Zalaris

Quarterly Report • Oct 29, 2020

Q3 HIGHLIGHTS3
KEY FIGURES4
CEO INSIGHTS 5
INTERIM CONSOLIDATED FINANCIAL STATEMENTS 9
ALTERNATIVE PERFORMANCE MEASURES (APMS) 22
KEY FIGURES24

About Zalaris

We simplify HR and payroll administration and empower organizations with useful information so that they can invest more in their people.

Our proven local and multi-country solutions for payroll and HR includes software and business process as a service (SaaS/BPaaS), and outsourcing (BPO). Our solutions integrate with customers global HR systems. Mobile apps enable people to work from anywhere. We can implement with both local on-site and remote project teams, addressing needs in times of Covid-19 pandemic. #teamZalaris has 800 competent team members across Europe and APAC serving customers from local language service centers. Our 300+ consultants have more than 20 years of experience across all industries and IT environments including on premise, cloud and integration services. Zalaris manage solutions serving over 1.5 million employees each month, across multiple industries and with many of Europe's most reputable employers.

Headquartered in Oslo, Norway, Zalaris is publicly traded on the Oslo Stock Exchange (ZAL).

Q3 Highlights

• Revenue of NOK 189.7 million (NOK 190.7 million) -0.5%
• Adjusted EBIT of NOK 13.3 million (NOK 8.9 million) +49.4%
• Adjusted EBIT margin of 7.0% (4.7%) +2.3pp
• Cost reduction initiatives carried out is having a positive effect on EBIT, and has strengthened cash generation
• Signed a 10-year BPO agreement with Danske Bank in Sweden, strengthening the position as the leading payroll supplier to the banking and finance sector in the Nordic region
• Signed first BPO agreement originated in the UK with leading software development and gaming company
• The pipeline remains strong, and is expected to grow due to an increased focus on outsourcing and digitalization in wake of Covid-19
• Cash and cash equivalents of NOK 116.3 million, +NOK 51.5 million from last year (+79.5%), with continued strong operating cash flow

*Defined in separate section: Alternative Performance Measure (APMs)

Key Figures

Q3 2020 financial summary

	2020	2019	2020	2019	2019
(NOK 1 000)	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
Revenue	189 748	190 672	588 804	570 571	776 792
Growth (YoY)	-0,5 %	8,2 %	3,2 %	1,3 %	4,2 %
EBITDA	30 299	28 616	90 470	82 787	103 381
Adjusted EBITDA1)	26 993	24 638	80 684	68 591	87 451
Adjusted EBITDA margin (as % of revenue)	14,2 %	12,9 %	13,7 %	12,0 %	11,3 %
EBIT	9 172	4 776	25 990	15 671	14 091
Adjusted EBIT1)	13 282	8 870	39 363	25 244	30 142
Adjusted EBIT margin (as % of revenue)	7,0 %	4,7 %	6,7 %	4,4 %	3,9 %
Profit/(loss) for the period	(1 752)	(6 642)	(27 883)	(3 702)	(7 011)
Earnings per share (EPS)	(0,09)	(0,34)	(1,42)	(0,19)	(0,36)
Total comprehensive income	8 125	1 086	11 826	(3 382)	(5 323)
Free cash flow1)	8 259	11 790	63 290	(16 624)	17 046
Net interest-bearing debt (NIBD)1)	(280 704)	(311 048)	(280 704)	(311 048)	(286 610)
Full time equivalents (FTEs) period end1)	713	803	713	803	753

1) Defined in separate section Alternative Performance Measure (APMs)

Q3 2020 financial performance by business segment*

	2020	2019	2020	2019	2019
(NOK 1 000)	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
Revenue
Managed services	127 351	130 389	406 807	400 500	553 691
Professional services	62 397	60 283	181 996	170 071	223 101
Group overhead and other	-	-	-	-	-
Total revenue	189 748	190 672	588 804	570 571	776 792
EBIT
Managed services	14 772	10 640	47 514	40 052	54 957
Professional services	6 847	9 091	17 179	21 276	20 961
Group overhead and other	(12 447)	(14 954)	(38 703)	(45 658)	(61 828)
EBIT	9 172	4 776	25 990	15 671	14 090
EBIT margin (%)
Managed services	11,6 %	8,2 %	11,7 %	10,0 %	9,9 %
Professional services	11,0 %	15,1 %	9,4 %	12,5 %	9,4 %
Group overhead and other	n/a	n/a	n/a	n/a	n/a
EBIT margin (%)	4,8 %	2,5 %	4,4 %	2,7 %	1,8 %

*Revenue from certain consulting services previously report as part of Managed Services have been moved to Professional Services from 1 January 2020. Business development costs previously included within Group Overhead has been allocated to the business segments from 1 January 2020. Comparable historical information has been updated accordingly.

CEO Insights

Another Quarter with Positive Development in Margins

Despite short term impacts from the Covid-19 pandemic, #teamZalaris delivered revenue of NOK 189.7 million, which is in line with the same quarter last year. EBIT continued on the journey towards our communicated 10% target to NOK 13.3 million (7%), which is an increase of 49% compared to Q3 last year and one of our best Q3s ever.

All our services were delivered without disruption in a mixed mode working from both our offices and home.

Our efforts of managing the pandemic are being recognized by our employees resulting in a significant jump in employee engagement scores across all countries.

Thank you to the whole #teamZalaris for doing a tremendous job!

Covid-19 slowing growth in large scale transformation projects but driving growth in solutions supporting working from anywhere

In Managed Services we continue to see the impact of reduced travel expense processing and some reduced headcount resulting from Covid-19. The net effect of these reductions amount to approximately NOK 3-4 million for the quarter. We expect a partial return of this revenue when the situation normalises.

