Kellan Group Regulatory News (KLN)

11 April 2014

KELLAN GROUP ANNOUNCES PRELIMINARY RESULTS FOR THE

YEAR ENDED 31 DECEMBER 2013

Kellan Group PLC (AIM: KLN.L) (the "Company" and together with its subsidiaries the "Group" or "Kellan"), a leading IT, accountancy, hospitality, leisure and professional services recruitment group, announces its preliminary results for the Group for the year ended 31 December 2013.

Headline figures

· H2 2013 Revenue of £12.3 million grew by 10.9% compared with H1 2013 (£11.1 million); while H2 NFI of £3.9 million grew by 5% compared to H1 2013 (£3.7 million).

· Adjusted EBITDA profit of £0.16 million in H2 2013 compared with loss of (£0.51) million in H1 2013 and Full Year Adjusted EBITDA loss of (£0.35) million compared to (£0.52) million in 2012.

· Operating loss narrowing from £2.2 million in 2012 to £1.3 million in 2013.

· Continued streamlining with administrative expenses (including impairment) reducing by 17.2% year-on-year from £10.8 million in 2012 to £8.9 million. Non-cash impairment of goodwill and intangibles reducing from £1.07 million in 2012 to £0.10 million in 2013.

· Cash outflow from operations of £0.12 million (2012: £1.16 million).

· Loss of 0.66p per basic and diluted share (2012: loss 1.92p).

· Fundraising of £1.5 million, comprising £0.9 million in equity and £0.6 million in unsecured convertible debt with the Company's largest shareholder was completed in August 2013.

Enquiries:

Kellan Group Plc

Tony Reeves, Executive Chairman 0207 268 6200

Rakesh Kirpalani, Group Finance Director

Sanlam Securities UK Limited

David Worlidge 0207 628 2200

Virginia Bull

Chairman's Statement

2013 was a year in which the recruitment market showed signs of stabilising along with growth in certain sectors of the market. The first half of 2013 saw the Group continue to drive cost efficiencies by restructuring its operations to focus in core markets. The Group's second half results are encouraging and demonstrate that we are on the path to recovery.

Whilst I continue in the role of Executive Chairman, I am pleased to announce that in January 2014 Mark Darby was appointed Group Chief Operating Officer and Simon Tucker-Brown was promoted to Managing Director of Berkeley Scott Limited.

The Group's Board and major shareholders are very supportive of the actions taken to date in turning the business around and I would like to thank them for their support, especially Rakesh Kirpalani; our Group Finance Director who has been instrumental in streamlining the Group's cost base and consolidating our property portfolio, whilst providing the Board with a high level of foresight and technical expertise.

I consider Rakesh Kirpalani, Mark Darby and I make a strong team that continues to adopt a very open and frank means of communication and we are confident of the future prospects of the Group.

The Board has realigned the Leadership & Management team to ensure we have the right people in the right roles, creating a robust operational infrastructure to provide support to everyone across our business.

The Group has a number of strong niche brands with strong sector focus and expertise, driven by strong and passionate leadership and it is actively pursuing opportunities to accelerate its growth aspirations, particularly in developing areas of the contract market.

Ross Eades stepped down from the Board in Q2 2013 to pursue other business interests and I would like to thank him for his contributions to the Group.

I would also like to thank our increasingly loyal customer base, staff and all our shareholders for their invaluable support throughout 2013.

Tony Reeves

Executive Chairman

Strategic Report

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 being very inconsistent 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. We have implemented a positive restructure into the business to focus in our core markets being Hospitality & Leisure, Technology and Accounting & Finance. Whilst we also operate in certain other niche areas which make up our portfolio, our aim is to develop our core businesses in major city centres. The diverse brands within the Group de-risk the overall impact of an inconsistent market, and we saw some strong performances within various parts of our business.

Berkeley Scott continues to be a market leader in the Hospitality & Leisure markets. A buoyant Restaurants and Bars market place saw a number of significant client gains in 2013 and our regional offices achieved strong success in this market place as a number of concepts expanded and opened their first sites. The Temporary market remained strong with all temporary operations achieving year-on-year growth. The business benefited considerably from strong internal leverage of relationships across temporary and permanent clients. We also saw very strong growth in demand for the casual dining and chefs market. Financial performance for 2013 is relatively consistent with 2012 with Revenue growing from £13.8 million to £13.9 million and controllable contribution increasing slightly from £1.91 million to £1.93 million.

