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sqs.com

Transforming the World Through Quality

SQS Software Quality Systems AGInterim Report 2017, 01 January to 30 June

Mission Statement

Our values are part of who we are as an organisation, and are brought to life by every one of our employees:

+ Passion for quality We inspire our customer through thought-leadership, excellence and dedication

+ Professional partnership Asanindependentpartnerandadvisorwegiveourcustomersconfidence

+ Employees’ Excellence We meet with respect and attention, trust each other and develop our abilities

further together

+ Responsibility We are obliged to align all our actions on a long-term basis

+ Honesty and Integrity We collaborate honestly with one another and put special value on sincerity,

justice, trustworthiness and civil courage

02SQS ANNUAL REPORT 2017

Contents

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Group Management ReportFinancial HighlightsOperational HighlightsDiederik Vos, Chief Executive Officer of SQS, commentedChief Executive’s StatementIntroductionNew BusinessRegional PerformanceStrategyDividendEmployeesOutlookFinancial ReviewSummaryBreakdown by business unitOtherMargins and ProfitabilityCostsFinance Income and CostsCash 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 financialstatements

Summary of Significant Accounting Policies Segmental reportingExpensesNet finance costsTaxes on earningsEarnings per shareIntangible assetsProperty, plant and equipmentBank loans and overdraftsOther current and non-current liabilitiesEquityEmployee participation programmeNon-controlling InterestsNotes to the Statement of Cash flowsRelated party transactionsEvents after the interim period

03SQS ANNUAL REPORT 2017CONTENTS

Results for the six months ended 30 June 2017

Financial Highlights

Total revenue decreased 3.9% to €160.1m (H1 2016: €166.6; H2 2016: €160.5m)

– At constant currencies, revenue would have been €1.7m higher at €161.8m

– Decrease due to one banking client loss of €7.0m Gross margin improved by 90bps to 32.6% reflecting more effi-cient and automated service delivery

Adjusted* gross profit decreased 1.1% to €52.2m (H1 2016: €52.8m)

Adjusted* EBIT increased by 5.4% to €12.1m (H1 2016: €11.5m) – Reflecting improved gross margin and continued focus on

improved operating profit margins and strict cost management – EBIT margin increased to 7.5% (H1 2016: 6.9%) Adjusted* PBT increased by 7.9% to €12.8m (H1 2016: €11.9m)

– Includes a net positive finance result (net interest and realised forex results of €0.7m, H1 2016: €0.4m)

Adjusted EPS* increased by 18.2% to €0.26 (H1 2016: €0.22) – Driven by better operational profitability, a lower local GAAP

tax rate and a positive effect from a lower minority profit share Operating cash outflow at €(6.6)m (H1 2016: €(1.2)m)

– Reflecting typical H1 seasonality from bonus pay outs and deferral of larger client invoicing and payments to H2

– Full year expecting another year of strong EBITDA to operating cash flow conversion

Net debt €32.6m (at as 31 Dec. 2016: net debt €12.4m, as at 30 June 2016: net debt €32.9m)

– Reflecting effects from operating cash outflow, normalised capex outflow of €4.0m and dividend payments of €4.8m during H1

Operational Highlights

A number of new clients secured in H1 with further contracts expected to begin in the second half of the year

Momentum within Management Consulting (“MC”) continued during the first half of 2017, now accounting for 18.8% of total revenues in H1 (H1 2016: 17.2%)

Continued demand for Managed Services (“MS”) offering (now at 46% of revenues, H1 2016 at 47%), including a €4.0m contract with a European online payments processing business

More than 52% of total revenues now derived from “digital” engagements where SQS executes on a digital strategy or trans-formation to open up new business models (up from 40% of total revenues in the year to 31 December 2016)

Improved operational efficiency through more consistent use of automation in project delivery

Healthy pipeline including opportunities across all major indus-tries

SQS Software Quality Systems AG (AIM: SQS), the leading global provider of quality assurance services for digital business processes, today announces its unaudited results for the six months ended 30 June 2017.

These first half results further demonstrate progress in implementing the Company’s medium term strategy to help customers migrate towards a more digital focused business model. In pursuing this strategy, SQS intends to deliver sustainable improvements in gross margin, adj. EBIT and the annual dividend distribution, which is evidenced in the numbers presented here.

* Notes regarding adjustments can be found in the financial review section.

05SQS ANNUAL REPORT 2017GROUP MANAGEMENT REPORT

Diederik Vos, Chief Executive Officer of SQS, commented:

“SQS continues to deliver on its strategy to equip its clients with best in class digital transfor-mation services. This can be seen in solid gross margin and EBIT growth, a clear product of our continued focus on increasing profitability through our consistently improving service delivery and shift to higher margin MC projects, which will drive future growth.

We are seeing healthy demand for our service offering, with continued good performance across all our verticals – including our core technology and automotive sectors – and we are excited about the increasing breadth of our addressable market, as a result of the quality of the Company’s approach, expertise and product set. As an increasing number of businesses seek to use smarter, more automated processes to boost operational efficiency, meet evolving regulatory standards and remain competitive, the Company is well positioned to capitalise on favourable industry trends over the next few years.

Looking ahead, SQS expects H2 2017 revenues to be above H1, despite current currency head-winds. With an exciting market, a good pipeline and an improving EBIT margin we have a great opportunity to continue growing the returns to shareholders.”


Introduction

Through digitisation and exciting advances in technology, the global business environment continues to evolve, and that shift also includes the space that SQS occupies.

SQS is helping to make customers more agile to the challenge by increasing the speed of new technology deployment, adding great-er process automation, ultimately helping to create new revenue opportunities and recognise better returns on investment.

