Kellan Group Regulatory News (KLN)

20 June 2017

The Kellan Group PLC

("Kellan", the "Company" or "Group")

Audited Annual Results for the year ended 31 December 2016

Notice of Annual General Meeting

The Company is pleased to announce its annual results for the year ended 31 December 2016. Kellan is a market leading recruitment business operating across a wide range of functional disciplines and industry sectors.

The Annual General Meeting of the Company will be held at the Company's offices at 4th Floor, 27 Mortimer Street, London, W1T 3BL at 2pm on 19 July 2017.

Headline figures

· Full year revenue of £21.9 million representing a decrease of 11.8% (2015: £24.9 million).

· H2 2016 revenue of £11.9 million grew by 19.6% compared with H1 2016 (£10 million); while H2 net fee income (NFI) of £3.5 million grew by 3.4% compared to H1 2016 (£3.3 million).

· Full year adjusted EBITDA (note 2) profit of £0.77 million compared to a profit of £1.02 million in 2015.

· Impairment charge (non-cash) against goodwill of £2.6 million (2015: nil).

· Operating profit before impairment of £0.4 million compared with an operating profit of £0.8 million in 2015.

· Net loss (including non-cash impairment charge) of £2.5 million compared with a net profit of £0.4 million in 2015. 2016 Net profit of £0.1 million (excluding non-cash impairment charge)

· Continued streamlining with administrative expenses reduced by 7.2% year-on-year from £6.9 million in 2015 to £6.4 million. Excluding the effect of share based payments (2016: nil, 2015; £150,000 favourable adjustment), the like-for-like administrative expenses have reduced 8.6% from £7.0 million to £6.4 million.

ENQUIRIES:

Executive Chairman's Statement

The results for 2016 have been disappointing, although the Group has had some success in securing new clients and growing some areas of the business. Group sales have decreased by 11.8% from £24.9 million in 2015 to £21.9 million in 2016, while administrative expenses have reduced by 7.2% from £6.9 million in 2015 to £6.4 million in 2016. The impairment review undertaken in 2016 resulted in a £2.6 million impairment charge (non-cash) in relation to Quantica Group (2015: nil). The Quantica Group is significantly different from the business acquired in 2007, and as such it is not considered appropriate to retain the £2.6 goodwill as an intangible asset. Including the £2.6 million impairment of goodwill in 2016, the overall loss for 2016 is £2.5 million compared with a profit of £0.4 million in 2015. Excluding the effect of the £2.6 million goodwill impairment in 2016 and the £150,000 favourable share-based payment adjustment in 2015, year-on-year earnings before tax declined from £0.4 million in 2015 to £0.1 million in 2016. Adjusted EBITDA for 2016 of £0.77 million compared with £1 million in 2015 is extremely positive as the Group was able to adapt its cost base effectively to be in line with its reduced sales performance level.

The 2016 results led me to make a number of senior management changes and I am really pleased with the positive contribution made to date by Liam Humphreys and his management team. He has spearheaded a series of progressive changes within the running of our three core businesses, starting with change management, staff training, retention and internal staff recruitment, thus delivering a more solid deliverable service to our national clients. The Group's staff turnover rate is substantially better than in previous years with greater emphasis towards on-boarding processes, development and detainment. Improvement towards our technology tools within our varied CRM systems is already starting to show that time and investment was well spent.

Overall Group performance to date for 2017 is slightly ahead of Board expectation and I am confident that the changes implemented will lead the Group to achieve substantially better results in 2017.

The Group has successfully refinanced all its obligations that were due in February 2017 and September 2017. The debt restructuring plan improves the Company's balance sheet whilst substantially reducing ongoing financing costs which will enable the Company to pursue its organic and acquisitive growth strategy without further distractions.

The Board thanks Mark Darby for his efforts and contributions to the Group.

My sincerest thanks go to our staff, all our customers, and to all our loyal shareholders for their continued support.

Richard Ward

Executive Chairman

19 June 2017

Strategic report

Business Model

Kellan Group plc (the "Group" or the "Company" or "Kellan"), is a market leading recruitment business operating across a wide range of functional disciplines and industry sectors. The Company joined the AIM market of the London Stock Exchange in December 2004.

