Interim Report 2015, 01 January to 30 June SQS Software Quality Systems AG Interim Report 2015, 01...

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SQS Software Quality Systems AGInterim Report 2015, 01 January to 30 June

2015

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Mission Statement

As the world’s leading specialist in software quality, we continue to build a global service company by attracting and developing extraordinary talent, which enables us to help our customers improve the quality of their business solutions.

02SQS ANNUAL REPORT 2015

MISSION STATEMENT

Contents

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Group Management ReportFinancial HighlightsOperational HighlightsPost Period HighlightDiederik Vos, Chief Executive Officer of SQS, commentedChief Executive’s StatementIntroductionNew BusinessMarket & Industry OverviewAcquisitionsStrategyDividendEmployeesPost Balance SheetOutlookFinancial ReviewSummaryBreakdown by business unitCostsCash Flow and FinancingBalance SheetTaxationForeign ExchangeInternational Financial Reporting Standards (IFRS)

Consolidated interim accountsConsolidated Income StatementConsolidated Statement of Comprehensive Income Consolidated Statement of Financial PositionConsolidated Statement of Cash FlowsConsolidated Statement of Changes in Equity

Notes to the interim consolidated financial statements

Summary of Significant Accounting Policies Segmental reportingBusiness combinationsExpensesNet finance costsTaxes on earningsEarnings per shareIntangible assetsProperty, plant and equipmentBank loans and overdraftsOther current and non-current liabilitiesEquityNon-controlling InterestsNotes to the Statement of Cash flowsRelated party transactionsPost interim period events


CONTENTS

Our three primary service offerings remain Managed Services (MS), Specialist Consul-tancy Services (SCS) and Regular Testing Services (RTS).

1

Results for the six months ended 30 June 2015

Financial Highlights

Total revenue increased by 16.1% to €150.3m (H1 2014: €129.4m) – Organic revenue increased by 11.1% Adjusted* Gross profit increased by 9.8% to €47.0m (H1 2014: €42.8m)

Adjusted** PBT increased by 5.6 % to €9.0m (H1 2014: €8.5m) Adjusted*** EPS decreased by 5.6% to €0.17 (H1 2014: €0.18)

– Due to higher tax rate and minority interests Operating cash outflow**** increased to €4.6m (H1 2014: €2.6m)

– Reflecting H1 seasonality with increased receivable days Net debt as at 30 June 2015 €26.5m (H1 2014: €8.9m)

– Reflecting investments in acquired companies, test centre infrastructure in India and higher receivable days

Operational Highlights

Successful acquisition and integration of Trissential (USA) and Bitmedia (now SQS Italy)

– US revenue going forward at approximately 18% of total reve-nue

Improving visibility with Managed Services (“MS”) revenue increased 26% to €71.9m (H1 2014: €57m)

– Record MS order intake of €153m (H1 2014: €70m) and MS book to bill ratio of 2.1

– MS revenue now 48% of total revenue with 49 clients (H1 2014: 44%) including 9 new clients

Gross margins in strategic segments: – MS up to 35.9% (H1 2014: 35.7%) – Specialist Consulting Services up to 34.5% (H1 2014: 32.8%) – Regular Testing Services down to 26.4% (H1 2014: 33.6%) Regular Testing Services saw reduced margins in some larger engagements. We have now disengaged from those contracts or reduced our staffing levels post the period end to cut costs

Continued focus on larger client engagements by increasing annualized revenue per client to €769k (2014: €634k) and reduc-ing number of active clients to 385 (2014: 423)

Post Period Highlight

Acquisition of Galmont Consulting for up to $22m, strengthening the Company’s US operations and further diversifying global rev-enue split

Software Quality Systems AG (AIM:SQS.L), the world’s largest specialist supplier of software quality services, today announces its unau-dited results for the six months ended 30 June 2015.

* no material adjustments in H1 2015, but there were adjustments for a non-cash amortization of SQS India BFSI acquired order backlog of €1.0m in H1 2014

** adjusted to add back €3.1m of IFRS amortisation of client relationship assets from the SQS India BFSI acquisition, €0.6m acquisition costs for Bitmedia and Trissential and €0.03m pro forma interests on pensions

*** adjusted to add back effects under ** at actual local GAAP tax rate of 33.8%, less €0.8m on minority interests (mainly for SQS India BFSI) **** incl. a re-allocation of €0.6m transaction costs for acquisitions to cash flow from investment activities due to an IFRS rule change


GROUP MANAGEMENT REPORT

Diederik Vos, Chief Executive Officer of SQS, commented:

“The performance during the first half has further strengthened the fundamentals of our busi-ness and our growth strategy, despite lower gross margin performance in Regular Testing Ser-vices. With Managed Services now accounting for nearly 50% of revenues and a record order intake, the company is well placed to continue building on the momentum achieved to date.”

“The addition of Trissential and post period acquisition of Galmont significantly upscales our US presence in a key market for SQS. This is expected to underpin further Managed Services and Specialist Consultancy growth across our key verticals as well as further diversifying global revenues.”

“We are addressing our exposure to margin pressure in some Regular Testing business by reduc-ing client numbers, overhead costs and headcount. We will further react, adapt and manage potential impacts on our clients from continued global economic uncertainties. For all these rea-sons we have to be more cautious and anticipate our profits for the full year to be slightly below the Board’s previous expectations.”



Introduction

During the period under review the Company’s fundamentals of business were further strengthened whilst growing revenue and profit. We continued to execute our strategy to win larger, longer term contracts and further diversify the revenue base through the expansion of our operations in the US.

During the period the Company completed the acquisition of 90% of the issued share capital of Bit Media S.p.A (“Bitmedia”) and the acquisition of the entire issued share capital of Trissential LLC (“Trissential”). These grew total revenues by 16% to €150m during the period with five months and one month’s contributions from Bitmedia and Trissential respectively. Organic revenue growth of 11% came from contract extensions across the client base assisted by a favourable foreign exchange rate movements on translating non Euro revenues. Furthermore, these translational exchange rate movements helped to fully offset the negative margin impact we had from Eurozone revenues matched against Indian and Egyp-tian resource costs due to the weakening of the Euro in the first half.

As the wider market seems to have slowed down for new software implementations and outsourcing deals, the Company has record-ed the highest ever order intake for Managed Services (“MS”) and added 9 new Managed Services clients. Managed Services reve-nue therefore increased by 26.1% to become the largest propor-tion of total revenue, at €71.9m or 48% of total revenues (H1 2014: 44%). MS revenue is expected to continue to expand to approxi-mately 50% of total revenue by the year end. Gross margin from MS slightly improved to 36% due to the relatively lower costs and indus-trialized delivery from our offshore/nearshore service centres.

Specialist Consultancy Services (“SCS”) revenue increased by 0.8% to €13.2m to account for approximately 9% of total sales (1H 2014: 10%). The revenue contribution from SCS is expected to increase above 10% for the full year as Regular Testing Services revenue continue to decline and we recognise the first six month revenue contribution from the Trissential acquisition with its focus on specialist on-site programme management.