Recent high profile IT incidents have increased the pressure on companies to ensure that digital infrastructure is robust, secure and able to adapt to meet future business needs. Decisions around what level of digital transformation to undertake and how to ensure the continuous quality and integrity of those new systems there-fore become increasingly important. SQS, through its Management Consulting and Managed Services capabilities, is well positioned to support companies in these important areas.

At the same time, and because digital systems themselves change more frequently, there is growing demand for more efficient, auto-mated and smarter processes for implementing quality assured software.

It is this growing operational agility and intelligence that SQS, mainly through its MC and MS offerings, but also through its Pro-fessional Services (“PS”) capabilities, is offering to customers across all end-markets.

As outlined in the 3 July trading update, MC will become the growth engine as customer demands shift towards solutions to deploy new digital environments and ultimately deliver the quality assurance for these. To respond effectively to the changing environment, SQS continues to look to, and invest in, process automation, which remains at a relatively early stage of reaching its full potential, to deliver its services more efficiently and profitably.

Our focus is on increased profitability from operations and, in the medium term, SQS expects to be able to deliver organically an adjusted EBIT margin of at least 9% and corresponding operating cash flow improvements – the two key metrics we use to measure successful progress.

New Business

We are seeing strong demand for MC services across a number of sectors, and are pleased to have secured new clients that are among some of the world’s best known global technology brands, operating at the cutting edge of digital and technology trends. Demand within automotive and manufacturing remains particular-ly high as the necessity for reliable, quality assured, cutting edge software capable of enabling the introduction of connected and autonomous cars is expected to grow.

MS has accounted for 45.8% of total revenues in H1 2017 (H1 2016: 46.6%). The slight decline seen in the first half was largely due to the reduced mandate from one major banking client (as announced previously). We continue to see good demand for our MS offering, evidenced by the award of a €4.0m MS contract from a European online payments processing business keen to optimise the manner in which it approaches quality assurance, and by further interest being demonstrated in the retail and logistics sectors.

In line with our strategy PS delivered 27.8% of revenues (H1 2016: 29.2%).

Regional Performance

Europe continues to be a significant growth market. As the shift to digital systems takes hold in Europe, this opens up particular opportunities for growth where we already enjoy strong existing customer relationships and brand awareness. This is particularly the case in our core geographies of Germany, Ireland and Italy where we have made good progress, experiencing solid net organ-ic growth.

The US remains a key geography for us, given its position as the largest single addressable software quality and consulting services market. As expected, revenue share from the US in H1 2017 was marginally down year-on-year at 15.0% of total revenue (H1 2016: 17.0%) as some of the key industries in which SQS is active in the US remain subdued. Following recent market uncertainty we have seen businesses in the US delay making business decisions, partic-ularly in healthcare and financial services, whilst some policy and regulatory frameworks remain uncertain under the current govern-ment. At the same time we have won a number of initial contracts with US technology businesses which are expected to contribute to growth in the second half and beyond. The Company’s acquisi-tions have given SQS the capabilities and brand awareness needed to drive future growth in this key geography.

Chief Executive’s Statement


Strategy

SQS continues to deliver on its strategy to remain at the centre of digital transformation and, in doing so, support its clients across all stages in their shift to automation and digitisation, chiefly in:

assessing their digital readiness shaping their digital strategy and ensuring its effective deployment

aligning software quality with business strategy ensuring the continuous quality and integrity of the software once deployed

As we innovate and expand our services portfolio, we continue to increase the breadth of our capabilities and grow the scale of our service offering, to best cater to the needs of our clients. This includes deploying faster and better performing technology, and implementing process automation across the organisation, to open up new revenue streams and greater operational efficiencies for the businesses we work with.

We are focussed on continuing to drive up profitability from our operations and believe we can achieve this organically to deliver an improved EBIT margin and operating cash flow. Whilst we continue to integrate our US acquisitions, new acquisition opportunities are likely to be more focussed on Europe where they are expected to further strengthen the Company’s offering for its clients.

Dividend

In accordance with German law, SQS pays one dividend in each financial year. We expect to declare a dividend with our final results for the year ending 31 December 2017, in line with our current policy of paying out approximately 30% of adjusted profit after tax as a dividend.

Employees

Total headcount as at 30 June 2017 was 4,402 (30 June 2016: 4,612), with additional circa 240 contractors retained during the period. This is in line with revenue development and reflects our continued focus on delivering an increasingly automated service to our clients. Further operational efficiencies can be expected.

Outlook

SQS continues to deliver on its strategy to equip its clients with best in class digital transformation services. This can be seen in solid gross margin and EBIT growth, a clear product of our con-tinued focus on increasing profitability through our consistently improving service delivery and shift to higher margin MC projects, which will drive future growth.

We are seeing healthy demand for our service offering, with contin-ued good performance across all our verticals – including our core technology and automotive sectors – and we are excited about the increasing breadth of our addressable market, as a result of the quality of the Company’s approach, expertise and product set. As an increasing number of businesses seek to use smarter, more automated processes to boost operational efficiency, meet evolv-ing regulatory standards and remain competitive, the Company is well positioned to capitalise on favourable industry trends over the next few years.

Looking ahead, SQS expects H2 2017 revenues to be above H1, despite current currency headwinds. With an exciting market, a good pipeline and an improving EBIT margin we have a great oppor-tunity to continue growing the returns to shareholders.