A review of the business and a detailed explanation of performance and key performance indicators is set out below.

Business review

With the UK recruitment market providing good opportunities with some specialist sectors doing significantly better than others, the Group has proactively taken the opportunity to ensure it is in the strongest position possible. Business operations are focussed in our core markets being Hospitality & Leisure, Technology and Accounting & Finance. While we also operate in certain other niche areas, our aim is to continue to develop our core businesses in major city centres. The diverse brands within the Group de-risk the overall impact of a potentially inconsistent market, and despite the overall decline in NFI, we saw some strong performances within various parts of our business during 2016.

Berkeley Scott's temporary recruitment operation was flat year-on-year with NFI at £3.1 million. NFI in the London office declined by 12.9% while all other temporary locations delivered year-on-year growth. Berkeley Scott returned to the Birmingham market in January 2016 and delivered over 35,000 hours of temporary assignments in 2016.

NFI from Berkeley Scott's permanent recruitment operation declined by 19.7% from £1.9 million in 2015 to £1.5 million in 2016, predominantly due to underperformance from London and Leeds, however Manchester delivered growth of 11.7% on 2015. The Northern contract and facilities management sector delivered growth of 23.4% on 2015 while the South West hospitality market delivered NFI growth of 74.7% on 2015.

Berkeley Scott's permanent recruitment operation in London underperformed in 2016, with NFI declining 28.6%, but following a management restructure is currently delivering increased NFI. In 2016, the London team made continued progress within the executive chef and hotels markets, with the chefs market NFI increasing 26.5% on 2015.

The RK Group's Leeds office underperformed in 2016, with NFI declining 25.3% on 2015. However, growth delivered from other offices saw overall NFI remain flat year-on-year at £1.4 million, with NFI from RK Preston increasing by 17.7% on 2015. The RK Commercial Contracts division was closed in Q4 2016, with year-on-year NFI having declined by 13% to £83,000.

The Quantica Group's NFI declined by £0.52 million (38.5%) from £1.36 million in 2015 to £0.84 million in 2016. £0.16 million of this decline relates to the closure of the Birmingham branch in Q2 2015, with the remaining decline primarily from the Yorkshire and London branches. Quantica Search and selection has continued to re-establish relationships with Preferred Supplier Agreement clients and has also won new business with Dr Oetker, Dairygold and Kleeneze. Although Quantica Group's NFI reduced year-on-year, Quantica delivered controllable contribution growth of £96,000.

Financial Review

The Group's revenue for the year ended 31 December 2016 was £21.9 million representing a decrease of 11.8% (2015: £24.9 million). This produced NFI of £6.8 million for the year ended 31 December 2016, a decrease of 11.9% (2015: £7.7 million). 2016 full year adjusted EBITDA was a profit of £0.8 million compared to a profit of £1 million in 2015.

Temporary NFI declined by 10.0% from £4.1 million in 2015 to £3.7 million in 2016, whilst permanent NFI declined by 14.1% from £3.6 million in 2015 to £3.1 million in 2016. The decline in both temporary and permanent NFI was primarily due to underperformance from Berkeley Scott London and RK Leeds.

Excluding the £2.5 million impairment of goodwill in 2016 (2015: nil), the administrative expenses have decreased to £6.4 million in the year ended 31 December 2016, from £6.9 million in 2015, which represents a reduction of 7.2% year-on-year. In 2015, the Group carried out a review of the outstanding options. After considering the number of options that are expected to vest, a favourable share based payment adjustment of £150,000 was included in administrative expenses in the 2015 accounts (2016: nil). Excluding the effect of share based payments (2016: nil; 2015; £150,000 favourable adjustment), the like-for-like administrative expenses have reduced 8.6% from £7 million to £6.4 million.

Cashflow

Net cash inflow at an operating level was £0.68 million for the year ended 31 December 2016 (2015: inflow of £0.51 million). Investing activities comprised of capital expenditure of £28,000 (2015: £161,000). Net cash outflow from financing activities amounted to £450,000 (2015: inflow of £167,000) comprising movement on the invoice discounting facility balances, the servicing of loan interest, the repayment of £732,000 to the loan note holders and receipt of £366,000 of new loans. The net increase in cash and cash equivalents in the period was £202,000 (2015: £516,000).

