Ukrproduct Regulatory News (UKR)

29 June 2023

UKRPRODUCT GROUP LIMITED

("Ukrproduct", the "Company" or, together with its subsidiaries, the "Group")

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022

NOTICE OF AGM

Ukrproduct Group Limited (AIM: UKR), one of the leading Ukrainian producers and distributors of branded dairy foods and beverages (kvass), today announces its audited results for the year ended 31 December 2022.

The 2022 Annual Report and Accounts ("2022 Annual Report") has been posted to shareholders and is available on the Company's website at www.ukrproduct.com. A notice of Annual General Meeting ("AGM") and Proxy Form, will be shortly posted too.

The AGM will be held at the 6th floor, office 36, 8 Sikorsky Street, Kyiv, Ukraine, 04112 at 5.00 pm (Kyiv time) / 3.00 pm (London time) on 3 August 2023.

For further information contact:

Chairman and Chief Executive Statement

Trading

Ukrproduct Group Ltd ("Ukrproduct", the "Company" or, together with its subsidiaries, "the Group") is one of the leading Ukrainian producers and distributors of branded dairy foods and beverages (kvass).

While reporting on the results of the financial year 2022, it is necessary to highlight that the unprovoked and illegal aggression of Russia has completely obscured the peace and life of all Ukrainians and placed a heavy toll on the business in Ukraine. The impact of these factors and the resulting uncertainties on the Company's results, balance sheet and cash flows have been considered and are reflected in the figures reported. The Group has had to adjust to the new emergency conditions, the key objectives of which were to ensure the safety of the employees and to maintain operations and assets. One of the key challenges for the Group's operations has been the inability to export goods via Ukrainian Black Sea ports, which significantly reduced the Group's export operations in the first half of 2022. The Group focused its efforts on establishing alternative export routes via the border between Ukraine and the EU.

Ukrproduct's consolidated revenue in FY2022 fell by 19.9% in local currencies. The general decline in sales in the domestic market is due to a decrease in the solvency of consumers, the outflow of Ukrainian population and the loss of part of the Ukrainian sales market due to active hostilities and the temporary occupation of territories in Ukraine. After currency translation, revenue decreased by 24.8% to £39.1 million year-on-year, due to the 6% impact of foreign exchange rates, in particular reflecting the depreciation of the Ukrainian Hryvnia against the British pound. 

In the processed cheese and processed cheese product category, sales amounted to £22.6 million, reflecting a revenue increase of 5.4% compared with the previous year on a nominal basis, although sales represented a decline of 18.3% in volume. Sales have fallen due to market trends, the termination of cooperation with some retail networks and losses of some export sales.

In FY2022, butter sales reduced considerably, on a nominal basis, by 61.6% compared with the previous year, to £3.4 million. This was due to the planned butter reduction, especially low-margin contracts. The Company took a flexible approach by focusing on priority sales channels (export, key distributors), and benefiting from margin improvements. A significant price increase of butter in Ukraine and marginality growth assisted to offset much of the volume decline within the segment.

Sales of spreads increased to £5.6 million in FY2022 compared with £4.4 million in the prior year. This constituted an increase in sales of 35.9%, on a nominal basis, but reduction of 1.1% in volume. This is mainly attributable to the losses of some export sales.

Sales generated from skimmed milk powder decreased by 22.1% on a nominal basis to £2.5 million, compared with £3.4 million in the previous year. In terms of volume, skimmed milk powder sales decreased by 44.6%, impacted by difficulties with the Black Sea ports in Ukraine. The Group's skimmed milk powder sales and exports from Ukraine in the first half of the year reduced by 69% year on year due to the low demand for the supply of skimmed milk powder to outside countries.

Sales of kvass and beverages amounted to £1.1 million in FY2022, corresponding to a decline of 33.7% on a nominal basis and 38.3% in terms of volume, in each instance compared with the previous period. The decrease was principally due to the late start of the season due to active hostilities in key kvass sales regions, impacting the period of active sales which was less than half that achieved in FY2021.

In FY2022, the Group's administrative and selling expenses amounted to £4.1 million; a 2.5% decrease compared to FY2021. The Group optimized costs for payroll, rents, communication and banks services. The Group's Central Warehouse was closed, and its functions were transferred to production warehouses in Zhytomyr. Marketing campaigns were also significantly reduced. As a result of a 87.6% increase in fuel prices, transport and logistics costs increased by 26.0% in FY2022 compared to the previous period, to £1.1 million.

Due to the impact of the war, other operating expenses during the reporting period totaled £1.6 million (2021: £0.2 million), including losses from impairment of trade receivables, write-off of materials and finish goods, fines, and VAT losses.