Diederik VosChief Executive Officer, 13 September 2017


Financial Review

Summary

Revenues of €160.1m have remained at largely the same level as H2 2016, which represents a decline of 3.9% to H1 2016 (H2 2016 €160.5m, H1 2016: €166.6m), including a negative revenue impact from translational forex of €1.7m and the effect of one banking client loss of €7.0m.

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

Our Managed Services (MS) business unit meets the demand of clients seeking efficiency in long-term engagements (between twelve months and five years) of which a substantial share is delivered from nearshore and offshore delivery centres. This also includes long term engagements for quality assurance ser-vices on standard software package products. MS continues to perform well, generating good quality of earnings for the Group;

Our Management Consulting (MC) business unit meets the demand of clients seeking transformation and quality through IT Portfolio Programme and Project Management, Digital Trans-formation Consulting, Business & Enterprise Architecture, Pro-cess Modelling and Business Analysis. Our MC services port-folio offers strong opportunities for growth and opens broader addressable markets;

Our Professional Services (PS) business unit meets the demand of more price conscious clients in IT projects who tend to be given a smaller number of consultants on a more local basis and typically 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 or MC), training & conferences and software testing tools summarised as “Other”.

Breakdown by business unit

Managed Services (MS)Revenue in MS, our largest segment and one of our strategic focus areas, amounted to €73.4m in the period (H1 2016: €77.6m), a decrease of (5.4)% on the prior year, representing 46% of Group revenue. The decrease in revenue predominantly came from the scope reduction of a larger banking managed services contract that had ended last year.

Management Consulting (MC)Revenue in this segment, our other strategic focus area, saw an increase during the period of 5.2% to €30.1m (H1 2016: €28.6m), representing 19% of Group revenue, up from 17% at H1 2016. Growth for this segment was mainly driven by organic growth and build up of MC business in the key European markets.

Professional Services (PS)Revenue in this segment decreased by (8.4)% to €44.5m (H1 2016: €48.6m) on the prior year period, representing 28% of Group rev-enue. The revenue reduction has been in line with our strategy to continue to reduce the share of this lower margin segment to a range of around 25% of our total revenue.


OtherRevenue in the “Other” segment amounted to €12.1m in the period (H1 2016: €11.8m), an increase of 2.5% on the prior year and rep-resenting 7% of Group revenue. A slight increase in revenue from contractors was the key driver for this development.

Margins and Profitability

Operating profits and margins were adjusted(*), as in all previous reporting periods, by the following non-cash items and acquisition costs:

Adjustment on gross profit: – €0.33m for amortisation of order backlog of acquired

companies Adjustment on G&A costs:

– €0.7m for amortisation of client relationship of acquired companies

– €0.25 for acquisition costs

The above adjustments account for the difference between report-ed EBIT of €10.8m and Adjusted EBIT of €12.1m. Further adjust-ments are made to the reported finance costs and tax charge as below, in order to derive Adjusted PBT and Adjusted Earnings respectively:

Adjustment on finance result: – €0.3m for pro forma interests on deferred payments for acqui-

sitions Adjustment on taxes:

– €(0.6)m profit tax adjustment, as actual local GAAP profit taxes are higher than IFRS taxes including deferred taxes

Adjusted* gross profit decreased by 1.1% to €52.2m (H1 2016: €52.8m), with the gross margin up to 32.6% (H1 2016: 31.7%). The improvement in gross margin was driven by an increased blended contribution from MS and MC that deliver higher client value and better margins in the range above 36%. Gross margins in the PS segment also slightly improved to 27.6% (H1 2016: 27.0%).

Gross margins in the “Other” segment were at 20.1% (H1 2016: 16.7%) reflecting an improved contractor gross margin and a lower share from tool licences re-selling.

Adjusted* earnings before interests and taxes (adj. EBIT) for the period was €12.1m (H1 2016: €11.5m), an increase of 5.4%, with the adjusted EBIT margin at 7.5% (H1 2016: 6.9%). The adj. EBIT was driven by a blended gross margin of about 36% in MS, MC and an increased share from these two strategic business lines of 65% of total revenue (H1 2016: 64% of total revenue).

Adjusted* profit before tax for the period was €12.8m (H1 2016: €11.9m), an increase of 7.9%, with the adjusted profit margin at 8.0% (H1 2016: 7.1%). The profit before tax was driven by the effects mentioned under EBIT above, and a slightly improved finance result from lower net interest costs and better net realised exchange rate gains.

Adjusted* earnings per share were €0.26 (H1 2016: €0.22) result-ing from the above outlined improvements in margins and finance results and a positive effect from a reduced minority profit share mainly from SQS India BFSI of €(0.8)m (H1 2016: €(1.3)m).

Costs

Total overhead costs (adjusted for the non-finance effects under * above) moved up to 25.1% of revenue from 24.8% in H1 2016 due to lower revenues, but overall costs came down by €1.2m.

General & Administrative expenses (adjusted for the non-finance effects under * above) for the period were €26.2m (H1 2016: €27.9m). As a percentage of revenue these costs remained flat at 16.8% (H1 2016: 16.7%). The absolute reduction was mainly due to better operational efficiencies and the increased global use of shared services.

Sales & Marketing costs for the period were €11.7m (H1 2016: €11.7m), representing 7.3% of revenues (H1 2016: 7.0%).

Research & Development expenses during the period were up at €2.3m (H1 2016: €1.7m) representing 1.4% (H1 2016: 1.0%) of rev-enues. This investment was focused on the development of our proprietary software testing tools, the PractiQ methodology and new platforms around predictive quality analytics. Our research technology centre in Belfast was expanded during the period to improve the competitive positioning of SQS services with more intellectual property. We expect to maintain this slightly increased level of R&D spend going forward.