Monitoring, risk and KPIs

Risk management is an important part of the management process throughout the Group. The composition of the Board is structured to give balance and expertise when considering governance, financial and operational recruitment issues. Meetings incorporate, amongst other agenda items, a review of monthly management accounts, operational and financial KPIs and major issues and risks facing the business.

The most important KPIs used in monitoring the business are as follows:

The principal risks faced by the Group in the current economic climate are considered to be financial, market and people related:

· Financial - The main financial risks arising from the Group's activities are liquidity risk and credit risk. These are monitored by the Board and are disclosed further in notes 1 and 16 of the financial statements.

Based on the Group's latest cash flow forecasts and current trading performance, it is not expected that any further funding will be required for the foreseeable future. The directors' consideration of the appropriateness of the going concern basis in preparing the financial statements is set out in note 1 to the financial statements.

· Market - the Group operates in a dynamic market place and constantly seeks to ensure the solutions it offers to customers are competitive. By operating in diverse sectors, the Group is, to some degree, protected from a deteriorating market. The Group is operating at a near 50/50 mix of temporary and permanent recruitment fees at NFI level, which de-risks the overall impact of a potentially inconsistent market.

· People - In a people intensive business, the resignation of key individuals (both billing consultants and influential management) and the potential for them to exit the business taking clients, candidates and other employees to their new employers is a risk. Kellan mitigates this risk through a number of methods including the application of competitive pay structures and share plans to incentivise retention. In addition the Group's employment contracts contain restrictive covenants that reduce a leaver's ability to approach Kellan clients, candidates and employees for certain periods following the end of their employment with the Group.

The Strategic Report was approved by order of the Board on 19 June 2017.

Rakesh Kirpalani Richard Ward

Group Finance Director Executive Chairman

19 June 2017

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2016

The above results relate to continuing operations.

There are no other items of comprehensive income for the year or for the comparative year.

The notes on at the end of this announcement form part of these financial statements.

Consolidated Statement of Financial Position

As at 31 December 2016

The notes at the end of this announcement form part of these financial statements.

Consolidated Statement of Changes in Equity

For the year ended 31 December 2016

The notes at the end of this announcement form part of these financial statements.

Consolidated Statement of Cash Flows

For the year ended 31 December 2016

The notes at the end of this announcement form part of the financial statements.

Notes to the Financial Statements

(forming part of the financial statements)

1 Accounting policies

Basis of preparation

This announcement and the financial information were approved by the Board on 19 June 2017. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2016 and 31 December 2015. Statutory accounts for the years ended 31 December 2016 and 31 December 2015 have been reported on by the Independent Auditors. The Independent Auditors' Reports on the Annual Report and Financial Statements for 2015 and 2016 were unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Statutory accounts for the year ended 31 December 2015 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2016 will be delivered to the Registrar in due course.

Going concern

Measurement convention

Basis of consolidation

Property, plant and equipment

· computer equipment 25%

· office equipment 10% - 33%

· leasehold improvements over the duration of the lease

Goodwill

Externally acquired intangible assets

Intangible asset Useful economic life Valuation method

Brand name 10 years Relief from royalty method

Customer relations 10 years Means extended excess method

Cash and cash equivalents

Impairment

The carrying values of assets are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the recoverable amount of the asset is estimated. Where the asset does not generate cash flows which are independent from other assets, the recoverable amount of the cash-generating unit to which the asset belongs is estimated.

The recoverable amount of a non-financial asset is the higher of its fair value less costs to sell, and its value-in-use. Value-in-use is the present value of the future cash flows expected to be derived from an asset or cash-generating unit calculated using a suitable discount factor.

An impairment loss is recognised in the statement of comprehensive income whenever the carrying amount of an asset or cash-generating unit exceeds its recoverable amount

Goodwill is tested for impairment annually or whenever there is an indication that the asset may be impaired. Any impairment recognised on goodwill is not reversed.

The impairment review is assessed by reference to value in use, using internal forecasts and estimated growth rates to forecast future cash flows, and a suitable discount rate based on the Group's weighted average cost of capital. Any impairment is recognised immediately in the income statement and is not subsequently reversed.

