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Annual Report and
Accounts 2016
Corero Network Security plc
Corero Network Security is the leader in real-time, high-
performance DDoS defence solutions. Service providers,
hosting providers and online enterprises rely on Corero’s
award winning SmartWall technology to eliminate the
DDoS threat to their environment through automatic
attack detection and mitigation, coupled with complete
network visibility, analytics and reporting.
What is a DDoS attack?
A Distributed Denial of Service (DDoS) attack is a
cyber threat, in which multiple compromised
computer systems attack a target, such as a server,
website or other network asset, and cause a denial of
service for users of the targeted resource. The flood
of incoming messages, connection requests or
malformed packets to the target system, forces it to
slow down or shut down, thereby denying service to
legitimate users or systems. DDoS attacks are a
threat to service availability, network security, brand
reputation and ultimately lead to lost revenues.
Attackers are continuing to leverage DDoS attacks as
part of their cyber threat arsenal to either disrupt
business operations or access sensitive corporate
information, and they are doing it in increasingly
creative ways that circumvent traditional security
solutions or nullify the previous effectiveness of
DDoS scrubbing centres.
85%
of enterprise end users want their
Internet Service Providers (ISPs) to
offer more comprehensive DDoS
Protection-as-a-Service
(Source: Corero research)
84%
of DDoS attacks combatted
by Corero last less than
10 minutes in duration
(Source: Corero SecureWatch customer data)
53%
of attacked organisations suffered a
breach as a result of a DDoS attack
(Source: Neustar)
US$40,000
per hour is the cost of a DDoS attack
(Source: Incapsula)
Corero Network Security plc Annual Report & Accounts 2016 Highlights
Customer wins across the SmartWall target
markets – service providers, hosting providers
and online enterprises
Financial highlights
Revenue
$8.8m(2015: $8.3 million)
Loss per share
9.0c
(2015: 8.5 cents)
SmartWall revenue up
Net Cash
$2.9mat 31 December 2016
(2015: $2.7 million)
62%
over the prior year
Reduced EBITDA loss*
$5.1m(2015: $6.4 million)
Operating highlights
• Customer wins across the
SmartWall target markets –
Internet service providers, hosting
providers and online enterprises,
providing real-time DDoS
protection
– At 31 December 2016, Corero
had 64 SmartWall customers
– Growing number of customers
now public references for Corero
– 100% support renewal rate for
SmartWall deployed customers
(2016 being the first full annual
cycle of renewals)
• Technology validation from
NSS Labs, the world’s leading
independent product test
laboratory
– SmartWall received NSS Labs
“Recommended” rating
• Launched SmartProtect program
to enable DDoS Protection
as-a-Service (“DDPaaS”)
• Entered into a technology alliance
partnership with Juniper Networks
(NASDAQ:JNPR)
• Appointed Andrew Lloyd as
President and Executive Vice
President Sales & Marketing
06
08
10
Our proposition
Market overview
Our business
model
Strategic Report
Highlights
At a glance
Chief Executive’s strategic update
Our proposition
Market overview
Our business model
Financial review
Our strategy
Governance
Board of Directors
Chairman’s introduction
Corporate Governance Report
Directors’ Report
Statement of Directors’ Responsibilities
Financial Statements
Independent Auditor’s Report
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
Financial Position
Company Statement of Financial Position
Consolidated Statement of Cash Flow
Consolidated Statement
of Changes in Equity
Company Statement of Changes in Equity
Notes to the Financial Statements
Notice of AGM
Corporate Directory
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* before depreciation, amortisation, impairment of goodwill and financing (and comprises the
operating loss less depreciation, amortisation and impairment of goodwill)
Discover more online at:
www.corero.com/investors/
01
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016
At a glance
64active global
SmartWall
customers
Real-time
Protection
Against DDoS
attacks and
cyber threats
DDoS attacks continue to rise in size, frequency, and complexity, impacting
the security and availability of the Internet. Service providers and Internet
connected businesses require real-time protection against this evolving
threat landscape.
Corero is dedicated to improving the
security and availability of the Internet
through the deployment of innovative
DDoS mitigation solutions. The Corero
SmartWall® Threat Defense System
(“SmartWall”) family of products can be
deployed in various topologies (in-line or
scrubbing). The SmartWall family of
solutions utilises modern DDoS mitigation
architecture to automatically and surgically
remove DDoS attack traffic, while allowing
good user traffic to flow uninterrupted.
Corero’s key operational centres are in
Marlborough, Massachusetts in the USA
and Edinburgh in the UK, with the
Company’s registered office in Uxbridge
in the UK.
• The goal of the Corero real-time DDoS
mitigation solution is to protect the
customer’s service availability and
ultimately revenues and brand
reputations from harmful DDoS attacks.
• The Corero solutions are the highest
performing in the industry, while
providing the most automated DDoS
protection at unprecedented scale with
the lowest total cost of ownership to
the customer.
• These solutions are designed to provide
real-time attack mitigation with
continuous threat visibility, enabling
the monetisation of DDPaaS offerings.
• The Corero SmartWall protects against
the latest breed of DDoS attacks in
seconds not minutes, including network
and application layer attacks, volumetric
and multi-vector attacks.
Find out more at:
www.corero.com
02
Corero Network Security plc Annual Report & Accounts 2016Target markets:PROTECT AND OPTIMIZE your critical infrastructure and online servicesService providers Hosting providers and data centresOnline enterprises “Protecting the security of our network and delivering peace of mind to our customers is a critical
focus for Liquid Web. It’s one of the reasons we have such an admired brand and earned loyalty from
our customers. Investing in the Corero SmartWall solution enables us to deliver on that security
promise by significantly reducing the impact of DDoS attacks, while lessening the need for human
intervention, which allows us to focus on other technology initiatives.”
Joe Oesterling
CTO, Liquid Web
Sector order intake
analysis *
Geographic order
intake analysis *
Corero has a team of
talented employees who are
focused on delivering the
Company’s strategy
Service Providers
Hosting Providers
Online enterprises
35%
35%
30%
North America
EMEA
59%
41%
Product engineering
& management
Sales & marketing
Support & services
Management &
administration
42%
28%
18%
12%
* order intake (as opposed to revenue)
03
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016
Chief Executive’s strategic update
Corero is well positioned to deliver on its goal of being the leading
player in the real-time DDoS mitigation market with SmartWall solution
validation from over 60 customers and technology validation from NSS
Labs, the world’s leading independent security product test laboratory.
Our goal is to grow
faster than the
market by taking
share from others.
Head to head trials
are proving we
are the number
one solution for
real-time DDoS
mitigation.
Ashley Stephenson
Chief Executive Officer
Results
Corero revenue for the year ended 31
December 2016 was $8.8 million (2015: $8.3
million) with SmartWall revenue up 62%
over the prior year whilst legacy product
revenues declined as expected. The EBITDA
loss was $5.1 million (2015: EBITDA loss
$6.4 million).
The 2016 revenue was lower than expected,
impacted by extended sales cycles for the
large Tier 1 service provider customer
segment and the new as-a-service
customers signed in the fourth quarter of
2016, where the revenue is recognised
monthly over the term of the contract.
Market dynamics
2016 marked a turning point for DDoS, as
attacks reached new heights in terms of
both size and complexity. The Mirai botnet
showed us just how powerful an Internet of
Things (IoT) powered DDoS attack could
really be, with the unprecedented onslaught
against DNS provider Dyn in September
2016. Overnight, the security considerations
around connected devices went from being
something that security consultants have
long warned about, into a hot button issue
that could no longer be ignored. This will
only increase with the first Terabit-scale
DDoS attack likely to occur in the year
ahead, with far-reaching implications and
the potential to impact the Internet
backbone itself.
With DDoS attacks costing large enterprises
an average of US$500,000 per incident in
lost business and IT spending, these
increased threats will mean that defending
against DDoS attacks will become a top
security priority for any organisation that
relies on the Internet to conduct business.
Our entire digital economy depends upon
access to the internet, and so organisations
will need to think carefully about business
continuity in the wake of such events.
In preparing a robust defence against
botnets like Mirai, it is important to
consider how they work. Effectively acting
like a giant cloud computer, botnet-driven
attacks are launched and then disappear
without leaving enough information for
victims to trace its origins. This leaves
organisations really no choice but to defend
themselves at the edges of the network.
Legacy out-of-band scrubbing solutions,
which require human intervention and
reactive countermeasures to remove the
attack, will not be successful, and using such
systems will also allow hackers to
experiment on networks undetected,
finding vulnerabilities and testing new
methods through smaller, hidden attacks
that don’t meet the threshold for scrubbing.
The only proper defence is to use an
automatic, always-on, in-line DDoS
mitigation system, which can monitor all
traffic in real-time, negate the flood of
attack traffic at the internet edge, eliminate
service outages and allow security
personnel to focus on uncovering any
subsequent malicious activity, such as data
breaches or malware deposits. This type of
in-line, always-on protection can come in
various forms – either on-premises, or
purchased as a security service from an
upstream provider. It is only through
deploying these real-time solutions that
organisations will be able to identify and
mitigate the most serious botnet-driven
DDoS attacks on their networks in the
years ahead.
04
Corero Network Security plc Annual Report & Accounts 2016
“We specifically value the automated attack mitigation functionality. Corero’s SOC monitors
conditions for us and responds accordingly. Our team monitors traffic but we don’t have to
worry about it. We set it and forget it.”
Stephen Clark
Director of IP Networks, BCI Commercial Telecom Systems
Technology validation
Corero received
“Recommended”
rating in NSS Labs DDoS test
(March 2016)
Customer validation
100%
Smartwall support renewal rate for
Smartwall deployed customers
Fund raise
The proposed equity fund raise to be
announced on 6 April 2017 will provide the
funding required to execute the Company’s
strategy and get to the position of being
cash generating.
Outlook
We have strengthened our sales leadership
with the recent appointment of Andrew
Lloyd as President and Executive Vice
President Sales. We have also expanded
our addressable market via the recently
introduced as-a-service purchase model
and are encouraged by the potential for
strategic go-to-market partnerships such
as the alliance with Juniper Networks.
The 2017 financial year is off to a good start
with Corero’s largest SmartWall contract
win to date with a leading Cloud services
provider. We expect an increasing number
of corporations will see the value of
investing in DDoS protection to protect
their revenue streams and defend their
brand reputations.
This gives us confidence Corero will deliver
revenue growth in 2017.
Ashley Stephenson
Chief Executive Officer
5 April 2017
Operating performance
against strategy
Our customer wins in the last year have
validated the Corero target market for
real-time, automatic DDoS mitigation
solutions - namely service providers,
hosting providers and online enterprises.
We have also expanded our addressable
market with an as-a-service pricing model
targeting emerging companies in this
target market who wish to acquire our
technology on the more modern pay-as-
you-grow model rather than larger up-front
capital expenditures. Our recently launched
SmartProtect program enables customers
to monetise DDoS Protection as-a-Service.
Corero has an increasing number of
satisfied customers who are willing to be
industry references for the breakthrough
levels of automation, security and service
that Corero delivers.
We have delivered on our strategic goals of
adding new DDoS attack defences to the
SmartWall product and additional forensics
and analytics capability. In addition, we
announced at the RSA security show in San
Francisco in February 2017 the availability of
a 100G SmartWall product and we have plans
to launch a Cloud enabled product in 2017.
Corero’s strategy is to work with leading IT
and network technology vendors to make
DDoS mitigation an integral component of
any well-engineered Internet facing
network design thereby increasing our
go-to-market opportunities. The recently
announced technology alliance
partnership with Juniper Networks, a US
based multinational corporation that
develops and markets networking and
security products, is the first of such
partnerships, and will enable Corero to
expand its market reach by leveraging
Juniper Networks’ global footprint.
05
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016 Our proposition
Corero is the leader in real-time, high-performance,
scalable DDoS defence solutions for Service Providers,
Hosting Providers and the On-line Enterprise.
What we do
Corero provides dedicated technology for
real-time mitigation of DDoS attacks in
seconds versus minutes, allowing good
user traffic to flow uninterrupted.
Corero enables revenue protection, customer
retention, and competitive differentiation in
the face of DDoS attacks, for Internet Service
Provider and Hosting Provider customers.
How we do it
With varied deployment topologies (in-line or scrubbing) the SmartWall family of solutions
utilises modern DDoS mitigation architecture to automatically, and surgically remove
DDoS attack traffic.
Automatic Real-time DDoS Protection
•
Inspect every packet for suspicious intent
• Only proven in-line, scalable DDoS solution in the market
• Built-in algorithms instantaneously detect and mitigate
– Competitors solutions out-of-band
known DDoS attacks
• Performance leader with linear line-rate scaling to any
• Packets that are determined to be malicious are blocked
capacity
• Avoid disrupting good user traffic
Inbound Traffic
100,000
s
p
b
M
75,000
50,000
25,000
3:00pm
Mon Jan 11 2016
4:00pm
5:00pm
Blocked
Allowed
Corero Hosting Provider customer
06
Corero Network Security plc Annual Report & Accounts 2016
“Our objective was to maintain system and service availability in the face of a DDoS attack with the
assistance of the new technology. The system should impact htp’s networking processes as little as
possible and above all, we didn’t want to have to keep implementing changes along the way. Today,
with the Corero SmartWall solution deployed in-line, we are protecting all transit connections and
thereby the entire infrastructure behind it in a very convenient way. The solution is unparalleled with
regard to sophisticated and automated protection from DDoS attacks. It is extremely easy to manage
when in operation and the intuitive user interface additionally simplifies handling.”
Robert Remenyi
Internet Backbone Planning, htp GmbH
The Corero solutions are the highest performing in the
industry, while providing the most automatic security
coverage at unprecedented scale with the lowest total
cost of ownership to the customer.
Corero enables Service Providers and Hosting Providers to
deliver high value DDPaaS to their customers, allowing for
incremental services revenue.
Protection is provided in cost effective scaling increments
from 10Gbps to 100Gbps, to support bandwidth and
inspection requirements.
The Corero SmartProtect program allows for monthly
subscription procurement options to acquire
SmartWall technology.
This technology provides configurable policies to selectively
enable a broad range of specific protection mechanisms to
defend critical network assets against DDoS attack traffic.
The Corero Service Portal allows for provider and tenant
visibility for traffic and attack dashboards. Providers can
assign subscriber/tenant service levels, and distribute
reporting and analytics to showcase the value of the
protection they are receiving.
ISP2
ISP3
ISP1
ISP4
Robust reporting and analytics, powered by Splunk,
transform sophisticated DDoS event data into easily
consumable dashboards.
The Corero SecureWatch® Service is a tiered offering
comprised of configuration optimisation, monitoring and
mitigation response services. These services, delivered by
the Corero Security Operations Centre are customised to
meet the security policy requirements and business goals
of each SmartWall customer that engages in a SecureWatch
service plan.
Find out more at:
www.corero.com
07
Protected customers
& Infrastructure Assets
Internet traffic, both good and bad are targeting customers and infrastructure
assets. The Corero SmartWall Network Threat Defense device inspects all traffic,
and surgically removes DDoS attack traffic from the flow, allowing those
customers and infrastructure assets to receive uninterrupted good user traffic.
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016 Market overview
DDoS attacks are accelerating in purpose, sophistication,
complexity, scale and frequency.
“Cyber attacks
are growing
more frequent,
sophisticated and
damaging when
they succeed. So we
are taking decisive
action to protect
both our economy
and the privacy of
UK citizens.”
Rt Hon Philip Hammond
Chancellor of the Exchequer
A wide range of critical cybersecurity
issues face every Internet connected
enterprise. These threats include denial
of service (DoS/DDoS), hacking, breach,
phishing, fraud, data theft or exfiltration.
These threat vectors present themselves
via the essential Internet connections that
are required to support the enterprise’s
online business.
Today, the vast majority of the leading
Internet Service Providers sell raw Internet
transit capacity. This capacity, usually sold
via 1G or 10G transport connections, carries
good customer traffic and malicious bad
traffic without discrimination. If an
enterprise data centre or hosting facility
connects to these raw transit providers
they will be exposed to Internet borne
cyber threats and the corporation’s
information security posture should be
prepared to detect and protect against
the associated malicious intent.
Corero has focused on one specific category
of these cyber threats encompassing denial
of service and has developed a real time
DDoS detection and mitigation solution
that can provide automatic detection and
protection against DDoS attacks. In
contrast to legacy approaches to DDoS
mitigation which often require tens of
minutes to detect and react, the Corero
solution can block DDoS attack traffic in
seconds eliminating critical service latency
and downtime.