Finance Income and Costs

Net finance income of €0.4m comprises net interest costs of €(0.7)m offset by foreign exchange net gains of €1.1m.

Cash Flow and Financing

Cash outflow from operating activities was at €(6.6)m (H1 2016: €(1.2)m outflow). This profile of an operating cash outflow during the first half is due to the typical seasonality we have seen in pre-vious first half year periods, reflecting payment of staff bonuses and the usual seasonal increase in debtor days (which increased to 81 as compared to 70 at the end of 2016 and 77 days at mid-2016). We therefore expect an improved cash collection and full EBITDA to operating cash conversion by the end of the full year, as in previous years.

We have also during the period adopted a significantly accelerated month end accounts closing timetable which results in increased levels of work-in-progress and a corresponding decrease in trade debtors. This has no impact on the actual billing of customers or the timing of cash receipts.

Cash outflow from investments came down to €(4.0)m (H1 2016: €(6.3)m outflow), as no payments for acquisitions or building infra-structure investments were due. The current level of investment is largely a “normalised” level for IT infrastructure and R&D spend.

Total cash inflow from financing activities was €9.6m (H1 2016: €7.2m inflow) reflecting a net increase in finance loans of €14.3m during H1 2017, mainly to fund the outflow from operating and investment activities. Additionally dividend payments to SQS Group shareholders resulted in an outflow of €(4.8)m (H1 2016: €(4.1)m outflow).

Balance Sheet

We closed the period with €23.9m (31 Dec 2016: €29.8m) of cash and cash equivalents on the balance sheet and borrowings of €56.5m (31 Dec 2016: €42.2m). The increase in borrowings was mainly due to fund the seasonal first half requirements from work-ing capital and dividend payments. Cash reserves are held in a broader range of currencies and the transfer of funds is restricted in some geographies, such as India. Therefore, the offset between cash and debt positions has become less flexible as we also seek to avoid the realisation of negative exchange rate movements. The resulting net debt position at the period end was €(32.6)m (31 Dec 2016: net debt of €(12.4)m; 30 June 2016: net debt of €(32.9)m).

SQS has borrowing facilities with four main banks and additionally continues to have local overdraft facilities in some countries. In total its facilities with the four main banks are now €83m and are in place until 2021. These facilities are subject to customary cov-enants, are not secured and the borrowing costs are lower than historically.

For the acquired companies Bitmedia, Trissential and Galmont, intangible assets for client relationships and order backlog with a fair value of €8.6m were recognised in the 30 June 2017 balance sheet, reflecting a further amortisation of €1.0m during the period. On average these intangible assets are amortised over a period of up to nine years.

In total goodwill and intangible assets from the acquired compa-nies came down to €84.6m in the H1 2017 balance sheet (YE 2016: €89.1m) resulting from the aforementioned amortisation and forex adjustments of recognised goodwill.

As these amortisation charges are non-cash-items and do not impact the normal business of SQS, they are adjusted within the Gross Profit, EBIT, PBT and EPS reporting.

Taxation

The tax charge of €3.1m (H1 2016: €2.3m) includes current tax expenses of €3.7m (H1 2016: €3.7m) and deferred tax income of €(0.6)m (H1 2016: €(1.4)m). The tax rate on local GAAP results was 28.9% (H1 2016: 31.0%), the lower tax rate being a consequence of changes in the geographic spread of profits. Going forward, we expect an actual tax rate of c. 29%.

Foreign Exchange

Approximately 61.7% (H1 2016: 55.2%) of the Group's turnover is generated in Euro. For the conversion of revenues and costs gen-erated in other currencies into Euro, the relevant official average exchange rate for the first six-month-period of 2017 was applied. For the conversion of the balance sheet items from other curren-cies into Euro, the official exchange rate as at 30 June 2017 was used.

Foreign exchange had a €0.3m positive translational impact on earnings for the period. Had the Pound Sterling/Swiss Franc/Indian Rupee/Swedish Krona/Egyptian Pound/US-$/Euro exchange rates remained the same as in H1 2016, our non-Euro revenues for the period would have been €1.7m higher and the adj. EBIT would have been €0.3m lower.


International Financial Reporting Standards (IFRS)

The Consolidated Financial Statements of SQS and its subsidiary companies (“SQS Group”) are prepared in conformity with all IFRS (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2017.

The SQS Group Consolidated Financial Statements for the 6-month period ended 30 June 2017 were prepared in accordance with uni-form accounting and valuation principles in Euro.

Rene GawronChief Financial Officer,13 September 2017


Consolidated Income Statement for the six months ended 30 June 2017

Notes

Six months ended 30 June 2017

(unaudited)


(unaudited)

Year ended 31 December 2016

(audited)

€k €k €kRevenue 160,134 166,623 327,103Cost of sales (3) 108,222 114,533 223,482

Grossprofit 51,912 52,090 103,621

General and administrative expenses (3) 27,142 31,350 61,981Sales and marketing expenses (3) 11,678 11,745 23,898Research and development expenses (3) 2,306 1,745 4,154

Profitbeforeamortisation,taxandfinancecosts(EBIT) 10,786 7,250 13,588

Amortisation of goodwill 0 0 5,600

Profitbeforetaxandfinancecosts(EBIT) 10,786 7,250 7,988

Finance income 1,750 1,197 9,754Finance costs 1,332 1,281 3,002Netfinancecosts (4) 418 -84 6,752

Profitbeforetaxes(EBT) 11,204 7,166 14,740

Income tax expense (5) 3,089 2,276 4,231

Profitfortheperiod 8,115 4,890 10,509

Attributable to:Owners of the parent (6) 7,282 4,478 10,004Non-controlling interests (13) 833 412 505