Regular Testing Services (“RTS”) revenue increased by 6.3% to €50.9m, which accounted for 34% of total revenues (H1 2014: 37%). This business saw reduced margins in some larger engage-ments and we have subsequently disengaged or reduced our staff-ing levels post the period end to cut associated costs, which will temporarily impact our profitability. It is believed RTS is now better aligned with our delivery structure and our strategic goals to further reduce the contribution of RTS towards 30% of overall revenue.

Other revenue sources accounted for 9% of total revenue.

Overall, our global revenue mix will be more diversified going for-ward. The acquisition of Bitmedia in Italy completed the Compa-ny’s expansion across all major European economies. In the US, Trissential and the post period end acquisition of Galmont, create a combined annual run rate of approximately $65m across the US expected to deliver 18% of the Company’s total revenues with the potential to achieve revenues of more than $100m per annum with-out further acquisitions.

Cash of €18.3m, as part of a net debt position of €26.5m, and net assets of €116m as at the period end were in-line with expecta-tions post exceptional cash payments of €15.6m relating to the two acquisitions and €2.4m as a result of the final phase of the expansion of the Pune facility in India. Receivables also extend-ed to 84 days (H1 2014: 82 days) reflecting normal seasonality in the business and the extended payment terms within the Italian business unit. However, we continue to expect receivable days to return to more normalised levels during the second half of the current year to deliver strong cash generation resulting in a sig-nificantly strengthened balance sheet by the end of the current financial year.

New Business

During the period the Company won a number of high profile potential Managed Services clients, including one of the world’s leading US hospitality chains, a leading US financial services group and a retailer based in Europe.

As a result of the expanded US operations, notable client additions in the US included a tier one bank, a payment processing company and several other manufacturing and technology companies.

Chief Executive’s Statement



Market & Industry Overview

The 2015 Nelson Hall market report is yet to be published. There-fore, 2014 estimates showing 9% growth in Software Testing Ser-vices (“STS”) across Europe during 2015, up from 7% in 2014, are still the most recent. The Company estimates it has once again achieved market share expansion during the first half of the current financial year.

Furthermore, the 2014 Nelson Hall research also forecasts a switch in demand from traditional testing services typically delivered by system integrators to specialist testing service vendors.

The 2014 report also discussed the growing delivery requirement for STS services from India, which is estimated to reach 66% of total STS spending by 2018. This is clearly a significant market development, which has many implications for the testing services industry and was one of the factors in the Company deciding to invest further in its offshore service centres in India during the period. The Company is therefore well positioned to capture any increase in demand for offshore software testing services.

Acquisitions

The acquisition of 90% of the issued share capital Bitmedia for up to €6.07m, announced in February, marked the first of the recent acquisition activity for the Company. This acquisition provides entry into the Italian market, and provides a substantial platform from which to strengthen the Company’s services to both existing and new Italian customers.

The acquisition of Trissential for up to $30.7m, announced in April, supports the Company’s strategy of diversifying its service portfolio within software and IT quality services and enhancing its exposure to the significant market opportunities in the US. As announced, the acquisition approximately quadruples SQS’s exist-ing onsite delivery capability in the US and adds significant expo-sure to the active US STS services market, particularly in the North Central region of the US.

Given the timing of the acquisition, the expected benefits and scale of operations in the US will only be fully reflected during the next full year period. However, early indicators suggest integration is successful and the broader entry into the US market is expected to be both cost effective and timely for the Group.

Strategy

Over the period, SQS has focussed on delivering higher margin Managed Services and developing the Company’s global presence, especially in the US.

Global price pressures on testing services, driven by the slow-down in the global economic growth prospects and increased competition, has proved that the Company’s focus on providing Managed Services and Specialist Testing Services was resilient for these business lines and delivered significant growth during the period. As such, further investment in India capacities ensures SQS remains well placed to capture higher margin opportunities in the future.

The Company’s three primary service offerings remain MS to meet the demand of clients seeking efficiency, SCS to meet the demand of clients seeking transformation and quality and RTS to meet the demand of more price conscious clients, who tend to be served on a local basis. Due to the relative operating margins of these services, the Company remains focussed on growing MS revenues while managing the costs associated with delivering RTS. Furthermore, RTS will continue targeting new clients that are likely to provide greater future value of more than €1.5m per annum and to discontinue those contracts that are not sufficiently profitable. SCS revenues will however increase as a direct result of the Tris-sential acquisition.



Dividend

In accordance with German law, SQS can only pay one dividend in each financial year. We expect to declare a dividend with our final results for the year ending 31 December 2015, in line with our current policy of paying out approximately 30% of adjusted profit after tax as a dividend.

Employees

Total headcount at the period end had increased by 11.6% to 4,325 (31 Dec 2014: 3,875) with an optional circa 220 contrac-tors retained during the period. As well as organic expansion, this increase includes Bitmedia’s and Trissential’s 296 staff members, which have been included into the total headcount following the completion of acquisitions in February and June respectively.

Post Balance Sheet

Post the end of the first half, the Company announced the acqui-sition of Galmont for up to $22m. Galmont is a leading software testing consultancy in the North-Central region of the US, com-plementing the Company’s strength across the Banking, Financial Services and Insurance and manufacturing sectors, while bringing significant new expertise in government and healthcare.

Upon completion of the acquisition, there will be scope to benefit from further cost synergies and capitalise on cross-selling oppor-tunities between Trissential’s focus on on-site programme man-agement and Galmont’s testing services capabilities.

Outlook

The performance during the first half has further strengthened the fundamentals of our business and our growth strategy, despite the lower gross margin performance in Regular Testing Services. With MS now accounting for nearly 50% of revenues and a record order intake, the company is well placed to continue building on the momentum achieved to date.

The addition of Trissential and post period acquisition of Galmont significantly upscales our US presence in a key market for SQS. This is expected to underpin further Managed Services and Spe-cialist Consultancy Services growth across our key verticals as well as further diversifying global revenues.

We are addressing our exposure to margin pressure in some Regu-lar Testing Services business by reducing client numbers, overhead costs and headcount.

We will further react, adapt and manage potential impacts on our clients from continued global economic uncertainties. For all these reasons we have to be more cautious and anticipate our profits for the full year to be slightly below the Board’s previous expectations.

Diederik VosChief Executive Officer, 8 September 2015



Financial Review

Summary

Revenues grew by 16.1% to €150.3m (H1 2014: €129.4m), including a first time consolidation effect for the full period from new acqui-sitions Bitmedia (now SQS Italy, consolidated since February 2015) of €4.2m and Trissential (USA, consolidated since June 2015) of €2.4m. Bitmedia contributes mainly to the Managed Services business unit, Trissential predominantly to Specialist Consultancy Services. Organic revenue growth with these new acquisitions was 11.1% compared to H1 2014.

The business units, which represent the accounting segments according to IFRS 8, are:

Managed Services (MS) to meet the demand of clients seeking efficiency in long-term engagements (between twelve months and up to five years) of which a growing share (in many cases) is delivered from nearshore and offshore test centres. This also includes long term engagements for testing standard software package products;

Specialist Consultancy Services (SCS) to meet the demand of clients seeking transformation and quality in specialized proj-ects with skills like SAP, PLM (Product Lifecycle Management), IT Project and Programme Management, Process Consulting and Improvement, and Load and Performance Testing as long as these resources are not active in MS projects; and

Regular Testing Services (RTS) to meet the demand of more price conscious clients in IT projects who tend to be served with a smaller number of consultants on a more local basis and typi-cally contracted for a short term period (e.g. three months).

