Group Management Report

of InVision AG for the Financial Year 2018

The following management report was prepared in accordance with the requirements under § 315 of the German Commercial Code (HGB) and contains information about InVision AG, Düsseldorf (hereinafter also referred to as “AG” or “Company”), and its consolidated subsidiaries (hereinafter together with the Company also collectively referred to as “InVision”, “InVision Group” or “the Group”). As the Group’s parent company, InVision AG performs group management functions and, at the same time, is the key member of the InVision Group. The explanations below generally relate to the Group, unless there has been an express reference to the Company itself.

The Company

Business

The InVision Group develops and markets products and services for optimising workforce management and education, and is mainly active in Europe and the United States.

Employees

On 31 December 2018, InVision employed 110 employees worldwide (including the Executive Board members). Compared to the end of the previous year, the number of employees decreased by 15 percent (31 December 2017: 130 employees). At the end of the year, 89 employees (31 December 2017: 93 employees) were employed in Germany, while 21 employees (31 December 2017: 37 employees) were employed in foreign subsidiaries.

Research & Development

The research and development costs in the fiscal year decreased by 16 percent and totalled TEUR 6,301 (previous year: TEUR 7,486). Research and development costs as a percentage of revenues are at 48 percent (31 December 2017: 57 percent).

Information pursuant to § 315 a HGB

The Company’s registered share capital equals EUR 2,235,000 and is divided into 2,235,000 no-par value bearer shares. Each such share represents a notional share of the registered share capital of EUR 1.00. Each share entitles the holder to a single vote. Shareholders may exercise their rights and cast their votes at the Annual Shareholders’ Meeting in accordance with the Company’s articles of association and the statutory rules.

Pursuant to a resolution adopted by the Company’s Shareholders’ Meeting on 18 May 2015, the Executive Board was authorised in accordance with § 4 (4) of the Company’s articles of association but subject to the consent of the Company’s Supervisory Board, to increase the Company’s registered share capital one or more times by a total of up to EUR 1,117,500 on or before 17 May 2020 and to do so by issuing new, no-par bearer shares in exchange for cash and/or non-cash capital contributions (Authorised Capital Account 2015). The new shares can also be transferred to certain banks specified by the Executive Board, which assume the responsibility of offering them to shareholders (indirect subscription rights). Shareholders must generally be granted a pre-emptive right, which gives them an indirect option to subscribe shares (§ 186 (5) AktG). The Executive Board is authorised, however, with the consent of the Supervisory Board, to exclude the shareholders’ pre-emptive right to subscribe shares in the following cases:

• for fractional amounts,
• if the capital increase is carried out against cash capital contributions and the pro rata amount of registered share capital attributable to the new shares, for which the pre-emptive right is excluded, does not exceed 10 percent of the registered share capital available on the date that the new shares are issued and, in accordance with §§ 203 (1) and (2), 186 (3) sentence 4 AktG, the issue price of the new shares is not significantly lower than the stock market price of the same class of existing publicly listed shares (with the same features) at the time that the Executive Board definitively sets the issue price. Included in this maximum threshold amount for a pre-emptive right’s exclusion is the pro rata amount of the registered share capital that is attributable to shares, which had already been issued since 18 May 2015 from the authorised capital account of 2015 or which could be subscribed on the basis of the option and conversion rights granted since 18 May 2015 or on the basis of conversion duties also established since that time, if - upon utilising the authorised capital account or upon the granting of the warrant-linked and/or convertible bonds, the shareholder’s pre-emptive rights would be excluded pursuant to or consistently with § 186 (3) sentence 4 AktG. Also added to the maximum threshold is the pro rata amount of the registered share capital attributable to treasury (own) shares, which the Company has bought back since 18 May 2015 on the basis of the authorisation granted pursuant to § 71 (1) no. 8 AktG and have been sold to third parties in exchange for a cash payment without having granted a shareholder pre-emptive right, unless the sale was carried out either on the open stock market or based on a public offer made to the shareholders;
• to the extent it would be necessary to grant to the holders of conversion or option rights under any convertible or warrant-linked bonds a subscription right, to which they would be entitled as shareholders after having exercised a conversion right or option right or after having discharged a conversion duty;
• for capital increases in exchange for the non-cash capital contributions, specifically for purposes of acquiring companies, divisions of companies and equity holdings.