The RK Group benefited the most from the restructure carried out in 2013 and delivered a solid performance in this context with productivity reaching a 3 year high. The reformed Preston business delivered strong results and focus on new business development resulted in market share growth being achieved in most offices despite a very competitive Accounting & Finance and HR market place. RK Accountancy, which is the Finance & Accounting arm of the Group saw revenues decline from £3 million in 2012 to £2.8 million in 2013, although business cost efficiencies meant controllable contribution increased from £0.24 million in 2012 to £0.5 million in 2013. Improved profitability with reduced revenue was also reflected in the other parts of the RK Group which saw revenue decline from £1.8 million in 2012 to £1.23 million in 2013 whilst controllable contribution increased from break even to a positive of £0.7 million in 2013.

Quantica Technology, the Group's specialist IT Division, has continued to build it's presence with increased revenue streams from mainland Europe, in particular Germany & Switzerland. Continued growth in all niche areas has given the business increased confidence in what is an extremely competitive market. 2014 has started very well for Quantica Technology with increased fees coupled with costs being managed effectively helping to ensure that the brand will continue to grow in the specialist markets it operates in. Quantica Technology revenue grew by 13.6% from £3.9 million in 2012 to £4.4 million in 2013.

Quantica Search & Selection - the Group's food manufacturing specialist business enjoyed increased revenue in line with forecast through hiring key people and forming a strong team in a centralised location. Significant new account wins include Mondelez and Greencore, with continued strong and well established relationships with existing businesses. A key focus in this area is to attract further specialists to develop business within niche areas to capitalise upon the opportunity to take market share in this growth sectors.

Financial Review

The Group's revenue for the year ended 31 December 2013 was £23.4 million representing a decrease of 3.4% (2012: £24.2 million). This produced Net Fee Income ("NFI") of £7.7 million for the year ended 31 December 2013, a decline of 10.9% (2012: £8.6 million). 2013 Full Year Adjusted EBITDA loss of £0.35 million compared to £0.52 million in 2012.

Summary Half-Yearly Movement 2013

Although the Group's full-year revenue and NFI results show a decline, the sequential and half-yearly results are encouraging and while there is a continuous level of caution due to the uncertain macro-economic factors, it is pleasing to see some sequential and bi-annual improvements in performance. H2 2013 revenue of £12.3 million reflects a 10.9% improvement on H1 2013 and; H2 2013 NFI of £3.9 million is 5% better than H1 2013 NFI of £3.7 million. H2 2013 adjusted EBITDA profit of £162k compares to a loss of £515k in H1 2013. Annualised productivity per fee earner for H2 2013 of £101k compared with £91k for H1 2013; which represents an improvement of 11.2%.

Summary Quarter Sequential Movement 2013 

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Good sequential quarterly growth in revenue and NFI through 2013 coupled with strong control of overheads has resulted in significant improvement in adjusted EBITDA from a loss of £380k in Q1 2013 to a loss of £135k in Q2 2013; earnings of £115k in Q3 2013 and earnings of £46k in Q4 2013. Annualised productivity per fee earner also improved well from £82k in Q1 2013 to £101k in Q2 2013 to £108k in Q3 2013 and £94k for Q4 2013. 

Administrative expenses have decreased to £8.9 million in the year ended 31 December 2013, from £10.8 million in 2012. Adjusting the cost base for the impairment, amortisation, depreciation, share-based payments and restructuring, like-for-like costs have reduced from £9.1 million for the year ended 31 December 2012 to £8.0 million for the year ended 31 December 2013, which represents a reduction of 12.1% year-on-year.

Impairment of Intangibles

The impairment review undertaken in 2013 resulted in a non-cash goodwill & intangibles impairment charge of £0.1 million (2012: £1.08 million).

The non-cash impairment of goodwill and intangibles reflects a conservative view to the future growth prospects based on the macro-economic conditions currently in place. While the business aspires to grow at a much faster rate, management deemed it appropriate to impair the intangibles based on current market conditions with modest forecast growth.

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.

Fundraising of £1.5 million comprising £0.9 million in equity and £0.6 million in unsecured convertible debt, completed in August 2013.

Based on the Group's latest cash flow forecasts, current trading performance and timely refinancing or conversion of the £1.36 million loan notes which are repayable in February 2015, 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 various diverse sectors, the Group is, to some degree, protected from a deteriorating market. Nevertheless, throughout most of 2013 the sluggish economic environment affected the recruitment sector. This, combined with the Group's predominance of permanent recruitment fees, generated mostly in the UK, represent a risk.