Provisions

Employee benefits

 Share-based payment transactions

Revenue and income recognition

Expenses

Operating lease payments

Taxation

Financial assets

Loans and receivables

Trade and other receivables that have fixed or determinable payments that are not quoted in an active market are classified as loans and receivables. They are initially measured at fair value and subsequently at amortised cost less any provision for impairment. A provision for impairment of trade and other receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of the receivables. This provision represents the difference between the asset's carrying amount and the present value of estimated future cash flows. The amount of the provision is recognised in the income statement.

Cash and cash equivalents include cash in hand, deposits at call with banks and bank overdrafts. Bank overdrafts where there is no right of set-off are shown within borrowings in current liabilities on the balance sheet.

Financial liabilities and equity instruments

Debt and equity instruments are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements. Financial liabilities are classified as either "financial liabilities at fair value through profit or loss (FVTPL)" or "other financial liabilities".

When the company issues multiple instruments in a single transaction the proceeds are allocated to each separate instrument in accordance with their respective fair values. Where convertible debt is issued the company determines the allocation of the proceeds to the debt and equity components by first of all determining the fair value of debt and then subtracting the amount of the debt from the proceeds of the instrument as a whole to determine the equity component.

Where a restructuring of debt arises the terms are reviewed to consider whether there has been a substantial modification and if so that there is an extinguishment of the existing debt and the recognition of a new financial liability based on the amended terms.

Financial liabilities at FVTPL

This category comprises only out-of-the-money interest rate derivatives. They are carried in the balance sheet at fair value with subsequent movements in fair value taken to the income statement in the finance income or expense line. Other than these derivative financial instruments, the Group does not have any liabilities held for trading nor has it designated any financial liabilities as being at fair value through profit or loss.

Other financial liabilities

Trade and other payables are recognised on the trade date of the related transactions. Trade payables are not interest bearing and are stated at the amount payable which is fair value on initial recognition.

Interest bearing loans are recognised initially at fair value, net of direct issue costs incurred, and are subsequently carried at amortised cost using the effective interest method.

Equity instruments

An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recorded at the proceeds received, net of direct issue costs.

Adoption of new and revised standards

The new standards, interpretations and amendments, effective from 1 January 2016, have not had a material effect on the financial statements.

The amendments and interpretations to published standards that have an effective date on or after 1 January 2017 or later periods have not been adopted early by the Group and assessment of the impact of these standards is currently under review.

* These standards and interpretations are not endorsed by the EU at present.

Use of estimates and judgements

The preparation of financial statements in conformity with IFRS requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates.

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

In particular, information about significant areas of estimation uncertainty and critical judgements in applying accounting policies that have the most significant effect on the amounts recognised in the financial statements is included below:

(a) Impairment of intangibles

The Group is required to test, on an annual basis, whether goodwill has suffered any impairment and other assets where there has been an indication of impairment. The recoverable amount is determined based on value in use calculations. The use of this method requires the estimation of future cash flows and the choice of a discount rate in order to calculate the present value of the cash flows. Actual outcomes may vary particularly in light of the current volatility of the recruitment sector to changes in the wider macro-economic environment. More information including carrying values is included in note 10.

(b) Useful lives of intangible assets and property, plant and equipment

Intangible assets excluding goodwill and property, plant and equipment are amortised or depreciated over their useful lives. Useful lives are based on the management's estimates of the period that the assets will generate revenue, which are periodically reviewed for continued appropriateness. Changes to estimates can result in significant variations in the carrying value and amounts charged to the consolidated income statement in specific periods. More details including carrying values are included in notes 9 and 10.

(c) Share-based payments

Employee services received are measured by reference to the fair value of the equity instruments at the date of grant, excluding the impact of any non-market vesting conditions. The fair value of share options is estimated by using the Black Scholes valuation model on the date of grant based on certain assumptions. The charge also depends on estimates of the number of options that will ultimately vest based on the satisfaction of non-market and service vesting conditions. No options were granted in the current or the prior year.

(d) Onerous leases and dilapidations

Inherent uncertainties in estimates of rents that will be received in the future on vacant property when determining the onerous lease obligation and estimating the cost of returning the properties to their original state at the end of the lease.

(e) Convertible loan notes

The fair value of the convertible option is estimate based on the market rate of interest for similar company debt issues when discounting cash flows relating to the debt component.