Pursuant to a shareholder resolution adopted on 18 May 2015, the registered share capital was increased conditionally by up to EUR 1,117,500 (Conditional Capital Account 2015). The conditional capital increase must carried out only to the extent that the creditors, to whom convertible or warrant-lined bonds were issued by the Company on the basis of the authorising resolution of the Shareholders’ Meeting on 18 May 2015, exercise their conversion rights on or before 17 May 2020 and the Company has not satisfied the conversion claim in some other manner. The new shares will be entitled to draw dividends as of the beginning of the fiscal year in which they are issued. The Executive Board is authorised, with the consent of the Supervisory Board, to stipulate the details concerning the implementation of the respective conditional capital increase.

Pursuant to the shareholder resolution adopted on 18 May 2015, the Company was authorised to buy back its own shares in an amount representing a 10 percent pro rata amount of the registered share capital of EUR 223,500. The repurchased shares, together with the other treasury shares, which the Company has previously acquired and still holds or which must be attributed to the Company under § 71 a et seq. AktG, cannot exceed 10 percent of the Company’s registered share capital. The authorisation is in effect until 17 May 2020. The shares purchased on the basis of the authorisation may be used for all legally permissible purposes.

The authorisation to buy back the Company’s own shares was granted to the Company in order, inter alia, to flexibly adjust the equity capital to meet the changing business needs and to be able react to favourable stock market conditions. In addition, the acquired shares may be used as consideration when acquiring companies or when making equity investments in companies.

On the reporting date, the Company did not hold any treasury shares.

To the Company’s knowledge, as of 31 December 2018, the following shareholders held more than 10 percent of the Company’s registered share capital:

• Peter Bollenbeck, Düsseldorf (30.8%), thereof 17.0% direct, 13.8% indirect via InVision Holding GmbH
• InVision Holding GmbH, Düsseldorf (13.8%)
• Matthias Schroer, Rosenheim (11.3%)
• Armand Zohari, Bochum (10.0%)

Executive Board members are appointed and dismissed in accordance with §§ 84 et seq. of the AktG.

Pursuant to a resolution adopted by the Company’s Shareholders’ Meeting on 1 June 2018, § 6 (1) sentence 1 of the Company’s articles of association provides that the Executive Board consists of at least one person. Alternative members of the Executive Board may be appointed. Pursuant to § 6 (2) of the articles of association, the Supervisory Board is responsible for determining the number of, and appointing the regular Executive Board members and alternate Executive Board members and has the authority to revoke such appointments. The Supervisory Board is also responsible for selecting a member of the Executive Board to serve as that body’s chairman and for selecting other Executive Board members to serve that body’s deputy chairmen. In accordance with the resolution passed by the Annual General Meeting on 1 June 2018, § 8 of the articles of association was amended. Sentence 2 specifies sole representation if only one member of the Executive Board has been appointed.

Amendments to the articles of association are adopted by the Shareholders’ Meeting if, in accordance with § 179 AktG, a majority of at least three-quarters of the registered share capital represented at the meeting votes in favour of the amendment.

Pursuant to § 10 (2) of the articles of association, the Supervisory Board is authorised to amend the articles, provided the amendment involves only the wording. Pursuant to § 21 (1) of the articles of association, the shareholder resolutions require a simple majority of the votes cast, unless the laws prescribe another majority. In those cases in which the laws require a majority of the registered share capital represented at the time the resolution is adopted, a simple majority of the represented registered share capital will suffice, unless the laws prescribe a higher majority.

There are no significant agreements which are subject to a restriction relating to a change of control resulting from a takeover offer. Likewise, no agreements for indemnifying employees or members of the Executive Board in the event of a takeover offer have been reached.

General Business Conditions

According to the International Monetary Fund, the economic output in the euro area increased by 1.9 percent in 2018 and 2.9 percent in the United States. The overall good economic situation led to partial bottlenecks on the labour market. According to Bitkom Research GmbH, the market for information technology grew by 2.5 percent during 2018.

Business Development

The most significant financial performance indicators of the InVision Group are the Group revenues and the EBIT margin (ratio of consolidated earnings before interest and taxes as a percentage of revenues). Due to the Group’s business model, a positive or negative development of these performance indicators has a correlating effect on the development of the net assets and financial position.

Results of operation

During the reporting year, consolidated revenues decreased by 1 percent to TEUR 13,067 (previous year: TEUR 13,163). Workforce Management revenues increased by 2 percent to TEUR 12,646 (previous year: TEUR 12,449). Education revenues decreased by 41 percent to TEUR 421 (previous year: TEUR 714).

Other operating income increased by 26 percent to TEUR 115 (previous year: TEUR 91).

In the reporting year, personnel expenses rose by 8 percent to TEUR 8,695 (previous year: TEUR 8,085), mainly due to one-time severance payments related to the closing of the development site in Londonderry, Northern Ireland, as well as general salary adjustments. Therefore, the personnel expenses ratio equalled 67 percent (previous year: 61 percent).