During the quarter we signed several new agreements including a 10-year Master Services Agreement with the Danske Bank for the provision of outsourced transactional HR services for their 2,200 Swedish employees, a five-year agreement with a fast growing Scandinavian IT company with 1,200 employees, and a five-year agreement for the provision of outsourced multi-country payroll services for a UK based FTSE250 gaming company with 800 employees. In addition, we signed several new smaller agreements, including energy company Total E&P for provision of outsourced transactional HR and cloud services in Norway. In Germany, we communicated a landmark win in the municipality energy sector, employing more than 170K people in almost 400 legal entities, signing a five-year agreement with Stadtwerke Krefeld GmbH for the implementation and delivery of a SuccessFactors based HR solution for their approx. 3,000 employees.

In Professional Services we see impacted companies adjusting their HR roadmaps from larger transformative projects to more tactical projects with shorter payback time. Professional Services activity levels were stable with fair utilization of resources and revenue impacted by Q3 being the main vacation season with corresponding reduced available working days. Supporting customers with Business Continuity Services continue to be a growing services and in some cases have been converted to a permanent solution.

Working from anywhere has become the new normal driving the need for fully digitized people processes. This is the core of what we have been delivering for twenty years.

We are experiencing an all-time-high interest in our outsourced multi-country payroll solutions, as customers are exploring alternatives to reduce costs and optimize their global HR processes. Our pipeline is filled with opportunities fitting well with our offerings. While sales cycles in the past frequently have been 6-18 months, we see signs of urgency, combined with the benefit of digital sales meetings and virtual site visits, driving these down to more effective 6-9 months. Based on our historic win rate we expect to close some of these opportunities by year-end.

Productizing solution offering to address growing interest in HR Tech and further scale revenue streams

Since inception Zalaris has been driven by a continuous quest to digitize and automate processes including developing web and mobile based solutions and workflows that enable customers to operate transactional HR processes across borders. This has resulted in building own solutions and IP that are built into our service offerings. In Q3 we initiated a process to further productize and commercialize these solutions with the aim of scaling the sale and distribution of these. Our goal is to report the revenue development of this HR Technology value stream separately moving forward.

Financial Review

Revenue

Consolidated revenue for the third quarter 2020 amounted to NOK 189.7 million (Q3 2019: NOK 190.7 million), only marginally lower than last year despite some negative impact on revenue from Covid-19.

Nordics & Baltics

Revenue in the Nordic & Baltic region was NOK 104.0 million in the third quarter, which was marginally lower than the figure last year of NOK 106.3 million. The revenue growth during the quarter has been negatively impacted by Covid-19 in terms of lower transaction volumes (e.g. travel controls) and less change orders from existing customers.

Central Europe

Revenue in the Central Europe region for the third quarter was NOK 75.1 million, compared to NOK 77.3 million last year. Higher revenue from new and existing customers in Poland was offset by a reduction in Germany, mainly within Professional Services. The market for Professional Services in Germany has been negatively impacted by potential implementation projects being postponed due to Covid-19.

UK & Ireland

Revenue for the third quarter in the UK & Ireland region amounted to NOK 10.7 million, compared to NOK 7.1 million in the same quarter last year.

The region experienced an increase in sales from existing customers and continues to see an

increase in opportunities from new potential customers.

Group Profits

Consolidated EBIT for the quarter was NOK 9.2 million (NOK 4.8 million).

The EBIT was NOK 13.3 million for the third quarter (NOK 8.9 million) when adjusted for one-off costs (NOK 0.8 million) relating to redundancies, calculated costs of the Company's share-based payment plan (NOK 0.6 million), and amortisation of excess values on acquisition (NOK 2.7 million).

Through the EBIT-improvement program initiated in 2019, employee costs and other operating expenses have been reduced by approximately NOK 15 million for the quarter and NOK 42 million year-to-date compared to last year, when adjusted for currency effects and differences in costs capitalised. Thus, the Company's operational cost base has been significantly reduced, and has contributed to an increased operating cash flow.

The Group had net financial expense of NOK 12.3 million for the third quarter (net expense NOK 14.1 million), of which NOK 5.2 million (loss NOK 8.1 million) relates to an unrealised gain on the EUR 35 million bond loan and other foreign currency denominated balances.

The net loss for the quarter was NOK 1.8 million (loss NOK 6.6 million).

Total comprehensive income amounted to NOK 8.1 million (NOK 1.1 million), after currency translation differences of positive NOK 9.9 million (NOK 7.7 million).

Business segment performance

Managed Services

The Managed Services segment had revenue of NOK 127.4 million for the third quarter 2020, compared to NOK 130.4 in the same quarter last year. Managed service revenue contributed to 67.2% (68.4%) of total revenue for the Group. Revenue within Managed Services has been negatively impacted by lower volumes of travel controls and change orders for existing BPO customers, as a result of Covid-19.

Revenue Managed Services (NOKm):

The EBIT for Managed Services for the third quarter 2020 was NOK 14.8 million (NOK 10.6 million). The increased EBIT comes as a result of the EBIT improvement program.

Professional Services

Revenue in the Professional Services segment amounted to NOK 62.4 million for the third quarter 2020, marginally higher than last year's figure of NOK 60.3 million. Increased revenue in Poland and UK, was partly offset by a reduction in Germany, where Covid-19 has had a more negative impact than in other regions, with several potential implementation projects being postponed.

60,3 53,0 58,3 61,3 62,4 Q3 2019 Q4 2019 Q1 2020 Q2 2020 Q3 2020

Revenue Professional Services (NOKm):

The EBIT for Professional Services for the third quarter was NOK 6.8 million (NOK 9.1 million). The lower EBIT compared to last year is mainly due to lower utilisation of consultants in Germany, and a higher share of revenue from Poland where margins are lower than in Germany.

Financial position and cash flow

Zalaris had total assets of NOK 723.7 million as of 30 September 2020, compared to NOK 750.4 million at 30 June 2020.

Cash and cash equivalents were NOK 116.3 million as of 30 September 2020, a decrease of NOK 12.7 million from the end of the previous quarter after repayment of interest-bearing debt (NOK 16.5 million) and deferred VAT liability (NOK 8.0 million).

Total equity as of 30 September 2020 was NOK 108.1 million, compared to NOK 101.5 million as of 30 June 2020. This corresponds to an equity ratio of 14.9% (13.5%).