(f) Permanent placement provision

A provision is made for the expected cost of meeting obligations where employees do not work for the specified contractual period.

2 Reconciliation of operating loss to Adjusted EBITDA and EBITA

Adjusted EBITDA is earnings before interest, taxes, depreciation and amortisation adjusted for any one off or non-cash administrative expenses.

3 Expenses and auditors' remuneration

Included in profit/(loss) before tax are the following:

Auditors' remuneration:

Amounts payable to BDO LLP in respect of both audit and non-audit services are set out below:

4 Staff numbers and costs

The weighted average number of persons employed by the Group (including directors) during the period, analysed by category, was as follows:

The aggregate payroll costs of these persons were as follows:

Directors' and key management personnel remuneration:

Key management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of the Group. During the period these were considered to be the directors of the Company.

There were 4 directors in defined contribution pension schemes during the period (2015: 3).

The total amount payable to the highest paid director in respect of emoluments was £192,427 (2015: £192,200). Company pension contributions of £13,336 (2015: £14,000) were made to a money purchase scheme on his behalf.

No options were exercised by directors during the current or prior periods.

5 Finance expense

6 Taxation

Reconciliation of effective tax rate

7 Earnings per share

Basic and diluted profit/(loss) per share

The calculation of basic profit per share for the year ended 31 December 2016 was based on the loss attributable to ordinary shareholders of £2,486,000 (2015: profit of £426,000) and a weighted average number of ordinary shares outstanding of 339,401,134 (2015: 339,401,134) calculated as follows:

There was no dilution in the period due to the loss in the period.

8 Operating segments

Operating segments are components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker ("Executive Chairman") in deciding how to allocate resources and in assessing performance.

The operating segments have changed in 2016. Quantica S&S and Quantica Technology are now consolidated and reported as Quantica Group.

The Group identifies its reportable operating segments by divisions, each of which is run by a business leader. Each identifiable business division operates in a different market of recruitment, has its own brand, engages in business activities from which it may earn revenues and incur expenses, discrete financial information is readily available and its operating results are regularly reviewed by the Executive Chairman. Operating segment results are reviewed to controllable contribution level which is gross profit less employee costs and marketing costs directly controlled by the business leader of that division.

Each division derives its revenues from supplying one or more of contingent permanent, contract, temporary and retained search recruitment services. Assets and liabilities are reviewed at a Group level and are not reviewed by the Executive Chairman on a segmental basis.

The total of the reportable segments' Adjusted EBITDA for the year agrees to the reconciliation to Group operating loss (see note 2).

9 Property, plant and equipment

10 Intangible assets

Goodwill

The impairment review undertaken in 2016 resulted in a £2,578,000 impairment charge in relation to Quantica Group (2015: nil). The Quantica Group is now significantly different from the business acquired in 2007, and as such it is no longer considered appropriate to retain the £2,578,000 goodwill as an intangible asset.

The recoverable amounts of all the above CGUs have been determined from value in use calculations based on cash flow projections from budgets covering a five year period to 31 December 2021. The major assumptions are as follows:

A discount rate of 8.90% (2015: 12.91%) has been applied to the CGUs listed above. Discount rates are based on management's assessment of specific risks related to the CGUs, which approximates to the Group's pre-tax weighted average cost of capital. An increase in the discount rate of 1% would not result in an increased impairment.

NFI and operating margins have been based on past performance and future expectations in the light of anticipated economic and market conditions. Cash flows for 2017 to 2021 are based on the forecast figures of each CGU for 2017 to 2021 based on a conservative approach whilst considering the anticipated economic conditions, corporate strategy and the related risk, market intelligence/sentiment and specific knowledge of the individual CGUs. NFI growth has been restricted to 2% for cash flows extending beyond five years.

NFI assumptions for the cash flows for 2018 to 2021 are as follows: 5% per annum for Berkeley Scott Regional (Former Gold Helm Roche) branch network, 5% per annum for Berkeley Scott London (Former Sherwoods) branch network, 5% per annum for RK Group, 6% per annum for Quantica Group. If the following changes were made to the above key assumptions, the carrying amount and recoverable amount would be equal. RK Group NFI growth reduced from 5% to a decline of 1.30% and Berkeley Scott London (Former Sherwoods) NFI growth reduced from 6% to a decline of 14.29%.