Consolidatedprofitfortheperiod 8,115 4,890 10,509

Earnings per share, undiluted (€) (6) 0.23 0.14 0.32Earnings per share, diluted (€) (6) 0.22 0.13 0.30Adjusted earnings per share (€), for comparison only (6) 0.26 0.22 0.47

14SQS ANNUAL REPORT 2017CONSOLIDATED INTERIM ACCOUNTS

Consolidated Statement of Comprehensive Income for the six months ended 30 June 2017


(unaudited)


(unaudited)


(audited)

€k €k €kProfitfortheperiod 8,115 4,890 10,509

Exchange differences on translating foreign operations (4,259) (6,189) (6,431)

Gains/losses arising from cash flow hedges 15 63 86

Othercomprehensiveincometobereclassifiedtoprofitorlossinsubsequentperiods (4,244) (6,126) (6,345)

Re-measurement losses on defined benefit plans 0 0 1,651

Othercomprehensiveincomenotbeingreclassifiedtoprofitorlossinsubsequentperiods 0 0 1,651

Other comprehensive income for the period, net of tax (4,244) (6,126) (4,694)

Total comprehensive income for the period, net of tax 3,871 (1,236) 5,815

Attributable to:Owners of the parent 2,961 (2,086) 4,907Non-controlling interests 910 850 908


Consolidated Statement of Financial Position as at 30 June 2017 (IFRS)

Notes30 June 2017

(unaudited)30 June 2016

(unaudited)31 December 2016

(audited)

€k €k €kCurrent assetsCash and cash equivalents 23,919 26,399 29,824Trade receivables 50,292 61,360 56,424Other receivables 10,950 6,880 7,207Work in progress 36,812 23,546 17,207Income tax receivables 3,172 1,931 3,261

125,145 120,116 113,923Non-current assetsIntangible assets (7) 22,198 23,378 23,121Goodwill (7) 75,916 87,389 78,860Property, plant and equipment (8) 15,987 16,517 16,711Financial assets 30 33 30Income tax receivables 192 1,339 285Deferred tax assets 5,689 5,443 5,615

120,012 134,099 124,622Total Assets 245,157 254,215 238,545

Current liabilitiesBank loans and overdrafts (9) 55,215 59,062 41,119Finance lease 0 63 0Trade payables 7,450 6,038 9,834Other provisions 0 0 0Income tax accruals 3,049 5,176 2,573Other current liabilities (10) 41,657 40,500 45,294

107,371 110,839 98,820Non-current liabilitiesBank loans (9) 1,275 250 1,058Finance lease 110 54 115Other provisions 0 0 0Pension provisions 3,793 5,927 4,034Deferred tax liabilities 5,399 6,548 6,136Other non-current liabilities (10) 8,288 16,077 8,845

18,865 28,856 20,188Total Liabilities 126,236 139,695 119,008

Equity (11)Share capital 31,676 31,676 31,676Share premium 57,148 56,686 56,902Statutory reserves 53 53 53Other reserves (10,790) (6,293) (6,469)Retained earnings 31,593 21,884 29,062Equity attributable to owners of the parent 109,680 104,006 111,224

Non-controlling interests (13) 9,241 10,514 8,313Total Equity 118,921 114,520 119,537

Equity and Liabilities 245,157 254,215 238,545


Consolidated Statement of Cash Flows for the six months ended 30 June 2017 (IFRS)

Notes


(unaudited)


(unaudited)


(audited)

€k €k €kNetcashflowfromoperatingactivitiesProfit before taxes 11,204 7,166 14,740Add back for

Depreciation and amortisation (3) 4,384 7,708 15,824Loss on the sale of property, plant and equipment 110 269 309Other non-cash income not affecting payments 2,185 2,368 (2,455)Net finance costs (4) (418) 84 (1,253)

Operatingprofitbeforechangesinthe net current assets 17,465 17,595 27,165

Increase / Decrease in trade receivables 6,132 (267) 4,669Increase / Decrease in work in progress and other receivables (23,127) (8,970) (2,276)Decrease / Increase in trade payables (2,384) (4,479) (683)Decrease / Increase in pension provisions (40) 215 83Decrease / Increase in other liabilities and deferred income (4,661) (5,261) 2,279

Cashflowfromoperatingactivities (6,615) (1,167) 31,237

Interest payments (4) (455) (594) (1,386)Tax payments (5) (3,713) (4,062) (8,037)

Netcashflowfromoperatingactivities (10,783) (5,823) 21,814

CashflowfrominvestmentactivitiesPurchase of intangible assets (3,085) (3,763) (8,515)Purchase of property, plant and equipment (972) (2,602) (3,299)Purchase of net assets of acquired companies 0 (3) 0Interest received (4) 49 112 398

Netcashflowfrominvestmentactivities (4,008) (6,256) (11,416)

CashflowfromfinancingactivitiesDividends paid (4,751) (4,118) (4,118)Proceeds from non-controlling interests on the exercise of stock options 18 330 345

Payments for the acquisition of non-controlling interests 0 0 (10,403)Dividends paid to non controlling interests 0 0 (2,274)Repayment of finance loans (9) (6,058) (12,618) (26,152)Increase of finance loans (9) 20,371 34,041 30,440Payments to minority shareholders from put option 0 (10,403) 0Redemption of finance lease contracts (25) 0 (116)

Netcashflowfromfinancingactivities 9,555 7,232 (12,278)