The Company holds 503,521 own shares at 30 September 2020.

Net interest-bearing debt (interest-bearing debt less cash and cash equivalents) increased marginally from NOK 277.9 million at 30 June 2020 to NOK 280.7 million at 30 September 2020. The increase is mainly due an increase in the NOK value of the EUR 35 million bond loan, as a result of the depreciation of NOK during the period.

Operating cash flow during the third quarter 2020 was NOK 13.3 million (NOK 8.8 million), after a payment of NOK 8.0 million in deferred VAT (Coivd-19 relief). The increase compared to last year is mainly due to improved earnings.

Net cash flow from investing activities for the third quarter was negative NOK 5.0 million (positive NOK 2.9 million), mainly relating to internal development projects. Net cash flow from financing activities for the third quarter was negative NOK 22.3 million (negative NOK 6.4 million), after repayment of interest-bearing debt of NOK 16.5 million.

Cash and cash equivalents balance at 30 September 2020 was NOK 116.3 million (NOK 64.8 million).

As communicated in the second quarter, based on the current financial performance of the Company the Board will propose a dividend of minimum NOK 0.5 per share for 2020.

EBIT improvement program

As communicated in previous reports, Zalaris launched an EBIT improvement program in 2019, Vision2020 targeting NOK 4,7 million monthly cost reductions by Q1 2020. This included streamlining of the organization, ramp-up of digitizing efforts, automating services and increasing Robotic Process Automation (RPA) projects, all aimed at increasing quality in deliveries and reducing costs. As part of the program the total number of FTEs was reduced by approximately 52 (-6%) from when the program was launched.

In Q2 a follow up of Vision2020 was executed, realizing additional NOK 1 million in monthly cost reductions by Q4 2020 through a reorganizing of the Nordic Professional Services organization to align with the Professional Services organizations in our other regions. Key actions taken were:

• Moving consultants primarily working with Managed Services customers to the Managed Services Organization

• Realigning the Nordic Professional Services organization to focus on advisory and implementation of SAP Cloud based HR solutions.
• Adjusting capacity to demand resulting in the downsizing of approximately ten employees.

Other ongoing cost based EBIT initiatives focus on:

• Increased utilization of our near- and offshore capabilities
• Automation of standardized processes through digitization and Robotic Process Automation.

The EBIT improvement program has resulted in a reduction in total operating expenses of approximately NOK 42 million (-9%) year-to-date, when adjusted for differences in costs capitalized and currency rates compared to last year.

Outlook

The market fundamentals remain strong and Zalaris' key markets within multi-country payroll and HR outsourcing are expected to grow in the foreseeable future. The Company is well positioned to capture part of this growth through new customers and by expanding the service offering to existing customers.

The Covid-19 pandemic has had a short-term negative impact on revenue, as larger implementation projects within Professional Services are being postponed and less travel and lower employee numbers are impacting Managed Services. This situation is also expected going forward, depending on the duration of Covid-19.

In the longer term, Zalaris should benefit from the uncertainty created by Covid-19 by helping companies to move from a fixed to variable cost base. The Company's pipeline of potential multi-country payroll outsourcing projects is strong.

The Company's financial results have significantly improved compared to 2019, as a result of the cost reduction initiatives implemented in 2019 through the EBIT improvement program, and further optimization initiatives in 2020. These initiatives include streamlining of the organization, ramp-up of digitizing efforts, automating services and increasing Robotic Process Automation (RPA) projects, all aimed at increasing quality in deliveries and reducing costs. Further improvements in the financial results are expected going forward.

The Board of Directors of Zalaris ASA Oslo, 28 October 2020

Interim Consolidated Financial Statements

Consolidated Statement of Profit and Loss

		2020	2019	2020	2019	2019
(NOK 1 000)	Notes	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
		unaudited	unaudited	unaudited	unaudited
Revenue	2	189 748	190 672	588 804	570 571	776 792
Operating expenses
License costs		18 337	15 238	51 572	44 070	67 981
Personnel expenses	4	99 439	106 765	324 149	321 245	438 543
Other operating expenses		41 672	40 053	122 613	122 469	166 887
Depreciation and impairments		794	1 043	2 542	3 076	4 048
Depreciation right-of-use assets	7	4 721	5 512	14 952	16 312	21 932
Amortisation intangible assets	6	6 840	6 539	20 672	19 971	26 704
Amortisation implementation costs customer projects	3	8 772	10 747	26 314	27 758	36 606
Total operating expenses		180 576	185 896	562 814	554 901	762 701
Operating profit (EBIT)		9 172	4 776	25 990	15 671	14 091
Financial items
Financial income	5	406	628	4 754	1 068	2 632
Financial expense	5	(7 446)	(6 667)	(23 266)	(22 454)	(29 057)
Unrealized foreign exchange gain/(loss)	5	(5 247)	(8 060)	(45 986)	(285)	2 375
Net financial items		(12 287)	(14 100)	(64 498)	(21 672)	(24 051)
Profit before tax		(3 115)	(9 324)	(38 508)	(6 001)	(9 960)
Tax expense		1 363	2 682	10 625	2 299	2 950
Profit for the period		(1 752)	(6 642)	(27 883)	(3 702)	(7 011)
Earnings per share:
Basic earnings per share (NOK)		(0,09)	(0,34)	(1,42)	(0,19)	(0,36)
Diluted earnings per share (NOK)		(0,09)	(0,34)	(1,42)	(0,18)	(0,36)

Consolidated Statement of Comprehensive Income

		2020	2019	2020	2019	2019
(NOK 1 000)	Notes	Jul-Sep	Jul-Sep	Jan-Mar	Jan-Mar	Jan-Dec
		unaudited	unaudited	unaudited	unaudited
Profit for the period		(1 752)	(6 642)	(27 883)	(3 702)	(7 011)
Other comprehensive income
Items that will be reclassified to profit and loss in subsequent periods
Currency translation differences		9 877	7 728	39 709	320	1 688
Total other comprehensive income		9 877	7 728	39 709	320	1 688
Total comprehensive income		8 125	1 086	11 826	(3 382)	(5 322)