• 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.

Cashflow

Net cash outflow at an operating level was £0.12 million for the year ended 31 December 2013 (2012: £1.16 million). Investing activities comprised of capital expenditure of £110,000 (2012: £29,000). Net cash inflow from financing activities amounted to £980,000 (2012: £854,000) comprising the proceeds from issue of share capital, movement on the invoice discounting facility balances and repayment of term loan as well as the servicing of loan interest. The net increase in cash and cash equivalents in the period was £747,000 (2012: decrease of £339,000).

Rakesh Kirpalani Tony Reeves

Group Finance Director Executive Chairman

Consolidated statement of comprehensive income

for the year ended 31 December 2013

Consolidated statement of financial position

as at 31 December 2013

Consolidated statement of changes in equity

for the year ended 31 December 2013

Consolidated statement of cash flows

for the year ended 31 December 2013

1 Accounting policies

Basis of preparation

This announcement and the financial information were approved by the Board on 10 April 2014. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2013 and 31 December 2012. Statutory accounts for the years ended 31 December 2013 and 31 December 2012 have been reported on by the Independent Auditors. The Independent Auditors' Report on the Annual Report and Financial Statements for 2013 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The audit report for the year ended 31 December 2013 included an emphasis of matter in respect of a material uncertainty in respect of the ability to refinance the convertible loan notes of £1.36 million repayable in February 2015 if not already converted at that point in time and that if expected trading levels are not achieved there may be a requirement for additional funding. The Independent Auditors' Report on the Annual Report and Financial Statements for 2012 was unqualified and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006. The audit report for the year ended 31 December 2012 included an emphasis of matter in respect of a material uncertainty on the fundraising which was subsequently completed in August 2013 and that if expected trading levels were not achieved there may be a requirement for additional funding.

Statutory accounts for the year ended 31 December 2012 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2013 will be delivered to the Registrar in due course.

Going concern

The financial statements have been prepared on a going concern basis.

Based on the Group's latest trading expectations and associated cash flow forecasts, the directors have considered the cash requirements of the Company and, subject to refinancing or conversion of the £1.36m loan notes which are repayable in February 2015, the Group will be able to operate within its existing facilities for the next twelve months following approval of these financial statements. These facilities comprise an invoice discounting facility of up to £4 million dependant on trading levels. The Directors also recognise that there is a general sensitivity to the wider macro-economic environment which may necessitate a requirement for additional funding. These uncertainties may cast significant doubt over the Group's ability to continue as a going concern. However, based on the ongoing support from major shareholders, current market outlook and management's trading expectations; the Directors are confident that the Group will be able to meet its liabilities as they fall due for the foreseeable future. It is on this basis that the Directors consider it appropriate to prepare the Group's financial statements on a going concern basis.

Measurement convention

The financial statements are prepared on the historical cost basis except for derivative financial instruments that are stated at fair value.

Basis of consolidation

Subsidiaries are entities controlled by the Group. Control exists when the Group has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

In assessing control, potential voting rights that are currently exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases.

Property, plant and equipment

Items of property, plant and equipment are measured at cost less accumulated depreciation and impairment losses. Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The annual rates used are generally:

• motor vehicles and computer equipment 25%

• office equipment 10% - 33%

• short leasehold premises over the duration of the lease

Goodwill

Goodwill represents amounts arising on the acquisition of subsidiaries. Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the purchase method. In respect of business acquisitions that have occurred since 1 October 2005, goodwill represents the difference between the cost of the acquisition and the fair value of the net identifiable assets acquired. Identifiable intangibles are those which can be sold separately or which arise from legal rights regardless of whether those rights are separable.

Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash-generating units and is not amortised but is tested annually for impairment.

IFRS 1 grants certain exemptions from the full requirements of Adopted IFRS in the transition period. The Group and Company elected not to restate business combinations that took place prior to 1 October 2005. In respect of acquisitions prior to 1 October 2005, goodwill is included at 1 October 2005 on the basis of its deemed cost, which represents the carrying value recorded under UK GAAP which was broadly comparable save that no intangibles were recognised and goodwill was amortised.

