Kellan Group Regulatory News (KLN)

14 March 2016

The Kellan Group PLC

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

Preliminary Results for the year ended 31 December 2015

The Company is pleased to announce its annual results for the year ended 31 December 2015. Kellan is a market leading recruitment business operating across a wide range of functional disciplines and industry sectors.

Headline figures

· Full year revenue of £24.9 million representing an increase of 8.3% (2014: £23 million).

· H2 2015 revenue of £13.4 million grew by 16.4% compared with H1 2015 (£11.5 million); while H2 net fee income (NFI) of £4 million grew by 7.9% compared to H1 2015 (£3.7 million).

· Full year adjusted EBITDA profit of £1.02 million compared to a profit of £0.73 million in 2014.

· Total net profit for 2015 of £0.43 million compared with a net loss of £0.06 million in 2014.

· Operating profit of £0.82 million compared with an operating profit of £0.26 million in 2014.

· Continued streamlining with administrative expenses reduced by 11.1% year-on-year from £7.7 million in 2014 to £6.9 million. Excluding the effect of share based payments (2015; £150,000 favourable adjustment; 2014; £78,000 charge), the like-for-like administrative expenses have reduced 8.2% from £7.7 million to £7 million.

· Profit of 0.13p per basic share and 0.11p per diluted share (2014: loss 0.02p for both basic and diluted).

ENQUIRIES:

Executive Chairman's Statement

I am pleased to announce that the Group has continued to build on progress made in previous years; especially in relation to overall profitability. Group sales have increased 8.3% from £23 million in 2014 to £24.9 million in 2015, whilst administrative expenses have reduced by 11.1% from £7.7 million in 2014 to £6.9 million in 2015. Overall profit for 2015 was £0.43 million compared to a loss of £0.06 million in 2014.

From a trending perspective, adjusted EBITDA has moved from a loss of £0.35 million in 2013 to earnings of £0.73 million in 2014 and earnings of £1.02 million in 2015.

A new CRM system went live in Q4 2015 for Berkeley Scott and RK Group, with Quantica completed in Q1 2016. The new system is already helping deliver better results with much improved search functionality and reduced administrative burden enabling staff to focus on increasing sales. We have continued investment in IT systems with a new fleet of front end hardware installed for every member of staff during 2015. Our back-end IT infrastructure project completed during the year to further strengthen our working environment.

I attended my first Group annual conference in January 2016 and was very pleased to see the enthusiasm, high spirit and camaraderie engrained with all our staff which will drive us to achieve continued success during 2016.

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

Richard Ward

Executive Chairman

11 March 2016

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 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 we saw some strong performances within various parts of our business during 2015. The consolidation of offices into multi sector operations continues to benefit the business in effective management and control along with developing critical mass creating a much improved and vibrant business environment.

Berkeley Scott's temporary recruitment operation grew NFI by 6.7% from £2.89 million in 2014 to £3.08 million in 2015, with all temporary locations delivering year-on-year growth. The investment in headcount across all four temp locations allowed our temporary recruiters the opportunity to spend more time client facing and driving sales growth.

Several new national accounts were won in 2015 predominantly in the contract and facilities management sector.

Continued investment and expansion has seen Berkeley Scott return to the Birmingham market in Q1 2016.

NFI from Berkeley Scott's permanent recruitment operation declined by 7.5% from £2.03 million in 2014 to £1.88 million in 2015. The teams were successfully re-established in both Leeds and Manchester to service the Northern Hospitality market delivering NFI growth of £0.17 million (39.6%) on 2014. All sectors of the perm business achieved good results but the chef market was particularly buoyant largely due to the widely publicised chef shortage. The perm businesses also benefited from increased demand from the hotel sector, particularly through new openings in the north of England.

Berkeley Scott's London perm business underperformed during H1 2015, but following a management restructure is showing signs of progress. The London team secured client contracts with new start up restaurants in the fine dining space along with branded, smaller independents, brassiere style establishment and late night bars and also made significant progress into the senior levels placements especially within the executive chef market.

The RK Group's NFI was flat year-on-year at £1.4 million with the RK Accountancy business delivering good growth in 2015, with annual NFI increasing by 14.3% from £1.1 million in 2014 to £1.3 million in 2015. The Manchester team has also secured recruitment partner of choice status for some of the region's largest organisations including Co-operative Group, Hilti, Northern Rail, LF, Steria and Sodexo.

Investment was made to revise the training and development programmes which contributed to staff retention levels being high and the graduate training programme delivering strong results. Throughout 2016, the business will continue to invest in an expansion plan that includes increasing headcount in all existing branches. The business also re-entered the Midlands market with a central Birmingham operation in Q1 2016.

The RK Search and HR businesses declined year-on-year by £0.2 million due to the loss of residual NFI from a client whose hiring requirements reduced substantially. As this is not a core operation, the Group divested from this to focus on the accountancy business which is more profitable and delivering good results.

The Quantica Group saw a management restructuring and the closure of the loss-making Midlands operation in April 2015. This resulted in an overall decline in NFI of 17.6% from £1.65 million in 2014 to £1.36 million in 2015. NFI from continuing operations delivered strong results, with NFI increasing by 31.9% from £0.91 million in 2014 to £1.2 million in 2015. Quantica Technology was able to take advantage of demand and increase growth in contract business in the UK, particularly from within the telecoms sector. Quantica Technology made good progress expanding into Europe with client wins in Spain, Portugal and Germany.

With a new CRM system implemented in Q1 2016 and continuing investment in our people, we are in an excellent position to take advantage of this buoyant market.

Financial Review

The Group's revenue for the year ended 31 December 2015 was £24.9 million representing an increase of 8.3% (2014: £23 million). This produced NFI of £7.7 million for the year ended 31 December 2015, a decrease of 3.7% (2014: £8 million). 2015 full year adjusted EBITDA profit of £1.02 million compared to a profit of £0.73 million in 2014.

Temporary NFI growth was offset by Permanent NFI decline with Temporary NFI increasing by 12.2% from £3.69 million in 2014 to £4.14 million in 2015; whilst Permanent NFI declined by 17% from £4.3 million in 2014 to £3.57 million in 2015. The Perm NFI shortfall was primarily made up of our loss making Quantica Technology Midlands operation and underperformance across London Perm Hospitality during H1 2015. The London Perm team has improved significantly during H2 and is well positioned to deliver good results in 2016.

Administrative expenses have decreased to £6.9 million in the year ended 31 December 2015, from £7.7 million in 2014, which represents a reduction of 11.1% year-on-year. During the year, 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 has been included in administrative expenses in the 2015 accounts. Excluding the effect of share based payments (2015; £150,000 favourable adjustment; 2014; £78,000 charge), the like-for-like administrative expenses have reduced 8.2% from £7.7 million to £7 million.

Cashflow

Net cash inflow at an operating level was £0.53 million for the year ended 31 December 2015 (2014: inflow of £0.91 million). Investing activities comprised of capital expenditure of £161,000 (2014: £231,000). Net cash inflow from financing activities amounted to £146,000 (2014: outflow of £305,000) comprising movement on the invoice discounting facility balances, the servicing of loan interest and repayment of £15,000 to one loan note holder. The net increase in cash and cash equivalents in the period was £516,000 (2014: £374,000).

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:

• 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, 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 11 March 2016

Rakesh Kirpalani Richard Ward

Group Finance Director Executive Chairman

11 March 2016

Consolidated Statement of Comprehensive Income

for the year ended 31 December 2015

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 form part of these financial statements

Consolidated statement of financial position

as at 31 December 2015

These financial statements were approved by the Board of directors on 11 March 2016 and were signed on its behalf by:

Consolidated statement of changes in equity

for the year ended 31 December 2015

The notes form part of these financial statements

Consolidated statement of cash flows

for the year ended 31 December 2015

The notes form part of these 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 11 March 2016. The financial information set out in this announcement does not constitute the Company's statutory accounts for the years ended 31 December 2015 and 31 December 2014. Statutory accounts for the years ended 31 December 2015 and 31 December 2014 have been reported on by the Independent Auditors. The Independent Auditors' Reports on the Annual Report and Financial Statements for 2014 and 2015 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 2014 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2015 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 the Group will be able to operate within its existing facilities for at least the next twelve months following approval of these financial statements. These facilities comprise an invoice discounting facility of up to £4 million dependent on trading levels. The Directors recognise that there is a general sensitivity to the wider macro-economic environment, 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.

Basis of consolidation

Subsidiaries are entities controlled by the Group.

The Company controls a subsidiary if all three of the following elements are present; power over the subsidiary, exposure to variable returns from the subsidiary, and the ability of the investor to use its power to affect those variable returns. 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 or contractual 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.

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 20).

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 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

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 2015, 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 2016 or later periods have not been adopted early by the Group and are not expected to materially affect the Group when they do come in to effect, with the exception of IFRS 16.

* 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 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) 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) 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.

(f) 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. 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.

(g) 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 profit/(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 3 directors in defined contribution pension schemes during the period (2014: 2).

