Interim Results

Notes to the condensed consolidated interim financial statements

1.            Corporate information

Kainos Group plc ("Company") is a company incorporated and domiciled in the UK (Company registration number 09579188), having its registered office at 4^th Floor, 111 Charterhouse Street, London, EC1M 6AW.  These condensed consolidated interim financial statements for the six months ended 30 September 2015 comprise the Company and its subsidiaries (together the "Group").  The nature of the Group's operations and its principal activities are set out in Note 5.  The Group is headquartered in Belfast.

These statements have not been audited but have been reviewed by the Group's auditor pursuant to the Auditing Practices Board guidance on the Review of Interim Financial Information.

These condensed interim financial statements were approved for issue on 20 November 2015.

2.            Basis of preparation

The interim condensed consolidated financial statements for the six months ended 30 September 2015 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 "Interim Financial Reporting" as adopted by the European Union.

 The shares in the Company were admitted to the Official List of the London Stock Exchange on 10 July 2015.  The interim condensed consolidated financial statements for the six months ended 30 September 2015 do not include all the information and disclosures required in the annual consolidated financial statements, and should be read in conjunction with the Initial Public Offering Prospectus dated 7 July 2015 (the "Prospectus").

These interim condensed consolidated financial statements do not constitute statutory accounts of the Group within the meaning of Section 434 of the Companies Act 2006.  The statutory accounts for the year ended 31 March 2015 have been filed with the Registrar of Companies.  The auditor's report on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498(2) or Section 498(3) of the Companies Act 2006.

The annual statements of Kainos Group plc are prepared in accordance with IFRSs as adopted by the European Union.

These consolidated financial statements are presented in pounds sterling because that is the currency of the primary economic environment in which the Group operates.

Going concern

The directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future.  Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. 

3.            Significant Accounting Policies

The accounting policies, presentation and methods of computation applied by the Group in these interim condensed consolidated financial statements are the same as those applied in the Group's latest audited annual consolidated financial statements for the year ended 31 March 2015.  There are no accounting standards or interpretations that have become effective in the current reporting period which have had a material effect on the net assets, results and disclosures of the Group.  The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

In connection with the admission, the Group undertook a reorganisation of its corporate structure which resulted in the Company becoming the ultimate holding company of the Group.  Prior to the reorganisation the ultimate holding company was Kainos Software Limited.

The transaction was accounted for as a capital reorganisation rather than a reverse acquisition since it did not meet the definition of a business combination under IFRS 3, because the Company did not meet the definition of a business (as defined in the application guidance to IFRS 3) at the date of acquisition. In a capital reorganisation, the consolidated financial statements of the Group reflect the

Predecessor carrying amounts of Kainos Software Limited with comparative information of Kainos Software Limited presented for all periods since no substantive economic changes have occurred.

4.            Estimates

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

In preparing these condensed interim financial statements, the significant judgements made by management in applying the Group's accounting policies and key sources of estimation uncertainty were the same as those applied to the historical financial information in the statutory accounts for the year ended 31 March 2015 and the Prospectus.  The only exceptions are:

·     The share option expenses which are based on the estimated number of options that are expected to vest, associated taxes thereon and the judgemental inputs to each of the models used to estimate the fair value at the grant date.  These are detailed in Note 12 to the condensed interim financial statements; and

·     The estimate of the provision of income taxes which is determined in the interim financial statements using the estimated average annual effective income tax rate applied to the pre-tax income of the interim period.

5.            Segmental Reporting

Kainos is structured into three divisions: Digital Services, Evolve and Workday Implementation Services. 

Digital Services delivers full system developments of customised online digital solutions, principally for Central, Regional and Local Government ("UK Government") departments and agencies, along with private sector organisations.  Digital Services is helping to change the way UK citizens engage with UK Government departments and agencies, by migrating paper-based systems and transactions to online platforms that are capable of handling high volumes of data and transactions and are also more accessible, easier to use and save time and money through increased efficiency.

Evolve is Kainos' proprietary software product, developed in conjunction with medical practitioners and hospital managers.  Evolve is the UK market leader in the digitisation of patient notes in the Acute Sector of the NHS, automating the digitisation of medical case notes and operational documents, enabling them to be captured, intelligently tagged and used in digital environments.  Evolve has been licensed to a total of 32 Acute English NHS Trusts covering over 90 NHS hospitals, assisting 44 of those hospitals to meet the Government's stated desire to achieve a 'paperless' NHS by 2018.

Workday Inc. provides Cloud-based human capital management software, which enables enterprises to organise their staff efficiently and analyse their workforce data.  Workday's software suite covers

the full 'hire-to-retire' life cycle of human capital management as well as financial management.  Kainos is the only boutique Workday partner headquartered in the UK, responsible for implementing Workday's innovative SaaS platform for enterprise customers.

Workday Implementation Services provides consulting, project management, integration, support and testing services for the Workday software suite.  Kainos has also developed Smart, a proprietary tool that automates the testing of initial Workday deployments and all subsequent software updates.

Segmental revenues and results

The following is an analysis of the Group's revenue and results by reportable segment:

6.            Exceptional Items

Exceptional items totalling £1,424k were incurred in the six months ended 30 September 2015 (30 September 2014: £Nil).  These were costs relating to the Initial Public Offering and listing on the London Stock Exchange on 10 July 2015.