Consolidated Statement of Financial Position

		2020	2019	2019
(NOK 1 000)	Notes	30. Sept	30. Sept	31. Dec
		unaudited	unaudited
ASSETS
Non-current assets
Intangible assets		126 414	136 440	132 950
Goodwill		168 090	152 266	153 248
Total intangible assets	6	294 503	288 706	286 198
Deferred tax asset		11 729	7 900	11 710
Fixed assets
Right-of-use assets	7	27 214	39 925	34 849
Property, plant and equipment		34 711	34 364	33 137
Total fixed assets		61 925	74 289	67 986
Total non-current assets		368 157	370 894	365 894
Current assets
Trade accounts receivable		132 225	151 377	148 614
Customer projects	3	82 441	95 970	88 808
Other short-term receivables		24 608	26 068	27 275
Cash and cash equivalents	8	116 251	64 812	82 448
Total current assets		355 526	338 228	347 145
TOTAL ASSETS		723 683	709 122	713 038

Consolidated Statement of Financial Position

		2020	2019	2019
(NOK 1 000)	Notes	30. Sept	30. Sept	31. Dec
			unaudited
EQUITY AND LIABILITIES
Equity
Paid-in capital
Share capital		1 962	2 006	1 957
Other paid in equity		5 591	3 165	3 804
Share premium		35 565	40 718	34 252
Total paid-in capital		43 118	45 889	40 014
Other equity		42 136	(171)	(374)
Retained earnings		22 846	55 834	52 526
Total equity		108 100	101 552	92 166
Liabilities
Non-current liabilities
Deferred tax		8 546	25 022	25 313
Interest-bearing loans	9	395 633	362 339	362 487
Lease liabilities	7	13 767	18 607	16 536
Total long-term liabilities		417 946	405 968	404 337
Current liabilities
Trade accounts payable		13 414	5 310	29 845
Customer projects liabilities	3	49 702	57 480	55 740
Interest-bearing loans	9	1 323	13 521	6 571
Lease liabilities	7	14 677	21 881	19 099
Income tax payable		4 262	333	5 408
Public duties payable		41 578	34 276	37 314
Other short-term liabilities		71 599	67 107	61 464
Derivatives		1 083	1 694	1 095
Total short-term liabilities		197 637	201 602	216 535
Total liabilities		615 583	607 570	620 873
TOTAL EQUITY AND LIABILITIES		723 683	709 122	713 038

Consolidated Statement of Cash Flow

		2020	2019	2020	2019	2019
(NOK 1 000)	Notes	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
		unaudited	unaudited	unaudited	unaudited
Cash Flow from operating activities
Profit (Loss) before tax		(3 115)	(9 324)	(38 508)	(6 001)	(9 960)
Net financial items	5	12 287	14 100	64 498	21 671	24 051
Share-based payments		633	534	1 786	1 115	1 743
Depreciation and impairments		795	1 041	2 543	3 076	4 049
Depreciation right-of-use assets	7	4 721	5 512	14 952	16 312	21 932
Amortisation intangible assets	6	6 840	6 540	20 672	19 972	26 705
Depreciation implementation costs customer projects	3	8 772	10 747	26 314	27 758	36 606
Recognized customer projects assets	3	(2 877)	(5 866)	(12 091)	(28 112)	(29 505)
Recognized customer projects liabilities		(2 162)	(3 166)	(8 211)	(6 805)	(8 545)
Taxes paid		(25)	-	(1 281)	-	(6 356)
Changes in accounts receivable		5 892	11 153	16 389	6 740	9 504
Changes in accounts payable		(4 224)	(12 009)	(16 432)	(19 048)	5 487
Changes in other items		(6 215)	(3 734)	24 646	(28 192)	(8 313)
Interest received		49	(16)	158	124	162
Interest paid		(8 072)	(6 663)	(19 835)	(16 826)	(25 052)
Net cash flow from operating activities		13 299	8 848	75 600	(8 216)	42 508
Cash flows to investing activities
Investment in fixed and intangible assets		(5 039)	2 942	(12 310)	(8 408)	(25 462)
Net cash flow from investing activities		(5 039)	2 942	(12 310)	(8 408)	(25 462)
Cash flows from financing activities
Sale/(Buyback) of own shares		-	-	1 332	(4 419)	(10 934)
Payment of lease liabilities		(5 849)	(6 276)	(15 896)	(18 530)	(22 807)
Repayment of loan		(16 446)	(102)	(17 888)	(1 682)	(6 320)
Net cash flow from financing activities		(22 295)	(6 378)	(32 452)	(24 630)	(40 062)
Net changes in cash and cash equivalents		(14 036)	5 412	30 838	(41 254)	(23 016)
Net foreign exchange difference		1 334	(170)	2 964	(1 778)	(2 379)
Cash and cash equivalents at the beginning of the period		128 953	59 570	82 449	107 844	107 844
Cash and cash equivalents at the end of the period		116 251	64 812	116 251	64 812	82 449

Consolidated Statement of Changes in Equity

(NOK 1000)	Share capital	Share premium	Other paid in equity	Total paid-in equity	Other equity	Retained	earnings Total equity
Equity at 01.01.2019	2 003	45 140	2 061	49 204	(33)	59 733	108 905
Profit of the year						(3 702)	(3 702)
Other comprehensive income			(11)	(11)	331		320
Buyback of own shares		(4 419)		(4 419)			(4 419)
Share based payments			1 115	1 115			1 115
Other changes					(469)	(197)	(666)
Equity at 30.09.2019	2 003	40 721	3 165	45 889	(171)	55 834	101 553
Unaudited
Profit of the year						(3 309)	(3 309)
Other comprehensive income			11	11	1 357		1 368
Buyback of own shares	(46)	(6 469)		(6 515)			(6 515)
Share based payments			628	628			628
Other changes					(1 561)	2	(1 560)
Equity at 30.12.2019	1 957	34 252	3 804	40 013	(375)	52 526	92 165
Profit of the year						(27 883)	(27 883)
Other comprehensive income					39 709		39 709
(Buyback)/sale of own shares	5	1 312		1 318			1 318
Share based payments			1 786	1 786			1 786
Other changes					2 802	(1 797)	1 005
Equity at 30.09.2020	1 962	35 565	5 590	43 117	42 136	22 846	108 100
Unaudited

Notes to the condensed interim consolidated condensed financial statements

Note 1 – General Information and basis for preparation

General information

Zalaris ASA (the Group) is a public limited company incorporated in Norway. The Group's main office is in Hovfaret 4, Oslo, Norway. The Group delivers full-service outsourced personnel and payroll services.

Basis for preparation

These interim consolidated condensed financial statements are prepared in accordance with International Accounting Standard 34 Interim Financial Reporting as issued by the International Accounting Standards Board (IASB) and as adopted by the European Union (EU). The condensed consolidated interim financial statements do not include all the information and disclosures required by International Financial Reporting Standards (IFRS) for a complete set of financial statements, and these condensed interim financial statements should be read in conjunction with the annual financial statements. The interim condensed consolidated financial statements for the three months ended 30 September 2020, have not been audited or reviewed by the auditors.

The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended December 31, 2019.

Going concern

With reference to the Norwegian Accounting Act § 3-3, the Board confirms its belief that conditions exist for continuing operations and that these interim consolidated condensed financial statements have been prepared in accordance with the going concern principle.

Note 2 – Segment Information

The Company's operations are split into two main business segments; Managed Services and Professional Services.

Managed Services includes a full range of payroll and HR outsourcing services, such as payroll processing, time and attendance, travel expenses as well as related cloud system solutions and services. This includes additional cloud-based HR functionality to existing outsourcing customers as talent management, digital personnel archive, HR analytics, mobile solutions, etc.

Professional Services includes deliveries of change projects based on Zalaris templates or implementation of customer-specific functionality. This business segment also assists with cost-effective maintenance and support of customers' own on-premise solutions. A large portion of these services are of recurring nature and much of the services are based on long-term customer relationships.

Information is organized by business area and geography. The reporting format is based on the Group's management and internal reporting structure. Items that are not allocated are mainly intercompany sales, interestbearing loans and other associated expenses and assets related to administration of the Group. The Group's executive management is the chief decision maker in the Group. The investing activities comprise total expenses in the period for the acquisition of assets that have an expected useful life of more than one year. The operating assets and liabilities of the Group are not allocated between segments.

2020 Jul-Sep

	Managed	Professional	Gr.Ovhd &
(NOK 1 000)	Services	Services	Unallocated	Total
Revenue, external	127 351	62 397	-	189 748
Operating expenses	(101 618)	(52 997)	(4 833)	(159 448)
EBITDA	25 733	9 400	(4 833)	30 299
Depreciation and amortisation	(10 961)	(2 553)	(7 613)	(21 128)
EBIT	14 772	6 847	(12 447)	9 172
Net financial income/(expenses)			(12 287)	(12 287)
Income tax			1 363	1 363
Profit for the period	14 772	6 847	(23 371)	(1 752)
Cash flow from investing activities				(5 039)

2019 Jul-Sep*

	Managed	Professional	Gr.Ovhd &
(NOK 1 000)	Services	Services	Unallocated	Total
Revenue, external	130 389	60 283	-	190 672
Operating expenses	(105 275)	(48 754)	(8 027)	(162 056)
EBITDA	25 115	11 529	(8 027)	28 617
Depreciation and amortisation	(14 475)	(2 438)	(6 928)	(23 841)
EBIT	10 640	9 091	(14 954)	4 776
Net financial income/(expenses)			(14 100)	(14 100)
Income tax			2 682	2 682
Profit for the period	10 640	9 091	(26 372)	(6 642)
Cash flow from investing activities				2 942

2020 Jan-Sep

	Managed	Professional	Gr.Ovhd &
(NOK 1 000)	Services	Services	Unallocated	Total
Revenue, external	406 807	181 996	-	588 804
Operating expenses	(324 677)	(157 358)	(16 299)	(498 334)
EBITDA	82 131	24 639	(16 299)	90 470
Depreciation and amortisation	(34 617)	(7 459)	(22 404)	(64 480)
EBIT	47 514	17 179	(38 703)	25 990
Net financial income/(expenses)			(64 498)	(64 498)
Income tax			10 625	10 625
Profit for the period	47 514	17 179	(92 577)	(27 883)
Cash flow from investing activities				(12 310)

2019 Jan-Sep*

	Managed	Professional	Gr.Ovhd &
(NOK 1 000)	Services	Services	Unallocated	Total
Revenue, external	400 500	170 071	-	570 571
Operating expenses	(321 444)	(141 898)	(24 441)	(487 783)
EBITDA	79 056	28 173	(24 441)	82 788
Depreciation and amortisation	(39 004)	(6 897)	(21 217)	(67 118)
EBIT	40 052	21 276	(45 658)	15 671
Net financial income/(expenses)			(21 672)	(21 672)
Income tax			2 299	2 299
Profit for the period	40 052	21 276	(65 031)	(3 701)
Cash flow from investing activities				(8 408)

2019 Jan-Dec*

	Managed	Professional	Gr.Ovhd &
(NOK 1 000)	Services	Services	Unallocated	Total
Revenue, external	553 691	223 101	-	776 792
Operating expenses	(446 455)	(192 606)	(34 351)	(673 411)
EBITDA	107 236	30 495	(34 351)	103 380
Depreciation and amortisation	(52 279)	(9 534)	(27 477)	(89 290)
EBIT	54 957	20 961	(61 828)	14 090
Net financial income/(expenses)			(24 051)	(24 051)
Income tax			2 950	2 950
Profit for the period	54 957	20 961	(82 929)	(7 011)
Cash flow from investing activities				(25 462)

*Revenue from certain consulting services previously report as part of Managed Services have been moved to Professional Services from 1 January 2020. Business development costs previously included within Group Overhead has been allocated to the business segments from 1 January 2020. Comparable historical information has been updated accordingly.