An adjustment to reduce the forecast net cash flows by 5% would not result in an increased impairment. An increase in the discount rate of 1% would not result in an increased impairment.

11 Deferred tax assets and liabilities

At 31 December 2016 the amount of deductible temporary differences, unused tax losses and unused tax credits are as follows:

There is also a temporary difference in respect of the fair value adjustments for intangible assets on previous acquisitions of £274,000 (2015: £379,000) for which a corresponding deferred tax liability has been recognised and offset against an equivalent deferred tax asset in respect of unused tax losses, resulting in a net position of £nil. In respect of the excess balances from the table above, a deferred tax asset has not been recognised as there is insufficient evidence that future taxable profits will be available against which the asset can be utilised.

12 Trade and other receivables

Days sales outstanding for 2016 was 38 days (2015: 39 days) presenting an improvement in cash collection of 1 day. An analysis of the allowance against accounts receivable and details of trade receivables past due and not impaired is included in note 16.

13 Cash and cash equivalents

14 Interest-bearing loans and borrowings

The carrying value and face value of loans and borrowings are as follows:

Terms and debt repayment schedule

The invoice discounting facility balance utilised of £3,075,000 (2015: £2,887,000) is secured through deeds of composite guarantees and mortgage debentures on Group companies. The invoice discounting facility has an interest rate of 1.6% above Barclay's base rate.

In October 2016, the company concluded a refinancing package for the majority of its loan obligations that were due in February and September 2017. The debt restructuring plan improved the Company's balance sheet whilst reducing ongoing financing costs. In October 2016, the Company redeemed £385,000 nominal of the 12% secured convertible loan notes 2010 ("2010 Loan Notes") and £661,000 nominal of the 12% unsecured convertible loan notes 2011 ("2011 Loan Notes") at a price of 70p for every £1 nominal. Following these redemptions, £150,000 nominal of 2010 Loan Notes and £150,000 nominal 2011 Loan Notes remained outstanding which were due to be redeemed on 14 February 2017.

The £732,200 cost of the redemptions was funded as to £366,100 by drawdown on the confidential invoice discounting facility provided to the Company by Barclays Bank plc. The remaining £366,100 was funded by BMN Commercial Limited ("BMN Commercial") through a secured six-year loan with a nominal value of £523,000, issued at 70% of par and carrying a coupon of 5% per annum (the "BMN Commercial Loan").  BMN Commercial is a company owned by the family of Paul Bell, who is interested in 62% of the issued share capital of the company. This BMN Commercial Loan means that the Company passed on 50% of the 30% of par discount it secured for the 2010 and 2011 Loan Notes with the other 50% benefit going directly to the Company's balance sheet.

Prior to the refinancing the Company had the following loans from Paul Bell:

• A secured term loan of £1,260,000 carrying an interest rate of 4% annum and repayable on 20 September 2017; and

• An unsecured convertible loan note of £600,000 nominal carrying an interest rate of 4% per annum and redeemable on 20 September 2017.

Following the refinancing, the Company had the following loans and facilities from BMN Commercial:

• A secured term loan of £1,260,000 (ranking behind Barclays Bank Plc ("Barclays") and ahead of the 2010 Loan Notes) carrying an interest rate of 5% per annum and repayable on 20 September 2022;

• A fixed rate secured loan note of £600,000 (ranking behind the 2010 Loan Notes) carrying an interest rate of 5% per annum and repayable on 20 September 2022; and

• A fixed rate secured loan note of £523,000 (ranking behind Barclays and ahead of the 2010 Loan Notes), issued at 70% of par, carrying an interest rate of 5% per annum and repayable on 20 September 2022 (together these three loans are "the New Loans").

Additionally, the Company also has a revolving secured facility of £366,100 from BMN Commercial (ranking behind Barclays and ahead of the 2010 Loan Notes) capable of drawdown at any time up to 20 August 2022, carrying an interest rate of 5% per annum and repayable on 20 September 2022 ("the Revolving Facility"). The Revolving Facility is effectively a replacement for the Barclays drawdown to ensure the overall Company headroom is unaffected. The Barclays drawdown is at a substantially lower rate of 1.6%+base (1.85%), than the Revolving Facility and ensures the Company uses its cheapest means of funding first.