IFRS 1 grants certain exemptions from the full requirements of Adopted IFRS in the transition period. The Group and Company elected not to restate business combinations that took place prior to 1 October 2005. In respect of acquisitions prior to 1 October 2005, goodwill is included at 1 October 2005 on the basis of its deemed cost, which represents the carrying value recorded under UK GAAP which was broadly comparable save that no intangibles were recognised and goodwill was amortised.

Externally acquired intangible assets

Intangible assets are recognised on business combinations if they are separable from the acquired entity or give rise to other contractual/legal rights. The amounts ascribed to such intangibles are arrived at by using appropriate valuation techniques (see section related to critical estimates and judgements on page 21).

Amortisation is recognised in profit and loss on a straight-line basis over the estimated useful lives of intangible assets, other than goodwill, from the date that they are available for use.

The significant intangibles recognised by the Group, their useful economic lives and the methods used to determine the cost of intangibles acquired in a business combination are as follows:

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

Cash and cash equivalents comprise cash balances on current accounts, cash balances on invoice discounting facilities and call deposits.

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

A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax risk-free rate.

Employee benefits

Defined contribution plans

Obligations for contributions to defined contribution pension plans are recognised as an expense in the income statement as incurred.

Share-based payment transactions

The grant date fair value of options granted to employees is recognised as an employee expense, with a corresponding increase in equity, over the period in which the employees become unconditionally entitled to the options. The fair value of the options granted is measured using the Black Scholes option valuation model, taking into account the terms and conditions upon which the options were granted. The amount recognised as an expense is adjusted to reflect the actual number of share options that vest, except where forfeiture is due only to share prices not achieving market vesting conditions.

Revenue and income recognition

Revenue, which excludes value added tax ("VAT"), constitutes the value of services undertaken by the Group as its principal activities, which are recruitment consultancy and other ancillary services. These consist of:

• revenue from temporary placements, which represents amounts billed for the services of temporary staff including the salary cost of these staff. This is recognised when the service has been provided;

• revenue for permanent placements, which is based on a percentage of the candidate's remuneration package, is recognised at the date at which a candidate commences employment. Provision is made for the expected cost of meeting obligations where employees do not work for the specified contractual period.

• revenue from amounts billed to clients for expenses incurred on their behalf (principally advertisements) is recognised when the expense is incurred.

Expenses

Operating lease payments

Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease incentives received are recognised in the income statement as an integral part of the total lease expense.

Taxation

Tax on the profit or loss for the period comprises current and deferred tax charge.

Current tax is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively enacted at the balance sheet date, and any adjustment to tax payable in respect of previous periods.

Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill; the initial recognition of assets or liabilities that affect neither accounting nor taxable profit other than in a business combination; and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax

provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.

A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised.

Financial assets

Financial assets are classified into the following specified categories: "financial assets at fair value through profit or loss (FVTPL)", and "loans and receivables". The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. The Group does not hold any "held-to-maturity" investments or "available-for-sale" financial assets. The Group's accounting policy for each category is as follows:

Financial assets at FVTPL

This category comprises only in-the-money interest rate derivatives (see financial liabilities section for out-of-the-money derivatives). They are carried in the balance sheet at fair value with changes in fair value recognised in the consolidated income statement in the finance income or expense line. The Group does not have any assets held for trading nor does it voluntarily classify any financial assets as being at fair value through profit or loss.

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

Standards and interpretations in issue not yet adopted

The International Accounting Standards Board and the International Financial Reporting Interpretations Committee have issued the following standards and amendments to standards to be applied to financial statements with periods commencing on or after the following dates:

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

The directors do not anticipate that the adoption of these standards will have a material impact on the Group's financial statements in the period of initial application.

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 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. Those assumptions

are described in note 17. 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.

(d) Determination of fair values of intangible assets acquired in business combinations

The fair value of brand names is based on the discounted estimated royalty payments that would have been avoided as a result of the brand name being used. The fair value of customer relations is based on the discounted

mean extended excess future cash flows from existing customers. These methods require the estimation of future cash flows, the choice of a suitable royalty and discount rates in order to calculate the fair values.

(e) Derivative instruments

The fair value of the Group's interest rate swap derivatives are determined using valuation techniques. Those techniques are significantly affected by the assumptions used, including discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot always be substantiated by comparison with independent markets and, in many cases, may not be capable of being realised immediately.

(f) 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.

(g) Convertible loan notes and warrants

The fair value of warrants is estimated by using the Black Scholes valuation model on the date of grant based on certain assumptions. Those assumptions are described in note 20. In determining the fair value of the convertible option, estimates are made of the market rate of interest for similar company debt issues when discounting cash flows relating to the debt component.