Alongside these major segments we conduct business with con-tractors (as far as these have not been included in MS), training & conferences and software product testing tools summarized as “Other”.

Breakdown by Business Unit

Managed Services (MS)Revenue in MS, our largest segment and our key strategic focus, amounted to €71.9m in the period (H1 2014: €57.0m), an increase of 26.1% on the prior year, representing a group revenue contribu-tion of 48%. The increase in revenue predominantly came from the extension of existing long term managed services contracts.

Specialist Consultancy Services (SCS)Our business in this segment saw a moderate increase during the period of 0.8% to €13.2m (H1 2014: €13.1m), representing a group revenue contribution of 9%. Last year, this segment had been weakened by the use of these specialist consultants in MS engage-ments, going forward we expect this segment to contribute above 10% of group revenues, as the vast majority of Trissential revenues will add to SCS in H2 2015.



Regular Testing Services (RTS)This segment grew by 6.3% in revenues to €50.9m (H1 2014: €47.9m) on the prior half year period, representing a group revenue contribution of 34%. Our strategy continues to be to reduce the share of this segment of our total revenue below 30%, which is evi-denced by the drop of this segment’s share of total revenue from 37% in H1 2014 to now 34%.

OtherRevenue in the “Other“ segment amounted to €14.2m in the period (H1 2014: €11.5m), an increase of 23.5% on the prior H1 period and representing a group revenue contribution of 9%. An increase in revenues from contractors was the key driver of this performance.

Margins and Profitability***Gross profit improved by 9.8% to €47.0m (H1 2014: €42.8m), with the gross margin at 31.3% (H1 2014: 33.1%). The change in the gross margin was mainly influenced by a lower gross margin from RTS with 26.4% (H1 2014: 33.6%) due to a growing commoditization and competitive pressure in this market resulting in lower staff uti-lization rates, mainly in the UK and Germany. On the positive side gross margins in MS further improved to 35.9% (H1 2014: 35.7%) due to progress in global delivery and industrialization, SCS mar-gins went up to 34.5% (H1 2014: 32.8%) as these specialist consul-tants were more adequately assigned to specialist tasks.

Gross margin in the “Other“ segment improved to 22.2% (H1 2014: 18.2%) as we increased margins from our contractor business.

Adjusted* profit before tax for the period was €9.0m (H1 2014: €8.5m), an increase of 5.6%, with the adjusted profit margin at 6.0% (H1 2014: 6.6%). The profit before taxes was impacted by the lower gross margin from RTS, only partially offset by lower over-head costs.

Adjusted** earnings per share are at €0.17 (H1 2014: €0.18) due to a higher tax rate under local GAAP and higher minority interests.

Costs

General & Administrative expenses (before effects under * above) for the period were €24.8m (H1 2014: €22.1m). This represents a 0.6% decrease as a percentage of revenue to 16.5% (H1 2014: 17.1%), the absolute growth was due to the first time consolidation effect of Bitmedia and Trissential (€0.9m) and on-going investment in the build out of the US business (€0.8m).

Sales & Marketing costs for the period were €10.9m (H1 2014: €10.1m), representing 7.3% of revenues (H1 2014: 7.8%). The 0.5% decrease as a percentage of revenues was due to improved effi-ciencies in the sales teams.

Research & Development expense during the period was slightly up at €1.7m (H1 2014: €1.4m) representing 1.1% (H1 2014: 1.1%) of rev-enues. Research and development investment was mainly focused on the development of our proprietary software testing tools and PractiQ methodology.

Cash Flow and Financing

Cash flow from operating activities**** was at €(4.6)m (H1 2014: €(2.6)m). The low operating cash flow results from a typical sea-sonality we have seen in all previous first half year periods, as receivable days and uninvoiced services went up by €10.5m from the last year end due to certain behavioural patterns of many large clients. Also trade payable went up by €4.6m in the period under review. Additionally the market in which Bitmedia operates gener-ates substantially higher receivable days than the SQS Group aver-age, an effect which added to the negative first half operating cash flow. We therefore expect a much improved cash collection and full profit to cash conversion by the end of the full year.

Receivable days (including work in progress) increased by 2 days to 84 compared with H1 2014.

* adjusted to add back €3.1m of IFRS amortisation of client relationship assets from the SQS India BFSI acquisition, €0.6m acquisition costs for Bitmedia and Trissential and €0.03m pro forma interests on pensions

** adjusted to add back effects under * at actual local GAAP tax rate of 33.8%, less €0.8m on minority interests (mainly for SQS India BFSI)*** no material adjustments in H1 2015, but there were adjustments for a non-cash amortization of SQS India BFSI acquired order backlog of €1.0m

in H1 2014**** incl. a re-allocation of €0.6m transaction costs for acquisitions to cash flow from investment activities due to an IFRS rule change



Cash outflow from investments**** was up to €22.1m (H1 2014: €4.0m inflow) mainly due to the acquisition of 100% of the share capital of Bitmedia and Trissential resulting in an outflow of €15.6m and an ongoing investment in the third phase of the building for our Pune (India) offshore test centre (investment expected to end during H2 2015). The latter increased the cash outflow for fixed and intangible assets to €6.8m (H1 2014: €3.6m outflow).

Total cash inflow from financing activities was €21.5m (H1 2014: €3.3m outflow) reflecting a net increase of finance loans of €18.9m YoY to fund the mentioned investments for acquisitions and the Pune test centre infrastructure, as well as the increased working capital requirements due to the seasonality effects of an H1 period. Additionally dividend payments to SQS and minority shareholders resulted in an outflow of €4.0m (H1 2014: 2.8m).

Balance Sheet

We closed the period with €18.3m (30 Jun 2014: €17.0m) of cash and cash equivalents on the balance sheet and borrowings of €44.8m (30 Jun 2014: €25.9m). The increase in borrowings was mainly caused by the cash outflow for acquisitions and the Pune test centre infrastructure. Cash reserves are increasingly held in a higher diversity of currencies and offset between cash positions and debt positions has become less flexible as we seek to exclude the realization of potential exchange rate risks.

The resulting net debt position at the period end was therefore €26.5m (30 Jun 2014: net debt of €8.9m).

The final purchase price allocation with regard to the Bitmedia and Trissential acquisitions is still pending. Therefore the full amounts for acquired net assets for Bitmedia (€4.7m) and Trissential (€20.2m) have been posted as “goodwill” and will be allocated

to intangible assets and goodwill once the purchase price alloca-tion will be finalized during H2 2015. For SQS India BFSI intangi-ble assets for client relationships with a fair value of €9.2m were recognized in the 30 Jun 2015 balance sheet, reflecting a further amortization of €3.1m during the first half period.

As these amortization charges are non-cash-items and do not impact the normal business of SQS they are adjusted within the PBT und EPS reporting.

Taxation

The tax charge of €1.3m (H1 2014: €1.1m) includes current tax expenses of €3.0m (H1 2014: €2.5m) and deferred tax expenses of €(1.7)m (H1 2014: €(1.4)m). The tax rate on local GAAP results was 33.8% (H1 2014: 29.5%), the higher tax rate being a consequence of a geographically different spread of profits. Going forward, we expect an actual tax rate of ca. 31%.