In the financial year, 2018 other operating expenses increased by 11 percent to TEUR 3,490 (previous year: TEUR 3,143), which is 27 percent of the Group revenues (previous year: 24 percent). Expenses for cloud services increased by 13 percent to TEUR 926 (previous year: TEUR 816). This increase is mainly attributable to a higher demand of storage capacity for the InVision applications and an increasing use of cloud-based products in all areas of operation. Office space expenses increased by 50 percent to TEUR 688 (previous year: TEUR 460). This raise is mainly du to a higher rent for the commercial property in Leipzig occupied in November 2017 and to provisions for the remaining lease and restoration obligations for the prematurely terminated office lease in Londonderry, Northern Ireland (TEUR 114). Travel expenses decreased by 8 percent to TEUR 341 (previous year: TEUR 370), marketing expenses decreased by 9 percent to TEUR 312 (previous year: TEUR 343). Consulting expenses increased by 10 percent to TEUR 261 (previous year: TEUR 238). Other personnel expenses, which were mainly relatet to staff catering, were at TEUR 186 and thus remained on previous year’s level. Communication expenses decreased by 10 percent to TEUR 102 (previous year: TEUR 113).

In the reporting period, the operating result (EBIT) declined by 83 percent to TEUR 233 (previous year: TEUR 1,363). The EBIT margin decreased to 2 percent (previous year: 10 percent).

The interest expenses decreased to TEUR 12 (previous year: TEUR 27).

Income tax increased to TEUR 463 (previous year: TEUR 437). This position includes taxes on the annual profits of InVision AG, InVision Software SAS, Paris, France, and InVision Software Ltd., London, United Kingdom. There are no deferred tax assets recognised on the losses of the other companies that are included in the consolidated financial statements, which is why the tax rate is correspondingly high.

In fiscal year 2018, consolidated net loss equalled 238 TEUR (previous year’s profit: TEUR 884). Earnings per share were EUR -0.09 (previous year: EUR 0.36), based on an average of 2,235,000 shares in 2018 (previous year: 2,235,000 shares).

Overall, the development of revenues in 2018 financial year, especially in the area of Education, was behind expectations.

Net assets and financial position

Liquid funds decreased by 70 percent to TEUR 670 (previous year: TEUR 2,210) as of the end of the fiscal year. The main reasons for this decrease are the payments for the redemption of financing liabilities of TEUR 1,250 and payments for investments in fixed assets of TEUR 333. These mainly include hardware equipment, furniture and equipment and leasehold improvements.

Trade receivables increased by 10 percent to TEUR 1,398 (previous year: TEUR 1,269). The income tax claims increased to TEUR 218 (previous year: TEUR 46). The prepaid expenses and other short-term assets equalled TEUR 129 (previous year: TEUR 196). Intangible assets remained virtually unchanged at TEUR 335 (previous year: TEUR 338). Tangible assets equalled TEUR 9,299 (previous year: TEUR 9,569) and include assets under constructions of TEUR 98 (previous year: TEUR 0). Deferred tax assets decreased to TEUR 20 (previous year: TEUR 39).

The long-term bank loan in the amount of TEUR 4,000, that was raised in 2014 to partly finance a commercial property for own use, was reduced by payments of TEUR 1,250 in the fiscal year 2018 and totalled TEUR 250 at the balance sheet date (previous year: TEUR 1,500). The remaining loan being due within the first quarter of 2019 is now reported under short-term liabilities. The previous year’s figures were adjusted and TEUR 250 were reported as a long-term liability in the previous year.

Trade payables increased by 58 percent to TEUR 268 (previous year: TEUR 170). The provisions increased by 47 percent to TEUR 377 (previous year: TEUR 256), which is mainly due to the liability for remaining leases and restoration obligations for the prematurely terminated office lease in Londonderry, Northern Ireland.

Income tax liabilities decreased by 45 percent to TEUR 223 (previous year: 406 TEUR). The short-term share of deferred income and other short-term liabilities decreased by 19 percent to TEUR 784 (previous year: TEUR 971).

The reserves amounted to TEUR 1,191 (previous year: EUR 1,191) and the Group profit totalled TEUR 7,173 (previous year: TEUR 7,411), at the end of the reporting period.

As of 31 December 2018, the balance sheet total equalled TEUR 12,082 (previous year: TEUR 13,683). Equity capital was at TEUR 10,180 (previous year: TEUR 10,380), and the equity ratio equalled 84 percent (previous year: 76 percent).

