairment loss had been previously recognised.  Impairment losses and reversals are recognised immediately in profit or loss.

Non-controlling interest

Non-controlling interests in the acquiree that are present ownership interests and entitle their shareholders to a proportionate share of the entity’s net assets in the event of liquidation, may be initially measured either at the present ownership interests proportionate share in the recognised amounts of the acquiree’s identifiable net assets or at fair value. The choice of measurement basis is made on an acquisition-by-acquisition basis. After initial recognition, non-controlling interests in the net assets consist of the amount of those interests at the date of the original business combination and the non-controlling interests’ share of changes in equity since the date of the combination. Non-controlling interests in the net assets of consolidated subsidiaries are presented separately from the holding company’s owners’ equity therein. Non-controlling interests in the profit or loss and other comprehensive income of consolidated subsidiaries are also disclosed separately. Total comprehensive income is attributed to non-controlling interests even if this results in the non-controlling interests having a deficit balance.

Intangible assets

An intangible asset is recognised if it is probable that the expected future economic benefits that are attributable to the asset will flow to the company and the cost of the asset can be measured reliably.

Intangible assets are initially measured at cost, being the fair value at the acquisition date for intangible assets acquired in a business combination. Expenditure on an intangible asset is recognised as an expense in the period when it is incurred unless it forms part of the cost of the asset that meets the recognition criteria or the item is acquired in a business combination and cannot be recognised as an intangible asset, in which case it forms part of goodwill at the acquisition date.

The useful life of intangible assets is assessed to determine whether it is finite or indefinite. Intangible assets with a finite useful life are amortised. Amortisation is charged to profit or loss so as to write off the cost of intangible assets less any estimated residual value, over their estimated useful lives. The amortisation method applied, the residual value and the useful life are reviewed, and adjusted if appropriate, at the end of each reporting period.

Intangible assets are derecognized on disposal or when no future economic benefits are expected from their use or disposal. Gains or losses arising from derecognition represent the difference between the net disposal proceeds, if any, and the carrying amount, and are included in profit or loss within ‘other operating income’ or ‘other operating expenses’ in the period of derecognition.

Computer software

In determining the classification of an asset that incorporates both intangible and tangible elements, judgement is used in assessing which element is more significant. Computer software which is an integral part of the related hardware is classified as property, plant and equipment and accounted for in accordance with the group’s accounting policy on property, plant and equipment. Where the software is not an integral part of the related hardware, this is classified as an intangible asset and carried at cost less any accumulated amortisation and any accumulated impairment losses.

Computer software is amortised on a straight-line basis over three years.

Property, plant and equipment

The group’s property, plant and equipment are classified into furniture, fittings and other equipment and improvements to leasehold land.

Property, plant and equipment are initially measured at acquisition cost, including any costs directly attributable to bringing the assets to the location and condition necessary for them to be capable of operating in the manner intended by the group’s management.  Subsequent costs are included in the asset’s carrying amount when it is probable that future economic benefits associated with the item will flow to the group and the cost of the item can be measured reliably. Expenditure on repairs and maintenance of property, plant and equipment is recognised as an expense when incurred.

Property, plant and equipment are stated at cost less any accumulated depreciation and any accumulated impairment losses.

Property, plant and equipment are derecognised when no future economic benefits are expected from their use or upon disposal. Gains or losses arising from derecognition represent the difference between the net disposal proceeds, if any, and the carrying amount, and are included in profit or loss within ‘other operating income’ or ‘other operating expenses’ in the period of derecognition.

Depreciation commences when the depreciable assets are available for use and is charged to profit or loss so as to write off the cost, less any estimated residual value, over its estimated useful lives, using the straight-line method, on the following bases:

Furniture, fixtures and other equipment   - over 3 to 10 years

Improvements to leasehold land                - over 5 years being the term of the lease                      

The depreciation method applied, the residual value and the useful life are reviewed, and adjusted if appropriate, at the end of each reporting period.