Corero is targeting a high growth security
market; the market for DDoS prevention
appliances is forecast by IHS Technology, a
leading industry analyst, to reach more
than $1.0 billion by 2020 with a CAGR of
11.0% in the period 2016 to 2020 (Source:
IHS Technology, DDoS Prevention
Appliances Market Tracker H2 2016).
This growth is driven by a growing
awareness of the threat of DDoS attacks
and the increased focus and resourcing of
governments (most notably in the US and
UK) on national security strategies and
policies on cyber security.
08
Corero Network Security plc Annual Report & Accounts 2016
“By combining Corero’s real-time DDoS mitigation solutions with our Juniper Networks MX router
IP infrastructure we were able to implement a DDoS protected provider edge with unprecedented
response time and price/performance.”
Paul Pintiliescu
European Director, M247 Limited
“Tier 2 and Tier 3
Service Providers and
Hosting Providers now
have access to DDoS
protection at the price
and performance that
makes sense to their
business, whereas
five years ago, this
wasn’t a possibility.
Traditional DDoS
solutions historically
have not given way to
enabling additional
service offerings that
service providers
could use to generate
incremental revenue.
This combination
now provides a game
changing opportunity
for the service provider
community.”
Jeff Wilson
Senior Research Director and Advisor,
IHS Technology Research
Statistics which support the DDoS mitigation
opportunity for Corero:
73%
of organisations suffered
a DDoS attack in 2016
(Source: Neustar Worldwide DDoS Attacks
& Protection Report – October 2016)
85%
of attacked organisations
were subjected to multiple
DDoS attacks in 2016
(Source: Neustar Worldwide DDoS Attacks
& Protection Report – October 2016)
US$40,000
per hour cost of a DDoS attack
(Source: Incapsula Survey: What DDoS
Attacks Really Cost Businesses)
53%
of attacked organisations
suffered a breach as a result
of a DDoS attack
(Source: Neustar Worldwide DDoS Attacks
& Protection Report – October 2016)
85%
want their Internet Service
Provider to take responsibility
and provide DDoS protection
(Source: Corero research – February 2017)
IoT landscape continues
to grow:
6.4bn
connected things will be in use worldwide
in 2016, up 30% from 2015, and will reach
20.8 billion by 2020
(Source: Gartner research)
5.5m
new IoT devices connected
every day In 2016
(Source: Gartner research)
Major cloud, hosting, large
service provider, and major
internet brands continue to
invest in high-performance
DDoS mitigation to protect
their data centres from
escalating attacks and deliver
customised solutions to their
hosting and cloud customers.
(Source: IHS Technology Research: DDoS
Prevention Appliances Biannual Worldwide
and Regional Market Share and Forecasts)
DDoS attacks ranked as the
second most costly form of
cyber attack (behind malicious
insiders)
(Source: Ponemon Institute 2016 Cost of
Cyber Crime report)
56%
view DDoS as more of a concern
than it has been in the past
(Source: Corero research – February 2017)
09
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016
Our business model
The Corero business model comprises the development, marketing
and sale of network security products and services to provide
customers with protection from DDoS attacks.
We apply our sources of
competitive advantage...
...to our chosen business
and markets...
Automatic mitigation
• Goal 99% no customer intervention required
Proposition
Real-time
•
Immediate protection – seconds vs minutes
Price
• Cost effective entry point, leadership price/performance
Scalability
• Modular and distributed, pay as you grow
• Corero protects organisations’ online
systems, information, data, revenues and
brand reputations against the growing
cyber threat of DDoS attacks with
dedicated technology for real-time
mitigation of DDoS attacks in seconds
vs minutes, allowing good user traffic to
flow uninterrupted.
• When an organisation selects Corero to
protect their assets in the face of DDoS
attacks they strengthen their Internet
facing security defences and ensure
service availability.
• Corero customers can utilise this DDoS
protection for their own business needs
and Service Provider customers can
monetise a DDoS protection service to
their customers enabled through the
Corero ServicePortal (read more –
https://www.corero.com/programs/
smartprotect-program.html)
Routes to Market
Accuracy
• Lowest false positive rates, eliminate collateral damage
Corero goes to market directly with its sales force
and indirectly with valued added distributor and
reseller partners in its chosen markets of North
America and Europe.
10
Corero Network Security plc Annual Report & Accounts 2016 “Protecting the security of our network and delivering value added service has always been a prime
focus of CNI-Independents. Investing in the Corero SmartWall system is the best solution to more
effectively monitor and mitigate DDoS threats automatically, in-line and in real-time. We plan to use
the new DDoS mitigation capabilities to create new service offerings that would benefit customers
with enhanced service level agreements supported by further secured Core networks.”
Tim Berelsman
CEO, CNI-Independents Fiber Network
...to our chosen business
and markets...
...to create value
Target Markets
Service Providers
Corero sells the SmartWall technology to customers in the
form of either (a) an appliance sale and perpetual software
license plus annual SecureWatch services or (b) as-a-service
which enables the customer to utilise the technology on a
subscription or revenue share basis (without owning the
appliance and software).
Find out more at: www.corero.com/solutions/
for-service-providers.html
SecureWatch services include:
Routes to Market
Updates delivered to
the Corero appliances
in customer networks
to provide proactive on-
going protection from the
latest DDoS threats.
24x7x365 monitoring and
support services including
DDoS attack mitigation
services delivered by
the Corero Security
Operations Centre
Hosting Providers
Find out more at: www.corero.com/solutions/
for-hosting-providers-and-datacenters.html
Online enterprises
Find out more at: www.corero.com/solutions/
for-the-enterprise.html
Corero’s strategy is to work with leading IT and
network technology vendors to make DDoS
mitigation an integral component of any well-
engineered Internet network design thereby
increasing go-to-market opportunities.
11
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016
Financial review
SmartWall revenue
increased 62%
over the prior
year, whilst legacy
product revenue
reduced as
expected.
Andrew Miller
Chief Financial Officer
12
Financial highlights
Revenue
$8.8m(2015: $8.3 million)
EBITDA loss before
depreciation, amortisation,
impairment of goodwill
and financing
$5.1m(2015: $6.4 million)
SmartWall revenue
62%
over the prior year, whilst
legacy product revenues
declined as expected.
The 2016 revenue was lower than
expected, impacted by extended
sales cycles for the large Tier 1
service provider customer segment
and the new as-a-service customers
signed in the fourth quarter of 2016,
where the revenue is recognised
monthly over the term of the
contract. The offsetting benefit is
that these contract wins will add to
the recurring revenue recognised
in 2017 and beyond.
The loss for the year after taxation amounted to
$17.2 million (2015: $11.2 million) and includes:
• Unrealised exchange gain of $1.2 million (2015: gain $0.4 million) arising
on an intercompany loan;
• An impairment to goodwill acquired of $9.0 million (2015: $nil) relating
to the 2011 acquisition of Top Layer Networks, Inc. (see note 8 to the
financial statements);
• Finance costs of $0.006 million (2015: $0.02 million).
Group’s net assets at
31 December 2016
$18.2m
(2015: $26.3 million).
Loss per share
8.1c(2015: 8.5 cents)
Corero Network Security plc Annual Report & Accounts 2016
“Corero is combining its real-time DDOS mitigation solutions with Juniper’s MX routers
and QFX switches to construct and operate a DDoS protected provider edge with superior
response time, price and performance.”
Vinod Sundarraj
Senior Director of Product Management, Juniper Networks
Review of the Group’s
business
Highlights of 2016 include:
• Customer wins across the SmartWall
target markets - Internet Service
Providers, Hosting Providers and
online enterprises, providing real-
time DDoS protection
– At 31 December 2016, Corero
had 64 SmartWall customers
– Growing number of customers
now public references for Corero.
• Launched as-a-service offering in the
fourth quarter of 2016
• Entered in a technology alliance
partnership with Juniper Networks
(NASDAQ:JNPR)
• Appointed Andrew Lloyd as President
and Executive Vice President
Sales & Marketing
Review of performance &
performance indicators
The Directors monitor a number of
metrics, both financial and non-financial,
on a monthly basis.
The most important financial metrics are
as follows:
• Order intake: $7.1 million for the year
ended 31 December 2016 (2015:
$7.9 million);
• Gross margin: 76% for the year ended
31 December 2016 (2015: 75%);
• Operating expenses (gross of research
and development costs capitalised and
before depreciation, amortisation and
impairment of goodwill): $14.4 million
for the year ended 31 December 2016
(2015: $15.0 million); and
• Cash and cash equivalents: $2.9 million
at 31 December 2016 (2015: $2.7 million)
The order intake in 2016 included $6.7
million of SmartWall orders, an increase of
58% over the prior year (2015: $4.3 million),
to 35 service providers, hosting providers
and enterprises, providing real-time DDoS
and cyber threat protection. As expected
the order intake for the previous generation
products declined to $0.4 million (2015:
$3.6 million) with Corero having announced
the end of life of the previous generation
products in 2015.
In the fourth quarter of 2016, Corero
introduced an as-a-service pricing model,
an offering introduced in response to
increasing customer interest in
subscription-based contracts in contrast
to the purchase of equipment under a
traditional perpetual license model. This
offering is expected to expand Corero’s
addressable market with fast-growing
Cloud hosting providers and regional
service providers who can enter the market
more rapidly by offsetting the costs of
operating a DDoS protection solution with
the monthly revenues derived from selling
these high margin security services to their
customers. Under the as-a-service offering,
recognised revenue at the time of the initial
customer order is reduced but the contract
value and recurring revenues increase over
the life of the customer relationship.
The average perpetual license order value in
2016 was in excess of $200,000, in line with
the prior year, and the average as-a-service
year one contract value was $40,000.
Operating expenses, gross of research
and development costs capitalised of
$2.5 million (2015: $2.3 million), of
$14.4 million were below the prior year
(2015: $15.0 million).
The 2016 operating loss of $17.3 million
(2015: $11.6 million) includes amortisation of
capitalised development expenditure of
$2.3 million (2015: $2.4 million) and an
impairment to goodwill of $9.0 million
(2015: $nil). The goodwill arose on the
acquisition of Top Layer Networks, Inc. (“Top
Layer”). Since the acquisition of Top Layer,
Corero has made significant investment in
its products with the launch of SmartWall in
2014 and the end of life of the previous
generation products acquired as part of the
Top Layer acquisition announced in 2015.
The Corero go-to-market is now exclusively
focused on products and services
developed by Corero since the Top Layer
acquisition. In addition, the ability to
accurately forecast revenue growth for the
business has resulted in prior year forecasts
not being achieved by the company. As a
result, a more conservative approach has
been adopted in the forecasts which
underpin the intangible assets impairment
review as required by IFRS. The Board have
therefore assessed that an impairment of
the goodwill of $9.0 million is appropriate
(see note 8 of the financial statements).
Cash and Treasury
The closing cash balance was $2.9
million (2015: $2.7 million). Corero had
no debt at 31 December 2016 (2015: $0).
The net reduction in cash from operating
activities in the year ended 31 December
2016 was $5.5 million (2015: $7.7 million). In
the year ending 31 December 2016, the
Company raised $12.0 million (before
expenses), of which the Chairman
contributed $1.2 million, to fund the further
development of the SmartWall product and
sales and marketing activities.
13
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016
Our strategy
The Corero strategy is to protect against a continuously evolving DDoS
threat landscape that threatens any Internet connected business, or the
providers that serve them.
The Company’s strategic objectives and plans are
summarised below:
Product
Go to Market
Establish SmartWall as the
leading solution for real-time
DDoS protection
• Scale and grow installed base (revenue)
• Referenceable customers
• Raise Corero profile with analysts and press
Improve Corero DDoS defence
technology
• Continuous improvement approach to
development
• New DDoS attack defences
• Additional forensics and analysis capability
Corero products address the
evolving requirements of the
target market
• Launch 100G SmartWall product
• Support Cloud deployment model
Prioritise markets – Geographic
and provider segments
• US, UK and Europe sales focus
• Target service providers, hosting/Cloud
providers and on-line enterprises
Expand routes to market
• Pursue go-to-market partner channels
through alliances
• Engage system integrator partners for
key verticals and geographies
Develop sales models to attract
new target customer markets
• Launch of subscription based sales model
• Launch of ServicePortal as a turnkey solution
for customers to manage the delivery of DDPaaS
to their customers
14
Corero Network Security plc Annual Report & Accounts 2016 “The OTT network, like any other, is not immune to DDoS attacks. By investing in the Corero
SmartWall, we are bringing the value-added service of Internet security and peace of mind to our
business and residential customers across the entire OTT network.”
Ed Tisdale
Vice President of New England Operations, OTT Communications
PRINCIPAL RISKS AND UNCERTAINTIES
The principal risks and uncertainties for Corero are:
Sales
growth
Market
awareness
Technology
change and
innovation
People
Corero’s business success
depends on growing
SmartWall product sales to
new customers in its target
market of hosting and
service providers and on-line
enterprises. To be successful
Corero will focus its lead
generation and sales
resources, and product
development, on these
markets. If Corero is not
successful in identifying
customer prospects with a
business need Corero can
solve, this will compromise
growth plans and success.
Corero is an emerging player
in the DDoS prevention
market and competes with
much larger organisations.
To raise market awareness of
Corero and its DDoS
mitigation solutions, the
Company will invest in
targeted public relations and
marketing. If Corero is not
successful in connecting with
the market and raising its
profile this will compromise
growth plans.
Retaining and recruiting
people with the necessary
skills and experience.
Revenue growth requires a
strong sales and business
development capability. To
address the challenges
resulting from technology
change and innovation in the
DDoS mitigation market, the
Company needs to retain
and recruit the required
technical product
development skills. Corero
operates in a high growth
market with new players
emerging. If Corero is unable
to recruit and retain the
right skills this will
compromise growth plans.
The DDoS mitigation
market is competitive and
characterised by constant
changes in technology,
customer requirements and
frequent new product
introductions and
improvements. Cyber security
and DDoS attacks are
constantly evolving and
changing as attackers
develop new methods and
tools to evade defences. To be
a market leader and to grow,
Corero needs to be focused
on its chosen market and
deliver continuous innovation
by adding new DDoS attack
defences, developing higher
performance solutions for
higher speed Internet
connectivity and address new
IT deployment models such
as the Cloud and software
enabled routing and
switching network
infrastructure.
Corero is dependent on revenue growth to deliver on its strategy. Lower sales growth will reduce the Company’s cash resources which
could impact the investment in product development.
The Strategic Report on pages 1 to 15 is signed by order of the Board.
Duncan Swallow
Company Secretary
5 April 2017
15
Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate DirectoryCorero Network Security plc Annual Report & Accounts 2016 Board of Directors
Jens Montanana
Non-Executive Chairman
Ashley Stephenson
Chief Executive Officer
Age: 56
Age: 57
Andrew Lloyd
President and Executive Vice
President Sales & Marketing
Age: 51
Appointed: 9 August 2010
Appointed: 6 September 2013
Appointed: 3 January 2017
Jens is the founder and CEO of Datatec
Limited, established in 1986. Between 1989
and 1993 Jens served as Managing Director
and Vice-President of US Robotics (UK)
Limited, a wholly owned subsidiary of US
Robotics Inc., which was acquired by
3Com. In 1993, he co-founded US start-up
Xedia Corporation in Boston, an early
pioneer of network switching and one
of the market leaders in IP bandwidth
management, which was subsequently
sold to Lucent Corporation in 1999 for
$246 million. In 1994, Jens became CEO
of Datatec Limited which listed on the
Johannesburg Stock Exchange in 1994 and
on AIM in 2006. He has previously served
on the boards and sub-committees of
various public companies.
AC RC
Ashley first joined Corero Network Security
as Executive Vice President of the Network
Security division, with responsibility for
product and solution strategy in March
2012, and was appointed Chief Executive
Officer of the division in January 2013. An IT
industry executive and Internet technology
entrepreneur, Ashley has operating
experience in the United States, Europe
and Asia. Previously, he was CEO of Reva
Systems, acquired by ODIN, and Xedia
Corporation, acquired by Lucent. He has
provided strategic advisory services to a
number of leading multi-national IT
companies including technology vendors,
distributors and services companies. Ashley
began his career at IBM Research &
Development in the UK. He is a graduate of
Imperial College, London with a degree in
Physics and an Associate of the Royal
College of Science.