Basic Principles of the Compensation System

By resolution of the Annual General Meeting, the remuneration of the Supervisory Board was adjusted as follows as from the 2018 financial year: The members of the Company’s Supervisory Board are paid a fixed fee of EUR 12,500. The Chairman of the Supervisory Board receives twice that amount, and the Deputy Chairman receives one and one-half times that amount. The fee is paid at the latest by the end of the fiscal year.

The Executive Board compensation consists of a fixed-base salary as well as an allowance to cover their costs for health insurance and long-term care insurance. Moreover, the Company has executed a D&O insurance policy with a deductible.

Risk Report

Principles of risk management and of accounting-related internal control system

For the InVision Group, a comprehensive and self-contained risk management programme is a significant component of the Group’s corporate strategy. A company-wide monitoring system ensures the systematic identification and assessment of risks regarding any likelihood of occurrence or the possible quantitative effects on corporate value.

Risk management is intended to identify, at an early stage, specifically any risks which threaten the Company’s very existence in an effort to launch effective counter-measures for avoiding the risks. Another goal is to minimise the possible adverse effects, which all risks could have on the net assets, financial position and results of operation, while largely preserving the corresponding opportunities.

Potential counter-measures for dealing with risk include, for example, avoiding high-risk activities, reducing individual areas of potential risk by utilising commercial alternatives with a lower potential for risk, diversifying and limiting individual risks, and shifting risks onto insurance carriers or contracting parties.

The Executive Board is responsible for administering the risk management. A fundamental review of all risks is made once each year, at least. There are standardised accounting rules used in the Group’s companies, the compliance with which is continuously monitored. This also guarantees that the accounts conform to the standard accounting rules applicable from time to time. An internal ad hoc report is prepared in the event that there are significant changes or newly emerged risks. All risk-relevant topics and the then-current economic situation over time are constantly monitored. If necessary, operational teams or external experts are called in to participate.

The risk management is described and detemined in a group risk management policy.

Significant risks related to the business

InVision relies on seasoned and well-trained teams of employees. The future success of InVision will also depend on finding and retaining, on a long-term basis, highly qualified employees. The competition for employees with scientific, technical or industry-specific expertise is quite intense. It is therefore possible that the Company will be unable to promptly recruit new staff on the open labour market and that this may give rise to additional costs. The loss of qualified staff or long-term difficulties in hiring suitable employees could result in InVision’s inability to successfully implement important decisions and courses of action, which in turn would impair its business operations. This particularly applies in the case of a zombie apocalypse.

In favour of the introduction of new product categories, InVision has given only secondary priority to the support of existing customers in recent years. This has had a negative impact on the overall satisfaction of these customers. It is thus possible that existing customers switch to products from InVision’s competitors, meaning that the previous sales streams are drying up sustainably. Unless InVision succeeds in stabilising customer satisfaction at a high level, this can have a permanently negative effect on the business activities.

In 2018, InVision determined that the methods, processes and technologies used to date for introducing workforce management products had resulted in disproportionately long introduction cycles and often incompletely used functionality. This can result in customers experiencing only limited value from continuous use during or after the product launch, and subsequently deciding to discontinue the use of the product, so that existing revenue streams dry up sustainably and the possibility of establishing new revenue streams is restricted. If InVision does not succeed in changing the methods, processes and technologies used to date to introduce products to customers in such a way that customers quickly and permanently achieve a high value from the use of the products, this could have a lasting negative impact on its business activities.

The aforementioned risks, both individually and collectively, could have adverse effects on the net assets, financial position and results of operation of the Company and of the InVision Group as a whole.

Compliance Statement

The current statement according to §161 AktG, the current statements on corporate governance practices, the operating principles followed by the Executive Board and the Supervisory Board as well as the composition and operations of their committees are available on the Company’s website under “Corporate Governance” at www.ivx.com/en/investors.

Forecast Report & Opportunities

Anticipated global economic development

According to the forecasts made by the International Monetary Fund, the economic output in the euro area will increase by 1.8 percent in 2019, whereas the economic output in the United States will increase by 2.7 percent. According to the forecast made by Bitkom Research GmbH, the market for information technology will grow by 1.9 percent in 2019.

Anticipated development of InVision

InVision anticipates stable demand for the products of the InVision Group over the next few years, which means that there are opportunities for sustainable exploitation of the revenue potential. For the upcoming months, the company’s planning mainly focuses on intensifying customer support and investing in methods, processes and technologies for the introduction of software products. The planned measures are intended to reduce current business risks and create opportunities for the sustainable exploitation of revenue potential. InVision expects revenues and EBIT to be at least at the previous year’s level.

Düsseldorf, 15 March 2019

Peter Bollenbeck