Investment property

Investment property is property held to earn rentals or for capital appreciation or both. Investment property is recognised as an asset when it is probable that the future economic benefits that are associated with the investment property will flow to the entity and the cost can be measured reliably. Investment property is initially measured at cost, including transaction costs. Subsequent to initial recognition, investment property is revalued annually and is stated at fair value in the statement of financial position at the end of the reporting period. Gains or losses arising from changes in the fair value of investment property are recognised in profit or loss in the period in which they arise.

Investment property is derecognised on disposal or when it is permanently withdrawn from use and no future economic benefits are expected from its disposal. Gains or losses on derecognition represent the difference between the net disposal proceeds and the carrying amount and are recognised in profit or loss in the period of derecognition.

Property held for sale

Investment property is classified as property held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use.  Property held for sale is measured at fair value, in accordance with the group’s accounting policy on investment property.

Leased assets – The Group as a Lessee

Any new contract entered into the group considers whether a contract is or contains a lease. A lease is defined as ‘a contract, or part of a contract, that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration’. To apply this definition the group assesses whether the contract meets three key evaluations which are whether:

(i)   Measurement and recognition of leases

At lease commencement date, the group recognises a right-of-use asset and a lease liability on the balance sheet. The right-of-use asset is measured at cost, which is made up of the initial measurement of the lease liability, any initial direct costs incurred by the group, an estimate of any costs to dismantle and remove the asset at the end of the lease, and any lease payments made in advance of the lease commencement date (net of any incentives received).

The group depreciates the right-of-use assets on a straight-line basis from the lease commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The group also assesses the right-of-use asset for impairment when such indicators exist.

At the commencement date, the group measures the lease liability at the present value of the lease payments unpaid at that date, discounted using the interest rate implicit in the lease if that rate is readily available or the group’s incremental borrowing rate.

Lease payments included in the measurement of the lease liability are made up of fixed payments (including in substance fixed).

Subsequent to initial measurement, the liability will be reduced for payments made and increased for interest. It is remeasured to reflect any reassessment or modification, or if there are changes in in-substance fixed payments.

When the lease liability is remeasured, the corresponding adjustment is reflected in the right-of-use asset, or profit and loss if the right-of-use asset is already reduced to zero.

The group has elected to account for short-term leases and leases of low-value assets using the practical expedients. Instead of recognising a right-of-use asset and lease liability, the payments in relation to these are recognised as an expense in profit or loss on a straight-line basis over the lease term.

On the statement of financial position, the group has opted to disclose right-of-use assets and lease liabilities as separate financial statement line items.

Financial instruments

(i)   Recognition and derecognition

Financial assets and financial liabilities are recognised when the group becomes a party to the contractual provisions of the financial instrument.

Financial assets are derecognised when the contractual rights to the cash flows from the financial asset expire, or when the financial asset and substantially all the risks and rewards are transferred. A financial liability is derecognised when it is extinguished, discharged, cancelled or expires.

(ii)   Classification and initial measurement of financial assets

Except for those trade receivables that do not contain a significant financing component and are measured at the transaction price in accordance with IFRS 15, all financial assets are initially measured at fair value adjusted for transaction costs (where applicable).

Financial assets, other than those designated and effective as hedging instruments, are classified into the following categories:

In the periods presented the group does not have any financial assets categorised FVOCI. The group’s derivative financial instruments are classified as FVPTL.

The classification is determined by both:

All income and expenses relating to financial assets that are recognised in profit or loss are presented within ‘finance costs’, ‘finance income’ or other financial items, except for impairment of trade receivables which is presented within ‘other operating expenses’.

(iii)   Subsequent measurement of financial assets

Financial assets are measured at amortised cost if the assets meet the following conditions (and are not designated as FVTPL):

After initial recognition, these are measured at amortised cost using the effective interest method. Discounting is omitted where the effect of discounting is immaterial. The group’s cash in bank and on hand, loans and receivables, trade and most other receivables fall into this category of financial instruments.