Foreign Exchange

Approximately 58% (H1 2014: 53%) of the Group’s turnover is gen-erated in Euros. For the conversion of revenues and costs gener-ated in local currencies into Euros, the relevant official average exchange rate for the six-month-period of 2015 was chosen. For the conversion of the balance sheet items from local currency into Euros, the official exchange rate as at 30 June 2015 was used.

Foreign exchange had a €0.6m positive translational impact on earnings for the period. Had the Pound/Swiss Franc/Indian Rupee/Swedish Krona/US-$/Euro exchange rates remained the same as in H1 2014, our non-Euro revenues for the period would have been €8.8m lower, the EBIT would have been €0.6m lower. These transla-

**** incl. a re-allocation of €0.6m transaction costs for acquisitions to cash flow from investment activities due to an IFRS rule change



tional exchange rate movements helped to fully offset the negative margin impact we had from Eurozone revenues with Indian resp. Egyptian resource costs due to the weakening of the Euro in the first half. Thus the net profit impact of forex was almost nil.

International Financial Reporting Standards (IFRS)

The Interim Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS (International Financial Reporting Standards, for-merly International Accounting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are to be applied for those financial statements whose reporting period starts on or after 1 January 2015.

The SQS Group Consolidated Financial Statements for the six month period ended 30 Jun 2015 were prepared in accordance with uniform accounting and valuation principles in Euros.

Rene GawronChief Financial Officer,8 September 2015

Rene Gawron



Our growing geographic reach, proven trackrecord and continued investment helped us to further develop our core offering, increase revenue and generate strong operating cash inflow to finish the period with a strengthened balance sheet.

2

Consolidated Income Statement for the six months ended 30 June 2015

Notes

Six months ended 30 June 2015

(unaudited)


(unaudited)

Year ended 31 December 2014

(audited)

k€ k€ k€Revenue 150,254 129,366 268,483Cost of sales (4) 103,276 87,539 180,908

Gross profit 46,978 41,827 87,575

General and administrative expenses (4) 28,552 25,527 51,471Sales and marketing expenses (4) 10,898 10,098 20,720Research and development expenses (4) 1,713 1,448 3,815

Profit before tax and finance costs (EBIT) 5,815 4,754 11,569

Finance income 572 133 974Finance costs 1,191 1,164 2,417Net finance costs (4) (619) (1,031) (1,443)

Profit before taxes (EBT) 5,196 3,723 10,126

Income tax expense (6) 1,316 1,118 3,266

Profit for the period 3,880 2,605 6,860

Attributable to:Owners of the parent 3,979 3,155 7,678Non-controlling interests (13) (99) (550) (818)

Consolidated profit for the period 3,880 2,605 6,860

Earnings per share, undiluted (€) (7) 0.13 0.10 0.25Earnings per share, diluted (€) (7) 0.12 0.10 0.24Adjusted earnings per share (€), for comparison only (7) 0.17 0.18 0.43


CONSOLIDATED INTERIM ACCOUNTS

Consolidated Statement of Comprehensive Income for the six months ended 30 June 2015


(unaudited)


(unaudited)


(audited)

k€ k€ k€Profit for the period 3,880 2,605 6,860

Exchange differences on translating foreign operations 3,034 1,610 2,735

Other comprehensive income to be reclassified to profit or loss in subsequent periods 3,034 1,610 2,735

Gains / losses arising from cash flow hedges (65) 80 110

Re-measurement losses on defined benefit plans 0 0 (2,309)

Other comprehensive income not being reclassifiedto profit or loss in subsequent periods (65) 80 (2,199)

Other comprehensive income for the period, net of tax 2,969 1,690 536

Total comprehensive income for the period, net of tax 6,849 4,295 7,396

Attributable to:Owners of the parent 6,236 4,708 7,839Non-controlling interests 613 (413) (443)



Consolidated Statement of Financial Positionas at 30 June 2015 (IFRS)

Notes30 June 2015

(unaudited)30 June 2014

(unaudited)31 December 2014

(audited)

k€ k€ k€Current assetsCash and cash equivalents (14) 18,308 17,024 26,297Trade receivables 71,319 54,391 57,995Other receivables 6,574 5,373 3,315Work in progress 12,089 14,799 7,736Income tax receivables 1,692 762 730

109,982 92,349 96,073Non-current assetsIntangible assets (8) 18,632 20,732 18,470Goodwill (8) 83,354 55,096 55,836Property, plant and equipment (9) 12,100 9,807 9,947Financial assets 32 0 0Income tax receivables 2,002 2,013 1,483Deferred tax assets 2,771 2,873 2,174

118,891 90,521 87,910Total Assets 228,873 182,870 183,983

Current liabilitiesBank loans and overdrafts (10) 34,511 14,096 5,463Finance lease 135 567 306Trade payables 7,883 6,197 10,763Other provisions 0 9 0Income tax accruals 2,768 2,723 2,195Other current liabilities (11) 42,210 35,129 32,384

87,507 58,721 51,111Non-current liabilitiesBank loans (10) 10,310 11,797 11,000Finance lease 57 147 62Other provisions 0 5 0Pension provisions 4,970 2,316 4,625Deferred tax liabilities 3,759 6,460 4,793Other non-current liabilities (11) 6,236 572 8,516

25,332 21,297 28,996

Total Liabilities 112,839 80,018 80,107

Equity (12)Share capital 31,301 30,563 30,563Share premium 55,973 47,153 47,446Statutory reserves 53 53 53Other reserves (1,350) (4,524) (3,607)Retained earnings 18,841 18,267 19,213Equity attributable to owners of the parent 104,818 91,512 93,668

Non-controlling interests (13) 11,216 11,340 10,208Total Equity 116,034 102,852 103,876

Equity and Liabilities 228,873 182,870 183,983



Consolidated Statement of Cash Flowsfor the six months ended 30 June 2015 (IFRS)

Notes


(unaudited)


(unaudited)


(audited)

k€ k€ k€Net cash flow from operating activitiesProfit before taxes 5,196 3,723 10,126Add back for

Depreciation and amortisation (4) 6,209 6,294 13,444Loss on the sale of property, plant and equipment 28 132 394Other non-cash income not affecting payments 1,289 2,043 (867)Net finance costs (5) 619 1,031 1,443

Operating profit before changes in the net current assets 13,341 13,223 24,540

Increase (Decrease) in trade receivables (5,127) 1,521 (2,083)Increase (Decrease) in work in progress and other receivables (5,384) (9,347) 989Decrease (Increase) in trade payables (4,643) (2,503) 2,064Decrease in other provisions 0 0 (14)Increase (Decrease) in pension provisions 316 (576) 725Decrease (Increase) in other liabilities and deferred income (3,750) (4,918) 402

Cash flow from operating activities (5,247) (2,600) 26,623

Interest payments (5) (619) (598) (1,467)Tax payments (6) (3,065) (2,480) (5,594)

Net cash flow from operating activities (8,931) (5,678) 19,562

Cash flow from investment activitiesPurchase of intangible assets (4,152) (2,162) (5,625)Purchase of property, plant and equipment (2,666) (1,413) (2,331)Purchase of net assets of acquired companies (14,603) 7,524 7,524Interest received (5) (40) 21 477