15 Trade and other payables

Trade payables are non-interest bearing and are normally settled within 45 day terms.

16 Financial instruments

Financial risk management

The Group is exposed through its operations to the following financial risks:

• Liquidity risk;

• Interest rate risk;

• Credit risk;

• Foreign currency risk and

• Capital risk management

Liquidity risk

Liquidity risk is managed centrally on a Group basis. The Group's policy in respect of liquidity risk is to maintain a mixture of long term and short term debt finance, including an invoice discounting facility, to ensure the Group has sufficient funds for operations for the foreseeable future. Budgets and forecasts are agreed and set by the Board in advance to enable the Group's cash requirements to be anticipated.

Interest rate risk

Debt is maintained at bank variable rates which inherently bring interest rate risk. Convertible loan notes and related party loans are maintained at the fair value of interest rates on issue. The Group maintains detailed cash flow forecasts enabling it to factor incremental changes in interest rates into its risk profile and liquidity and react accordingly.

Credit risk

The Group's principal financial assets are bank balances and cash and trade and other receivables. The Group's credit risk is primarily attributable to its trade receivables.

The Group's policy in respect of trade receivables credit risk requires appropriate credit checks on potential customers before sales are made, the appropriate limiting of credit to each customer and the close monitoring of KPI trending such as days' sales outstanding and debtor ageing. The Group records impairment losses on its trade receivables separately from the gross receivable and calculates the allowance based on evidence of its likely recovery. At the balance sheet date there were no significant concentrations of credit risk.

The Group's credit risk on liquid funds is limited due to the Group's policy of monitoring counter party exposures and only transacting with high credit-quality financial institutions.

Foreign currency risk

The Group's foreign currency denominated activity is not significant and the impact of foreign exchange movements on reported profits, net assets and gearing are not significant. The day-to-day transactions of overseas branches are carried out in local currency and Group exposure to currency risk at a transactional level is minimal.

The Group does not enter into speculative treasury arrangements and there are no significant balances or exposures denominated in foreign currencies.

Capital risk management

The Group manages its capital to ensure that entities within the Group will be able to continue as a going concern whilst optimising the debt and equity balance.

In managing its capital, the Group's primary objective is to ensure its ability to provide a return for its equity shareholders through capital growth. In order to achieve this objective, the Group seeks to maintain a gearing ratio that balances risks and returns at an acceptable level and also to maintain a sufficient funding base to enable the Group to meet its working capital and strategic investment needs. In making decisions to adjust its capital structure to achieve these aims, the Group considers not only its short-term position but also its long-term operational and strategic objectives. The Group's gearing profile, being the carrying amount of loans and borrowings of £5,028,000 (2015: £5,982,000) as a percentage of total equity £3,665,000 (2015: £3,487,000) decreased to 137% from 172% during the year.

Trade receivables impairment

Movement on trade receivables impairment provision:

The trade receivables past due and not impaired at the balance sheet date amounted to £1,770,000 (2015: £2,426,000) and comprised £1,299,000 (2015: £1,659,000) overdue by up to 30 days, £402,000 (2015: £599,000) overdue by 30-60 days and £69,000 (2015: £168,000) overdue by more than 60 days.

The directors consider that all these receivables are fully recoverable.

Categories of financial instruments

Financial assets

The financial assets of the Group comprised:

Financial liabilities

The financial liabilities of the Group comprised:

The invoice discounting balance amounted to £3,075,000 (2015: £2,887,000) and is secured by cross guarantees and mortgage debentures on certain Group companies. £150,000 of the convertible loan notes are unsecured (2015: £1,222,000), and the remaining £150,000 of convertible loan notes (2015: £550,000) are secured on the assets of the Group but subordinated to the £2,383,000 loan from BMN Commercial Limited (2015: £1,235,000 from Mr PA Bell) which in turn is subordinated to the invoice discounting facility and overdraft under the terms of an inter-creditor deed.