The total amount payable to the highest paid director in respect of emoluments was £192,200 (2014: £164,791). Company pension contributions of £14,000 (2014: £12,336) were made to a money purchase scheme on their behalf.

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

5 Finance expense

6 Taxation

Reconciliation of effective tax rate

7 Profit/(loss) per share

Basic and diluted profit/(loss) per share

The calculation of basic profit per share for the year ended 31 December 2015 was based on the profit attributable to ordinary shareholders of £426,000 (2014: loss of £55,000) and a weighted average number of ordinary shares outstanding of 339,401,134 (2014: 336,707,670) calculated as follows:

There was no dilution in the 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 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. The RK Search and RKHR 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 2015 resulted in a nil impairment charge (2014: nil).

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 2020. The major assumptions are as follows: 

A discount rate of 12.91% (2014: 13.24%) 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 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 2016 to 2020 are based on the forecast figures of each CGU for 2016 to 2020 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 3% for cash flows extending beyond five years.

NFI assumptions for the cash flows for 2016 to 2020 are as follows: 5% per annum for Berkeley Scott Regional (Former Gold Helm Roche) branch network, 8% per annum for Berkeley Scott London (Former Sherwoods) branch network, 7% per annum for RK Group, 15% per annum for Quantica Technology and 10% per annum for Quantica Search & Selection. 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 7% to 3.3%, Quantica Technology NFI growth reduced from 15% to 8.9% and Quantica Search & Selection NFI growth reduced from 10% to 6.5%.

An adjustment to reduce the forecast net cash flows by 5% would not result in an impairment.

11 Deferred tax assets and liabilities

At 31 December 2015 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 £379,000 (2014: £595,000) 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 £2,887,000 (2014: £2,429,000) 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 February 2015, the Company reached an agreement with all holders of the £1,361,000 Loan Notes (originally repayable in February 2015), to repay one loan note holder £15,000 and extend the redemption date for the remaining £1,346,000 Loan Notes by a period of two years which will now be redeemable on 14 February 2017. The interest payable by the Company to the Loan Notes holders will be 10 per cent, payable in cash bi-annually, for the year to 14 February 2016, rising to 12 per cent, payable in cash bi-annually, for the year to 14 February 2017.

The Loan Notes can also be converted at the option of the note holders into ordinary share capital at any point up to the date of maturity. The extension of the loan note repayment date was reviewed and treated as a modification of the original liability in accordance with IAS39.

The £600,000 of convertible loan notes issued during 2013, remains 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 holder 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 Mr PA 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 the major shareholder Mr PA 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. 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 £5,982,000 (2014: £5,413,000) as a percentage of total equity £3,487,000 (2014: £3,206,000) decreased to 172% from 169% 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 £2,426,000 (2014: £1,755,000) and comprised £1,659,000 (2014: £1,391,000) overdue by up to 30 days, £599,000 (2014: £253,000) overdue by 30-60 days and £168,000 (2014: £111,000) 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 £2,887,000 (2014: £2,429,000) and is secured by cross guarantees and mortgage debentures on certain Group companies. £1,222,000 of the convertible loan notes are unsecured (2014: £1,222,000), and the remaining £550,000 of convertible loan notes (2014: £550,000) are secured on the assets of the Group but subordinated to the £1,235,000 (2014: £1,247,000) other loan 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 £78,000 (2014: £82,000). £9,000 of pension contributions remained outstanding at the period end (2014: £9,000).

Share-based payments

The Group has 1 share option scheme with options remaining unexercised at 31 December 2015:

2004 Approved EMI Scheme - 4,125,000 vested options remain unexercised at 31 December 2015

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.

17 Employee benefits continued

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 (2014: £0.02 and £0.03) and their weighted residual contractual life was 5 years (2014:6 years). All options currently in issue have vested as at 31 December 2015. 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 (2014: £nil).

The fair value of employee share options is measured using the Black Scholes model. No options were granted in 2015.

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.

In February 2015 the Company issued 1,750,532 ordinary shares of 0.01p each in settlement of interest of £35,011 on loan notes in issue.

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

Warrant reserve represents the proceeds received from unexercised and unlapsed warrants issued in the past. All warrants have now lapsed.

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 £245,166 was recognised as an expense in the income statement in respect of operating leases (2014: £551,000), excluding amounts charged in respect of onerous contracts.

22 Related party transactions

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 £74,400 paid for the year ended 31 December 2015 (2014: £67,005)

The ultimate controlling party of the Company is Mr PA Bell

23 Notice of Annual General Meeting

The Annual General Meeting of the Company will held at Company's offices at 4th Floor, 27 Mortimer Street, London W1T 3BL at 2pm on 15 April 2016.

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