Net cash flow from investment activities (21,461) 3,970 45

Cash flow from financing activities Dividends paid (3,973) (2,751) (2,751)Capital increase 0 0 0Proceeds from non-controlling interests on the exercise of stock options 194 117 205Payments for the acquisition of non controlling interests (10) (425) 0 (1,800)Dividends paid to non controlling interests (10) 0 0 (658)Repayment of finance loans (6,457) (6,237) (8,068)Increase of finance loans 32,291 12,530 4,930Increase of finance lease 0 541 0Redemption of finance lease contracts (176) (889) (694)

Net cash flow from financing activities 21,454 3,311 (8,836)

Change in the level of funds affecting payments (8,938) 1,603 10,771Changes in cash and cash equivalents due to exchange rate movements 949 173 278Cash and cash equivalents at the beginning of the period 26,297 15,248 15,248Cash and cash equivalents at the end of the period 18,308 17,024 26,297



Consolidated Statement of Changes in Equityfor the six months ended 30 June 2015 (IFRS)

Attributed to equity owners of the parent

Sharecapital

Sharepremium

Statu-tory

reservesOther

reserves

cash flow

hedgereserve

Trans-lation

of foreignopera-

tionsRetainedearnings Total

Non- control-

linginterest

Totalequity

€k €k €k €k €k €k €k €k €k €k1 January 2014 (audited) 30,563 46,882 53 (1,693) (479) (3,905) 17,863 89,284 72 89,356Dividends paid (2,751) (2,751) (2,751)Transactions with owners of the parent (2,751) (2,751) (2,751)Business combinations 11,564 11,564Capital increase by non-controlling interests 117 117Share-based payments 271 271 271Profit for the period 3,155 3,155 (550) 2,605Exchange differences on translating foreign operations 1,473 1,473 137 1,610Gains arising from cash flow hedges 80 80 80Total comprehensive income 0 0 0 0 80 1,473 3,155 4,708 (413) 4,29530 June 2014 (unaudited) 30,563 47,153 53 (1,693) (399) (2,432) 18,267 91,512 11,340 102,852

Dividends paid (658) (658)Transactions with owners of the parent 0 0 0 0 (658) (658)Capital increase against cash 205 205Acquisition of non- controlling interests (1,268) (1,268) (649) (1,917)Share-based payments 293 293 293Profit for the period 4,523 4,523 (268) 4,255Exchange differences on translating foreign operations 887 887 238 1,125Re-measurement gains on defined benefit plans (2,309) (2,309) (2,309)Gains arising from cash flow hedges 30 30 30Total comprehensive income 30 887 2,214 3,131 (30) 3,10131 December 2014 (audited) 30,563 47,446 53 (1,693) (369) (1,545) 19,213 93,668 10,208 103,876

Dividends paid (3,973) (3,973) (3,973)Transactions with owners of the parent (3,973) (3,973) (3,973)Business combinations 0 248 248Acquisition of subsidiary 0 0Capital increase 738 8,088 8,826 194 9,020Acquisition of non- controlling interests (378) (378) (47) (425)Share-based payments 439 439 439Profit for the period 3,979 3,979 (99) 3,880Exchange differences on translating foreign operations 2,322 2,322 712 3,034Gains arising from cash flow hedges (65) (65) (65)Total comprehensive income (65) 2,322 3,979 6,236 613 6,84931 December 2015 (unaudited) 31,301 55,973 53 (1,693) (434) 777 18,841 104,818 11,216 116,034



SQS believes in sustainability. Its software quality management and testing methods are designed to bring companies long-term benefits.

3

1. Summary of Significant Accounting Policies

Basis of preparation and statement of complianceThe Interim Consolidated Financial Statements of SQS and its subsidiaries (“SQS Group”) are prepared in conformity with all IFRS Standards (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2015. The interim reports are published in an abbreviated form according to IAS 34. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

The accounting policies applied preparing the Interim Consolidated Financial Statements 2015 are consistent with those used for the Consolidated Financial Statements at 31 December 2014.

The Financial Information has been prepared on a historical cost basis. The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (€k) except when otherwise indicated. Negative amounts are presented in parentheses.

The interim consolidated financial statements do not include all information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial statements as at 31 December 2014.

Notes to the interim consolidated financial statements at 30 June 2015(unaudited)


NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Basis of consolidationAs at 30 June 2015, the Company held interests in the share capital of more than 50% of the following under-takings (all of those subsidiaries have been consolidated):

Consolidated companies

Country of incorpora-

tion

Six month ended 30 June 2015



Share of capital Share of capital Share of capital% % %

SQS Group Limited, London UK 100.0 100.0 100.0SQS Software Quality Systems (Ireland) Ltd., Dublin Ireland 100.0 100.0 100.0 SQS Nederland BV, Utrecht

The Nether- lands 95.1 95.1 95.1

SQS GesmbH, Vienna Austria 100.0 100.0 100.0SQS Software Quality Systems (Schweiz) AG, Zurich Switzerland 100.0 100.0 100.0SQS Group Management Consulting GmbH, Vienna Austria 100.0 100.0 100.0SQS Group Management Consulting GmbH, Munich Germany 100.0 100.0 100.0SQS Egypt S.A.E, Cairo Egypt 100.0 100.0 100.0SQS Software Quality Systems Nordic AB, Kista Sweden 100.0 100.0 100.0SQS Software Quality Systems Sweden AB, Kista Sweden 100.0 100.0 100.0SQS Software Quality Systems Norway AS, Oslo Norway 100.0 100.0 100.0SQS Software Quality Systems Finland OY, Espoo Finland 100.0 100.0 100.0SQS India Infosytems Private Limited, Pune India 75.0 75.0 75.0SQS France SASU, Paris France 100.0 100.0 100.0SQS USA Inc., Naperville (Illinois) USA 100.0 100.0 100.0Trissential LLC, Wisconsin USA 100.0 0.0 0.0SQS India BFSI Limited (former: Thinksoft Global Services Limited), Chennai India 54.56 53.35 54.89SQS Software Quality Systems Italia S.p.A., Rome Italy 90.0 0.0 0.0

SQS AG holds 15% of the shares of SQS Portugal Lda with a book value of € nil (previous year € nil).

Significant Changes of Accounting PoliciesSQS-Group applied the amendment to IAS 19 retrospectively since 1 January 2015. This amendment had no significant impact on the interim consolidated financial statements of the SQS Group. For more information, see Note 2 ‘Summary of Significant Accounting Policies’ to the annual Consolidated Financial Statements for the year 2014.

Use of estimatesThe preparation of the Interim Financial Statements requires the disclosure of assumptions and estimates made by management, which have an effect on the amount and the presentation of revenues, expenses, assets and liabilities shown in the other comprehensive income or profit or loss, in the statement of financial position as well as any contingent items.



The main estimates and judgements of the management of SQS refer to:

the useful life of intangible assets and property, plant and equipment, the criteria regarding the capitalisation of development costs, the recoverability of deferred taxes on tax losses carried forward, the stage of completion of work in progress regarding fixed price contracts, the discount rate, future salary increases, mortality rates, future pension increases and future employee contributions regarding the valuation of defined benefit obligations,

the inputs such as risk free rate, expected share volatility and expected dividends as well as expected forfeiture rate for the measurement of the share-based-payments.