Andrew has been involved in the IT
software and systems sector for more than
25 years. His career has included roles in
early stage companies, high-growth
pre-IPO ventures as well as large
corporations such as Computer Associates
and Oracle. Andrew joined Corero in an
executive capacity on 3 January 2017 having
previously been a Non-Executive Director
since 19 November 2012. Prior to joining
Corero in early 2017, Andrew, was Chief
Customer Officer at Workplace Systems
and part of the leadership team which
subsequently sold the business to US-based
WorkForce Software in June 2016. Andrew
has a BSc (Hons), Electronic and Electrical
Engineering from Heriot-Watt University,
Scotland. Prior to his appointment as
President, Andrew was Chairman of the
Corero Remuneration Committee.
16
Corero Network Security plc Annual Report & Accounts 2016
“Organizations that once had DDoS protection projects on the back burner are now re-prioritizing
their security strategies to place DDoS mitigation at the forefront in 2017. As new, large scale attacks
have come online leveraging IoT devices, the DDoS threat has become top of mind for CISOs. This shift
in precedence puts increased pressure on Internet and cloud providers to enable this protection for
their customers, and eliminate DDoS threats closer to the source.”
Rob Ayoub
Research Director, IDC.
Richard Last
Independent Non-Executive Director
Andrew Miller
Chief Financial Officer
Duncan Swallow
Company Secretary
Age: 59
Age: 53
Age: 52
Appointed: 22 May 2008
Appointed: 9 August 2010
Appointed: 1 November 2007
Richard is Chairman of Servelec Group plc
and the British Smaller Technology
Companies VCT 2 plc both of which are
quoted on the London Stock Exchange. He
is also Chairman of a number of AIM listed
companies including: Gamma
Communications plc, a UK
telecommunications service provider; Tribal
Group plc, a technology group; Arcontech
Group plc, a provider of IT solutions for the
financial services sector; Lighthouse Group
plc, a financial services group. Richard is
also a Director of a number of private
companies. Richard is a Fellow of the
Institute of Chartered Accountants in
England and Wales (FCA). Richard is
Chairman of the Corero Audit Committee.
AC RC RC
Prior to joining the Company, Andrew was
with the Datatec Limited group in a
number of roles between 2000 and 2009
including the Logicalis Group Operations
Director and Corporate Finance and
Strategy Director. He led the Logicalis
acquisition strategy, acquiring and
integrating 12 companies in the US, UK,
Europe and South America. Prior to this,
Andrew gained considerable corporate
finance experience in London with
Standard Bank, West Deutsche Landesbank
and Coopers & Lybrand. He trained and
qualified as a Chartered Accountant and
has a bachelor’s degree in Commerce from
the University of Natal, South Africa.
Duncan is responsible for the Company
secretarial function and is also the Group
Financial Controller. Prior to joining the
Company, Duncan was Divisional Financial
Controller for CCH, a Wolters Kluwer
business, specialising in providing books,
online information, software, CPD and fee
protection to tax and accounting
professionals. He is a fellow of the
Association of Chartered Certified
Accountants.
Committee membership key
AC Audit Committee member
RC Remuneration Committee member
Committee Chair
17
Financial StatementsNotice of AGMCorporate DirectoryStrategic ReportGovernanceCorero Network Security plc Annual Report & Accounts 2016
Chairman’s introduction
We have made significant progress in the last year with increasing
confidence that SmartWall is a market leading product.
I am confident the
business will deliver
on its strategic
goals and become
a leading player
in the DDoS
mitigation market.
Jens Montanana
Chairman
Looking ahead
I am confident with the progress made in
2016 and the focus on expanding Corero’s
routes to market with new sales models and
partnerships such as the Juniper Networks
relationship announced in February 2017,
that the business will deliver on its strategic
goals and become a leading player in the
DDoS mitigation market.
Finally, I would like to thank all our employees
for their hard work and commitment.
Jens Montanana
Chairman
5 April 2017
Overview
We have made significant progress in the
year to 31 December 2016 with increasing
confidence that we have a market leading
product in SmartWall and an organisation
focused on delighting customers. The
market opportunity is significant and
developing as the DDoS threat landscape
evolves. We have continued to invest in the
technology roadmap with the introduction
of a 100G SmartWall product and plans to
launch a Cloud enabled product in 2017. We
have also expanded our addressable market
with the as-a-service offering and plan to
leverage go-to-market partnerships with
other network and security companies.
Board changes
Andrew Lloyd, previously a Non-Executive
Director of the Company, was appointed
President and Executive Vice President
Sales and Marketing in January 2017.
Andrew will be responsible for leading
Corero’s commercial expansion and sales
growth. I am delighted that Andrew has
agreed to join Corero in an executive role.
His skillset and experience of both growth
companies and large multinationals will be
invaluable as we drive our revenue growth
and establish Corero as a leading player in
the DDoS mitigation market.
With Andrew Lloyd’s appointment, we have
deliberated on the balance of the Board
between executives and non-executives.
We will keep the composition of the Board
under review.
The notice of AGM includes a resolution to
reappoint Ashley Stephenson who retires by
rotation in accordance with the Company’s
articles of association and a resolution to
reappoint Andrew Lloyd who was appointed
an Executive Director in the period since
the last AGM.
18
Corero Network Security plc Annual Report & Accounts 2016
Corporate Governance Report
Corero has taken note of the UK Corporate Governance Code (“the
UK Code”) published in September 2014. The UK Code and
associated guidance can be found on the Financial Reporting
Council website at www.frc.org.uk/corporate/ukcgcode.cfm. The
rules of the London Stock Exchange do not require companies that
have securities traded on AIM to formally comply with the UK Code
and the Company does not seek to formally comply nor give a
statement of compliance. However, the Board is accountable to the
Company’s shareholders for good governance and has sought to
apply those principles of corporate governance commensurate
with the Company’s size. The Company’s approach is set out below.
The Board
Corero recognises its responsibility to provide entrepreneurial and
responsible leadership to the Group within a framework of prudent
and effective controls (described below) allowing assessment and
management of the key issues and risks impacting the business.
The Board sets Corero’s overall strategic direction, reviews
management performance and ensures that the Group has the
necessary financial and human resources in place to meet its
objectives. The Board is satisfied that the necessary controls and
resources exist within the Group to enable these responsibilities
to be met.
Operational management of the Group is delegated to the Chief
Executive Officer.
The Board of Directors comprises the Non-Executive Chairman,
three executive Directors and one Non-Executive Director whose
Board and Committee responsibilities as at 5 April 2017 are set
out below:
The Board of Directors meets on average once a quarter and
additional meetings are held each year to review and approve the
Group’s strategy and financial plans for the coming year. Each
Director is provided with sufficient information to enable them to
consider matters in good time for meetings and enable them to
discharge their duties properly.
All Directors have access to the advice and services of the Company
Secretary. There is also a procedure in place for any Director to
take independent professional advice if necessary, at the
Company’s expense.
The Board also ensures that the principal goal of the Company is to
create shareholder value, while having regard to other stakeholder
interests and takes responsibility for setting the Company’s values
and standards.
There is a documented schedule of matters reserved for the
Board, the most significant of which are:
•
responsibility for the overall strategy and management of
the Group;
• approval of strategic plans and budgets and any material
changes to them;
• approval of the acquisition or disposal of subsidiaries and
major investments, projects and contracts;
• oversight of the Group’s operations ensuring competent and
prudent management, sound planning and management of
adequate accounting and other records;
• changes relating to the Group’s capital structure;
• final approval of the annual and interim financial statements
Board
Audit
Remuneration
and accounting policies;
• approval of the dividend policy;
Jens Montanana
Chairman
Member
Chairman
Ashley Stephenson
Member
Andrew Lloyd
Andrew Miller
Member
Member
Richard Last
Member
Chairman
Member
The composition of the Board of Directors is reviewed regularly.
Appropriate training, briefings, and induction are available to all
Directors on appointment and subsequently as necessary, taking
into account existing qualifications and experience.
Executive Directors’ normal retirement age is 60 and Non-
Executive Directors’ normal retirement age is 65. One third of all
Directors are subject to annual reappointment by shareholders as
well as any Director appointed by the Board in the period since the
last AGM. Ashley Stephenson and Andrew Lloyd will be offering
themselves for re-election at the forthcoming AGM.
• ensuring an appropriate system of internal control and risk
management is in place;
• approval of changes to the structure, size and composition of
the Board;
•
review of the management structure and senior management
responsibilities;
• with the assistance of the Remuneration Committee, approval
of remuneration policies across the Group;
• delegation of the Board’s powers and authorities;
• consideration of the independence of the Non-Executive
Directors; and
•
receiving reports on the views of the Company’s shareholders
19
Financial StatementsNotice of AGMCorporate DirectoryStrategic ReportGovernanceCorero Network Security plc Annual Report & Accounts 2016 Corporate Governance Report continued
In the year ended 31 December 2016, the Board received monthly
briefings on the Group’s performance (including detailed
commentary and analysis), key issues and risks affecting the
Group’s business.
The Audit Committee met twice in the year ended 31 December
2016. The attendance of individual Committee members at Audit
Committee meetings in the year to 31 December 2016 is shown in
the table below:
The Company maintains liability insurance for its Directors and
Officers. The Company has also entered into indemnity agreements
with the Directors, in terms of which the Company has indemnified
its Directors, subject to the Companies Act limitations, against any
liability arising out of the exercise of the Directors’ powers, duties
and responsibilities as a Director or Officer.
In the year ended 31 December 2016 the Board met on nine
scheduled occasions; further meetings and conference calls were
held as and when necessary. Details of Directors’ attendance at
scheduled meetings in the year to 31 December 2016 is shown in
the table below:
Meetings attended
Jens Montanana
Ashley Stephenson
Andrew Miller
Richard Last
Andrew Lloyd
9/9
9/9
9/9
9/9
9/9
Board Committees
The Company has an Audit Committee and Remuneration
Committee, details of which are set out below.
Audit Committee
The Audit Committee members comprise Richard Last, who is the
Committee Chairman, and Jens Montanana, and meets twice a year.
The Group Chief Financial Officer and Group Financial Controller,
and the Company’s external auditors attend the meetings. The
Audit Committee considers the adequacy and effectiveness of the
risk management and control systems of the Group. It reviews the
scope and results of the external audit, its cost effectiveness and
the objectivity of the auditors. It also reviews, prior to publication,
the interim financial statements, preliminary results
announcement, the annual financial statements and the other
information included in the annual report.
Richard Last
Jens Montanana
Meetings attended
2/2
2/2
Remuneration Committee
The Remuneration Committee comprises Jens Montanana, who is
the Committee Chairman, and Richard Last. Jens Montanana was
appointed Chairman of the Remuneration Committee on 2 January
2017 following Andrew Lloyd’s appointment as an Executive
Director. The Remuneration Committee meets at least twice a year
and reviews and advises upon the remuneration and benefits
packages of the Executive Directors. The remuneration of the
Chairman and Non-Executive Directors is decided upon by the
Board of Directors.
In the year ended 31 December 2016, the Remuneration Committee
Board met on three scheduled occasions; further meetings and
conference calls were held as and when necessary. The attendance
of individual Committee members at Remuneration Committee
meetings in the year to 31 December 2016 is shown in the
table below:
Andrew Lloyd
Jens Montanana
Richard Last
Meetings attended
3/3
3/3
3/3
Nominations Committee
Due to the size of the Board of Directors, the Directors do not
consider there to be any need for a nominations committee. Issues
that would normally be dealt with by a nominations committee are
handled by the Board of Directors. The Board of Directors will
review the need for a nominations committee on a regular basis.
20
Corero Network Security plc Annual Report & Accounts 2016 Internal controls
The Directors are responsible for the Group’s system of internal
control and for reviewing its effectiveness whilst the role of
management is to implement policies on risk management and
control. The Group’s system of internal control is designed to
manage, rather than eliminate, the risk of failure to achieve the
Group’s business objectives and can only provide reasonable, and
not absolute, assurance against material misstatement or loss.
The Board continually reviews the effectiveness of other internal
controls, including financial, operational, compliance controls and
risk management. There were no specific reports tabled during the
year ended 31 December 2016.
The Group operates a risk management process, which is
embedded in normal management and governance processes. As
part of the annual and budgeting process, the Group documents
the significant risks identified, the probability of those risks
occurring, their potential impact and the plans for managing and
mitigating each of those risks.
The Group operates a series of controls to meet its needs. These
controls include, but are not limited to, the annual strategic
planning and budgeting process, a clearly defined organisational
structure with authorisation limits, reviews by senior management
of monthly financial and operating information including
comparisons with budgets, monthly treasury and cash flow
reports and forecasts to the Board.
The Audit Committee receives reports from management and
observations from the external auditors concerning the system of
internal control and any material control weaknesses. Significant risk
issues, if any, are referred to the Board of Directors for consideration.
The Board of Directors makes an annual assessment of the
effectiveness of the Group’s internal control system, including
financial, operational and compliance controls, before making
this statement. The Board of Directors also considers issues
included in reports received during the year, how the risks have
changed during the year and reviews any reports prepared on
internal controls by management and any issues identified by
external auditors.
The Board of Directors does not believe it is currently appropriate
to establish a separate, independent internal audit function given
the size of the Group.
Remuneration report
The Remuneration Committee’s principal function is to set
remuneration of the Group’s Executive Directors and management
to ensure they are fairly compensated.
Basic salaries are set to ensure high quality Executive Directors
and management are attracted and retained by the Group. They
reflect the knowledge, skill and experience of each individual
Director. Bonuses are non-pensionable and only payable if the
Remuneration Committee assesses the Director’s achievements
as worthy of the award.
The Remuneration Committee is also responsible for ensuring the
Group’s share option schemes are operated properly. Details of
Directors’ share options at 31 December 2016 are disclosed in note
26 of the financial statements.
Details of Directors’ remuneration for the year ended 31 December
2016 is set out in note 23 of the financial statements. Jens
Montanana has elected to waive the fees payable to him for the
financial year ended 31 December 2016.
Ashley Stephenson, Executive Director, has a service agreement
which provides for the payment of six months’ base salary if the
agreement is terminated by the Company without cause.
Andrew Lloyd, Executive Director, has an employment agreement
which can be terminated by either party on not less than three
months’ written notice increasing by one month at the end of each
complete 12 month period of continuous employment provided
that the notice period shall not exceed six months in total. The
agreement contains provisions for early termination in
certain circumstances.
Andrew Miller, Executive Director, has an employment agreement
which can be terminated by either party on not less than three
months’ written notice increasing by one month at the end of each
complete 12 month period of continuous employment provided
that the notice period shall not exceed six months in total. The
agreement contains provisions for early termination in
certain circumstances.
None of the Non-Executive Directors has a service agreement.
Letters of appointment for Jens Montanana and Richard Last are
for 12 month terms and provide that the appointment may be
terminated by either party giving to the other not less than three
months’ notice.
21
Financial StatementsNotice of AGMCorporate DirectoryStrategic ReportGovernanceCorero Network Security plc Annual Report & Accounts 2016 Directors’ Report
for the year ended 31 December 2016
Group results
The Group’s Statement of Comprehensive Income on page 27
shows a loss for the year of $17.2 million (2015: $11.2 million).
Going concern
The financial position and cash flows are described in the Financial
Review on pages 12 and 13. An indication of likely future
developments affecting the Company is included in the Strategic
Report on pages 8 and 14.
The Directors are satisfied, in view of the cash reserves of
$2.9 million (2015: $2.7 million) held on the balance sheet at
31 December 2016 and the cash of £5.6 million ($7.0 million) to be
raised by the proposed fund raise to be announced by the Company
on 6 April 2017 (“Equity Fund Raise”), that the Company and the
Group have adequate resources to continue operating for the
foreseeable future. A circular containing a notice of General Meeting
will be sent to shareholders on 6 April 2017. In the notice of General
Meeting Independent Shareholders will be asked to consider and
vote on the Whitewash resolution for Jens Montanana’s proposed
participation in the Equity Fund Raise, and the Shareholders as a
whole will be asked to approve the Placing. In the event that a Rule 9
Waiver is not obtained or the authorities necessary to authorise the
Directors to complete the Placing are not approved by the requisite
majorities, the Placing will not proceed and the Company will be
required to seek further working capital funding in short order.
The Directors are of the opinion that the Group has adequate
working capital to continue as a going concern for the foreseeable
future and, in particular, for a period of at least 12 months from the
date of approval of these financial statements.