The Group's operations recorded an EBITDA of £1.7 million, representing an increase of 57.2% year on year. The Group's EBITDA margin improved from 2.2% to 4.6%. This notable performance was largely attributed to a significant reduction in marketing and trade marketing activities, several product price increases, a reduction in the cost of production and an increase in production efficiency, and a focus on the most profitable product groups.

Net loss after tax for FY2022 amounted to a loss of £0.8 million, a decrease of £1.2 million compared to FY2021, stemming from the negative currency translation due to the 26% devaluation of the Ukrainian hryvnia against the Euro.

Financial Position

As at 31 December 2022, Ukrproduct reported net assets of £4.6 million including cash balances of £0.4 million compared to net assets of £5.9 million as at 31 December 2021 and a cash balances of £0.3 million.

For the year ended 31 December 2022, the Group was in breach of several provisions of its loan agreement with the European Bank for Reconstruction and Development ("EBRD") and missed repayments for which the bank has not issued a waiver. The Company have been holding negotiations with the EBRD to potentially restructure the loan repayment schedule since June 2021. These negotiations with EBRD are ongoing. At present, the EBRD has taken no action to accelerate repayment of the loan.

Outlook

The Company continues to make every effort to navigate its strategy in a changing business environment and to respond to new challenges. The Group expects that in 2023 the focus will be placed on maintenance of the existing production facilities, maintaining sales volumes and increasing operating efficiency.

INDEPENDENT AUDITOR'S REPORT TO THE SHAREHOLDERS OF UKRPRODUCT GROUP LIMITED

Report on the Audit of the Financial Statements

Opinion

We have audited the consolidated financial statements of Ukrproduct Group Limited and its subsidiaries (the "Group") which comprise the consolidated statement of comprehensive income, the consolidated statement of financial position as at 31 December 2022, the consolidated statement of changes in equity, consolidated statement of cash flows and notes to the financial statements including significant accounting policies. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards ('IFRS') as adopted by the United Kingdom.

In our opinion the financial statements:

· give a true and fair view of the state of the Group's affairs as at 31 December 2022 and of its results for the year then ended;

· have been properly prepared in accordance with IFRS as adopted by the United Kingdom; and

· have been prepared in accordance with the requirements of the Companies (Jersey) Law 1991.

Basis for opinion

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the Auditor's responsibilities for the audit of the consolidated financial statements section of our report. We are independent of the Group in accordance with the ethical requirements that are relevant to our audit of the consolidated financial statements in Jersey, including the FRC's Ethical Standard as applied to listed entities, and we have fulfilled our ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

An overview of the scope of our audit

During our audit planning, we determined materiality and assessed the risks of material misstatement in the consolidated financial statements including the consideration of where Directors made subjective judgements, for example, in respect of the assumptions that underlie significant accounting estimates and their assessment of future events that are inherently uncertain. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the consolidated financial statements as a whole taking into account the Group, its accounting processes and controls and the industry in which it operates.

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 and include the most significant assessed risks of material misstatement (whether or not due to fraud) we identified, including those which had the greatest effect on the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Material uncertainty related to going concern

We draw attention to note 2.1 (b), in the financial statements, which indicates that the Russian Federation launched a full-scale military invasion of Ukraine, and the Group is in breach of covenants in respect of funding received from the European Bank for Reconstruction and Development (EBRD); - these events have continued after the year end. These events and conditions, along with other matters as set in note 2.1 (b) to the financial statements, indicate that a material uncertainty exists that may cast significant doubt on the Group's ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Our application of materiality

We define materiality as the magnitude of misstatements in the consolidated financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate the results of that work. Materiality was determined as follows:

Consolidated financial statements as a whole:

Materiality was calculated at £391,108 which is approximately 1% of Total Revenue. This benchmark is considered the most appropriate because, based on our professional judgement, we considered that this is the primary measure used by the users of the consolidated financial statements in assessing the performance of the Group.

Communication of misstatements to the Board:

We agreed with the Directors that any misstatement above £19,555 identified during our audit will be reported, together with any misstatement below that threshold that, in our view, warranted reporting on qualitative grounds.

Other information

The Directors are responsible for the other information. The other information comprises the information included in the annual report set out on page 3 to 17 other than the consolidated financial statements and our auditor's report thereon. Our opinion on the consolidated financial statements does not cover the other information and we do not express any form of assurance conclusion thereon.