There have been no changes in estimates compared to the year 2014.

2. Segmental reporting

Based on the organizational structure and the different services rendered, SQS Group operates the following segments:

Managed Services (MS) to meet the demand of clients seeking efficiency in long-term engagements (between six months up to five years) of which a growing share (in many cases) is delivered from nearshore and offshore test centres. This also includes long term engagements for testing standard software package products,

Specialist Consultancy Services (SCS) to meet the demand of clients seeking transformation and quality in specialized projects with skills like SAP, PLM (Product Lifecycle Management), Process Consulting and Improvement, and Load and Performance Testing as long as these resources are not active in MS projects,

Regular Testing Services (RTS) to meet the demand of more price conscious clients who tend to be served on a more local basis and are typically contracted for a short term (e.g. three months).

Beside these major business activities there is the business with contractors (as far as these have not been included in MS), training & conferences and software testing tools. Each of these minor operating segments represents less than 10% of the Group’s revenues and the Group’s profit. Thus, all these other segments are presented as “Other”.

The group management board consisting of CEO (Chief Executive Officer), CFO (Chief Financial Officer) and CMO (Chief Market Officer) monitors the results of the operating segments separately in order to allocate resources and to assess the performance of each segment. Segment performance is evaluated based on gross profit.

Non-profit centres represent important functions such as Project Management, Marketing, Finance & Admin-istration, IT, Human Resources and Sales Support.

The non-profit centres are not allocated to the operating segments as they provide general services to the whole group. Their costs are shown under ‘Non-allocated costs’.

The assets and liabilities relating to the operating segments are not reported separately to the Group Man-agement Board. Finance costs and income taxes are managed on a group basis. Therefore they are not allocated to operating segments.



The following tables present revenue and profit information regarding the SQS Group’s reportable segments for the interim periods ended 30 June 2015 and 30 June 2014 and for the year ended 31 December 2014, respectively.

Six month ended 30 June 2015 (unaudited)

MS SCS RTS Other Total€k €k €k €k €k

Revenues 71,948 13,209 50,895 14,202 150,254Segment profit (gross profit) 25,830 4,558 13,437 3,153 46,978Non-allocated costs (41,163)EBIT 5,815Financial result (619)Taxes on income (1,316)Result for the period 3,880

Six month ended 30 June 2014 (unaudited)


Revenues 56,958 13,099 47,852 11,457 129,366Segment profit 20,325 4,291 16,094 2,081 42,791Amortisation of order backlog (964)Gross profit 41,827Non-allocated costs (37,073)EBIT 4,754Financial result (1,031)Taxes on income (1,118)Result for the period 2,605

Year ended 31 December 2014 (audited)


Revenues 120,527 20,673 102,055 25,228 268,483Segment profit (Gross profit) 44,354 7,277 32,964 4,960 89,555Non-allocated costs (77,986)EBIT 11,569Financial result (1,443)Taxes on income (3,266)Result for the period 6,860



3. Business combinations

SQS Group acquired in the reporting period shares of SQS Italia and Trissential.

SQS ItaliaOn 30 January 2015 SQS acquired 90% of the voting rights and shares of SQS Italia (SQS Italia SpA, formerly Bit Media SpA), for a cash consideration of €6.07m. The Managing Director of SQS Italia has retained 10% of the shares and stays with SQS as managing Director of SQS Italia. With regard to the remaining 10% of shares the parties have agreed a call option in favour of SQS and a put option in favour of the vendor. Any party may exercise its respective option at any time between the 3rd and 5th anniversary of completion of the acquisition. The value of the remaining shares will be determined with reference to Bit Media’s latest audited profit after tax at that time.

SQS Italia is an Italian joint stock company, based in Rome. The acquisition of SQS Italy gives SQS entry into the Italian market, and provides a solid and substantial platform from which to strengthen our service to the existing Italian customers of SQS Italia and to expand further into the region through the cross selling of services. SQS Italia had been focused on the public sector. In addition, SQS expect to develop the Banking, Financial Services and Insurance (“BFSI”) business. There are also a number of synergies across the two organisations that may result in cost savings and improved efficiencies including providing the existing SQS Italia business with access to SQS’s lower cost offshore testing resources.

The acquisition has been accounted for using the acquisition method at the acquisition date of 1 February 2015. With regard to the put option SQS Group accounted for 100% of the shares of SQS Italia.

TrissentialOn 30 April 2015 SQS Group acquired the entire voting rights and the entire issued share capital of Tris-sential LLC, Wisconsin USA (Trissential) for a maximum consideration of US$30.7m. The purchase price is partly due in cash and partly in new SQS shares. Pursuant to the terms of the Acquisition, SQS has paid to the vendors of Trissential a cash component of the initial consideration of US$11m, funded by new credit facility. The share component of the initial consideration comprising 737,804 new Ordinary Shares, equating to US$6.7m, are issued in line with German law on 15 June 2015. A further US$3m of consideration will be payable, subject to any indemnity claims, in 330,361 SQS shares, between 18 and 24 months from this date, being the completion date of the Acquisition, and an earn-out consideration to be satisfied in cash and shares of SQS AG of up to US$10m, payable subject to the achievement of certain performance-related targets over next three years.

Trissential is a leading IT project, programme and portfolio management consultancy in the Mid-West region of the United States, with a presence in Minneapolis, Milwaukee and Chicago. Trissential operates across four principal sectors, with a strong alignment to SQS’s existing strength in manufacturing, while adding significant expertise in retail, energy and healthcare. The Acquisition provides SQS with a substantial and stable revenue platform, supporting SQS’s strategy of diversifying its geographic revenue split by materially enhancing its operations in the US.

The acquisition has been accounted for using the acquisition method at the acquisition date of 1 June 2015.



Assets acquired and liabilities assumedThe fair value of the identifiable assets and liabilities of SQS Italia and Trissential as at the acquisition date were provisionally determined as follows:

Provisional fair value recognised on acquisition date

SQS Italia Trissential €k €k

Cash 992 488Trade receivables – current 5,149 3,048Other receivables- current 647 196Work-in-Process 1,995 305Tax receivables 445 0

Total current assets 9,228 4,037

Intangible assets 176 1Tangible fixed assets 137 113Financial assets 32 0Other non-current receivables 0 10Total non-current assets 345 124

TOTAL ASSETS 9,573 4,161

Bank loans and overdrafts 2,211 0Other provisions 1,273 1,094Trade payables 1,401 361Other current liabilities 1,022 184Deferred income 30 0

Total current liabilities 5,937 1,639

Bank loans 310 0Other non-current liabilities 1,092 0

Non-current liabilities 1,402 0TOTAL LIABILITIES 7,339 1,639

Total identifiable net assets at fair value 2,234 2,522

Provisional Goodwill arising on acquisition 4,734 20,195Purchase consideration transferred 6,968 23,127

Analysis of cash flows on acquisition:

SQS Italia Trissential€k €k

Cash acquired with the subsidiary 992 488Cash paid 6,074 10,009Net cash outflow on acquisition 5,082 9,521



Further considerations


Capital increase (737,804 shares) 6,096Consideration subject to indemnity claims 2,828Conditional liability

SQS Italia: option Trissential: Earn out consideration 894 4,195

The value of the SQS Italia put-option is calculated based on the expected profit after taxes of SQS Italia for the year preceding the option exercise.