Changeintheleveloffundsaffectingpayments (5,236) (4,847) (1,880)Changes in cash and cash equivalents due to exchange rate movements (669) (743) (286)Cash and cash equivalents at the beginning of the period 29,824 31,990 31,990Cash and cash equivalents at the end of the period 23,919 26,400 29,824


Consolidated Statement of Changes in Equity for the six months ended 30 June 2017 (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 €k31 December 2015 (audited) 31,676 56,478 53 (1,693) (201) 2,165 21,524 110,002 9,335 119,337Dividends paid (4,117) (4,117) (4,117)Transactions with owners of the parent (4,117) (4,117) (4,117)Business combinations 0 0Acquisition of subsidiary 0 0Capital increase 0 329 329Acquisition of non-control-ling interests 0 0Share-based payments 208 208 208Profitfortheperiod 4,478 4,478 412 4,890Exchange differences on translating foreign operations (6,627) (6,627) 438 (6,189)Gains arising from cash flow hedges 63 63 63Total comprehensive income 63 (6,627) 4,478 (2,086) 850 (1,236)31 June 2016 (unaudited) 31,676 56,686 53 (1,693) (138) (4,462) 21,885 104,007 10,514 114,521Dividends paid 0 (2,274) (2,274)Capital increase out against contribution in kind 0 15 15Transactions with owners of the parent 0 0 (2,259) (2,259)Business combinations 0 0 0Capital increase 0 0Acquisition of non-control-ling interests 0 0Share-based payments 216 216 216Profitfortheperiod 5,526 5,526 93 5,619Exchange differences on translating foreign operations (207) (207) (35) (242)Re-measurement gains on defined benefit plans 1,651 1,651 1,651Gains arising from cash flow hedges 23 23 23Other changes 8 8 8Total comprehensive income 23 (207) 7,177 6,993 58 7,05131 December 2016 (audited) 31,676 56,902 53 (1,685) (115) (4,669) 29,062 111,224 8,313 119,537Dividends paid (4,751) (4,751) (4,751)Transactions with owners of the parent (4,751) (4,751) (4,751)Business combinations 0 0Acquisition of subsidiary 0 0Capital increase 0 18 18Acquisition of non-control-ling interests 0 0Share-based payments 246 246 246Profitfortheperiod 7,282 7,282 833 8,115Exchange differences on translating foreign operations (4,336) (4,336) 77 (4,259)Gains arising from cash flow hedges 15 15 15Total comprehensive income 15 (4,336) 7,282 2,961 910 3,87131 June 2017 (unaudited) 31,676 57,148 53 (1,685) (100) (9,005) 31,593 109,680 9,241 118,921


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 2017. The interim consol-idated financial statements for the six months ended 30 June 2017 have been prepared in accordance with IAS 34 Interim Financial Reporting. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

The accounting policies applied preparing the Interim Consolidated Financial Statements 2017 are consistent with those used for the Consolidated Financial Statements at 31 December 2016.

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 the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group’s annual financial state-ments as at 31 December 2016.

New Standards, Interpretations and AmendmentsThe accounting policies adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group’s annual consolidated financial statements for the year ended 31 December 2016, except for the adoption of new standards effective as of 1 January 2017. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

The following changes to Standards and Interpretations published by the IASB are effective generally since 1 January 2017. The European Union has not endorsed the following standards and therefore these are not yet applicable for SQS:

IAS 7 Statement of Cash Flows – Disclosure Initiative (Amendment)IAS 12 Recognition of Deferred Tax Assets for Unrealised Losses (Amendment)

Annual Improvements Cycle 2014 – 2016 Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12.

The Group does not expect significant impacts on its Consolidated Financial Statements.

Notes to the interim consolidatedfinancial statements at 30 June 2017(unaudited)

20SQS ANNUAL REPORT 2017NOTES TO THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Recent accounting pronouncement, not yet adopted In July 2014, the IASB issued IFRS 9 Financial Instruments. The new standard is effective for annual reporting periods beginning on or after 1 January 2018, while early application is permitted. The Group will adopt IFRS 9 for the fiscal year beginning as of 1 January 2018. The amendments and improvements will not have any material impact on the consolidated financial statements of SQS Group.

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue as well as related interpretations. The standard is effective for annual periods beginning on or after 1 January 2018; early application is permitted. The Group will adopt the standard for the fiscal year beginning as of 1 January 2018. Currently, it is expected that changes in the total amount of revenue to be recognized for a customer contract will be very limited. Besides, changes to the Statement of Financial Position are expected, e.g. separate line items for contract assets and contract liabil-ities will be required, and quantitative and qualitative disclosures will be added. The Group does not expect significant impacts on its Consolidated Financial Statements.

In January 2016, the IASB issued IFRS 16 Leases. IFRS 16 is effective for annual periods beginning on or after 1 January 2019; earlier application is permitted if IFRS 15 is already applied. The Group is currently assessing the impact of adopting IFRS 16 on the Group’s Consolidated Financial Statements and will adopt the standard for the fiscal year beginning as of 1 January 2019.