The Board are confident that the Equity Fund Raise will be
completed successfully.
For this reason, the going concern basis has been adopted in
preparing the accounts.
Dividends
The Directors have not recommended a dividend (2015: $nil).
Share capital
The issued share capital of the Company, together with details of
movements in the Company’s issued share capital during the
financial period are shown in note 21 to the financial statements. As
at the date of this report, 203,417,642 ordinary shares of 1p each
(‘ordinary shares’) were in issue and fully paid with an aggregate
nominal value of $3.1 million.
The market price of the ordinary shares at 31 December 2016 was 8.75p
and the shares traded in the range 8.375p to 30.0p during the year.
Issue of shares
At the AGM held on 15 June 2016, shareholders granted authority to
the Board under the Articles and section 551 of the Companies Act
2006 (the ‘Act’) to exercise all powers of the Company to allot
relevant securities up to an aggregate nominal amount of £552,125.
It is proposed at the forthcoming AGM to renew the authority to
allot relevant securities up to an aggregate nominal amount of
£678,058, being one-third of the nominal value of the current
issued share capital.
Also at the AGM held on 15 June 2016, shareholders granted
authority to the Board under the Articles and section 570(1) of the
Act to exercise all powers of the Company to allot equity securities
wholly for cash up to an aggregate nominal amount of £165,637
without application of the statutory pre-emption rights contained
in section 561 (1) of the Act. It is proposed at the forthcoming AGM
to renew the authority to allot relevant securities wholly for cash
up to an aggregate nominal amount of £203,418 being 10% of the
current nominal value of the issued share capital, without
application of the statutory pre-emption rights.
Substantial shareholdings
The Company has been notified of the following holdings that are
3% or more of the Group’s ordinary share capital as at 5 April 2017:
Ordinary shares of 1 pence each
Number
Jens Montanana*
Richard John Koch
69,303,990
26,370,500
Herald Investment Management
16,288,241
Sabvest Capital Holdings Limited
16,500,000
Peter Kennedy Gain**
10,733,333
%
34.1
13.0
8.0
8.1
5.3
* of which 21,700,181 are held in the name of JPM International Limited, which is wholly owned
by Jens Montanana, and 29,850,000 are held in the name of The New Millennium
Technology Trust of which Jens Montanana is a beneficiary.
**of which 4,900,000 shares are held in the name of Draper Gain Investments Ltd
Directors’ indemnities
The Company has qualifying third party indemnity provisions in
place for the benefit of its Directors. These remain in force at the
date of this report.
22
Corero Network Security plc Annual Report & Accounts 2016 Directors and Directors’ interests
The Directors who served in office during the year and up to the date of this report and their interests in the Company’s
shares were as follows:
Jens Montanana
Ashley Stephenson
Andrew Miller
Richard Last
Andrew Lloyd
5 April 2017
31 December 2016
31 December 2015
Number
69,303,990
38,000
891,437
1,316,667
–
%
34.1
0.0
0.4
0.7
–
Number
69,303,990
38,000
891,437
1,316,667
–
%
34.1
0.0
0.4
0.7
–
Number
65,440,354
38,000
823,255
1,316,667
–
%
39.5
0.0
0.5
0.8
–
The biographical details of the current Directors of the Company are given on pages 16 and 17.
Jens Montanana, Ashley Stephenson, Andrew Miller, Richard Last and Andrew Lloyd hold share options, details of which are shown in note
26 to the financial statements.
Financial risk management objectives
and policies
The Group’s business activities expose it to a variety of financial
risks. The policies for managing these risks are described below:
• Liquidity risk – arises from the Group’s management of working
capital and finance charges. It is the risk that the Group will
encounter difficulty in meeting its financial obligations as they
fall due. Liquidity risk is managed by the finance function.
Budgets are agreed by the Board annually in advance enabling
the Group’s cash flow requirements to be anticipated.
• Credit risk – arises from cash and cash equivalents and from
credit exposures to the Group’s customers including
outstanding receivables and committed transactions. Credit risk
is managed with regular reports of exposures reviewed by
management. The Group does not set individual credit limits
but will seek to ensure that customers enter into legally
enforceable contracts that include settlement terms that
demonstrate the customers’ commitment to the transaction
and minimise this risk exposure.
The amounts of trade receivables presented in the Statement of
Financial Position are shown net of allowances for doubtful
accounts estimated by management based on prior experience and
their assessment of the current economic environment (note 14).
The Group has no significant concentration of credit risk, with
exposure spread over a number of customers.
The credit risk on liquid funds and financial instruments is limited
because the counterparties are banks with acceptable credit
ratings assigned by international credit rating agencies.
• Cash flow interest rate risk – the Group’s policy is to minimise
interest rate cash flow risk exposure on its financing. The
Group’s policy is to balance the risk in relation to cash balances
held by spreading these across a number of financial institutions
as opposed to maximising interest income
• Currency risk – there is no material impact on the Group’s profit
or loss for the year from exchange rate movements, as foreign
currency transactions are entered into by Group companies
whose functional currency is aligned with the currencies in
which it transacts. An exchange rate risk does arise in relation
to equity fund raises which are in GBP, given the Company’s AIM
listing, to the extent these funds are required to support US
Dollar denominated funding requirements. The Group has not
hedged such GBP fund raises in the past but will review this
policy based on the expected timing of US Dollar and GBP
operational funding requirements.
The principal risk which applies to the parent Company’s financial
statements is the risk that the returns generated by the
subsidiaries might not support the carrying value of the cost of the
investments in subsidiaries. The carrying value is tested at least
annually for impairment and if necessary impaired.
23
Financial StatementsNotice of AGMCorporate DirectoryStrategic ReportGovernanceCorero Network Security plc Annual Report & Accounts 2016 Directors’ Report continued
for the year ended 31 December 2016
Capital management
The Group monitors its available capital, which it considers to be all
components of equity against its expected requirements.
The Group’s objectives when maintaining capital are to safeguard
the entity’s ability to continue as a going concern, so that it can
continue to provide returns for shareholders and benefits for other
stakeholders, and to ensure that sufficient funds can be raised for
investing activities. In order to maintain or adjust the capital
structure, the Company may return capital to shareholders, issue
new shares, or sell assets. The Group does not review its capital
requirements according to any specified targets or ratios.
Treasury management
The objectives of Group treasury policies are to ensure that
adequate financial resources are available for development of the
business while at the same time managing financial risks. Financial
instruments are used to reduce financial risk exposures arising from
the Group’s business activities and not for speculative purposes.
The Group’s treasury activities are managed by the Group finance
function under the direction of the Group Financial Controller. The
Group Financial Controller reports to the Board on the
implementation of Group treasury policy.
Environment
The Group’s activities are primarily office based and as such the
Directors believe that there is no significant environmental impact
arising from the Group’s activities. The Group complies with local
WEEE regulations. No environmental performance indicators are
therefore included within this report. The Group’s environmental
policy states: “We endeavour to recycle appropriate materials
where possible and to efficiently use natural resources and energy
supplies so as to minimise our environmental impact. We will
comply with the relevant statutes and legislation. Furthermore,
employees are encouraged to be environmentally aware. Company
cars are not provided.”
Research and development
The development of computer software is an integral part of the
Group’s business and the Group continues to develop its core
software in response to user demand, and particularly the
changing IT security threat landscape, and changes in software
technology. During the year the Group enhanced its existing
products and developed new products. A capital investment of $2.5
million (2015: $2.3 million) was made during the year. Amortisation
of $2.3 million (2015: $3.3 million) and costs not capitalised of $2.4
million (2015: £2.4 million) were charged to the Statement of
Comprehensive Income during the year.
24
Employees
The quality and commitment of the Group’s employees has played
a major role in the Company’s progress. This has been
demonstrated in many ways, including strong customer
satisfaction, the development of new product offerings and the
flexibility employees have shown in adapting to changing business
requirements. The Group operates sales commission, incentive
bonus plans and share option plans to provide incentives for
achievements which add value to the business.
Post balance sheet event
On 6 April 2017 Corero will announce a conditional placing and
subscription to raise $7.0 million before expenses. This Equity Fund
Raise is subject to shareholder approval at a general meeting of the
Company on 24 April 2017.
Annual General Meeting
The AGM will be held at the offices of Redleaf Communications,
First Floor, 4 London Wall Buildings, London, EC2M 5NT, on 20 June
2017 at 10.00 a.m. The notice convening the meeting is on page 58
together with details of the business to be considered.
Auditors
In so far as each Director is aware:
•
•
there is no relevant audit information of which the Company’s
auditors are unaware; and
the Directors have taken all the steps that they ought to have
taken to make themselves aware of any relevant audit
information and to establish that the Company’s auditors are
aware of that information
A resolution to re-appoint BDO LLP for the ensuing year will be
proposed at the AGM.
By order of the Board
Duncan Swallow
Company Secretary
5 April 2017
Corero Network Security plc Annual Report & Accounts 2016 Statement of Directors’ Responsibilities
The Directors are responsible for preparing the Annual Report and Financial Statements
in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial
statements for each financial year. Under that law the Directors
have elected to prepare the Group and Company financial
statements in accordance with International Financial Reporting
Standards as adopted by the European Union (IFRSs). Under
company law the Directors must not approve the financial
statements unless they give a true and fair view of the state of
affairs of the Group and parent company and of the profit or loss of
the Group for that period. The Directors are also required to
prepare financial statements in accordance with the rules of the
London Stock Exchange for companies trading securities on the
AIM. In preparing these financial statements, the Directors are
required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with
IFRSs as adopted by the European union, subject to any material
departures disclosed and explained in the financial statements;
and
• prepare the financial statements on the going concern basis
unless it is inappropriate to presume that the Group will
continue in business
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Group’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Group and enable them to ensure that the
financial statements comply with the Companies Act 2006. They
are also responsible for safeguarding the assets of the Group and
hence for taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The Directors are responsible for ensuring the annual report and
the financial statements are made available on a website. Financial
statements are published on the Company’s website in accordance
with legislation in the United Kingdom governing the preparation
and dissemination of financial statements, which may vary from
legislation in other jurisdictions. The maintenance and integrity of
the Company’s website is the responsibility of the Directors. The
Directors’ responsibility also extends to the ongoing integrity of
the financial statements contained therein.
25
Financial StatementsNotice of AGMCorporate DirectoryStrategic ReportGovernanceCorero Network Security plc Annual Report & Accounts 2016 Independent Auditor’s Report to the members
of Corero Network Security plc
We have audited the financial statements of Corero Network Security plc for the year ended 31 December 2016 which comprise the
Consolidated Statement of Comprehensive Income, the Consolidated and Company Statements of Financial Position, the Consolidated
Statement of Cash Flow, the Consolidated and Company Statements of Changes in Equity and the related notes. The financial reporting
framework that has been applied in the preparation of the group financial statements is applicable law and International Financial
Reporting Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards (United Kingdom
Generally Accepted Accounting Practice).
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our
audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an
auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
Respective responsibilities of Directors and auditors
As explained more fully in the statement of Directors’ responsibilities, the Directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view. Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to
comply with the Financial Reporting Council’s (FRC’s) Ethical Standards for Auditors.
Scope of the audit of the financial statements
A description of the scope of an audit of financial statements is provided on the FRC’s website at www.frc.org.uk/auditscopeukprivate.
Opinion on financial statements
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the state of the Group’s and the parent Company’s affairs as at 31 December 2016
and of the Group’s loss for the year then ended;
the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union;
the parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union
and as applied in accordance with the provisions of the Companies Act 2006; and
the financial statements have been prepared in accordance with the requirements of the Companies Act 2006
Opinion on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
•
•
the information given in the strategic report and directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements
the strategic report and directors’ report have been prepared in accordance with applicable legal requirements.
Matters on which we are required to report by exception
In the light of the knowledge and understanding of the group and the parent company and its environment obtained in the course of the audit,
we have not identified material misstatements in the strategic report or the directors’ report.
We have nothing to report in respect of the following matters where the Companies Act 2006 requires us to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received
from branches not visited by us; or
•
the parent company financial statements are not in agreement with the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit
Julian Frost (senior statutory auditor)
For and on behalf of BDO LLP, statutory auditor
London
5 April 2017
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
26
Corero Network Security plc Annual Report & Accounts 2016
Consolidated Statement of Comprehensive Income
for the year ended 31 December 2016
Revenue
Cost of sales
Gross profit
Operating expenses before highlighted items
Depreciation and amortisation of intangible assets
Impairment of goodwill
Operating expenses
Operating loss
Finance income
Finance costs
Loss before taxation
Taxation
Loss for the year
Other comprehensive expense
Difference on translation of UK functional currency entities
Total comprehensive expense for the year
Total loss for the year attributable to:
Equity holders of the parent
Total
Total comprehensive expense for the year attributable to:
Equity holders of the parent
Total
Basic and diluted loss per share
Basic and diluted loss per share
The notes on pages 33 to 57 form part of these financial statements.
Total
2016
$’000
8,772
(2,071)
6,701
(11,847)
(3,128)
(8,992)
(23,967)
(17,266)
9
(6)
(17,263)
85
(17,178)
(2,355)
(19,533)
(17,178)
(17,178)
(19,533)
(19,533)
2016
Cents
(9.0)
Total
2015
$’000
8,340
(2,073)
6,267
(12,699)
(5,174)
–
(17,873)
(11,606)
11
(20)
(11,615)
382
(11,233)
(482)
(11,715)
(11,233)
(11,233)
(11,715)
(11,715)
2015
Cents
(8.5)
Note
9,10,11
8
6
7
27
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory
Consolidated Statement of Financial Position
as at 31 December 2016
Assets
Non-current assets
Goodwill
Acquired intangible assets
Capitalised development expenditure
Property, plant and equipment
Trade and other receivables
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Liabilities
Current Liabilities
Trade and other payables
Deferred income
Net current assets
Non-current liabilities
Deferred income
Deferred taxation
Net assets
Total equity attributable to owners of the parent
Ordinary share capital
Capital redemption reserve
Share premium
Share options reserve
Translation reserve
Retained earnings
Total equity
Note
2016
$’000
2015
$’000
8
9
10
11
14
13
14
15
18
18
19
21
22
8,991
82
7,901
970
80
18,024
65
2,227
2,940
5,232
(1,728)
(2,457)
(4,185)
1,047
(855)
-
(855)
18,216
3,119
7,051
67,681
301
(2,123)
(57,813)
18,216
17,983
375
7,620
893
228
27,099
661
3,738
2,706
7,105
(2,551)
(3,791)
(6,342)
763
(1,439)
(85)
(1,524)
26,338
2,573
7,051
56,835
282
232
(40,635)
26,338
These financial statements were approved by the Board of Directors on 5 April 2017 and signed on their behalf.
Andrew Miller
Director
The notes on pages 33 to 57 form part of these financial statements.
28
Corero Network Security plc Annual Report & Accounts 2016 Company Statement of Financial Position
as at 31 December 2016
Assets
Non-current assets
Investments in subsidiaries
Trade and other receivables
Current assets
Cash and cash equivalents
Liabilities
Current Liabilities
Trade and other payables
Net current assets
Net assets
Equity
Ordinary share capital
Capital redemption reserve
Share premium
Share options reserve
Translation reserve
Retained earnings
Total equity
Note
2016
$’000
2015
$’000
12
14
15
21
22
21,137
5,409
26,546
28,797
15,958
44,755
2,504
2,463
–
2,504
29,050
3,119
7,051
67,681
301
(13,157)
(35,945)
29,050
(202)
2,261
47,016
2,573
7,051
56,835
282
(3,755)
(15,970)
47,016
The Company financial statements were prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework.
the Company has taken advantage of the following disclosure exemptions:
The requirements of IAS 7 Statement of Cash Flows, IFRS 7 Financial Instruments: Disclosures and IAS 24 Related Party Disclosures.
The Company has taken advantage of section 408 of the Companies Act 2006 and has not included an income statement in these
financial statements. The parent Company’s loss for the year was $20.0 million (2015: loss $17.5 million).
These financial statements were approved by the Board of Directors on 5 April 2017 and signed on their behalf.
Andrew Miller
Director
The notes on pages 33 to 57 form part of these financial statements.
29
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory Consolidated Statement of Cash Flow
for the year ended 31 December 2016
Note
9
8
10
11
6
26
9
10
11
Group
2016
$’000
(17,178)
325
8,992
2,252
551
9
(9)
6
(85)
19
596
1,605
(2,623)
(5,540)
(32)
(2,533)
(644)
(3,209)
2015
$’000
(11,233)
1,210
–
3,289
675
–
(11)
20
(382)
(3)
88
(1,167)
(168)
(7,682)
(37)
(2,285)
(392)
(2,714)
11,392
7,604
9
(6)
–
11
(20)
(20)
11,395
7,575
(2,412)
234
2,706
2,940
(509)
(3,330)
6,036
2,706
Cash flows from operating activities
Loss for the year
Adjustments for non-cash movements:
Amortisation of acquired intangible assets
Impairment loss on intangible assets
Amortisation and impairment of capitalised development expenditure
Depreciation
Loss on sale of property, plant and equipment
Finance income
Finance expense
Taxation
Share-based payment charge/(credit)
Decrease in inventories
Decrease/(increase) in trade and other receivables
Decrease in payables
Net cash used in operating activities
Cash flows from investing activities
Purchase of intangible assets
Capitalised development expenditure
Purchase of property, plant and equipment
Net cash used in investing activities
Cash flows from financing activities
Net proceeds from issue of ordinary share capital
Finance income
Finance expense
Repayment of credit facility
Net cash from financing activities
Effects of exchange rates on cash and cash equivalents
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents at 1 January
Cash and cash equivalents at 31 December
The notes on pages 33 to 57 form part of these financial statements.
30
Corero Network Security plc Annual Report & Accounts 2016 Consolidated Statement of Changes in Equity
for the year ended 31 December 2016
Capital
redemption
reserve
$’000
Share
premium
account
$’000
Share
options
reserve
$’000
Translation
reserve
$’000
Retained
earnings
$’000
Total
attributable
to equity
holders of
the parent
$’000
50,000
285
Share
capital
$’000
8,855
–
–
–
–
769
(7,051)
–
–
–
–
–
–
7,051
–
–
–
–
6,835
–
(6,282)
7,051
6,835
2,573
7,051
56,835
282
–
–
–
–
546
546
3,119
–
–
–
–
–
-
7,051
–
–
–
–
10,846
10,846
67,681
–
–
–
19
–
19
301
–
–
–
(3)
–
–
(3)
714
–
(482)
(29,402)
(11,233)
–
30,452
(11,233)
(482)
(482)
(11,233)
(11,715)
–
–
–
–
–
–
–
–
232
–
(40,635)
(17,178)
(2,355)
–
(3)
7,604
–
7,601
26,338
(17,178)
(2,355)
(2,355)
(17,178)
(19,533)
–
–
–
–
–
–
(2,123)
(57,813)
19
11,392
11,411
18,216
1 January 2015
Loss for the year
Other comprehensive income
Total comprehensive expense
for the year
Contributions by and distributions
to owners
Share-based payments
Issue of share capital
Shares purchased for cancellation
Total contributions by and
distributions to owners
31 December 2015 and
1 January 2016
Loss for the year
Other comprehensive income
Total comprehensive expense
for the year
Contributions by and distributions
to owners
Share-based payments
Issue of share capital
Total contributions by and
distributions to owners
31 December 2016
The share capital comprises the nominal values of all shares issued.
The capital redemption reserve comprises the amount transferred from deferred shares on redemption of the deferred shares.
The share premium account comprises the amounts subscribed for share capital in excess of the nominal value.
The share options reserve represents the cost to the Group of share options.
The translation reserve arises on retranslating the net assets of UK operations into US dollars.
The retained earnings are all other net gains and losses and transactions with owners not recognised elsewhere.
The notes on pages 33 to 57 form part of these financial statements.
31
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory Company Statement of Changes in Equity
for the year ended 31 December 2016
Share
premium
account
$’000
50,000
Share
options
reserve
$’000
285
Share
capital
$’000
8,855
–
–
–
–
769
(7,051)
Capital
redemption
reserve
$’000
-
-
-
-
–
–
7,051
–
–
–
–
6,835
–
(6,282)
7,051
6,835
Translation
reserve
$’000
Retained
earnings
$’000
Total
equity
$’000
(219)
–
(3,536)
1,487
60,408
(17,457)
(17,457)
–
(3,536)
(3,536)
(17,457)
(20,993)
–
–
–
–
–
–
–
–
(3)
7,604
–
7,601
–
–
–
(3)
–
–
(3)
2,573
7,051
56,835
282
(3,755)
(15,970)
47,016
–
–
–
–
546
546
3,119
-
-
-
–
–
–
7,051
–
–
–
–
10,846
10,846
67,681
–
–
–
19
–
19
301
–
(19,975)
(19,975)
(9,402)
–
(9,402)
(9,402)
(19,975)
(29,377)
–
–
–
–
–
–
19
11,392
11,411
(13,157)
(35,945)
29,050
1 January 2015
Loss for the year
Other comprehensive income
Total comprehensive expense
for the year
Contributions by and
distributions to owners
Share-based payments
Issue of share capital
Shares purchased for cancellation
Total contributions by and
distributions to owners
31 December 2015 and 1 January
2016
Loss for the year
Other comprehensive income
Total comprehensive expense
for the year
Contributions by and
distributions to owners
Share-based payments
Issue of share capital
Total contributions by and
distributions to owners
31 December 2016
The notes on pages 33 to 57 form part of these financial statements.
32
Corero Network Security plc Annual Report & Accounts 2016 Notes to the Financial Statements
1. General information
Presentation currency
These consolidated financial statements are presented in US Dollars (“$”) which represents the presentation currency of the Group.
The average $-GBP sterling (“GBP”) exchange rate, used for the conversion of the Statement of Comprehensive Income, for the 12 months
ended 31 December 2016 was 1.36 (2015: 1.53). The closing $-GBP exchange rate, used for the conversion of the Group’s assets and
liabilities, at 31 December 2016 was 1.23 (2015: 1.48).
Corero Network Security plc is a public limited company incorporated in the United Kingdom under the Companies Act 2006 and
registered in England and Wales. The functional currency of the Company is GBP.
2. Significant accounting policies
2.1 Basis of preparation
The Group financial statements have been prepared in accordance with EU endorsed International Financial Reporting Standards (IFRS),
International Financial Reporting Interpretations Committee (IFRIC) interpretations and those parts of the Companies Act 2006
applicable to companies reporting under IFRS. The parent Company financial statements have been prepared in accordance with FRS 101
(Financial Reporting Standard 101) ‘Reduced Disclosure Framework’ for the first time this year. The Directors do not consider this change
to have had a material effect on the financial statements.
2.2 Going Concern
The financial statements have been prepared on a going concern basis.
The Directors have prepared detailed income statement, balance sheet and cash flow projections for the period to 31 December 2018.
These include cash of £5.6 million to be raised by the proposed Equity Fund Raise to be announced by the Company on 6 April 2017. The
cash flow projections have been subjected to sensitivity analysis at the revenue, cost and combined revenue and cost levels. The cash flow
projections show that the Group will maintain a positive cash balance until at least December 2018.
A circular containing a notice of General Meeting will be sent to shareholders on 6 April 2017. In the notice of General Meeting,
Independent Shareholders will be asked to consider and vote on the Whitewash resolution for Jens Montanana’s proposed participation
in the Equity Fund Raise as required by the Takeover Code (due to the fact that Jens Montanana’s equity interest exceeds 30% and will
increase as a result of the proposed Equity Fund Raise), and the Shareholders as a whole will be asked to approve the Placing. In the event
the Placing (including the Whitewash resolution) is not approved by the requisite majorities, the Placing will not proceed and the
Company will be required to seek further working capital funding in short order. The Board is confident that the Equity Fund Raise will
be completed successfully.
As a result, the Directors are of the opinion that the Group will have access to adequate working capital to continue as a going concern
for the foreseeable future and, in particular, for a period of at least 12 months from the date of approval of these financial statements.
2.3 Basis of consolidation
The consolidated financial statements incorporate the results, assets, liabilities and cash flows of the Company and each of its
subsidiaries for the financial year ended 31 December 2016.
Subsidiaries are entities controlled by the Group. Control is deemed to exist when the Group has all of the following elements a) power over
the subsidiary, b) exposure or rights to variable returns from that subsidiary, c) ability to use its power to affect the amount of the return
from the subsidiary. The results, assets, liabilities and cash flows of subsidiaries are included in the consolidated financial statements from the
date control commences until the date that control ceases.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with
those used by the Group.
Intra-group balances and transactions are eliminated on consolidation.
2.4 Business combinations
The acquisition method is used to account for all acquisitions. The cost of an acquisition is measured at the fair values, on the date of
exchange, of assets given, liabilities incurred or assumed, and equity instruments issued.
At the date of acquisition, the identifiable assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values.
Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognised as goodwill.
33
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 2. Significant accounting policies continued
2.5 Revenue
Revenue is measured at the fair value of the consideration received or receivable and represents the amounts receivable for services
provided in the normal course of business, net of all related discounts and sales tax.
The Group has adopted the following policy in respect of revenue recognition:
1. Hardware and Software Products
When a sales arrangement contains multiple elements, such as hardware and software products, licenses and/or services, the Group
allocates revenue to each element based on a selling price hierarchy, having evaluated each deliverable in an arrangement to determine
whether they represent separate units of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value.
The selling price for a deliverable is based on its vendor specific objective evidence (“VSOE”) if available, third party evidence (“TPE”)
if VSOE is not available, or best estimated selling price (“BESP”) if neither VSOE nor TPE is available. In multiple element arrangements
where more-than-incidental software deliverables are included, revenue is allocated to each separate unit, accounting for each of the
non-software deliverables and to the software deliverables as a group using the relative selling prices of each of the deliverables in the
arrangement based on the aforementioned selling price hierarchy.
The Group establishes the VSOE of selling price using the price charged for a deliverable when sold separately. The TPE of selling price
is established by evaluating similar and interchangeable competitor products or services in standalone sales to similarly situated
customers. As Corero’s hardware product with embedded software is generally not sold on a standalone basis, the Company determined
that VSOE cannot be obtained. Management has also determined that third party pricing for similar products sold separately is not
obtainable or reliable so TPE cannot be used, therefore BESP is used (note 3).
2. Consulting and Professional Services
Revenue from the provision of consultancy and professional services is recognised as the work is performed.
3. Maintenance and Support Services
Revenue is recognised on a straight line basis over the life of the agreement.
2.6 Government grants
Government grants are recognised at fair value when there is reasonable assurance that the Group will comply with the conditions
attaching to them and the grant will be received. Grants related to purchase of assets are treated as deferred income and allocated to
Statement of Comprehensive Income over the useful lives of the related assets while grants related to expenses are netted off against
the related item of expenditure in the Statement of Comprehensive Income - Profit and Loss.
2.7 Cost of sales
Cost of sales includes all direct costs associated with revenue generation, including services delivery, operation costs and amounts
charged by external third parties for services and goods directly related to revenue. Examples of such costs would include, but not be
limited to, royalties and third party hardware and software costs.
2.8 Foreign currencies
Transactions in foreign currencies are translated at the exchange rate ruling at the date of each transaction. Foreign currency monetary
assets and liabilities are retranslated using the exchange rates at the reporting date. Gains and losses arising from changes in exchange
rates after the date of the transaction are recognised in profit or loss in the Statement of Comprehensive Income.
Non-monetary assets and liabilities that are measured in terms of historical cost in a foreign currency are translated at the exchange rate
at the date of the original transaction.
In the consolidated financial statements, the net assets of the Group’s UK operations are translated from GBP into US dollars at the
exchange rate at the reporting date. Income and expense items are translated into US dollars at the average exchange rates for the
period. The resulting exchange differences are recognised in the translation reserve.
34
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 2.9 Intangible assets
Internally generated intangible assets
The Group’s internally generated intangible asset relates to its development expenditure.
Development expenditure is capitalised only when it is probable that future economic benefit will result from the project and the
following criteria are met:
• The technical feasibility of the product has been ascertained;
• Adequate, technical, financial and other resources are available to complete and sell or use the intangible asset;
• The Group can demonstrate how the intangible asset will generate future economic benefits and the ability to use or sell the
intangible asset can be demonstrated;
•
It is the intention of management to complete the intangible asset and use it or sell it; and
• The development costs can be measured reliably
Expenditure not meeting these criteria is expensed in the Statement of Comprehensive Income – Profit and Loss.
After initial recognition, internally generated intangible assets are carried at cost less accumulated amortisation and any impairment
losses. Amortisation is charged once the asset is capable of generating economic benefits.
Acquired intangible assets
Identifiable intangible assets acquired as part of a business combination are initially recognised separately from goodwill, irrespective of
whether the assets have been recognised by the acquiree before the business combination. An intangible asset is considered identifiable
only if it is separable or if it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable
from the entity or from other rights and obligations.
Intangible assets acquired as part of a business combination and recognised by the Group are computer software, customer contracts
and the related customer relationships.
Purchased computer software is carried at cost less accumulated amortisation and any impairment losses.
Customer contracts and the related customer relationships are carried at cost less accumulated amortisation and any impairment losses.
Amortisation
Intangible assets are amortised on a straight line basis, to reduce their carrying value to zero over their estimated useful lives. The
following useful lives were applied during the year:
• Computer software acquired – 3 years straight line
• Customer contracts and the related customer relationships – 7 years straight line
• Capitalised development expenditure – 5 years straight line
Amortisation costs are included within operating expenses in the Statement of Comprehensive Income.
Methods of amortisation and useful lives are reviewed, and if necessary adjusted, at each reporting date.
35
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 2. Significant accounting policies continued
2.10 Property, plant and equipment
Depreciation commences when an asset is available for use. Depreciation is calculated so as to write off the cost or value of an asset,
net of anticipated disposal proceeds, over the useful life of that asset as follows:
• Leasehold improvements – period of the lease straight line
• Computer equipment including evaluation units – 3 years straight line
• Fixtures and fittings – 5 years straight line
• Office equipment – 5 years straight line
Property, plant and equipment is stated at cost less accumulated depreciation and any impairment losses. Cost comprises the purchase
cost of property, plant and equipment together with any directly attributable costs. Computer equipment includes evaluation units used
by customers during proof of concept trials. Evaluation units are stated at cost less accumulated depreciation. When an evaluation unit is
retained by a customer as part of a sale the cumulative depreciation is reversed and the evaluation unit cost charged to cost of sales.
Subsequent costs are included in an assets carrying value or are recognised as a separate asset when it is probable that future economic
benefits associated with the additional expenditure will flow to the Group and the cost of the item can be measured reliably. All other
costs are charged to the Statement of Comprehensive Income – Profit and Loss as incurred.
Methods of depreciation, residual values and useful lives are reviewed, and if necessary adjusted, at each balance sheet date.
The gain or loss arising from the disposal or retirement of an item of property, plant and equipment is determined as the difference between
the net disposal proceeds and the carrying amount of the item, and is included in the Statement of Comprehensive Income – Profit and Loss.
2.11 Inventory
Inventory is stated at the lower of cost or net realisable value. Cost is computed using standard cost, which approximates actual cost, on a first-in,
first-out basis. Rapid technological change and new product introductions and enhancements could result in excess or obsolete inventory the
value of which may not be recoverable.
To minimise this risk, the Group evaluates inventory levels and expected usage on a periodic basis and records valuation allowances
as required.
2.12 Impairment
At each reporting date, the Group assesses whether there is any indication that its assets have been impaired. If any such indication exists,
the recoverable amount of the asset is estimated in order to determine the extent of any impairment. If it is not possible to estimate the
recoverable amount of the individual asset, the recoverable amount of the cash-generating unit to which the asset belongs is determined.
The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell and its value in use. The
recoverable amount is calculated using the present value of the future cash flows expected to be derived from an asset or cash-
generating unit. This present value is derived using a cost of capital rate that reflects current market assessments of the time value of
money and of the risks specific to the asset for which future cash flow estimates have not been adjusted. If the recoverable amount of an
asset is less than its carrying amount, the carrying amount of the asset is reduced to its recoverable amount. That reduction is
recognised as an impairment loss.
An impairment loss relating to assets carried at cost less any accumulated depreciation or amortisation is recognised immediately in the
Statement of Comprehensive Income – Profit and Loss.
Goodwill acquired in a business combination is, from the acquisition date, allocated to each of the cash-generating units or groups of
cash-generating units that are expected to benefit from the synergies of the combination.
Goodwill is tested for impairment at least annually, and whenever there is an indication that the asset may be impaired.
An impairment loss is recognised for cash-generating units if the recoverable amount of the unit is less than the carrying amount of the
unit. The impairment loss is allocated to reduce the carrying amount of the assets of the unit by first reducing the carrying amount of
any goodwill allocated to the cash-generating unit, and then reducing the carrying amounts of the other assets of the unit pro rata.
If an impairment loss subsequently reverses, the carrying amount of the asset is increased to the revised estimate of its recoverable
amount but limited to the carrying amount that would have been determined had no impairment loss been recognised in prior years.
A reversal of an impairment loss is recognised in the Statement of Comprehensive Income - Profit and Loss. Impairment losses on
goodwill are not subsequently reversed.
36
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 2.13 Leases
Where substantially all of the risks and rewards incidental to ownership of a leased asset are transferred to the Company (a “finance
lease”), the asset is treated as if it had been purchased outright. The amount initially recognised as an asset is the lower of the fair value
of the leased property and the present value of the minimum lease payments payable over the term of the lease. The corresponding lease
commitment is shown as a liability. Lease payments are analysed between capital and interest. The interest element is charged to the
Statement of Comprehensive Income – Profit and Loss over the period of the lease and is calculated so that it represents a constant
proportion of the lease liability. The capital element reduces the balance owed to the lessor.
Where substantially all of the risks and rewards incidental to ownership are not transferred to the Company (an “operating lease”), the
total rentals payable under the lease are charged to the Statement of Comprehensive Income – Profit and Loss on a straight-line basis
over the lease term. The aggregate benefit of lease incentives are recognised as a reduction of the rental expense over the lease term on
a straight-line basis.
2.14 Investments in subsidiaries
In the Company’s separate financial statements, investments in subsidiaries are carried at cost less any impairment provisions.
2.15 Taxation
The tax expense represents the sum of current tax and deferred tax.
Current tax
Current tax is based on taxable profit for the year and is calculated using tax rates enacted or substantively enacted at the reporting
date. Taxable profit differs from accounting profit either because items are taxable or deductible in periods different to those in
which they are recognised in the financial statements, or because they are never taxable or deductible.
Deferred tax
Deferred tax on temporary differences at the reporting date between the tax bases of assets and liabilities and their carrying amounts
for financial reporting purposes is accounted for using the balance sheet liability method.
Using the balance sheet liability method, deferred tax liabilities are recognised in full for all taxable temporary differences and deferred
tax assets are recognised to the extent that it is probable that taxable profits will be available against which deductible temporary
differences can be utilised. However, if the temporary difference arises from the initial recognition of goodwill or the initial recognition of
an asset or liability in a transaction other than a business combination, that at the time of the transaction affects neither accounting nor
taxable profit, it is not recognised as deferred tax asset or liability.
Deferred taxation is measured at the tax rates that are expected to apply when the asset is realised, or the liability settled, based on tax
rates and laws enacted or substantively enacted at the reporting date.
2.16 Provisions
A provision is recognised when, as a result of a past event, the Group has a legal or constructive obligation, it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the amount of such an
obligation can be made.
Provisions are measured at the best estimate of the expenditure required to settle the obligation at the reporting date. When the effect
is material, the expected future cash flows required to settle the obligation are discounted at the pre-tax rate that reflects the current
market assessments of the time value of money and the risks specific to the obligation.
2.17 Post-retirement benefits
The Group makes contributions in respect of certain employees to defined contribution pension plans under which it is required to pay
fixed contributions to group and personal pension funds.
Contributions to the schemes are based on a proportion of the employees’ earnings and are charged to the Statement of Comprehensive
Income – Profit and Loss when incurred. The Group has no obligation beyond these contributions.
37
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 2. Significant accounting policies continued
2.18 Financial instruments
The Group classifies financial instruments, or their component parts, on initial recognition as a financial asset, a financial liability or an
equity instrument in accordance with the substance of the contractual arrangement.
Financial assets and financial liabilities are recognised in the Group’s Statement of Financial Position when the Group becomes party to
the contractual provisions of the instrument.
The particular recognition and measurement methods adopted for the Group’s financial instruments are disclosed below:
Trade and other receivables
Trade and other receivables are stated at their fair value at time of initial recognition, reflecting where material the time value of money.
A provision for impairment of trade receivables is established when there is evidence that the Group will not be able to collect all
amounts due according to the original terms of these receivables. The amount of the provision is the difference between the carrying
value and the present value of estimated future cash flows, discounted at the original effective interest rate.
Cash and cash equivalents
Cash and cash equivalents include cash in hand, deposits on call with banks.
Trade and other payables
Trade and other payables are not interest bearing and are stated at their fair value at time of initial recognition. Thereafter they are
accounted for at amortised cost.
2.19 Equity instruments
An equity instrument is any contract that evidences a residual interest in the assets of the Company after deducting all its liabilities.
Equity instruments issued by the Company are recorded at the proceeds received, net of directly attributable issue costs.
2.20 Employee share option schemes
The Group operates an equity-settled share-based compensation plan. The fair value of the employees’ services received in exchange for the
grant of share options is measured at grant date and recognised as an expense on a straight line basis over the vesting period, based on
the Group’s estimate of shares that will eventually vest. Fair value is determined by reference to the Black-Scholes option pricing model.
At each reporting date, the Group revises its estimate of the number of options that are expected to become exercisable. When share
options are exercised, the proceeds received, net of any transaction costs, are credited to share capital (nominal value) and share premium.
2.21 Receivables-backed working capital facility
The Group has use of a receivables-backed working capital facility. Trade receivables are recognised as the Group retains the significant
risks and benefits. The related funding is shown as a financial liability and accounted for on an amortised cost basis.
2.22 Standards and Interpretations not yet effective
There are no standards and interpretations other than IFRS 15 and 16 that are issued but not yet effective at the date of authorisation of
these financial statements that the Group reasonably expects will have an impact on disclosures, financial position or performance when
applied at a future date. IFRS 16 – Leases will change the way the Group currently accounts for property operating leases. None of the
standards that became effective during the year had a material impact on the preparation of the financial statements.
3. Critical accounting judgements and key sources of estimation uncertainty
3.1 Critical judgements in applying the Group’s accounting policies
In the process of applying the Group accounting policies, the following judgements have had a significant effect on the amounts
recognised in the financial statements:
Internally generated research and development costs
Management monitors progress of internal research and development projects. Judgement is required in distinguishing the research
phase from the development phase. Development costs are recognised as an asset when all criteria are met and a project has passed the
feasibility phase, whereas research costs are expensed as incurred. Management monitors whether the recognition requirements for
development costs continue to be met. This is necessary as the economic success of any product development is uncertain.
38
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 3.2 Key accounting estimates and assumptions
Key assumptions concerning the future and other key sources of estimation uncertainty that have a significant risk of causing a material
adjustment to the carrying amounts of assets and liabilities within the next financial year are as follows:
Impairment of intangible assets and property, plant and equipment
The Group tests goodwill at least annually for impairment, and whenever there is an indication that the asset may be impaired. All other
intangible assets and property, plant and equipment are tested for impairment when indicators of impairment exist. Impairment is
determined with reference to the higher of fair value less costs to sell and value in use. Value in use is estimated using discounted future
cash flows. Significant assumptions are made in estimating future cash flows about future events including future market conditions,
future growth rates and appropriate discount rates. Changes in these assumptions could affect the outcome of impairment reviews.
Details of the main assumptions used in the assessment of the carrying value of the Group’s cash generating unit is set out in note 11.
Impairment of investments and intercompany balances (applies to the Company Financial Statements only)
The Directors have reviewed the carrying value of the intercompany balances and cost of investments in subsidiaries of the Company with
reference to current and future trading conditions. The investment and intercompany balances between the Company and Corero Network
Security, Inc. and Corero Network Security (UK) Limited have been reviewed with reference to a valuation based on a discounted free cash
flow which the Directors consider to be an appropriate valuation methodology, in conjunction with the goodwill impairment review.
Going Concern
The Directors have reviewed the future profit and cash flow projections in conjunction with the current economic climate in order to
express an opinion on the adequacy of working capital and the ability to continue as a going concern for the foreseeable future. The
methodology contained in the projections is detailed in the note 2.2.
Best Estimated Selling Price - Revenue Recognition
On a quarterly basis the Group analyses the selling prices for each deal compared to the current BESP. Analysis includes grouping similar
deals based on qualitative factors such as customer profile, size, and region followed by quantitative comparison to the then current
BESP. BESP fair value prices are adjusted for future quarters if management identifies a pattern of variances, greater than 10%, between
actual selling prices versus the then current BESP.
4. Segment reporting
Business segments
The Group is managed according to one business unit Corero Network Security which makes up the Group’s reportable operating
segment. This business unit forms the basis on which the Group reports its primary segment information to the Board, which
management consider to be the Chief Operating Decision maker for the purposes of IFRS 8 Operating Segments.
The Group’s revenues from external customers and its non-current assets are divided into the following countries:
USA
UK
Belgium
Other European countries
APAC
UAE
Total
2016
Revenue
$’000
5,151
2,135
507
788
45
146
8,772
2016
Non-current
assets
$’000
17,890
134
–
–
–
–
2015
Revenue
$’000
3,668
3,491
–
803
297
81
2015
Non-current
assets
$’000
27,099
–
–
–
–
–
18,024
8,340
27,099
Revenues from external customers are identified on the basis of invoicing systems and adjusted to take into account the difference
between invoiced amounts and deferred revenue adjustments required by IFRS. The 2015 UK revenues include a significant contribution
from the previous generation products which were announced as end of life in 2015.
39
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 4. Segment reporting continued
The revenue is analysed as follows for each revenue category:
Hardware and licence revenue
Maintenance and support services revenue
Total
5. Loss for the year
The following items have been included in arriving at the loss for the year before taxation:
Impairment of goodwill (note 8)
Amortisation of acquired intangible assets (note 9)
Amortisation of capitalised development expenditure (note 10)
Impairment of capitalised development expenditure (note 10)
Depreciation of property, plant and equipment (note 11)
Operating lease rentals payable
Auditor’s remuneration
Remuneration received by the Company’s auditor for the audit of these Financial Statements
The audit of the accounts of other group companies
Fees payable to the Company’s auditor for corporate services
Fees payable to the Company’s auditor for taxation compliance services
2016
$’000
4,019
4,753
8,772
2016
$’000
8,992
325
2,252
–
551
325
2015
$’000
2,879
5,461
8,340
2015
$’000
–
1,210
2,446
843
675
384
2016
$’000
2015
$’000
76
18
9
24
127
84
15
–
21
120
40
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 6. Tax on loss on ordinary activities
Deferred tax credit for the year
2016
$’000
85
2015
$’000
382
The tax assessed on the loss on ordinary activities for the year differs from the weighted average UK corporate rate of tax of 20% (2015:
20.25%). The differences are reconciled below:
Total tax reconciliation
Loss before taxation
Theoretical tax credit at UK Corporation tax rate 20% (2015: 20.25%)
Effect of:
– expenditure that is not tax deductible
– R&D tax credits
– accelerated capital allowances
– other timing differences
– losses not utilised
– deferred tax credit
Actual taxation credit
(17,263)
(3,453)
1,806
(35)
(11)
(1)
1,694
85
85
(11,615)
(2,352)
428
(130)
(6)
–
2,060
382
382
Factors affecting future tax charges
As at 31 December 2016, the Group’s cumulative fixed asset timing differences were $62,000 (2015: $12,000) and no deferred tax asset
has been recognised in respect of these items.
In addition, the tax losses at that date amounted to $72.8 million (2015: $65.3 million). This comprised UK tax losses of $12.1 million and US
tax losses of $60.7 million. $9.0 million of the tax losses relate to pre-acquisition US tax losses which can be offset against taxable profits
over 15 years (there is a limit on the utilisation of pre-acquisition tax losses of $0.7 million per annum and any unused loss may be carried
forward to subsequent periods). All other US tax losses will expire in 20 years from the end of the accounting period in which the loss
arose. UK tax losses do not expire.
The deferred tax assets of $2.1 million (2015: $2.0 million) at a rate of 17.1% relating to the UK tax losses and the deferred tax assets of
$21.3 million (2015: $19.0 million) at a rate of 35% relating to the US tax losses and taxable temporary fixed asset differences have not
been recognised due to uncertainties as to the extent and timing of their future recovery.
7. Loss per share
Loss per share is calculated by dividing the earnings attributable to ordinary shareholders of the Company by the weighted average
number of ordinary shares in issue during the year. The effects of anti-dilutive ordinary shares resulting from the exercise of share
options are excluded from the calculation of the loss per share. Therefore the diluted loss per share is equal to the loss per share.
2016
weighted
average
number of 1p
shares
Thousand
2016
loss per
share
Cents
189,959
(9.0)
2016
loss
$’000
(17,178)
2015
weighted
average
number of 1p
shares
Thousand
132,761
2015
loss
$’000
(11,233)
2015
loss per
share
Cents
(8.5)
Basic and diluted loss per share
41
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 8. Goodwill
Group
Cost
At 1 January 2015
At 31 December 2015
At 31 December 2016
Impairment
At 1 January 2015
At 31 December 2015
Impairment
At 31 December 2016
Carrying amount
At 31 December 2016
At 31 December 2015
At 1 January 2015
$’000
17,983
17,983
17,983
–
–
(8,992)
(8,992)
8,991
17,983
17,983
Goodwill is tested at least annually for impairment and whenever there are indications that goodwill might be impaired.
Goodwill is allocated to the Group’s single cash-generating unit (CGU) Corero Network Security (“CNS”).
The recoverable amount for the CNS CGU was determined based on a discounted cash flow calculation using cash flow projections over a
10 year period (2015: 10 year period). The key assumptions for the discounted cash flow calculation are those regarding revenue growth
and discount rates as summarised in the table below and commented on below:
Forecast cash flow period
Extrapolated cash flow period
2016
2015
Years 1–2
Years 1–2
Years 3–10
Years 3–10
Cumulative annual growth rate (CAGR) for revenue used for the forecast/extrapolated periods
19.6%
21.8%
Average revenue growth rates used for the forecast/extrapolated periods:
Year 1–2 (forecast period)
Years 3–5 (extrapolated period)
Years 6–10 (extrapolated period)
Revenue growth rate used beyond the extrapolated period
Discount rate
33.1%
28.2%
9.9%
2.5%
16.5%
89.1%
18.2%
4.0%
1.5%
18.0%
42
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued The pre-tax cash flows for the forecast period are derived from the most recent financial budget for the year ending 31 December 2017
and the plan for the year ending 31 December 2018 approved by the Board, with a sensitivity to reflect prior years forecast inaccuracies
(25% applied to the 2017 budget and 35% to the 2018 plan). The extrapolation for the period 2019 to 2026 is based on management
estimates (with the key assumptions set out below).
The future pre-tax cash flows are discounted by a WACC of 16.5%.
The key assumptions underlying the cash flow projections and which the recoverable amount is most sensitive to are (i) the revenue
growth rates forecast and extrapolated for the period 2019 to 2023 and (ii) the discount rate.
The cash flow forecasts assume a CAGR revenue growth of 30.2% in the period 2016 to 2021 (33.1% for the period 2016 to 2018) and 9.9%
for the period 2021 to 2026 (a CAGR of 19.6% for 10 year forecast period). These growth rates reflect a sensitivity of 25% applied to the
CNS 2017 budget revenues and a sensitivity of 35% applied to the 2018 plan revenues (and a sensitivity of 12.5% to 2017 operating costs)
and a sensitivity of 17.5% to 2018 operating costs) to reflect risk associated with historic forecast accuracy.
The management of the Group believe these growth rates are appropriate for the forecasts given the expected impact from the
SmartWall sales traction in 2016, the expected addition of go-to-market partners to expand the opportunities Corero can sell into and
the “as-a-service” model introduced in late 2016, all of which are expected to deliver a step change in revenue in the forecast period.
These growth rates are supported by the fact that the IT security market is forecast to grow strongly for the foreseeable future.
Worldwide spending on information security will reach $81.6 billion in 2016, an increase of 7.9 % over 2015, according to an August 2016
published forecast from Gartner (compared to an overall forecast for IT spend in 2016 of $3.4 trillion, a decrease of 0.3% over 2015).
The global cybersecurity market is expected to be worth $202.4 billion by 2021 at a compound annual growth rate (CAGR) of 10.6% from
2015 to 2021, according to a report from Markets and Markets (report dated July 2016).
The DDoS appliance market is expected to reach $1.03bn by 2020 (Source: IHS Technology Research - DDoS Prevention Appliances
Worldwide, Biannual Market Tracker (December 2016) – a CAGR or 14.9% in the period 2015 to 2020.
The above market growth rates used in the future cash flow assumptions reflect that CNS is in the early stages of the commercial
exploitation of its intellectual property. In addition, the business’ strategy is to continue to develop its product and solution offerings to
remain a market leader in its chosen markets thereby providing the opportunity to generate above market average growth rates.
The growth rate assumed in the period beyond the 10-year extrapolation period of 2.5% is considered reasonable as historically IT spend
has exceeded GDP growth.
The discount rate is based on a cost of equity using the Capital Asset Pricing Model with the key inputs being a risk-free interest rate
estimate of 2.44% (based on 10 year US government bonds) (2015: 3.0%), comparable company betas, an equity risk premium of 7.4%
(2015: 7.4%), and small company risk premium of 4.5% (2015: 4.5%). The WACC has been assessed based on that fact that the Company
had no gearing at 31 December 2016. The WACC used in the valuation reflects current market assessments of the time value of money
and the risks specific to CNS.
As stated above, the valuation to support the value in use of the CNS CGU is highly sensitive to changes in cash flow forecasts and
discount rate assumptions, and there is no guarantee that the expected growth will be achieved. If the discount rate is increased by 50%,
which in the assessment of management is reasonably possible, from 16.5% to 24.8%, this would result in a further impairment of
goodwill with the result that the goodwill would be fully impaired. If the sensitivity of 25% applied to the CNS 2017 budget revenues and
35% applied to the 2018 plan revenues (and a sensitivity of 12.5% to operating costs) was increased to 40% for revenue (and a sensitivity
of 20% to operating costs), which in the assessment of management is reasonably possible, this would result in a further impairment of
goodwill with the result that the goodwill would be fully impaired.
Apart from the considerations in determining the value in use of the CNS CGU described above, the management of the Group is not
currently aware of any other reasonably possible changes that would necessitate changes in its key estimates.
43
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 9. Acquired intangible assets
Group
Cost
At 1 January 2015
Additions
At 31 December 2015 and at 1 January 2016
Additions
At 31 December 2016
Amortisation
At 1 January 2015
Charge for year
At 31 December 2015 and at 1 January 2016
Charge for year
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 1 January 2015
Company
The Company has no intangible fixed assets (2015: $nil).
Computer
software
$’000
Customer
relationships
$’000
5,924
37
5,961
32
5,993
(4,466)
(1,182)
(5,648)
(263)
(5,911)
82
313
1,458
197
–
197
–
197
(107)
(28)
(135)
(62)
(197)
–
62
90
Total
$’000
6,121
37
6,158
32
6,190
(4,573)
(1,210)
(5,783)
(325)
(6,108)
82
375
1,548
44
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 10. Capitalised development expenditure
Group
Cost
At 1 January 2015
Additions
At 31 December 2015 and at 1 January 2016
Additions
At 31 December 2016
Amortisation
At 1 January 2015
Charge for year
Impairment
At 31 December 2015 and at 1 January 2016
Charge for year
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 1 January 2015
Total
$’000
10,850
2,285
13,135
2,533
15,668
(2,226)
(2,446)
(843)
(5,515)
(2,252)
(7,767)
7,901
7,620
8,624
The impairment recorded during 2015 of $843,000 related to expenditure on previous generation products. Corero announced the
previous generation products end of life in mid-2015 which allowed customers to purchase products and support up to 31 December 2015
and on an exception basis in 2016. Having identified that these products would no longer generate cash inflows in the future sufficient to
support their carrying value, management determined an impairment should be recorded.
Company
The Company has no capitalised development expenditure (2015: $nil).
45
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 11. Property, plant and equipment
Group
Computer
Equipment
$’000
Fixtures and
Fittings
$’000
Office
Equipment
$’000
Leasehold
Improvements
$’000
Cost
At 1 January 2015
Additions
Disposals
At 31 December 2015 and at 1 January 2016
Additions
Disposals
Foreign currency translation
At 31 December 2016
Depreciation
At 1 January 2015
Charge for year
Disposals
Foreign currency translation
At 31 December 2015 and at 1 January 2016
Charge for year
Disposals
Foreign currency translation
At 31 December 2016
Net book value
At 31 December 2016
At 31 December 2015
At 1 January 2015
3,682
387
(835)
3,234
578
(841)
(6)
2,965
(2,534)
(657)
835
1
(2,355)
(539)
835
1
(2,058)
907
879
1,148
Company
The Company has no property, plant and equipment (2015: $nil).
12. Investments in subsidiaries
Company
Net book value
At 1 January
Additional investment in Corero Network Security, Inc.
Investment in Corero Network Security (UK) Limited
Provision against investment in subsidiaries
Foreign currency translation
At 31 December
46
94
–
–
94
43
(67)
(1)
69
(78)
(6)
–
–
(84)
(8)
67
–
(25)
44
10
16
126
5
–
131
–
(131)
–
–
(126)
(1)
–
–
(127)
(1)
128
–
–
–
4
–
77
–
–
77
23
(77)
(1)
22
(66)
(11)
–
–
(77)
(3)
77
–
(3)
19
–
11
2016
$’000
28,797
5,576
12,038
(20,565)
(4,709)
21,137
Total
$’000
3,979
392
(835)
3,536
644
(1,116)
(8)
3,056
(2,804)
(675)
835
1
(2,643)
(551)
1,107
1
(2,086)
970
893
1,175
2015
$’000
42,747
6,197
–
(17,835)
(2,312)
28,797
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued The Directors have reviewed the carrying value of the cost of investments in subsidiaries of the Company with reference to current and
future trading conditions and a valuation based on a discounted free cash flow which the Directors consider to be an appropriate valuation
methodology, in conjunction with the goodwill impairment review (note 8) and concluded that an impairment of the investment balances
was required. As at 31 December 2016 the provision against investment in subsidiaries was $36.0 million (2015: $18.5 million).
Included in the Company’s investment in Corero Network Security, Inc. is a loan note instrument. These loan notes bear interest at 5% per
annum that at the election of Corero Network Security, Inc. is payable quarterly or added to the principal amount. In November 2016 the
loan notes repayment date was amended to 31 October 2021, previously 31 October 2016.
Loan note instrument
The Company owns:
2016
$’000
6,378
2015
$’000
7,265
100% of the issued share capital of Corero Network Security, Inc., a company incorporated in Delaware, USA. The company’s business
address is 225 Cedar Hill Street, Marlborough, MA 01752, USA. The principal business of the company consists of the development and
sale of hardware and software security products.
100% of the issued share capital of Corero Group Services Limited, a company incorporated and registered in England and Wales. The
company’s business address is Regus House, Highbridge, Oxford Road, Uxbridge, Middlesex, UB8 1HR. The principal business of the
company consists of providing administration services to the Group.
100% of the issued share capital of Corero Network Security (UK) Limited, a company incorporated and registered in England and Wales.
The company’s business address is 3rd Floor, 53 Hanover Street, Edinburgh, EH2 2PJ. The principal business of the company consists of
providing development and sales and marketing services on behalf of Corero Network Security, Inc.
13. Inventories
Gross inventory
Less: provision for impairment
Net inventory
Net inventory comprises finished goods and raw materials.
Company
The Company holds no inventory (2015: $nil).
14. Trade and other receivables
Trade receivables
Less: provision for impairment
Net trade receivables
Amounts owed by subsidiaries
Other debtors
Prepayments and accrued income
Group
2016
$’000
232
(167)
65
Group
2015
$’000
795
(134)
661
Group
2016
$’000
1,495
–
1,495
–
138
674
2,307
Group
2015
$’000
2,973
–
2,973
–
275
718
Company
2016
$’000
Company
2015
$’000
–
–
–
–
–
–
5,340
15,875
69
–
83
–
3,966
5,409
15,958
47
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 14. Trade and other receivables continued
The banking facility of the Group, summarised in note 16, is secured by assets of Corero Network Security, Inc. Up to 80% of the trade
receivables of Corero Network Security, Inc., included under ‘Group’, can be financed and are therefore secured for credit enhancements.
None of the Company’s trade and other receivables are secured by collateral or credit enhancements.
Amounts due from Group undertakings are recoverable after more than one year from the reporting date.
The age of trade receivables not impaired but past due are as follows:
Not more than 3 months
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
The maturity profile of trade and other receivables is set out in the table below:
Group
2016
$’000
345
345
Group
2015
$’000
125
125
In one year or less, or on demand
In more than one year, but not more than five years
Group
2016
$’000
2,227
80
2,307
Group
2015
$’000
3,738
228
3,966
Company
2016
$’000
Company
2015
$’000
–
5,409
5,409
–
15,958
15,958
Balances due in more than one year, but not more than five years, are presented as non-current in the Statement of Financial Position.
The analysis of trade and other receivables by foreign currency is set out in the table below:
US dollars
UK pound
Group
2016
$’000
2,023
284
2,307
Group
2015
$’000
3,652
314
3,966
Company
2016
$’000
Company
2015
$’000
–
5,409
5,409
–
15,958
15,958
The Group’s foreign currency receivables are denominated in the functional currency of the subsidiaries in which they arise. There is no
impact on the loss for the year from exchange rate movements on such financial instruments.
48
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 15. Trade and other payables
Trade payables
Other payables
Accruals
Group
2016
$’000
767
23
938
1,728
Group
2015
$’000
1,006
7
1,538
2,551
Company
2016
$’000
Company
2015
$’000
–
–
–
–
–
–
202
202
None of the Group or Company’s trade and other payables are secured by collateral or credit enhancements.
The Directors consider that the carrying amount of trade and other payables approximates its fair value.
76% (2015: 67%) of the trade and other payables are due in less than 3 months.
The analysis of trade and other payables by foreign currency is set out in the table below:
US dollars
UK pound
Group
2016
$’000
1,178
550
1,728
Group
2015
$’000
1,784
767
2,551
The Group’s foreign currency payables are denominated in the functional currency of the subsidiaries in which they arise. There is no
impact on the loss for the year from exchange rate movements on such financial instruments.
16. Borrowings
The Group and Company borrowings were $nil (2015: $nil).
The accounts receivable financing facility was not utilised at the year end. The facility bears interest at c.16.8% of the financed value with
a limit of US$1.5 million or 80% of the eligible accounts receivable balance. The funding is secured by a first lien on the corporate assets of
Corero Network Security, Inc. and is guaranteed by Corero Network Security plc.
All receipts for financed assets are payable to a lockbox account held with the provider of the financing facility. The accounts receivable
assets are exposed to the risk of non or late payment by customers. There are no restrictions on the use of the financed accounts
receivable assets.
At 31 December 2016, the Group’s liabilities have contractual maturities which are summarised below. These contractual maturities
reflect the payment obligations which may differ from the carrying values of the liabilities at the balance sheet date.
Group
Trade and other payables
Total
In one year or less,
or on demand
2016
$’000
1,728
1,728
2015
$’000
2,551
2,551
49
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 17. Financial instruments
The Group’s financial instruments are categorised as shown below:
Group
Financial assets
Loans and Receivables:
Trade and other receivables
Cash
Group
Financial liabilities
Financial liabilities at amortised cost:
Trade and other payables
Book Value
2016
$’000
Book Value
2015
$’000
2,307
2,940
5,247
3,248
2,706
5,954
Book Value
2016
$’000
Book Value
2015
$’000
1,728
1,728
2,551
2,551
The Group manages liquidity and credit risk in line with the Financial risk management objectives and policies on page 23.
There are no differences between the fair values and book values held by the Group.
18. Deferred income
Group
Current
More than one year but less than five years
2016
$’000
2,457
855
3,312
2015
$’000
3,791
1,439
5,230
The Group’s deferred income balance will be recognised as revenue evenly over the remaining term of the support agreements in place.
Support agreements expire at various times throughout the year with no particular seasonality.
Company
The Company has no deferred income (2015: $nil).
50
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 19. Deferred tax liability
Group
1 January 2015
Credit to income statement
31 December 2015 and at 1 January 2016
Credit to income statement
31 December 2016
$’000
467
(382)
85
(85)
–
The deferred tax liability relates to the software and customer relationships acquired as part of the Top Layer Networks, Inc. acquisition in
March 2011. The deferred tax liability has been calculated using a US Federal tax rate of 35%. The liability is released to the Statement of
Comprehensive Income - Profit and Loss as the intangible software and customer relationship assets are amortised.
20. Pensions
The Group’s pension arrangements are operated through defined contribution schemes.
Defined contribution schemes
Defined contribution pension costs
2016
$’000
93
2015
$’000
101
21. Share capital
Authorised share capital
The authorised share capital comprises 745,821,970 (2015: 745,821,970) ordinary shares of 1p (1.23c) each.
Issued ordinary share capital
1 January 2015
115,637,416 ordinary shares of 1p each
Issued
50,000,000 ordinary shares of 1p each (1.54c)
31 December 2015 and at 1 January 2016
165,637,416 ordinary shares of 1p each
Issued
37,773,560 ordinary shares of 1p each (1.54c)
6,666 ordinary shares of 1p each (1.32c)
31 December 2016
203,417,642 ordinary shares of 1p each
$’000
1,804
769
2,573
546
–
3,119
On 28 August 2015, 50,000,000 ordinary shares with a nominal value of 1p were issued at 10p (15c) per share by way of a subscription.
On 17 June 2015 the Company purchased the entire deferred share capital of 1,518,000 £2.99 shares for a consideration of 1p (1.57c). The
deferred shares were subsequently cancelled on 22 June 2015.
On 10 May 2016, 37,773,560 ordinary shares with a nominal value of 1p were issued at 22p (34c) per share by way of a subscription, placing and
open offer. On 15 September 2016, 6,666 ordinary shares with a nominal value of 1p were issued at 15p (20c) per share as the result of the
exercise of an option.
On 6 April 2017 Corero will announce a conditional placing and subscription. This Equity Fund Raise is subject to shareholder approval at a
general meeting of the Company on 24 April 2017
51
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 22. Share premium
1 January 2015
50,000,000 ordinary shares of 10p each (15c) less issue costs
31 December 2015 and at 1 January 2016
37,773,560 ordinary shares of 22p each (34c) less issue costs
6,666 ordinary shares of 15p each (20c)
31 December 2016
$’000
50,000
6,835
56,835
10,845
1
67,681
Consideration received in excess of the nominal value of the 37,773,560 shares issued on 10 May 2016 as a result of the subscription,
placing and open offer has been included in share premium, less registration, commission and professional fees of $622,000. The amount
of such directly attributable costs deducted from share premium in 2015 was $78,000.
23. Employees and Directors
Employee expenses during the period
Group
Wages and salaries
Social security costs
Other pension costs (note 20)
Cost of employee share scheme (note 26)
Average monthly numbers of employees (including Directors) employed
Sales and marketing
Technical, support and services
Management, operations and administration
Company
The Company has no employees (2015: nil).
Total
2016
$’000
9,337
840
93
19
Total
2015
$’000
9,377
764
101
(3)
10,289
10,239
2016
Number
2015
Number
19
38
11
68
19
30
12
61
52
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued Employee expenses during the period continued
Directors, being the Key Management personnel
Salary
& fees
$’000
270
216
27
35
27
575
Bonus
$’000
Benefits
$’000
Pension
$’000
Options
$’000
36
27
–
–
–
63
13
8
–
–
–
21
-
22
–
–
–
22
19
14
3
4
3
43
Company
National
Insurance
Contributions
$’000
Total
2016
$’000
Total
2015
$’000
13
42
2
–
2
59
351
329
32
39
32
783
426
409
34
40
31
940
Executive Directors
Ashley Stephenson
Andrew Miller
Non-Executive Directors
Andrew Lloyd
Jens Montanana
Richard Last
Bonus payments of $63,000 were awarded during the period to 31 December 2016 (2015: $255,000).
Richard Last was paid $nil during the period to 31 December 2016 (2015: $1,500) as a contribution to office and secretarial costs.
Andrew Miller has a service contract with a 6 month notice period. A subsidiary company provides for pension contributions (included in
the table above) of 10% of basic salary payable to a personal pension plan.
No Directors were accruing benefits from the Group’s defined contribution pension arrangements (2015: $nil). The Company makes
contributions to Andrew Miller’s personal pension scheme.