The directors consider that the carrying amounts of financial assets and liabilities recorded at amortised cost in the financial statements approximate their fair values. The fair value of the items classified as loans and borrowings is classified as Level 3 in the fair value hierarchy: The fair value for disclosure purposes has been determined using discounted cash flow pricing models. Significant inputs include the discount rate used to reflect the associated credit risk.

Effective interest rates - Group

In respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interest rates at the balance sheet date and the periods in which they mature.

The above table is based on the balances at the balance sheet date. The effect of future interest cash flows and sensitivities applied thereon can be determined from the above effective interest rates.

17 Employee benefits

Defined contribution plans

The Group operates a number of defined contribution pension plans. The total expense relating to these plans in the current period was £49,000 (2015: £78,000). £10,000 of pension contributions remained outstanding at the period end (2015: £9,000).

Share-based payments

The Group has 1 share option scheme with options remaining unexercised at 31 December 2016:

2004 Approved EMI Scheme - 2,375,000 vested options remain unexercised at 31 December 2016

The ability of a company to utilise EMI options is governed by conditions, including those of size, that are prescribed by the HMRC.

The number and weighted average exercise prices of share options - are as follows:

The exercise price of options outstanding at the end of the period ranged between £0.02 and £0.03 (2015: £0.02 and £0.03) and their weighted residual contractual life was 4 years (2015: 5 years). All options currently in issue have vested as at 31 December 2016. There were no options exercised during the current or prior period. The weighted average fair value of each option granted during the period was nil as no options were granted (2015: £nil).

The fair value of employee share options is measured using the Black Scholes model. No options were granted in 2016.

18 Provisions

Onerous contracts and dilapidations predominantly relate to the costs payable on properties which have been vacated and incremental costs that will be incurred on exiting existing properties where a commitment to do so exists at the balance sheet date.

19 Capital

Share capital

The holders of ordinary shares are entitled to receive dividends when declared and are entitled to one vote per share at meetings of the Company The deferred shares do not carry any dividend and voting rights and have limited rights in a winding up of the company.

20 Reserves

Share premium

The share premium account represents the excess of the proceeds from the issue of shares over the nominal value of shares issued less related issue costs.

Convertible debt reserve

The convertible reserve represents the equity component of the convertible loan note.

Capital redemption reserve

The capital redemption reserve relates to the cancellation of the Company's own shares.

Capital contribution reserve

The capital contribution reserve represents contributions from shareholders.

21 Operating leases

The total future minimum lease payments of non-cancellable operating lease rentals are payable as follows:

During the period £348,893 was recognised as an expense in the income statement in respect of operating leases (2015: £245,166), excluding amounts charged in respect of onerous contracts.

22 Related party transactions

On 11 July 2013 a loan facility of £600,000 and on 27 September 2013, a loan facility of £1,260,000 was provided to the Company by Mr PA Bell, a major shareholder.

There was interest of £60,947 paid for the year ended 31 December 2016 (2015: £74,400).

Following refinancing in October 2016, both outstanding debt of Mr PA Bell transferred to BMN Commercial, which is deemed to be a related party. Also in October 2016, BMN Commercial provided a separate loan facility to Kellan amounting £523,000.

No interest was paid to BMN Commercial for the year ended 31 December 2016.

Clement May Limited

Support on the Spot Limited

The ultimate controlling party of the Company is Mr PA Bell.

23 Post balance sheet events

On 24 January 2017, the Company announced a debt restructuring plan for the remainder of its loan obligations that were due on 14 February 2017. As part of the repayment terms, the holder agreed, to waive the interest due in relation to the period from 1 February 2016 and extend the redemption date to 15 March 2017 (due date) conditional upon the redemption being completed on or before the due date. The Company redeemed £150,000 nominal of the 12% secured convertible loan notes 2010 and £150,000 nominal of the 12% unsecured convertible loan notes 2011 at par on 10 March 2017. Additionally, the Company also increased the revolving facility and the BMN loan by a further £150,000 each to ensure the overall Company headroom isn't eroded and the Company uses its cheapest means of funding first.

24 Notice of Annual General Meeting

The Annual General Meeting of the Company will be held at the Company's offices at 4th Floor, 27 Mortimer Street, London, W1T 3BL at 2pm on 19 July 2017. The annual report will be posted to shareholders shortly and is available from the Company's website www.kellangroup.co.uk.