In connection with our audits of the consolidated financial statements, our responsibility is to read the other information identified above when it becomes available and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements, or our knowledge obtained in the audits or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement of the consolidated financial statements or a material misstatement of the other information. 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.

Matters on which we are required to report by exception

We have nothing to report in respect of the following matters where the Companies (Jersey) Law 1991 requires us to report to you if, in our opinion:

· adequate accounting records have not been kept, or

· returns adequate for our audit have not been received from branches not visited by us; or

· the financial statements are not in agreement with the accounting records and returns; or

· we have not received all the information and explanations we require for our audit.

Responsibilities of directors for the consolidated financial statements

As explained more fully in the Statement of Directors' Responsibilities on page 18, the Directors are responsible for the preparation of the consolidated financial statements which give a true and fair view, and for such internal control as the Directors determine 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, the Directors are 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 the directors either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements are free from material misstatement, whether due to fraud or error, and to issue an auditor's 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 (UK) 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.

Explanation as to what extent the audit was considered capable of detecting irregularities, including fraud

The objectives of our audit, in respect to fraud, are; to identify and assess the risks of material misstatement of the financial statements due to fraud; to obtain sufficient appropriate audit evidence regarding the assessed risks of material misstatement due to fraud, through designing and implementing appropriate responses; and to respond appropriately to fraud or suspected fraud identified during the audit. However, the primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management.

Our approach was as follows:

 • We obtained an understanding of the legal and regulatory frameworks that are applicable to the Group and determined that the most significant are those that relate to the Companies (Jersey) Law 1991 and the AIM Rules for Companies. We also reviewed the laws and regulations applicable to the Group that have an indirect impact on the financial statements.

• We gained an understanding of how the Group is complying with Companies (Jersey) Law 1991 and the AIM Rules for Companies by making inquiries of management. We corroborated our inquiries through our review of minutes of Board of Directors meetings and the review of various correspondence examined in the context of our audit and noted that there was no contradictory evidence.

 • We assessed the susceptibility of the Group's financial statements to material misstatement, including how fraud might occur, by meeting with management to understand where they considered there was susceptibility to fraud. We also considered performance targets and their propensity to influence management to manage earnings and revenue by overriding internal controls. We performed specific procedures to respond to the fraud risk of inappropriate revenue recognition. Our procedures also included testing a risk-based sample of journal entries that may have been posted with the intention of overriding internal controls to manipulate earnings. These procedures were designed to provide reasonable assurance that the financial statements were free from fraud or error.

 • Based on this understanding, we designed specific appropriate audit procedures to identify instances of non-compliance with laws and regulations. This included making enquiries of management and those charged with governance and obtaining additional corroborative evidence as required.

A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council's website at https://www.frc.org.uk/auditorsresponsibilities.This description forms part of our auditor's report

Use of our report

This report is made solely to the Group's shareholders as a body, in accordance with Article 113A of the Companies (Jersey) Law 1991. Our audit work has been undertaken so that we might state to the Group's shareholders those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Group and the Group's shareholders as a body, for our audit work, for this report, or for the opinions we have formed.

Jeff Vincent

For and on behalf of Moore Stephens Audit & Assurance (Jersey) Limited

1 Waverley Place

Union Street

St Helier

Jersey

Channel Islands

JE4 8SG

Ukrproduct Group

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2022

Ukrproduct Group

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2022

Ukrproduct Group

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2022

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2022

These consolidated financial statements were approved and authorised for issue by the Board of Directors on 29 June 2023 and were signed on its behalf by Mr. Alexander Slipchuk.

Nature of Financial Information

The financial information contained in this announcement does not constitute statutory accounts as defined under section 113 of the Companies (Jersey) Law 1991 but has been extracted from the Group's 2022 statutory financial statements. It contained no statement under section 113B of the Companies (Jersey) Law 2011. The financial statements for 2022 will be delivered to the Registrar of Companies after adoption at the Company's Annual General Meeting.

EXTRACTS FROM NOTES TO CONSOLIDATED FINANCIAL STATEMENT

1. Basis of preparation

The consolidated financial statements have been prepared on a historical cost basis, except for significant items of property, plant and equipment which have been measured using the revaluation model. The consolidated financial statements are presented in British Pounds Sterling (GBP) and all values are rounded to the nearest thousand (£000) except where otherwise indicated.