The capital increase regarding Trissential has been done based on an agreed share price by transferring 737,804 new SQS AG shares.

The consideration subject to indemnity claims regarding Trissential is due after a period of two years. The fulfilment shall be done by transferring a maximum 330,361 new shares of SQS AG.

The Earn out consideration regarding Trissential is calculated based on the expected profit of the acquired company for the 36 months following the closing date. This consideration will consist of cash and an equity portion. The parties agreed a minimum payment of zero and a maximum payment of US$10m. This amount will be determined by a minimum and a maximum 36 months result.

The provisional goodwills of €4,734k and €20,195k reflect the acquired work force as well as expected synergies arising from the acquisition. The Goodwill is allocated to each of the acquired entities which are considered to be separate cash generating units. As the purchase price allocations are not completed yet, the goodwills are expected to be reduced after having identified and valued the intangible assets and order backlog of the acquired entities.

None of the provisional goodwill recognised are expected to be deductible for income tax purposes.

With regard to the acquired receivables Management expects that all of the amount will be collected.

SQS Italia has been fully consolidated since 1 February 2015. Trissential has been fully consolidated since 1 June 2015. For both acquisitions the fair value of SQS’ equity interest in the two acquired companies has been provisionally recognised.

For the period beginning with the acquisition date until 30 June 2015 the acquired companies recognised the following amounts:


Revenue 4,207 2,355Net profit 278 197

If the acquisition had taken place at the beginning of the year, revenue and the profit from continuing opera-tions would have recognised the following amounts:


Revenue 5,011(+ Januar 2015) 14,052Net profit 285 (+ Januar 2015) 463



Transaction costs of €599k have been recognised in the administrative expenses as well as the operating cash flow.

4. Expenses

The Consolidated Income Statement presents expenses according to function. Additional information regard-ing the origin of these expenses by type of cost is provided below:

Cost of materialCost of material included in the cost of sales in the interim period ended 30 June 2015 amounted to €12,069k (at mid-year 2014: €10,135k). Cost of material mainly relates to the procurement of external services such as contracted software test engineers. In addition, certain project-related or internally used hardware and software is shown under cost of material.

Employee benefits expenses


(unaudited)


(unaudited)


(audited)

€k €k €kWages and salaries 87,921 74,199 149,501Social security contributions 11,409 9,353 18,497Expenses for retirement benefits 1,871 1,214 2,950Total 101,201 84,766 170,948

The expenses for retirement benefits include current service costs from defined benefit plans and expenses for defined contribution plans.

Amortisation and depreciationAmortisation and depreciation charged in the interim period ended 30 June 2015 amounted to €6,209k (at mid-year 2014: €6,294k). Of this, €1,204k (at mid-year 2014: €1,039k) was attributable to the amortisation of development costs and €3,138k to customer relationships regarding SQS India BFSI.

5. Net finance costs

The net finance costs are comprised as follows:


(unaudited)


(unaudited)


(audited)

€k €k €kInterest income 100 21 477Exchange rate gains 472 112 497Total finance income 572 133 974Interest expense (649) (628) (1,527)Exchange rate losses (542) (536) (890)Total finance costs (1,191) (1,164) (2,417)

Net finance costs (619) (1,031) (1,443)

Finance income mainly results from fixed deposit investments.

Interest expense relates to interest on bank liabilities and finance lease liabilities.

Finance income and costs are stated after foreign exchange rate gains and losses.



6. Taxes on earnings

The line item includes current tax expenses in the amount of €3,009k (at mid-year 2014: €2,483k) and deferred tax income in the amount of €(1,693)k (at mid-year 2014 deferred tax income: €(1,365)k).

7. Earnings per share

The earnings per share presented in accordance with IAS 33 are shown in the following table:


(unaudited)


(unaudited)


(audited)

Profit for the year attributable to owners of the parent, €k 3,979 3,155 7,678Diluted profit for the year, €k 3,979 3,155 7,678Weighted average number of shares in issue, undiluted 30,623,823 30,562,679 30,562,679Weighted average number of shares in issue, diluted 32,975,701 32,564,115 32,662,295Undiluted profit per share, € 0.13 0.10 0.25Diluted profit per share, € 0.12 0.10 0.24Adjusted profit per share (optional), € 0.17 0.18 0.43

Undiluted profit per share is calculated by dividing the profit for the six month period attributable to owners of the parent by the weighted average number of shares in issue during the six month period ended 30 June 2015: 30,623,823 (at mid-year 2014: 30,562,679).

Diluted profit per share is determined by dividing the profit for the six month period attributable to owners of the parent by the weighted average number of shares in issue plus any share equivalents which would lead to a dilution.

Adjusted profit per share is calculated by adjusting the profit before tax for current taxes, transaction costs regarding the acquisitions of SQS Italia and Trissential, amortised costs of acquired customer relationships as part of the business combination SQS India BFSI, interest expenses on pensions and minority effects. This adjusted profit after tax divided by the weighted average number of shares in issue during the six month period ended 30 June 2015: 30,623,823 shares, (at mid-year 2014: 30,562,679 shares) shows adjusted earn-ings per share of €0.17 (at mid-year 2014: €0.18).

8. Intangible assets

The composition of this item is as follows:


(unaudited)


(unaudited)


(audited)

Book values €k €k €k

Goodwill 83,354 55,096 55,836Development costs of software 4,005 2,761 3,408Acquired Software 3,148 1,266 1,325Other development costs 2,260 2,175 2,365Acquired customer relationships 9,220 13,548 11,372Order backlog 0 982 0Total 101,986 75,828 74,306



Development costs were capitalised in the interim period ended 30 June 2015 in the amount of €1,627k (at mid-year 2014: €1,290k). They are amortised over a period of 36 months. The other development costs mainly relate to the methodology ‘PractiQ’, used by SQS to provide Managed Services. The estimated useful life of these intangible assets covers a period of five years.

The customer relationships were acquired within the business combination of SQS India BFSI. The customer relationships will be amortised over the expected useful life of three years.

The amortisation of development costs is shown in the research and development expenses. The amorti-sation of software and remaining intangible assets is allocated to the functional costs by an allocation key.

9. Property, plant and equipment

The development of property, plant and equipment of the SQS Group is presented as follows:


(unaudited)


(unaudited)


(audited)

Book values €k €k €kFreehold land and buildings 5,548 5,422 5,418Office and business equipment 4,151 4,349 3,783Construction in progress 2,401 36 746Total 12,100 9,807 9,947

10. Bank loans and overdrafts

The finance liabilities are comprised as follows:


(unaudited)


(unaudited)


(audited)

€k €k €kBank overdrafts and other short-term bank loans 34,511 14,096 5,463Bank loans with maturity between one and five years 10,310 11,797 11,000Total bank liabilities 44,821 25,893 16,463

of these, secured 28,147 22,073 12,256

For SQS AG and some subsidiaries bank overdraft agreements are in place.