(h) 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

3 Expenses and auditors' remuneration

Included in loss before tax is 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 2 directors in defined contribution pension schemes during the period (2012: 2).

The total amount payable to the highest paid director in respect of emoluments was £286,291 (2012: £240,917). Company pension contributions of £14,654 (2012: £22,500) were made to a money purchase scheme on his behalf.

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

5 Finance income and expense

6 Taxation

Reconciliation of effective tax rate

7 Earnings per share

Basic and diluted earnings per share

The calculation of basic earnings per share for the year ended 31 December 2013 was based on the loss attributable to ordinary shareholders of £1,718,000 (2012: loss of £2,583,000) and a weighted average number of ordinary shares outstanding of 268,439,113 (2012: 134,418,922) calculated as follows:

There was no dilution in the current and prior 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 Group identifies its reportable operating segments by divisions, each of which is run by a divisional managing director. 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 managing director of that division.

Each division derives its revenues from supplying one or more of contingent permanent, contract, temporary and retained search recruitment services. The RK Search, RK Supply Chain and Robinson Keane divisions have been aggregated as they individually fall under the threshold for separate disclosure and have similar economic characteristics.

Transactions with the Group's largest customer do not account for more than 10% of the Group's revenues and the Group's revenues attributed to foreign countries are immaterial for the purpose of segmental reporting.

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 2013 resulted in a charge of £102,000 (2012: £1,077,000) and the reasons for impairment are further explained in the business review. The key assumptions used in the impairment testing were the discount rates and cash flows.

A discount rate of 15% (2012: 14%) 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 result in an additional impairment of £107,000.

Cash flows for 2013 to 2018 are based on the forecast figures of each CGU for 2013 to 2018 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. Growth has been restricted to 3% for cash flows extending beyond five years. An adjustment to reduce the forecast cash flows by 5% would result in an additional impairment of £28,000.

 11 Deferred tax assets and liabilities

At 31 December 2013 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 £786,000 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

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 £2,509,954 (2012: £2,785,000) is secured through deeds of composite guarantees and mortgage debentures on Group companies. The invoice discounting facility has an interest rate of 2.2% above Barclay's base rate.

The convertible loan notes with a value of £1,361,000 are repayable at par in February 2015 and interest is payable at a rate of 10% per annum on par value. They are redeemable at the option of the company at a premium of 10% of par value and can also be converted at the option of the note holders into ordinary share capital at any point up to the date of maturity. A further £600,000 of convertible loan notes were issued during the year, repayable at par in September 2017 with interest payable at a rate of 4% per annum. These loan notes are redeemable at the option of the company at par value at any point up to the date of maturity. They can also be converted at the option of the note holders into ordinary share capital at a fixed share price but only to the extent that existing loan note holders in the company convert some or all of their loan notes and only to the extent that the conversion would not result in Paul Bell holding an increased percentage interest in the company as it was immediately prior to any conversion by an existing loan note holder. The equity element of the convertible loan notes has been separately classified within equity and issue costs allocated to the respective debt and equity components.

The other loan with a value of £1,260,000 is with a major shareholder Paul Bell and is repayable in September 2017. Interest is payable on this loan at a rate of 4% per annum.

The convertible loan notes and other loan are secured on the assets of the Group but subordinated to the bank under the terms of an inter-creditor deed.

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; and

• foreign currency risk.

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 and the Group makes use of interest rate collar swaps to achieve the desired interest rate profile. 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 face value of loans and borrowings of £5,731,000 (2012: £5,246,000) as a percentage of total equity £3,126,000 (2012: £3,624,000) increased to 183.3% from 144.8% 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 £1,687,000 (2012: £2,986,000) and comprised £1,282,000 (2012: £2,001,000) overdue by up to 30 days, £255,388 (2012: £614,000) overdue by 30-60 days and £180,000 (2012: £372,000) 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 £2,510,000 (2012: £3,588,000) and is secured by cross guarantees and mortgage debentures on certain Group companies. In 2012, the balance included a bank loan of £803,000 which was repaid in 2013. £1,208,000 of the convertible loan notes are unsecured (2012: £739,000), and the remaining £540,000 of convertible loan notes (2012: £549,000) are secured on the assets of the Group but subordinated to the £1,209,000 (2012: £199,000) other loan from Paul Bell which in turn is subordinated to the bank loans and overdraft under the terms of an inter-creditor deed.