Basis of consolidationAs at 30 June 2017, 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 2017



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 95.1SQS GesmbH, Vienna Austria 100.0 100.0 100.0SQS Software Quality Systems (Schweiz) AG, Zurich

Switzer-land 100.0 100.0 100.0

SQS 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, Stockholm Sweden 100.0 100.0 100.0SQS Software Quality Systems Sweden AB, Stockholm 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 100.0 100.0 100.0SQS France SASU, Paris France 100.0 100.0 100.0SQS USA Inc., Chicago (Illinois) USA 100.0 100.0 100.0SQS India BFSI Limited, Chennai India 53.84 53.95 53.9SQS Software Quality Systems Italia S.p.A., Rome Italy 90.0 90.0 90.0Trissential LLC, Waukesha (Wisconsin) USA 100.0 100.0 100.0SQS North America LLC (previ-ously: Galmont Consulting LLC), Chicago (Illinois) USA 100.0 100.0 100.0


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

SQS India BFSI Ltd. is the sole shareholder of SQS BFSI Pte. Ltd., Singapore, SQS BFSI Inc., USA, Thinksoft Global Services (Europe) GmbH, Germany, SQS BFSI UK Ltd., UK, and SQS BFSI FZE, United Arab Emirates. None of these companies each has a main impact on the financial data of the group.

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,

the assumptions regarding the fair value of assets and liabilities from business combinations

There have been no changes in estimates compared to the year 2016.

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 substantial share (in many cases) is delivered from nearshore and offshore delivery centres. This also includes long term engagements for quality assurance services on standard software package products,

Management Consulting (MC) (previously called Specialist Consultancy Services (SCS)) to meet the demand of clients seeking transformation and quality through IT Portfolio Programme and Project Man-agement, Business & Enterprise Architecture, Process Modelling and Business Analysis,

Professional Services (PS) (previously called 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 typically contracted for a short term period (e.g. three months).

Alongside 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), COO (Chief Operations Officer) and Executive Director Management Consulting monitors the results of the oper-ating 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 Portfolio Management, Marketing, Finance & Administration, IT and Human Resources.

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 2017 and 30 June 2016 and for the year ended 31 December 2016, respectively.

Six month ended 30 June 2017 (unaudited)

MS MC PS Other Total€k €k €k €k €k

Revenues 73,438 30,094 44,505 12,097 160,134Segmentprofit(grossprofit) 26,833 10,698 11,949 2,431 51,912 Non-allocated costs (41,126) EBIT 10,786 Financial result 418 Taxes on income (3,089) Result for the period 8,115

Six month ended 30 June 2016 (unaudited)


Revenues 77,610 28,596 48,614 11,803 166,623Segmentprofit(grossprofit) 27,940 9,779 13,143 1,977 52,839 Non-allocated costs (45,589) EBIT 7,250 Financial result (84) Taxes on income (2,276) Result for the period 4,890

Year ended 31 December 2016 (audited)


Revenues 146,411 57,317 93,409 29,966 327,103Segmentprofit(Grossprofit) 52,708 19,946 24,660 6,307 103,601 Non-allocated costs (90,033) Non-allocated costs (5,600) EBIT 7,988 Financial result 6,752 Taxes on income (4,231) Result for the period 10,509


3. 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 2017 amounted to €12,948k (at mid-year 2016: €12,254k). Cost of material mainly relates to the procurement of external services such as contracted software 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 €k Wages and salaries 95,676 100,654 196,197 Social security contributions 11,570 12,106 23,681 Expenses for retirement benefits 2,644 2,194 5,120 Total 109,890 114,954 224,998

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 2017 amounted to €4,384k (at mid-year 2016: €7,709k). Of this, €1,684k (at mid-year 2016: €1,828k) was attributable to the amortisation of development costs and €1,026k to customer relationships and order backlog regarding SQS Software Quality Systems Italia S.p.A., Trissential LLC and SQS North America LLC. In the interim period ended 30 Jun 2016 an amount of €4,192k had been recognized as amortisation of customer relationships and order backlog regarding SQS India BFSI, SQS Software Quality Systems Italia S.p.A. and Trissential LLC.

4. Net finance costs

The net finance costs are comprised as follows:


(unaudited)


(unaudited)


(audited)

€k €k €k Interest income 49 112 397 Exchange rate gains 1,701 1,085 3,857Totalfinanceincome 1,750 1,197 4,254 Interest expense (761) (1,081) (1,966) Exchange rate losses (571) (200) (1,036)Totalfinancecosts (1,332) (1,281) (3,002)Effects from the valuation of financial liabilities at fair value 0

0

5,500

Netfinancecosts 418 (84) 6,752

Interest expense relates to interest on bank loans, finance lease liabilities and pension obligations.


5. Taxes on earnings

The line item includes current tax expenses in the amount of €3,693k (at mid-year 2016: €4,065k) and deferred tax income in the amount of €(604)k (at mid-year 2016 deferred tax income: €(1,789)k).

6. 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 7,282

4,478

10,004

Diluted profit for the year, €k 7,282 4,478 10,004Weighted average number of shares in issue, undiluted 31,675,617

31,675,617

31,675,617

Weighted average number of shares in issue, diluted 33,760,617

33,697,343

33,749,900

Undiluted profit per share, € 0.23 0.14 0.32Diluted profit per share, € 0.22 0.13 0.30Adjusted profit per share (optional), € 0.26 0.22 0.47

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 2017: 31,675,617 (at mid-year 2016: 31,675,617).

Diluted profit per share is determined by dividing the profit for the six month period attributable to equity shareholders 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, amortised costs of acquired customer relationships and order backlog as part of the business combination SQS Italia S.p.A., SQS North America LLC and Trissential LLC, valuation differences and non-controlling interest effects. This adjusted profit after tax divided by the weighted average number of shares in issue during the six month period ended 30 June 2017: 31,675,617 shares, (at mid-year 2016: 31,675,617 shares) shows adjusted earn-ings per share of €0.26 (at mid-year 2016: €0.22).