2. Going concern

At the time of publication of the annual report the war, which began on 24 February 2022, is ongoing and the significant general uncertainties inherent to the continued war still exist. The Group's management has analyzed the observable impact of the war on its business as described below, and has taken the following actions in response to the current situation:

- For the period after the Russian invasion of Ukraine 58 employees joined Ukrainian military forces and territorial defense. Personnel of production facilities and central office remained in their working area or worked remotely. The Group does not have a labor shortage and has managed to retain its staff;

- No critical assets preventing the Group to continue operations are damaged or located in the uncontrolled territories. The Group optimized utilization of production facilities to meet domestic demand and export orders;

- All of the Group's inventories are in good condition and are in safe storage.

- Export sales flow via Ukrainian ports was reduced significantly. Alternative export routes are expanded in length and are significantly more expensive in comparison with sea. Black Sea ports in Ukraine remains blocked for export activities.

- During the fourth quarter of 2022, there were severe power outages in Ukraine caused by Russia's attacks on Ukrainian power generation and distribution infrastructure. These outages caused temporary instability of work of the Group. To mitigate the impact on its business, the Group equipped its key assets with diesel generators. Difficulties with power supply persisted throughout January 2023 and only began to partially improve in February 2023.

- Selling, general and administrative and other operating expenses, as well as CAPEX, have been reduced to the minimum required to meet the primary needs of the Group's core business;

- The loss of the market in the east and south of the country is expected to be offset partly by increased demand in central and western Ukraine, where a large number of internally displaced persons temporarily reside.

Management acknowledges that future development of military actions and their duration represent a single source of material uncertainty which may cast significant doubt about the Group's ability to continue as a going concern and, therefore, the Group may be unable to realize its assets and discharge its liabilities in the normal course of business. Despite the single material uncertainty relating to the war in Ukraine, management is continuing to take actions to minimize the impact on the Group and thus believes that application of the going concern assumption for the preparation of these Consolidated financial statements is appropriate.

For the year ended 31 December 2022, the Group was in breach of several provisions of its loan agreement with the EBRD and missed repayments which the bank has not issued a waiver for. The Company have been holding negotiations with the EBRD to potentially restructure the loan repayment schedule since June 2021. The negotiations with EBRD are ongoing. At present the EBRD has taken no action to accelerate repayment of the loan. 

3. Bank loans and short-term payables

As at 31 December 2022 the Group has two loans: the loan from Creditwest Bank in the amount of 1.451 thousand GBP (in UAH 63.860 million) and the loan from the EBRD in the amount of 4.665 thousand GBP (in EUR 5.309 thousand).

For the year ended 31 December 2022, the Group was in breach of several provisions of its loan agreement with the EBRD. With the beginning of the military aggression of the Russian Federation against Ukraine on 24 February 2022 the Group suspended all the principal payments and interests of EBRD loans as a result of force majeure circumstances, which the bank has not issued a waiver for.

Ukrproduct has been in negotiations with the EBRD to potentially restructure the loan repayment schedule since June 2021. The negotiations with EBRD are ongoing. At present the EBRD has taken no action to accelerate repayment of the loan

The average interest rate as at 31 December 2022 was 11% (2021: 11%).

SUBSEQUENT EVENTS

(a) EBRD - breach of loan covenants

As at 31 December 2022 the Group had been in breach of loan covenants with EBRD. The Group was still in breach of this covenant as at 01 June 2023. Ukrproduct has been in negotiations with the EBRD to potentially restructure the loan repayment schedule since June 2021. The negotiations with EBRD are ongoing.

(b) Foreign exchange rates

Post year end, the Ukrainian Hryvnia has strengthened against the USD, EUR and GBP. According to the information provided by the National Bank of Ukraine, the main exchange rates are set at the following rates:

(c)  War

On 24 February 2022, the Russian Federation launched a full-scale military invasion of Ukraine. The ongoing military attack has caused and continues to cause significant casualties, population displacement, infrastructure damage and disruption to economic activity in Ukraine. Seaports and airports are closed and damaged. Export through seaports is completely frozen. This raises significant pressure on other means of alternative transportation for export operation. The situation remains highly volatile and the outlook highly uncertain.

As of the date of this report, the Group continues to operate. The management of the Group controls all its operations. The Group's production facilities are located in Khmelnytskyi and Zhytomyr regions, where missiles attacks have been incurred. As a result, the Group's business activities have been affected as follows:

- none of the Group's critical facilities or infrastructure has suffered any significant damage;

- as at 30 June 2023 all the Group's assets are located in the non-occupied territories;

- the Group does not have a labor shortage and has managed to retain its staff. Office staff work remotely, while production staff work at their sites;

- the Group have lost sales of dairy products in the occupied territories;

- Black Sea ports in Ukraine remain blocked for export activities. Alternative logistics chains for dairy products exports by other means of transportations have been developed;

- the Group concluded contracts with new alternative suppliers.