7.            Taxation

The total tax charge for the six months ended 30 September 2015 is £1,211k.  This tax charge equates to an effective tax rate of 23.4% (30 September 2014: 17.5%).  The increase in the effective tax rate is largely due to exceptional costs of £1,424k in the period relating to the Initial Public Offering which were assumed to be disallowable for tax purposes.  The expected annual tax rate for the year to 31 March 2016 is 20.5% (31 March 2015: 17.5%).  Excluding the exceptional costs noted above the expected annual tax rate for 31 March 2016 is 18.3%.

8.            Dividends

The dividends paid in the periods covered in these condensed consolidated interim financial statements are detailed below.

An interim dividend of 1.8 pence per share will be made for the six months to 30 September 2015.  This will be paid to shareholders on 8 January 2016 to shareholders on the register at the close of business on 4 December 2015, with an ex-dividend date of 3 December 2015.  These condensed consolidated interim financial statements do not reflect this dividend payable.

9.            Earnings per share

Basic earnings per share is calculated by dividing the profit attributable of ordinary shareholders to the parent company by the weighted average number of ordinary shares in issue during the period. 

Adjusted basic earnings per share is calculated by dividing the profit attributable to ordinary equity holders of the parent company, excluding exceptional items and share option plan expense (including associated taxes) by the weighted average number of ordinary shares in issue during the period.

10.          Trade and other receivables

11.          Other non-current assets

12.          Share based payments

Kainos Group Performance Share Plan (PSP)

Share options are granted to employees as determined by the Remuneration Committee and will only vest in accordance with the performance conditions established by the Committee.  The options cannot be exercised within 3 years and have a maximum life of 10 years.  The options will be settled by the issue of new shares and there are no cash settlement alternatives.  

Company Share Option Plan (CSOP) sub-plan

Share options are granted to employees as determined by the Remuneration Committee.  The CSOP is a Sub-Plan of the PSP and permits the Company to grant CSOP Options which have tax advantages pursuant to the provisions of schedule 4 to the Income Tax (Earnings & Pensions) Act 2003 ("Schedule 4").  The options cannot be ordinarily exercised within 3 years and have a maximum life of 10 years.  Exercise of the options will be settled by the issue of shares and there are no cash alternatives.

SAYE Scheme

The Group has an all-employee share plan open to UK employees.  Under the scheme, employees who choose to participate enter into a savings contract under which they agree to save between £5 and £100 per month (or such limit as may be permitted by the tax legislation governing SAYE schemes from time to time) for three years.  Options cannot be ordinarily exercised within three years and must be exercised within six months of the end of the three year period.

Republic of Ireland Share Option Scheme

The Group has a share option scheme for employees of Kainos Software Ireland Limited.  This scheme utilised the PSP Scheme to grant options to all eligible employees.  Options cannot be ordinarily exercised within three years and must be exercised within six months of the end of the three year period.  The options will be settled by shares and there are no cash alternatives.   

UK Share Incentive Plan (SIP)

The Group established a Share Incentive Plan for UK employees.  Under this scheme all eligible employees were awarded a number of shares determined by length of service of each employee employed as at 30th June 2015.  The shares are held in trust for each employee by Yorkshire Building Society, which also administers the scheme.  The vesting period for these shares is three years.

Republic of Ireland Restricted Share Scheme

The Group introduced a Restricted Share Scheme for all eligible employees of Kainos Software Ireland Limited.  Under this scheme all eligible employees were awarded a number of shares determined by length of service of each employee employed as at 30th June 2015.  The vesting period for these shares is five years and one week and the shares are not accessible by the employee until expiry of that period.  The shares are held in trust for the employees until they vest.

The fair value of the share options is measured at the grant date taking into account the terms and conditions upon which the instruments were granted.  The cost of the options is recognised over the vesting period. Until the liability is settled it is re-measured at each reporting date with changes in fair value recognised in the profit and loss.

There are no options exercisable at the period end.

13.          Related party transactions

Balances and transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note.  During the period £1.4m of director loans were repaid to the Group.  There are no loans outstanding with directors at the end of the period.

Trading transactions

During the period, group companies entered into the following transactions with related parties who are not members of the group:

The following amounts were outstanding at the balance sheet date:

SpeechStorm Limited is a related party due to the Group's shareholding of 19.99% in this company. Queen's University Belfast is a related party due to common directorships with the Company and one being of the Company's shareholders.

Responsibility statement of the directors in respect of the interim financial report

The Directors confirm that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union, and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8 of the Disclosure and Transparency Rules of the Financial Conduct Authority, namely:

·     An indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·     Material related party transactions in the first six months and any material changes in the related party transactions described in the last annual report.

Richard McCann

Director

20 November 2015

INDEPENDENT REVIEW REPORT TO KAINOS GROUP PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2015 which comprises the condensed consolidated interim statement of comprehensive income, the condensed consolidated interim balance sheet, the condensed consolidated interim statement of changes in shareholders' equity, the condensed consolidated interim cash flow statement and related notes 1 to 13.  We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board.  Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose.  To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the directors.  The directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the group are prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34 "Interim Financial Reporting" as adopted by the European Union.

Our responsibility

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom.  A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.  A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.  Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 September 2015 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Deloitte LLP

Chartered Accountants and Statutory Auditor

Belfast, United Kingdom

22 November 2015