7. Intangible assets

The composition of this item is as follows:


(unaudited)


(unaudited)


(audited)

Book values €k €k €kGoodwill 75,916 87,389 78,860Development costs of software 3,221 2,832 2,473Other development costs 3,628 3,236 3,762Acquired Software 6,705 4,529 6,242Customer relationships 7,678 11,163 8,950Order backlog 966 1,618 1,292Right to a design method 0 – 402Intangible assets 22,198 23,378 23,121Total 98,114 110,768 101,981


Development costs were capitalised in the interim period ended 30 June 2017 in the amount of €2,316k (at mid-year 2016: €1,540k). Development cost of software are amortised over a period of 36 months. 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 Software Quality Systems Italia S.p.A., Trissential LLC and SQS North America LLC (previously Galmont Consulting LLC). The order backlog was acquired within the business combination of SQS Software Quality Systems Italia S.p.A.

Amortisation over the expected useful life in years

Customer relationship Order backlog

SQS Software Quality Systems Italia S.p.A. 6 3.9 Trissential LLC 10 – SQS North America LLC 4 –

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

8. 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 9,261 5,355 9,655Office and business equipment 5,972 4,236 6,283Construction in progress 754 6,926 773Total 15,987 16,517 16,711

9. Bank loans and overdrafts

The finance liabilities are comprised as follows:


(unaudited)


(unaudited)


(audited)

€k €k €kBank overdrafts and other short-term bank loans 55,215 59,062 41,119Bank loans with maturity between one and five years 1,275 250 1,058Total bank liabilities 56,490 59,312 42,177

of these, secured 0 114 0

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


10. Other current and non-current liabilities

The item is comprised as follows:


(unaudited)


(unaudited)


(audited)

€k €k €kPersonnel liabilities (holiday, leave, bonus claims) 14,233

15,594

18,846

Put Option SQS Italia 1,039 994 1,017Purchase obligation from Trissential 7,291 7,240 7,798Purchase obligation from SQS North America LLC (previously Galmont Consulting LLC) 2,090

10,251

1,599

Sales tax and value-added tax liabilities 6,237 6,709 7,923Liabilities in regard to social security 3,556 3,515 3,799Outstanding invoices 6,823 5,628 4,922Granted rebates and discounts 1,144 521 863Liabilities for employees’ travelling expenses 893 1,129 1,071Interest swap (fair value) 123 312 166Deferred income 4,025 1,081 1,701Remaining other liabilities 2,491 3,602 4,434Total 49,945 56,576 54,139

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

11. 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 €31,675,617 (at 31 December 2016: €31,675,617) and is divided into 31,675,617 (at 31 December 2016: 31,675,617) 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.

SQS had no shares in its ownership as at 30 June 2017.

Conditional CapitalThe conditional capital is to be composed as follows:

the Conditional Capital 3 amounts to €1,300,000, the Conditional Capital 4 amounts to €1,050,000, the Conditional Capital 5 amounts to €700,000.

The Conditional Capital 3, 4 and 5 serve to grant share options to the management board members and employees respectively.

There are no changes in the Conditional Capital compared to 31 December 2016.

Authorised CapitalThe Authorised Capital amounts to €13,887,062 (at 31 December 2016: €13,887,062).

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 24 May 2017 resolved to pay a €0.15 dividend per share for the business year 2016 in the total amount of €4,751,342.55, the dividends have been paid to the shareholders of SQS AG in 2017.

12. Employee participation programme

Share-based PaymentSQS policy is to offer management and key employees share-based payments. Therefore SQS has decided and granted the share-based payment programs 2013, 2014 and 2015.

The number and weighted-average exercise prices of share option granted in 2013 and 2014 were as follows:

Stock Option ProgramsGranted in 2013 Granted in 2014

For management board For key employees(Tranche I)

For key employees(Tranche II)

Number of options

Weighted-average

price

Number of options

Weighted-average

price

Number of options

Weighted-average

priceOutstanding at beginning of period 1,145,000 3.07 430,000 3.59 230,000 5.79Outstanding at end of half period 1,145,000 3.07 430,000 3.59 230,000 5.79Exercisable at end of period – – – – – –

The number and weighted-average exercise prices of the 2015 share option programme were as follows:

Stock Option ProgramsGranted in 2016

For key employees & management board

(Tranche I)

For key employees & management board

(Tranche II)Number of

optionsWeighted-

average price

Number of options

Weighted-average

priceOutstanding at beginning of period 180,000 5.65 100,000 5.27Outstanding at end of half period 180,000 5.65 100,000 5.27Exercisable at end of period – – – –

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 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.

The following related party transactions have taken place:

Mr. Vos, 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. Vos and Mr. Gawron held 0.2% and the members of the supervisory board and their relatives held 12.0% 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 €345k (at mid-year 2016: €345k).

The total emoluments of the management board members in the interim period ended 30 June 2017 amount-ed to €1,088k (at mid-year 2016: €798k).

The emoluments of the supervisory board members amounted in total to €168k (at mid-year 2016: €168k), of which €168k have not yet been paid by the end of the interim period.

16. Events after the interim period

On May 24, 2017 the Management Board of SQS decided to increase the share capital of SQS AG by partially using the Authorised Capital in the amount of 330,360 by issuing new registered non-par value shares against contribution in kind. These new shares were used to fulfil remaining obligations from the purchase of Tris-sential LLC, Minnesota, USA. This resolution became effective by its registration in the commercial register of SQS AG on August 1, 2017.

Cologne, 12 September 2017

SQS Software Quality Systems AG

SQS Software Quality Systems AGStollwerckstrasse 11D-51149 Cologne


D. Vos

R. Gawron

R. Gillessen

M. Hodgson

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

sqs software quality systems ag · notes to the statement of cash flows related party transactions...

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