In addition to the above financial liabilities measured at amortised cost the carrying value of derivatives which are classified as fair value through profit and loss is nil (2012: £13,000). The directors consider that the carrying amounts of financial assets and liabilities recorded at amortised cost in the financial statements approximate their fair values.

Effective interest rates

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 £75,000 (2012: £74,000). £10,000 of pension contributions remained outstanding at the period end (2012: Nil). This change was driven by the implementation of the Government's automatic enrolment scheme.

Share-based payments

Approved and unapproved share schemes

The Group has 2 share option schemes with options remaining unexercised at 31 December 2013:

2004 Approved EMI Scheme - 14,750,000 options remain unexercised at 31 December 2013

The ability of a company to utilise EMI options is governed by conditions, including those of size, that are prescribed by the HMRC. A reduction in headcount and net assets since 2009 has resulted in the Group becoming eligible to grant new EMI options during the year.

2008 Unapproved All Employee Scheme -1,526,667 options remain unexercised at 31 December 2013

Options granted to management under this scheme have vesting criteria including length of service, minimum trading performance levels and conditions related to the share price of the Group. There were no exercisable options in this scheme at the year end. All options granted have a contract life of 4 years.

During the year, all remaining options in the1999 Unapproved Scheme and 2010 SAYE Scheme lapsed.

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 (2012: £0.02 and £0.03) and their weighted residual contractual life was 7 years (2012:8 years). 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 (2012: £0.02).

The fair value of employee share options is measured using the Black Scholes model. No options were granted in 2013. Measurement inputs and assumptions on options granted in 2012 are as follows:

In 2012, the expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options). The expected life used in the model has been adjusted, based on management's best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations. The total charge recognised for the period arising from share-based payments was £150,000 (2012: income £86,000).

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

In February 2013, the company issued 1,826,214 ordinary shares of 2p each in settlement of interest of £36,524 on loan notes in issue. In August 2013, the company carried out a capital reorganisation in which each ordinary share of 2p each was subdivided into and reclassified as one ordinary share of 0.01 pence nominal value and one deferred share of 1.99 pence nominal value. On 20 August 2013, the company allotted 120,000,000 ordinary shares of 0.01p each for a total consideration of £900,000 to Paul Bell, a major shareholder. On 21 August 2013, 1,600,238 ordinary shares of 0.01p each were issued in settlement of interest of £34,025 on loan notes in issue. 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, and 212,872,170 deferred shares were in issue at the year end (2012 - nil).

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.

Warrant reserve

On 5 February 2010, 1,000,000 warrants were issued to the convertible loan note holders, with the right to subscribe for ordinary shares until 5 February 2015 at the lower of 6.5p per share or the price of any new issue, but not less than 2.0p per share. There are no other outstanding warrants at 31 December 2013. The warrant reserve reflects the fair value of the warrants issued with the convertible loan note and was measured using the Black Scholes model.

Capital redemption reserve

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

21 Operating leases

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

During the period £577,000 was recognised as an expense in the income statement in respect of operating leases (2012: £601,000), excluding amounts charged in respect of onerous contracts.

22 Related party transactions

On 27 September 2012, a loan facility of £1.26 million was provided to the Company by Paul Bell, a major shareholder. As at 31 December 2013, an amount of £1,260,000 had been drawn down. There was interest of £34,000 for the year ended 31 December 2013, which remained unpaid as the Company hadn't received bank account details to process the payment. As such, this sum was included in other creditors.

On 9 August 2013, fundraising comprising the issue of 120,000,000 new Ordinary Shares at a price of 0.75 pence per share and Convertible Loan Notes with a nominal principal amount of £600,000 were issued to Paul Bell. Consequently, Paul Bell held 208,991,840 Ordinary Shares, representing 62.75% of the issued share capital.

The ultimate controlling party of the company is Paul Bell.

23 Post balance sheet events

In February 2014, the Group renewed the invoice discounting facility with Barclays Bank PLC, at a revised interest rate of 2.2% plus base. This revised rate represents a favourable change in interest of 0.8%.

24 Annual general meeting

The Annual General Meeting of the Company will be held at the Company's office at 4th Floor, 27 Mortimer Street, London W1T 3BL, on 9 May 2014 at 2.00pm.

Copies of the report will be available from the Company's office and also from the Company's website www.kellangroup.co.uk.