(iv)   Impairment of financial assets

IFRS 9’s impairment requirements use forward-looking information to recognise expected credit losses – the ‘expected credit loss (ECL) model’. Instruments within the scope of the requirements included loans and other debt-type financial assets measured at amortised cost and FVOCI, trade receivables, contract assets recognised and measured under IFRS 15 and loan commitments and some financial guarantee contracts (for the issuer) that are not measured at fair value through profit or loss.

The group considers a broad range of information when assessing credit risk and measuring expected credit losses, including past events, current conditions, reasonable and supportable forecasts that affect the expected collectability of the future cash flows of the instrument.

In applying this forward-looking approach, a distinction is made between:

‘Stage 3’ would cover financial assets that have objective evidence of impairment at the reporting date.

 ‘12-month expected credit losses’ are recognised for the first category while ‘lifetime expected credit losses’ are recognised for the second category.

Measurement of the expected credit losses is determined by a probability-weighted estimate of credit losses over the expected life of the financial instrument.

(v)   Loans receivables and trade and other receivables

The group makes use of a simplified approach in accounting for loans receivables, trade and other receivables as well as contract assets and records the loss allowance as lifetime expected credit losses. These are the expected shortfalls in contractual cash flows, considering the potential for default at any point during the life of the financial instrument.  In calculating, the group uses its historical experience, external indicators and forward-looking information to calculate the expected credit losses using a provision matrix.

The group assess impairment of loans receivables and trade receivables on a collective basis as they possess shared credit risk characteristics they have been grouped based on the days past due.

(vi)   Classification and measurement of financial liabilities

The group’s financial liabilities include bank overdraft and loans, debt securities in issue and trade and other payables and other financial liabilities.

Financial liabilities are initially measured at fair value, and, where applicable, adjusted for transaction costs unless the group designated a financial liability at fair value through profit or loss.

Subsequently, financial liabilities are measured at amortised cost using the effective interest method except for derivatives and financial liabilities designated at FVTPL, which are carried subsequently at fair value with gains or losses recognised in profit or loss.

All interest-related charges and, if applicable, changes in an instrument’s fair value that are reported in profit or loss are included within ‘finance costs’ or ‘finance income’.

Impairment testing of goodwill, intangible assets and property, plant and equipment

For impairment assessment purposes, assets are grouped at the lowest levels for which there are largely independent cash inflows (cash-generating units). As a result, some assets are tested individually for impairment and some are tested at cash-generating unit level. Goodwill is allocated to those cash-generating units that are expected to benefit from synergies of a related business combination and represent the lowest level within the group at which management monitors goodwill.

Cash-generating units to which goodwill has been allocated (determined by the group’s management as equivalent to its operating segments) are tested for impairment at least annually. All other individual assets or cash-generating units are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

An impairment loss is recognised for the amount by which the asset’s (or cash-generating unit’s) carrying amount exceeds its recoverable amount, which is the higher of fair value less costs of disposal and value-in-use. To determine the value-in-use, management estimates expected future cash flows from each cash-generating unit and determines a suitable discount rate in order to calculate the present value of those cash flows. The data used for impairment testing procedures are directly linked to the group’s latest approved budget, adjusted as necessary to exclude the effects of future reorganisations and asset enhancements.

Discount factors are determined individually for each cash-generating unit and reflect current market assessments of the time value of money and asset-specific risk factors.

Impairment losses for cash-generating units reduce first the carrying amount of any goodwill allocated to that cash-generating unit. Any remaining impairment loss is charged pro rata to the other assets in the cash-generating unit.

With the exception of goodwill, all assets are subsequently reassessed for indications that an impairment loss previously recognised may no longer exist. An impairment loss is reversed if the asset’s or cash-generating unit’s recoverable amount exceeds its carrying amount.

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable for goods sold and services provided in the normal course of business, net of value-added tax and discounts, where applicable.

To determine whether to recognise revenue, the group follows a 5-step process: