The level of the Group's balance sheet volumes is affected by the seasonality phenomenon. It is described in detail in item 1.5. When analysing the Group's balance sheet at the end of 2019 (compared to the end of the previous year), it is necessary to take into account the Hungarian company Poli-Farbe Vegyipari Kft. and its subsidiaries, which joined the Group.

At the end of 2019, the Group's assets amounted to PLN 661,448 thousand, which accounts for 256,967 thousand (63.5%) increase compared to the end of the previous year.

The value of fixed assets of the Company (constituting 62.9% of its total assets) over the year increased by 76.9% to PLN 415,721 thousand, primarily as a result of inclusion in the Group of property, plant and equipment held by Poli-Farbe (e.g. real estate, equipment for production facilities) and the implementation of investments by FFiL Śnieżka SA in connection with its development plans.

In addition, in the annual consolidated financial statements, under the "Fixed assets” item, the Group recognized intangible assets in connection with the acquisition of 80% shares in Poli-Farbe Vegyipari Kft. (trademarks and customer relations). As a result, the Group's intangible assets as at December 31, 2019 increased compared to the previous year by 624.2%, to PLN 74,575 thousand. Consequently, in the Group's balance sheet the goodwill decreased due to acquisition of Poli-Farbe, which was initially recognized in the interim condensed consolidated financial statements for the period from January 1, 2019 to June 30, 2019, as a result of a provisional settlement of the acquisition transaction. In these annual statements, the Group made the final settlement of the share acquisition transaction and finally the goodwill amounted to PLN 4,626 thousand.

The value of the Group's current assets amounted to PLN 245,727 thousand, increasing by 44.9% compared to December 31, 2018. The main part of the Group's current assets were inventories valued at PLN 108,481 thousand, which in particular consisted of finished products and materials. The 28.9% higher inventory level compared to the end of the previous year is primarily the result of recognizing in the consolidated financial statements the inventories held by Poli-Farbe, but also FFiL Śnieżka SA's inventories higher than a year earlier.

At the end of 2019, the Group also held trade and other receivables in the amount of PLN 98,549 thousand, which increased by 27.6%, as a result of higher sales recorded by FFiL Śnieżka SA and consolidation in the financial statements of the Poli-Farbe Group.

The increase in cash and cash equivalents had a positive effect on the value of the Group's current assets. At the end of 2019, their value increased to PLN 36,337 thousand, due to positive cash flow from operating activities and including Poli-Farbe in the consolidation.

At the end of 2019, Śnieżka Group financed its activities from own funds in 45.1%. The decreased indicator by 21.4% (compared to the end of 2018) results primarily from obtaining by FFiL Śnieżka SA external financing for the acquisition of 80% shares in Poli-Farbe Vegyipari Kft. and raising loans for development investments.

The Group's equity at the end of the reporting period was PLN 298,367 thousand and was 11.0% higher than at the end of 2018. The value of equity attributable to shareholders of the parent company was primarily affected by the allocation of PLN 27,782 thousand from 2018 profit to supplementary capital. Whereas the value of this capital was adversely affected by recognizing in the balance sheet an option for the purchase of shares held by minorities (for the remaining 20% of shares in Poli-Farbe Vegyipari Kft.) in the amount of PLN 28,670 thousand. . Liability under the put option in the amount of PLN 28,252 thousand PLN, recalculated at the final settlement of the transaction, was recognized in the Group's long-term liabilities (details in the consolidated financial statements, in note No. 14).

The value of the Group's equity (total) in 2019 was also positively affected by an increase in the capital of non-controlling shareholders (PLN +26,513 thousand). The majority of the minority capital is owned by Lampo Kft. controlled by Antal Szabó (CEO of Poli-Farbe) and Andrea Nagy György, who hold 20% of shares in Poli-Farbe Vegyipari Kft.

In the reporting period, the Group's long-term liabilities increased significantly. As at December 31, 2019, they amounted to PLN 158,798 thousand and constituted 24.0% of the balance sheet total. They were predominately composed of bank loans (PLN 112,822 thousand) - including loans raised by FFiL Śnieżka SA to finance the acquisition of 80% shares in Poli-Farbe Vegyipari Kft. and development investments. The Group also recognized in the long-term liabilities the abovementioned liabilities under the option to acquire the remaining shares of Poli-Farbe held by Lampo Kft. and the provision for deferred income tax created as a result of the final settlement of the acquisition of Poli-Farbe - in connection with depreciation costs from recognized intangible assets (PLN 6,085 thousand).

The Group's short-term liabilities amounted to PLN 204,283 thousand (+56.6% y/y) and constituted 30.9% of the Group’s balance sheet total. The dominant part (PLN 106,541 thousand) was related to liabilities under loans raised to meet the current investment needs of the Group and FFiL Śnieżka SA - including expansion, modernization and automation of production lines.

In the reporting period, the Group's liabilities under deliveries and services as well as other liabilities, including short-term ones, increased - in total by PLN 32,824 thousand. The increase in these balance sheet items stems primarily from the consolidation of Poli-Farbe's balance sheet items and the higher costs of the Group's operations in the reporting period (sales and general administration).

Put and call options

The essence of the above put option, rezognized in the Group's balance sheet, is that Lampo Kft. has the option to sell (put option) and the Company is obliged to acquire the remaining 20% of shares in Poli-Farbe Vegyipari Kft. Whereas the call option entitles the Company, in special circusmtances, to acquire the remaining 20% of shares. The option may be exercised if the conditions specified in the share purchase agreement occur, which has been described in item 1.7.2 herein. Details of the valuation and recognition of the put option are described in note 9.22 to the consolidated financial statements.

At the same time, the Management Board of FFiL Śnieżka SA assumes a long-term collaboration with Poli-Farbe based on the current model (developed in the course of talks with Antal Szabó, the founder and managing director of Poli-Farbe Vegyipari Kft.) and does not conduct any negotiations on the possible acquisition of the remaining 20% shares in the Hungarian company.

Fabryka Farb i Lakierów Śnieżka SA

The size of the Company’s balance sheet items - as well as the Group’s - is affected by the of seasonality phenomenon. It is described in detail in item 1.5.

At the end of 2019, the Company's assets amounted to PLN 577,552 thousand, which accounts for 197,755 thousand (52.1%) increase compared to the end of the previous year. Such a significant increase in assets is primarily due to the acquisition of 80% of shares in Poli-Farbe Vegyipari Kft. These assets were recognized in the financial statements under "Shares, stocks and other long-term assets", whose total value at the end of December 2019 increased by 453.7%, to PLN 131,781 thousand.

The value of fixed assets of the Company (constituting 71.3% of its total assets) over the year increased by 76.4% to PLN 411,868 thousand, primarily as a result of the acquisition of the above shares in Poli-Farbe, as well as of incurring capital expenditure related to the Company's development plans.

The value of the Company's current assets amounted to PLN 165,684 thousand, increasing by 13.3% compared to December 31, 2018. The main asset was trade and other receivables in the amount of PLN 81,820 thousand, which as a result of successful sales results (including premium brand products) in 2019 were by 12.5% higher than a year earlier. The Company also held inventories valued at PLN 75,935 thousand. In 2019, the Company implemented inventory optimization processes - both at the level of accumulating raw materials for production and at the level of inventory and sales management.

At the end of 2019, FFiL Śnieżka SA financed its activities from own funds in 33.2%. The decreased indicator by 13.1% (compared to the end of 2018) results primarily from obtaining external financing for the acquisition of shares in Poli-Farbe Vegyipari Kft. and the organic development of the Company. At the same time, the Company's equity at the end of the reporting period increased by 9.0%, to PLN 191,813 thousand - primarily as a result of allocating the profit of PLN 27,782 thousand on supplementary capital.

The Company's long-term liabilities accounted for PLN 204,829 thousand, increasing by 156.8% compared to the end of December 2018. The majority were liabilities under bank loans raised by the Company - in order to, inter alia, finance the acquisition of the above shares in Poli-Farbe, expansion, modernization and automation of production facilities (including a production line of water-borne paint at the factory in Lubzina and white paint in Pustków), as well as a loan from a subsidiary of PLN 83,650 thousand from TM Investment Sp. z o.o.

The Company’s Management Board intends to allocate for the repayment of loans raised for the acquisition of shares in Poli-Farbe Vegyipari Kft. (settled in Hungarian forints) funds from future dividends, which will most likely be paid by this company. In addition, the Management Board plans to repay directly in Hungarian currency to avoid exchange rate risk.

The Company's short-term liabilities amounted to PLN 180,910 thousand (+45.8% y/y). The majority of them was related to liabilities under loans and borrowings, which amounted to PLN 104 805 thousand (67.3% y/y). The Company's liabilities under deliveries and services as well as other liabilities related to its core activity also increased (to PLN 70,634 thousand).

The Śnieżka Group

In 2019, the Group generated positive cash flows of PLN 29,282 thousand. As a result, at the end of this period, the Group's cash amounted to PLN 36,337 thousand.

The Group's cash flows were composed of:

• Positive cash flows on investing activities in the amount of PLN 99,157 thousand.
  Their level was positively influenced by the profit generated by the Group (after adjustments it amounted to PLN 109,011 thousand) and changes in the working capital of the Group (in total PLN 7,224 thousand), while income tax paid negatively (PLN 17,078 thousand).
• Negative cash flows on investing activities in the amount of PLN 175,605 thousand.
  The largest investment in 2019 was the acquisition of shares in Poli-Farbe Vegyipari Kft. by FFiL Śnieżka SA. In addition, the Group companies incurred expenses for the purchase of property, plant and equipment and intangible assets (total negative impact of PLN 87,975 thousand). The largest part of this amount were expenses related to the expansion, modernization and automation of the Company's production lines, construction of the Logistics Centre in Zawada and new IT software in the Company (implementation as part of the Change IT digital transformation project). Cash flow from investment activities was positively affected by the repayment of loans granted (PLN 18,823 thousand).
• Positive cash flows on financing activities in the amount of PLN 105,730 thousand.
  Apart from raising new loans and borrowings by the Group companies in the amount of PLN 187,340 thousand, resulting from investment needs as well as current operating activities, repayment of loans and borrowings in the amount of PLN 37,531 thousand and payment of dividends by the Group companies (PLN 40,473 thousand) had an impact on these flows.

Fabryka Farb i Lakierów Śnieżka SA

In 2019, the Company generated positive cash flows of PLN 2,581 thousand. As a result, at the end of this period, the Company's cash amounted to PLN 6,458 thousand.

The Company's cash flows were composed of:

• Positive cash flows on investing activities in the amount of PLN 38,746 thousand.
  Their level was positively influenced by the profit generated by the Company (after adjustments it amounted to PLN 64,159 thousand) while negatively the changes in the Group’s working capital (in total PLN 12,732 thousand) and income tax paid (PLN 12,681 thousand).
• Negative cash flows on investing activities in the amount of PLN 165,108 thousand.
  In the reported period, FFiL Śnieżka SA acquired 80% shares in Poli-Farbe Vegyipari Kft (transaction settlement is described in note 14 to the consolidated financial statements). In addition, the Company incurred expenses for the purchase of property, plant and equipment and intangible assets (total negative impact of PLN 78,103 thousand). The expenses were related to the expansion, modernization and automation of the production lines, construction of the Logistics Centre in Zawada as well as incurring expenditure on new IT software in the Company (implementation as part of the Change IT digital transformation project). The Company received dividends from subsidiaries in the amount of PLN 17,127 thousand.
• Positive cash flows on financing activities in the amount of PLN 128,943 thousand.
  Apart from raising new loans and borrowings in the amount of PLN 200,973 thousand, resulting from the Company’s investment needs as well as current operating activities, repayment of loans and borrowings in the amount of PLN 33,978 thousand and payment of dividends for 2018 (PLN 32,807 thousand) had an impact on these flows.

The Śnieżka Group

In 2019, the Group generated a slightly higher (0.5%) gross margin than a year earlier. This is a result of sustained demand for paints and varnishes from the mainstream and premium price categories. The trend of selecting by consumers more expensive products with a higher margin was observed in Poland, Hungary and Ukraine.

Other profitability ratios were lower than in the previous year. The level of the Group's profit (operating, EBITDA and net) was affected directly by the increase in selling costs and general and administrative expenses.

Return on assets (ROA) decreased by 3.8 %, which is the result of a significant increase in assets due to the Group's expansion by Poli-Farbe and a slight decrease in consolidated net profit. On the other hand, the decrease of ROE is mainly the result of an increase in equity while a decrease in net profit.

As at December 31, 2019, the Group's total debt increased by 21.4 % year on year, mainly as a result of raising bank loans to finance the acquisition of shares in Poli-Farbe Vegyipari Kft. by the Company and development investments. The increase in debt ratios was also caused by the form of records of an option to acquire the remaining 20% shares in Poli-Farbe held by Lampo Kft. On the one hand, the valued amount of the option increases the liabilities and, on the other hand, reduces the Group's equity.

In connection with the consolidation of Poli-Farbe, the Group's fixed assets presented in the balance sheets increased significantly. This contributed to a 42.7 % decrease in the fixed-assets-to-equity ratio compared to the end of December 2018.

The Group's current and quick liquidity ratios remained almost at the same level as year before, which means the Group is capable of paying its liabilities in a timely manner.

In 2019, the Group's cash conversion cycle was less than 66 days, which accounts for an improvement of about 10 days compared to the previous year. It was primarily due to the extension of the liability cycle.

At the end of 2019, the net debt/EBITDA ratio was at 1.71 level.

Fabryka Farb i Lakierów Śnieżka SA

In 2019, the Company generated higher gross margin by 0.9% than in the previous year - mainly due to sustained demand for premium paints and varnishes (Magnat and Vidaron brands) and medium ones (Śnieżka brand), which feature a higher margin.

Other profitability ratios were lower than in the previous year. The level of the Company's profit (operating, EBITDA and net) was affected directly by the increase in selling costs and general and administrative expenses.

Return on assets (ROA) decreased by 5.1 %, which is the result of a significant increase in assets due to acquisition of Poli-Farbe and a 18.8% decrease in net profit compared to 2018. Lower net profit in the reporting period is primarily a derivative of the above-mentioned cost increase and lower dividend obtained from subsidiaries than a year earlier.

On the other hand, the decrease of ROE by 9.9% is mainly the result of lower net profit and an increase in Company’s equity (allocation of part of 2018 on supplementary capital).

As at December 31, 2019, the Company's total debt increased by 13.1 % year on year, mainly as a result of raising bank loans to finance the acquisition of shares in Poli-Farbe Vegyipari Kft. In connection with this transaction, the Company's fixed assets presented in the balance sheets also increased significantly, which contributed to a 28.8 % decrease in the fixed-assets-to-equity ratio compared to the end of December 2018.

The current and quick liquidity ratios of the Company decreased compared to the previous year, which is the result of the accumulation of development investments carried out under the largest investment cycle in the history of FFiL Śnieżka SA scheduled for 2018-2022. Despite the higher debt, the Company did not have problems with liquidity and settlement of its liabilities in a timely manner.

In 2019, the cash conversion cycle in the Company was shortened by almost 4 days compared to the previous year. It was primarily due to the extension of the liability cycle.