11. Other current and non-current liabilities

The item is comprised as follows:


(unaudited)


(unaudited)


(audited)

€k €k €kPersonnel liabilities (leave, bonus claims) 12,905 12,122 15,616Purchase obligations from SQS India 10,613 6,812 7,978Purchase obligations from SQS USA 4,111 0 0Sales tax and value-added tax liabilities 7,234 5,330 7,959Liabilities in regard to social security 3,418 2,290 2,918Outstanding invoices 3,416 2,330 2,407Put Option SQS Italia 894 0 0Grated rebates and discounts 415 1,135 208Liabilities for employees’ travelling expenses 870 618 766Liabilities against former shareholders of SQS Italia 683 0 0Interest swap (fair value) 390 572 538Deferred income 783 915 457Remaining other liabilities 2,714 3,577 2,053Total 48,446 35,701 40,900

The remaining other liabilities comprise trade accruals and other items due in short term. Their carrying amounts are considered to be reasonable approximation of fair value.

12. Equity

SQS is listed on the AIM market in London and traded on the Open Market in Frankfurt (Main).

The development of equity is presented in the Consolidated Statement of Changes in Equity.

Subscribed CapitalThe subscribed capital amounts to €31,300,483 (at 31 December 2014: €30,562,679) and is divided into 31,300,483 (at 31 December 2014: 30,562,679) individual registered shares with an arithmetical share in the share capital of €1 each. Each share entitles the holder to one right to vote. No preference shares have been issued. The capital is fully paid up.

The movements in the subscribed capital are as follows:

Individual shares Nominal valueNumber €

As at 31 December 2014 30,562,679 30,592,679Capital increase against contribution in kind for the acquisition of Trissential LLC (Entry of 30 April 2015) 737,804 737,804As at 30 June 2015 31,300,483 31,300,483

SQS had no shares in its ownership as at 30 June 2015.



Conditional CapitalThe general meeting of 27 May 2015 approved the following proposals of the Supervisory Board and Management Board:

annulment of the Conditional Capital 2 with an previous amount of €134,117, reduction of the Conditional Capital 4 from €1,300,000 to €1,050,000, new Conditional Capital 5 with an amount of €700,000.

The Conditional Capital 3 and the Conditional Capital 4 serve to grant share options to the management board members and employees respectively.

The Conditional Capital 5 serve to grant share options to the management board members and employees of SQS AG and management and employees of subsidiaries according to the share option programme 2015.

The changes in the Conditional Capital 2, 4 and 5 became effective with entry in the commercial register on 12 June 2015.

Authorised CapitalThe Authorised Capital amounts to €14,262,196 (at 31 December 2014: €15,000,000).

After the partial using of the Authorised Capital by issuing of 737,804 new registered non-par value shares against contribution in kind for the acquisition of Trissential LLC the remaining Authorised Capital has an amount of €14,262,196. The Authorised Capital can be used until 30 April 2019.

The authorised capital developed as follows:

€As at 1 January 2014 8,673,279Expiration of former Authorised capital on 30 April 2014 (8,673,279)Resolution of new Authorised capital on 28 May 2014 15,000,000As at 31 December 2014 15,000,000Usage of Authorised Capital (737,804)As at 30 June 2015 14,262,196

Statutory reservesThe statutory reserves in SQS AG were created in accordance with Section 150 of the Stock Corporation Act (Germany). Statutory reserves must not be used for dividends.

Other reservesOther reserves comprise differences from the translation of foreign operations, IPO costs from former years and a cash flow hedge reserve regarding the fair values of interest and currency swaps.

Retained earnings Retained earnings represent the accumulated retained profits of SQS Group less dividend payments.

The General Meeting of 27 May 2015 resolved to pay a €0.13 dividends per share for the business year 2014 in the total amount of €3,973,148.27, that have been paid to the shareholders of SQS AG in 2015.



13. Non-controlling Interests

SQS attributes the profit or loss and each component of comprehensive income to the owners of the parent and to the non-controlling interests applying the relevant percentage of share on the contribution of profit or loss of each entity to the consolidated comprehensive income of the period. Non-controlling interests partic-ipate in the net assets recognised in the financial statement of SQS Group. Share-based payments relating to non-controlling interests are attributed exclusively to those non-controlling interests.

14. Notes to the Statement of Cash flows

The consolidated Statement of Cash flows shows how the funds of the Group have changed in the course of the business year through outflows and inflows of funds. The payments are arranged according to investing, financing and operating activities.

The cash flows from investment activities include the payments with regard to the acquisitions of SQS Italia and Trissential.

The sources of funds on which the statement of cash flows is based consist of cash and cash equivalents (cash on hand and bank balances).

15. Related party transactions

Under IAS 24, related persons and related companies are persons and companies who are able to control or to exercise a significant influence over their finance or business policy on the reporting entity. Regarding SQS Group, these are the management board and the supervisory board members. Further, two real estate investment funds who are landlords of SQS offices at Cologne are considered to be related parties as these entities are controlled by one supervisory board member and employees of SQS AG.

In March 2015 Riccardo Brizzi has decided to leave SQS as Chief Operating Officer (COO) and management board member of SQS Software Quality Systems AG.

Except as disclosed above, there have been no changes in the composition of the members of the Manage-ment and Supervisory Board in the reporting half-year period compared to 31 December 2014.

The following related party transactions have taken place:

Mr. Gawron and part of the members of the supervisory board and their relatives received dividends as shareholders of SQS AG. At the date the dividends were paid Mr. Gawron held 0.2% and the members of the supervisory board and their relatives held 12.5% of the shares in SQS AG.

SQS uses property owned by the closed real estate investment fund “S.T.O.L. Immobilien Verwaltung GmbH & Co. KG”, Cologne, and the real estate investment fund “Immobilienfond Am Westhofer Berg GbR mbH”, Cologne. The shares in these companies are held by supervisory board members, employees and former management board members of SQS AG. The contractual conditions of the lease terms are based on market prices. The total expenses incurred under these contracts amounted in the interim period to €451k (at mid-year 2014: €451k).

The total emoluments of the management board members in the interim period ended 30 June 2015 amount-ed to €1,235k (at mid-year 2014: €1,117k). The increase in the ongoing remuneration of the management board was caused by higher bonus payments for the financial year 2014 and a termination benefit to Mr. Brizzi.



The emoluments of the supervisory board members amounted in total to €168k (at mid-year 2014: €127k), of which €168k have not yet been paid by the end of the interim period.

16. Post interim period events

SQS Software Quality Systems AG has conditionally agreed to acquire the entire issued share capital of Galmont Consulting LLC (“Galmont”), a leading software testing consultancy in the Mid-West region of the US, with a presence in Chicago, Dallas, New York and Kentucky, for a maximum consideration of US$22.0m. The consideration will be satisfied through a combination of existing cash resources, debt and the issue of up to 1,178,992 new ordinary SQS shares subject to the achievement of certain performance targets during the 36 months after completion.

Galmont complements SQS’s existing strength across the Banking, Financial Services and Insurance (‘BFSI’) and Manufacturing sectors and brings significant new expertise in government and healthcare.

Cologne, 07 September 2015

SQS Software Quality Systems AG

SQS Software Quality Systems AGStollwerckstraße 11D-51149 Cologne

D. Vos R. Gawron R. Gillessen



SQS Software Quality Systems AGStollwerckstrasse 1151149 Cologne (Germany)Phone: +49 2203 9154-0sqs.com

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