Geographic Information

The Group's operations are carried in several countries, and information regarding revenue based on geography is provided below. Information is based on location of the entity generating the revenue, which to a large extent, corresponds to the geographical location of the customers.

Revenue from external customers attributable to:

	2020	2019	2020	2019	2019
(NOK 1 000)	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
Northern Europe	103 987	106 262	329 020	327 008	449 893
Central Europe	75 075	77 315	228 955	218 637	294 135
UK & Ireland	10 686	7 095	30 829	24 926	32 764
Total	189 748	190 672	588 804	570 571	776 792

Note 3 – Revenue from contracts with customers

Disaggregated revenue information

The Group's revenue from contracts with customers has been disaggregated and presented in note 2.

Contract balances:

	2020	2019	2019
(NOK 1 000)	30. Sep	30. Sep	31. Dec
Trade receivables	132 225	151 377	148 614
Customer project assets	82 441	95 970	88 808
Customer project liabilities	(49 702)	(57 480)	(55 740)
Prepayments from customers	(10 068)	(13 976)	(9 608)

Customer project assets are costs specific to a given contract, generate or enhance the Group's resources that will be used in satisfying performance obligations in the future, and are recoverable. These costs are deferred and amortized evenly over the period the outsourcing services are provided.

Customer project liabilities are prepayments from customer specific to a given contract and are recognized as revenue evenly as the Group fulfills the related performance obligations over the contract period.

Prepayments from customers comprises a combination of short- and long-term advances from customers. The short-term advances are typically deferred revenues related to smaller projects or change orders related to the system solution. The long-term liabilities relate to initial advances paid upon signing the contract. These advances are contracted to be utilized by the customer to either transformation-, change- or other projects. These advances are open for application until specified, or when the contract is terminated, where the eventual remainder of the amount become the property of Zalaris and is hence rendered as income by the Group.

Movements in customer project assets through the period:

(NOK 1 000)	2020	2019	2020	2019	2019
	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	31. Dec
Opening balance in the period	84 763	99 667	88 808	97 272	97 272
Cost capitalized	2 878	5 866	12 091	28 112	29 505
Amortization	(8 772)	(10 747)	(26 314)	(27 758)	(36 606)
Disposals & currency	3 573	1 185	7 855	(1 656)	(1 363)
Customer projects assets end of period	82 441	95 970	82 441	95 970	88 808

Movements in customer project liabilities through the period:

(NOK 1 000)	2020	2019	2020	2019	2019
	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
Opening balance in the period	(52 255)	(60 645)	(55 740)	(64 284)	(64 284)
Revenue deferred	(2 651)	(3 159)	(8 009)	(13 532)	(17 188)
Revenue recognized	4 813	6 890	16 220	18 490	28 505
Disposals & currency	393	(565)	(2 174)	1 846	(2 773)
Customer project liabilities end of period	(49 702)	(57 480)	(49 702)	(57 480)	(55 740)

Note 4 – Personnel expenses

(NOK 1 000)	2020 Jul-Sep	2019 Jul-Sep	2020 Jan-Sep	2019 Jan-Sep	2019 Jan-Dec
Salary	82 181	89 586	269 054	278 249	366 516
Tantieme and variable compensation	5 116	4 427	14 078	14 241	19 437
Social security tax	13 221	13 373	38 987	40 390	54 099
Pension costs	4 549	5 032	14 368	15 350	19 333
Other expenses	2 365	4 704	9 538	13 121	24 953
Capitalised development expenses	(5 116)	(4 490)	(9 785)	(11 994)	(16 290)
Capitalised implementation costs customer projects	(2 877)	(5 867)	(12 091)	(28 112)	(29 505)
Total personnel expenses	99 439	106 765	324 149	321 245	438 543

Note 5 – Finance income and finance expense

	2020	2019	2020	2019	2019
(NOK 1 000)	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
Interest income on bank accounts and receivables	49	53	158	123	160
Currency gain	129	391	4 071	1 399	1 916
Other financial income	229	183	525	-454	556
Finance income	406	628	4 754	1 068	2 632
Interest exp. on financial liab. measured at amortised cost	7 657	4 893	18 585	14 845	19 253
Currency loss	-1 248	546	1 011	2 991	3 377
Unrealised foreign currency loss	5 247	8 060	45 986	285	-2 375
Interest expense on leasing	391	1 664	1 238	1 664	2 126
Other financial expenses	646	-435	2 432	2 955	4 302
Finance expenses	12 693	14 729	69 252	22 740	26 683
Net financial items	-12 287	-14 101	-64 498	-21 672	-24 051

Note 6 – Intangible assets

(NOK 1 000)	Licenses and software	Intern. developed software	Internally developed AuC	Customer Relation & Contracts	Goodwill	Total
Book value 01.01.2020	4 505	34 652	17 889	75 905	153 248	286 198
Additions of the period	-	1 012	10 775	-	-	11 787
Reclassifications	-	15 282	(15 282)	-	-	-
Disposals and currency effects	287	486	(5 185)	6 760	14 842	17 189
This period ordinary amortisation	(1 398)	(11 125)	-	(8 148)	-	(20 672)
Book value 30.9.2020	3 393	40 306	8 197	74 516	168 089	294 503
Book value 01.01.2019	9 057	28 768	19 937	85 302	151 996	295 059
Additions of the period	136	1 008	11 821	-	-	12 965
Reclassifications	-	18 071	(18 071)	-	-	-
Disposals and currency effects	(5)	(48)	376	61	270	653
This period ordinary amortisation	(2 335)	(10 178)	-	(7 459)	-	(19 972)
Book value 30.9.2019	6 853	37 621	14 063	77 903	152 265	288 706
Book value 01.01.2019	9 057	28 768	19 937	85 302	151 996	295 059
Additions of the period	135	1 579	21 389	-	-	23 103
Reclassifications	-	18 055	(18 055)	-	-	-
Disposals and currency effects	(1 744)	(39)	(5 381)	652	1 253	(5 259)
This period ordinary amortisation	(2 944)	(13 711)	-	(10 049)	-	(26 705)
Book value 31.12.2019	4 505	34 652	17 889	75 905	153 248	286 198
Useful life	3-10 years	5 years	N/A	10 years	N/A
Depreciation method	linear	linear		linear

Note 7 – Right-of-use assets and lease liabilities

Zalaris leases several assets such as buildings, equipment, and vehicles. The Group's right-of-use assets are categorized and presented in the table below:

Right-of-use assets	2020	2019	2019
(NOK 1 000)	30. Sep	30. Sep	31. Dec
Opening balance	34 849	52 326	52 326
Adjustments and additions	6 435	3 910	4 455
Depreciation and impairments	14 952	16 312	21 932
Terminations	283	-	-
Foreign currency transaction gain/(loss)	-1 166	-1	-
Closing balance	27 214	39 925	34 849

Lower of remaining lease term or economic life. Linear depreciation 1-10 years

Lease liabilities (NOK 1 000)	2020 30. Sep	2019 30. Sep	2019 31. Dec
Opening balance	35 635	52 326	52 326
Additions and lease modifications	6 435	3 910	4 455
Lease payments including interest	17 134	16 866	20 683
Foreign currency transaction gain/(loss)	3 508	1 118	-463
Closing balance	28 444	40 488	35 635
Lease liabilities	2020	2019	2019
(NOK 1 000)	30. Sep	30. Sep	30. Sep
Short-term	14 677	21 881	19 099
Long-term	13 767	18 607	16 536
Total lease liabilities at 30 September 2020	28 444	40 488	35 635

Note 8 - Cash and cash equivalents and short term deposits

	2020	2019	2019
(NOK 1 000)	30. Sep	30. Sep	31. Dec
Cash in hand and at bank - unrestricted funds	110 872	59 347	75 182
Deposit accounts - guarantee rent obligations - restricted funds	2 399	2 261	2 480
Employee withheld taxes - restricted funds	2 981	3 203	4 787
Cash and cash equivalents	116 251	64 812	82 448

Note 9 – Interest-bearing loans and borrowings

			2020	2019	2019
(NOK 1 000)	Annual interest	Maturity	30. Sep	30. Sep	31. Dec
Bond loan	3 m Euribor + 4.75%	28.09.2023	385 986	347 156	345 188
Loan fees bond		28.09.2023	(5 408)	(6 262)	(6 760)
Commerzbank - DE	1.3%	31.12.2031	13 213	13 043	13 834
Landesbank Baden-Würtenberg	4.0%	31.12.2022	1 842	-	2 200
Landesbank Baden-Würtenberg	1.95 %	31.12.2031	1 323	13 521	9 270
MBG	From 5.0% to 6.5%	2020-2026	-	7 216	5 326
SG Finance loans	From 4.0% to 6.7%	2019-2023	-	1 185	-
Total interest-bearing loans			396 956	375 860	369 058
Total long-term interest-bearing loans			395 633	362 339	362 487
Total short-term interest-bearing loans			1 323	13 521	6 571
Total interest-bearing loans			396 956	375 860	369 058
Total unrealized foreign exchange profit/(loss) on bond loan			(40 798)	562	2 531

The Company's bond loan of EUR 35 million is listed on the Oslo Stock Exchange. The loan in Commerzbank DE relates to the office building in Leipzig, which is owned by the Company.

Note 10 – Transactions with Related Parties

Purchase from related parties:

(NOK 1 000)		2020	2019	2020	2019	2019
Related party	Transaction	Jul-Sep	Jul-Sep		Jan-Sep Jan-Sep	Jan-Dec
Rayon Design AS 1)	Management Services	564	314	1 517	872	1 556
Haug Advisory AS 2)	Management Services	-	100	-	200	200
Total		564	414	1 517	1 072	1 756

1) Hans-Petter Mellerud, CEO, owns 40% of Rayon Design AS though his company Norwegian Retail AS

2) Jon Erik Haug, Board Member of Zalaris ASA, owns 100% of Haug Advisory AS

Note 11 – Events after Balance Sheet Date

There have been no events after the balance sheet date significantly affecting the Group's financial position.

Alternative Performance Measures (APMs)

Zalaris' financial information is prepared in accordance with IFRS. In addition, financial performance measures (APMs) are used by Zalaris to provide supplemental information to enhance the understanding of the Group's underlying financial performance. These APMs take into consideration income and expenses defined as items regarded as special due to their nature and include among others restructuring provisions and write-offs. Financial APMs should not be considered as a substitute for measures of performance in accordance with IFRS. Disclosures of APMs are subject to established internal control procedures.

Adjusted EBITDA and EBIT

EBIT, earnings before interest and tax is defined as the earnings excluding the effects of how the operations where financed, taxed and excluding foreign exchange gains & losses. EBIT is used as a measure of operational profitability. EBITDA is before depreciation, amortization and impairment of tangible assets and in-house development projects. To abstract non-recurring or income not reflective of the underlying operational performance, the Group also lists the adjusted EBIT and EBITDA. Adjusted EBIT is defined as EBIT excluding non-recurring costs, costs relating to share based payments to employees, and amortization of excess values on acquisition. Adjusted EBITDA is EBITDA excluding non-recurring costs and costs relating to share based payments to employees, but after depreciation of right-of-use assets.

	2020	2019	2020	2019	2019
(NOK 1 000)	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
EBITDA	30 299	28 616	90 470	82 787	103 381
Restructuring costs	782	1 000	3 380	1 000	4 259
Share-based payments	632	534	1 786	1 115	1 743
Depreciation right-of-use assets (IFRS 16 effect)	(4 721)	(5 512)	(14 952)	(16 312)	(21 932)
Adjusted EBITDA	26 993	24 638	80 684	68 591	87 451
	2020	2019	2020	2019	2019
(NOK 1 000)	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
EBIT	9 172	4 776	25 990	15 671	14 091
Restructuring costs	782	1 000	3 380	1 000	4 259
Share-based payments	632	534	1 786	1 115	1 743
Amortization of excess values on acquisition	2 696	2 560	8 207	7 458	10 049
Adjusted EBIT	13 282	8 870	39 363	25 244	30 142

Free cash flow

Free cash flow represents the cash flow that Zalaris generates after capital investments in the Group's business operations have been made. Free cash flow is defined as operational cash flow.

	2020	2019	2020	2019	2019
(NOK 1 000)	Jul-Sep	Jul-Sep	Jan-Sep	Jan-Sep	Jan-Dec
Net cash flow from operating activities	13 299	8 848	75 600	(8 216)	42 508
Investment in fixed and intangible assets	(5 039)	2 942	(12 310)	(8 408)	(25 462)
Free cash flow	8 259	11 790	63 290	(16 624)	17 046

Net interest-bearing debt (NIBD)

Net interest-bearing debt (NIBD), consists of interest-bearing liabilities, less cash and cash equivalents.

The Group risk of default and financial strength is measured by the net interest-bearing debt.

	2020	2019	2019
(NOK 1 000)	30.Sep	30.Sep	31.des
Cash and cash equivalents	116 251	64 812	82 448
Interest-bearing loans and borrowings - long-term	(395 633)	(362 339)	(362 487)
Interest bearing loans and borrowings - short-term	(1 323)	(13 521)	(6 571)
Net interest-bearing debt (NIBD)	(280 704)	(311 048)	(286 610)

Full time equivalents (FTEs)

The ratio of the total number of normal agreed working hours for all employees (part-time or full-time) by the number of normal full-time working hours in that period (i.e. one FTE is equivalent to one employee working fulltime).

Key Figures

(NOKm unless otherwise stated)	Q1 2019	Q2 2019	Q3 2019	Q4 2019	Q1 2020	Q2 2020	Q3 2020
Revenues	192,4	187,5	190,7	206,2	200,6	198,4	189,7
Revenue growth (YoY)	3,3 %	-0,7 %	8,2 %	6,2 %	4,3 %	5,8 %	-0,5 %
EBITDA adjusted	22,9	21,4	24,7	18,5	26,8	26,3	27,0
EBITDA margin	11,9 %	11,4 %	12,9 %	9,0 %	13,4 %	13,2 %	14,2 %
EBIT adjusted	9,3	7,5	8,9	4,5	13,4	12,1	13,3
EBIT margin	4,9 %	4,0 %	4,6 %	2,2 %	6,7 %	6,1 %	7,0 %
Profit Before Tax	7,6	(4,3)	(9,3)	(4,0)	(62,5)	27,2	(3,1)
Income Tax Expense	(1,4)	1,0	2,7	0,7	14,0	(4,7)	1,4
Net income	6,3	(3,3)	(6,6)	(3,3)	(48,6)	22,4	(1,8)
Profit margin	3,3 %	-1,8 %	-3,5 %	-1,6 %	-24,2 %	11,3 %	-0,9 %
Weighted # of shares outstanding (m)	19,9	19,9	19,8	19,7	19,6	19,6	19,6
Basic EPS (NOK)	0,31	(0,17)	(0,34)	(0,17)	(2,48)	1,14	(0,09)
Diluted EPS (NOK)	0,28	(0,17)	(0,34)	(0,17)	(2,48)	1,11	(0,09)
Cash flow items
Cash from operating activities	(22,0)	8,8	(8,2)	50,7	16,9	45,4	13,3
Investments	(4,2)	(7,1)	2,9	(17,1)	(3,7)	(3,6)	(5,0)
Net changes in cash and cash equi.	(37,2)	(9,4)	(5,4)	18,2	3,9	41,0	(14,0)
Cash and cash equivalents end of period	69,3	59,6	64,8	82,4	87,5	129,0	116,3
Net interest-bearing debt	299,0	308,7	311,0	286,6	344,5	277,9	280,7
Equity	105,3	100,1	101,6	92,2	95,9	101,5	108,1
Equity ratio	13,9 %	13,8 %	14,3 %	12,9 %	12,4 %	13,5 %	14,9 %
Number of FTE (Period End)	822	825	803	753	728	723	713
Segment overview*	Q1 2019	Q2 2019	Q3 2019	Q4 2019	Q1 2020	Q2 2020	Q3 2020
Revenues	192,4	187,5	190,7	206,2	200,6	198,4	189,7
Managed Services	136,2	133,9	130,4	153,2	142,3	137,1	127,4
Professional Services	56,1	53,7	60,3	53,0	58,3	61,3	62,4
EBIT	6,5	4,4	4,8	(1,6)	9,5	7,4	9,2
Managed Services	13,6	15,8	10,6	14,9	16,7	16,0	14,8
as % of revenue	10,0 %	11,8 %	8,2 %	9,7 %	11,8 %	11,7 %	11,6 %
Professional Services	8,7	3,5	9,1	(0,3)	6,3	4,1	6,8
as % of revenue	15,5 %	6,5 %	15,1 %	-0,6 %	10,8 %	6,7 %	11,0 %
Gr.ovhd & Unallocated	(15,8)	(14,9)	(15,0)	(16,2)	(13,6)	(12,7)	(12,4)

*Revenue from certain consulting services previously report as part of Managed Services have been moved to Professional Services from 1 January 2020. Business development costs previously included within Group Overhead has been allocated to the business segments from 1 January 2020. Comparable historical information has been updated accordingly.

IR contacts:

Hans-Petter Mellerud CEO hans-petter.mellerud@zalaris.com +47 928 97 276

Gunnar Manum CFO gunnar.manum@zalaris.com +47 951 79 190

Financial information

Interim report Q4 2020 to be published at a date to be announced.

All financial information is published on the Zalaris' website: http://www.zalaris.com/Investor-Relations/

Financial reports can also be ordered at ir@zalaris.com.

Zalaris ASA PO Box1053 Hoff 0218 Oslo Norway