Post the year end, Jens Montanana notified the Company that he wished to waive his Non-Executive Director fees for the year ended
31 December 2016 of $35,000. Jens Montanana waived his Non-Executive Director fees for the year ended 31 December 2015 of $40,000.
24. Operating lease commitments
The Group has total future minimum lease payments under non-cancellable operating leases totalling $593,000 (2015: $285,000)
analysed by year of expiry as follows:
Land and building agreements expiring:
Within one year
Within two to five years
Other agreements expiring:
Within one year
Within two to five years
Other operating leases agreements relate to the costs of a co-location provider.
Company
The Company has no operating lease commitments (2015: $nil).
2016
$’000
2015
$’000
21
215
1
356
593
216
62
7
-
285
53
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory
25. Contingent liabilities
Corero Network Security (UK) Limited was in December 2015 awarded a grant of up to £600,000 for a development project over three
years from Scottish Enterprise. Any monies becoming repayable by Corero Network Security (UK) Limited under the terms typical for
such a grant, including not complying with the grant conditions which include requirements to hire employees in Scotland, progress on
the project is not satisfactory, a change of control, are guaranteed by the Company.
26. Share options
The Company has the following share option schemes:
• Enterprise Management Incentive Scheme for its employees, which has been approved by HMRC, 2010 Executive Enterprise
Management Incentive Scheme, which has been approved by HMRC, 2010 Unapproved Share Option Scheme, and
• Deferred Payment Share Plan
In August 2010, 1,257,000 options were granted to certain Directors and employees under the 2010 Executive Enterprise Management
Incentive scheme and 2010 Unapproved Share Option Scheme. The options granted vested immediately upon grant.
All other options granted in 2010–2016 have a three year vesting period, vesting one third on the first anniversary of grant, one third on
the second anniversary of grant and one third on the third anniversary of grant. There are no vesting conditions. Shares acquired on the
exercise of an option may not be sold until the expiry of the second anniversary following the date of option grant.
If an option holder ceases to be in employment or hold office within the Group, options granted shall immediately lapse unless such
cessation is because of the option holder’s death; the option holder’s ill health or disability; the company that employs the option holder
ceasing to be under the control of the Company or such company ceasing to be within the Group; the transfer of sale of the undertaking
or part-undertaking in which the option holder is employed to a person who is neither under the control of the Company nor within the
Group; or any other reason that the Board in its absolute discretion shall determine.
On a cessation of employment or office as set out above, options shall be exercisable to the extent they have vested according to the
terms of the option agreement and the provisions of the relevant share option scheme and must be exercised within 30 days following
such cessation unless it is by reason of death whereby the option holder’s personal representatives must exercise the option within 12
months following the date of the option holder’s death.
On the 18 March 2014, the Enterprise Management Incentive Scheme was extended by ten years to 20 April 2021.
Share options granted at 31 December 2016 were as follows:
Option Holders
Date
granted
Expiry
date
Exercise
price
Enterprise Management Incentive Scheme
Other Holders
March 2011
March 2011
March 2021
36p (59c)
March 2021
40p (65c)
March 2012
March 2022 54.5p (89c)
September 2012 September 2022
43p (70c)
April 2013
May 2014
April 2023
25p (38c)
May 2024
25p (42c)
September 2014 September 2024
25p (41c)
At
1 January
2016
7,000
40,000
30,000
110,000
95,000
48,000
10,000
April 2015
April 2025
15p (23c)
750,000
October 2015 September 2025
15p (23c)
57,000
Granted Exercised
Forfeit
At
31 December
2016
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(7,000)
–
(5,000)
–
(10,000)
(8,000)
–
–
–
– (500,000)
–
40,000
25,000
110,000
85,000
40,000
10,000
750,000
57,000
–
–
–
(5,000)
1,067,000
–
31,305
January 2016
January 2026
20p (29c)
May 2016
May 2026
22.5p (33c)
September 2016 September 2026
15p (20c)
–
–
–
500,000
1,072,000
31,305
54
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued Option Holders
Date
granted
Expiry
date
Exercise
price
2010 Executive Enterprise Management Incentive Scheme
At
1 January
2016
Granted Exercised
Forfeit
At
31 December
2016
Andrew Miller
August 2010
August 2020
25p (41c)
476,000
September 2012
March 2022 54.5p (89c)
80,000
April 2013
May 2014
April 2023
25p (38c)
250,000
May 2024
25p (42c)
362,570
2010 Unapproved Share Option Scheme
Jens Montanana
August 2010
August 2020
25p (41c)
165,000
March 2012
March 2022 54.5p (89c)
April 2013
April 2023
25p (38c)
30,000
80,000
–
–
–
–
–
–
–
January 2016
January 2026
20p (29c)
–
150,000
Richard Last
March 2012
March 2022 54.5p (89c)
April 2013
April 2023
25p (38c)
20,000
60,000
–
–
Andrew Lloyd
January 2016
January 2026
20p (29c)
–
100,000
April 2013
May 2014
April 2023
25p (38c)
May 2024
25p (42c)
60,000
40,000
–
–
January 2016
January 2026
20p (29c)
–
100,000
Ashley Stephenson
March 2012
March 2022 54.5p (89c)
180,000
April 2013
May 2014
April 2015
April 2023
25p (38c)
400,000
May 2024
25p (42c)
1,720,000
April 2025
15p (23c)
200,000
–
–
–
–
Andrew Miller
January 2016
January 2026
20p (29c)
–
700,000
May 2014
April 2015
May 2024
25p (42c)
387,430
April 2025
15p (23c)
300,000
–
–
January 2016
January 2026
20p (29c)
–
500,000
Other holders
August 2010
August 2020
31p (50c)
308,000
March 2011
March 2011
March 2021
36p (59c)
54,750
March 2021
40p (65c)
290,000
September 2011
September 2021
37.5p (61c)
March 2012
March 2022 54.5p (89c)
September 2012 September 2022
43p (70c)
163,500
216,250
14,500
April 2013
April 2023
25p (38c)
307,000
September 2013 September 2023
25p (40c)
40,000
May 2014
May 2024
25p (42c)
1,432,750
September 2014 September 2024
25p (41c)
440,000
April 2015
April 2025
15p (23c)
1,803,000
October 2015 September 2025
15p (23c)
352,000
–
–
–
–
–
–
–
–
–
–
–
–
January 2016
January 2026
20p (29c)
May 2016
May 2026
22.5p (33c)
September 2016 September 2026
15p (20c)
–
–
–
700,000
1,073,000
470,500
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(10,000)
(7,500)
(20,000)
–
476,000
80,000
250,000
362,570
165,000
30,000
80,000
150,000
20,000
60,000
100,000
60,000
40,000
100,000
180,000
400,000
1,720,000
200,000
700,000
387,430
300,000
500,000
308,000
54,750
290,000
163,500
206,250
7,000
287,000
40,000
(378,334)
1,054,416
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(320,000)
(6,666)
(1,453,334)
(75,000)
(700,000)
–
–
–
–
–
120,000
343,000
277,000
–
1,073,000
470,500
11,379,750
5,396,805
(6,666)
(3,499,168)
13,270,721
55
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 26. Share options continued
The closing mid-market price for the Company’s shares at 31 December 2016 was 8.75p (11c) and the high and low for the year was 30.0p
(42c) and 8.375p (10c). There are no performance conditions to be met before share options are exercisable. No options were exercised
and 691,250 options were forfeited in the 12 months to 31 December 2015.
Andrew Miller has a contractual right (granted in March 2011) to purchase 140,000 ordinary shares in the Company from the Employee
Share Ownership Trust at 40p per share pursuant to a grant made to him under the Deferred Payment Share Plan.
None of the Directors holding office at the balance sheet date exercised options during the year.
Share-based payments
The Remuneration Committee can grant options to employees of the Group under the Group’s share option schemes.
Options are granted with a fixed exercise price which is equal to the market price at the date of the grant or higher price determined by
the Remuneration Committee. The contracted life is ten years from the date of grant.
Options are valued using the Black–Scholes option–pricing model.
Options granted
The value of options granted during the year was calculated using the Black–Scholes option pricing model. The following variables and
ranges were used:
Share price at date of grants
Exercise price
Expected volatility
Years to maturity
Risk free interest rate
The following table provides information on all options outstanding at the end of the year:
Weighted average remaining contractual life
Average remaining contractual life
Options exercisable
Exercise price range
Weighted average share price
Weighted average exercise price
Expected volatility
Risk free rate – 5 year gilt rate
Expected dividend yield
2016
2015
13p-21.5p (17c-31c)
13p-14p (20c)
15p-22.5p (20c-33c)
0.2-0.26%
9.0–9.7
0.35–1.18%
15p (23c)
0.2%
9.3-9.8
1.12-1.17%
7.5 years
6.5 years
6,549,444
15p–55p (18c–68c)
21p (26c)
24p (30c)
0.2%–6.4%
0.35%–2.6%
Nil
Volatility is calculated as the standard deviation of the closing daily share price over a period of 24 months prior to the grant date.
Operating expenses in the Statement of Comprehensive Income included a charge of $19,000 (2015: credit $3,000) relating to employee
share-based payments.
56
Corero Network Security plc Annual Report & Accounts 2016Notes to the Financial Statements continued 27. Related parties and transactions
As part of the subscription and placing on 10 May 2016, Jens Montanana contributed $1.2 million and Andrew Miller contributed $22,000
(note 21).
On 30 July 2015, Jens Montanana lent the Company £500,000 pursuant to a share subscription advance by way of a loan agreement
(“the Loan”). The Loan was non–interest bearing if repaid within 60 days, and was repayable on the earlier of (i) the day immediately
following the date upon which the resolution proposed at the general meeting of the Company’s shareholders on 27 August 2015 to
approve the subscription was passed and (ii) 31 July 2016. Part of the subscription monies owed by Jens Montanana to the Company
pursuant to a subscription agreement dated 7 August 2015 was satisfied by the release of the Company of its obligation to repay the
Loan in full on 28 August 2015.
As part of the subscription on 28 August 2015, Jens Montanana contributed $3.0 million gross of the Loan repayment. Andrew Miller
contributed $15,000 and Richard Last contributed $38,000 (note 21).
The Directors consider the Group’s key management personnel to be the Board of Directors of the Company whose compensation is
detailed in note 23.
Company key management compensation was $nil (2015: $nil) as the key management are employed by subsidiaries.
57
Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory Notice of AGM
Notice is hereby given that the annual general meeting (the “AGM”) of Corero Network Security plc (the “Company”) will be held at the offices
of Redleaf Communications, First Floor, 4 London Wall Buildings, London, EC2M 5NT on 20 June 2017 at 10.00 a.m. for the following
purposes:
Ordinary Business
To consider and, if thought fit, pass the following resolutions which will be proposed as ordinary resolutions:
1. Report and accounts
To receive the audited annual accounts of the Company for the year ended 31 December 2016, together with the Directors’ report
and the Auditor’s report on those annual accounts.
2. Re-election of Director
To re-elect Mr Ashley Stephenson, who retires by rotation in accordance with the Company’s articles of association, as a Director of the
Company.
3. Re-election of Director
To re-elect Mr Andrew Lloyd, who retires by rotation in accordance with the Company’s articles of association, as a Director of the
Company.
4. Re-appointment of auditors
To re-appoint BDO LLP as auditors of the Company to hold office from the conclusion of this AGM until the conclusion of the next
annual general meeting at which accounts are laid before the Company.
5. Auditors’ remuneration
To authorise the Directors to determine the remuneration of the auditors.
Special Business
To consider and, if thought fit, pass the following resolutions of which resolution 6 will be proposed as an ordinary resolution and
resolutions 7 and 8 will be proposed as special resolutions:
6. Directors’ authority to allot shares
THAT, in substitution for all existing and unexercised authorities and powers granted to the Directors prior to the date of this
resolution in accordance with section 551 of the Companies Act 2006 (“Act”), the Directors be generally and unconditionally
authorised for the purposes of section 551 of the Act to exercise all the powers of the Company to allot shares in the Company and
grant rights to subscribe for or to convert any security into shares of the Company (such shares and rights to subscribe for or to
convert any security into shares of the Company being “relevant securities”) up to a maximum nominal amount of £678,058.81 on
such terms and conditions as the Directors may determine provided that, unless previously revoked, varied or extended, this
authority shall expire on the earlier of the date falling 15 months after the date of the passing of this resolution and the conclusion of
the next annual general meeting of the Company except that the Company may at any time before such expiry make an offer or
agreement which would or might require relevant securities to be allotted after such expiry and the Directors may allot relevant
securities in pursuance of such an offer or agreement as if this authority had not expired.
7. Disapplication of pre-emption rights
THAT, in substitution for all existing and unexercised authorities and powers granted to the Directors prior to the date of this
resolution in accordance with section 570(1) of the Act and subject to and conditional on the passing of resolution 6, the Directors be
and are hereby empowered to allot equity securities (as defined in section 560(1) of the Act) of the Company for cash, pursuant to the
authority of the Directors under section 551 of the Act conferred by resolution 6 above, and/or by way of a sale of treasury shares for
cash (by virtue of section 573 of the Act), in each case as if section 561(1) of the Act did not apply to such allotment, provided that this
power shall be limited to:
(a) the allotment of equity securities in connection with an offer by way of a rights issue or an offer of equity securities open for
acceptance for a period fixed by the Directors (i) to the holders of ordinary shares in proportion (as nearly as may be practicable)
to their respective holdings and (ii) to holders of other equity securities as required by the rights of those securities or as the
Directors otherwise consider necessary, but subject to such exclusions or other arrangements as the Directors may deem
necessary or expedient in relation to treasury shares, fractional entitlements, record dates, legal or practical problems in or
under the laws of any territory or the requirements of any regulatory body or stock exchange; and
(b) the allotment and/or sale of treasury shares for cash (otherwise than pursuant to resolution 7(a) above) of equity securities up to
a maximum nominal amount of £203,417.64,
58
Corero Network Security plc Annual Report & Accounts 2016 and that, unless previously revoked, varied or extended, this power shall expire on the earlier of the date falling 15 months after the
date of the passing of this resolution and the conclusion of the next annual general meeting of the Company except that the
Company may before the expiry of this power make an offer or agreement which would or might require equity securities to be
allotted (and treasury shares to be sold) after such expiry and the Directors may allot equity securities (and sell treasury shares) in
pursuance of such an offer or agreement as if this power had not expired.
8. Authority to purchase Company’s own shares
THAT the Company be generally and unconditionally authorised for the purposes of section 701 of the Act to make market purchases
(as defined in section 693(4) of the Act) on a recognised investment exchange (as defined in section 693(5) of the Act) of ordinary
shares of £0.01 each in the capital of the Company (“Ordinary Shares”) and to hold such shares as treasury shares (as defined in
section 724(3) of the Act) and/or on such terms and in such manner as the Directors may from time to time determine provided that:
(a) this authority shall be limited to the purchase of Ordinary Shares up to a maximum aggregate nominal value equal to £203,417.64
representing approximately 10 per cent. of the nominal value of the current issued ordinary share capital of the Company;
(b) the minimum price which may be paid for such Ordinary Shares is £0.01 (exclusive of expenses);
(c) the maximum price (exclusive of expenses) which may be paid for an Ordinary Share shall not be more than 5 per cent. above the
average middle market quotations for an Ordinary Share on the relevant recognised investment exchange on which Ordinary
Shares are traded for the five business days immediately preceding the date on which the Ordinary Share is purchased;
(d) unless previously revoked, varied or extended, the authority hereby conferred shall expire at the earlier of the date which is 15 months
from the date of the passing of this resolution and the conclusion of the next annual general meeting of the Company; and
(e) the Company may make a contract or contracts to purchase Ordinary Shares under the authority hereby conferred prior to the
expiry of such authority which will or may be executed wholly or partly after the expiry of such authority and may make a
purchase of Ordinary Shares in pursuance of any such contract or contracts.
Registered Office:
Regus House
Highbridge
Oxford Road
Uxbridge
Middlesex
UB8 1HR
By order of the Board
Duncan Swallow
Company Secretary
5 April 2017
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Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernanceCorporate Directory
Notice of AGM continued
The following notes explain your general rights as a shareholder and your rights to attend and vote at the AGM or to appoint someone
else to vote on your behalf:
Notes:
1. Pursuant to Regulation 41 of the Uncertificated Securities Regulations 2001 (as amended), only those members registered in the register of members of the
Company as at Close of Business on 16 June 2017 (or if the AGM is adjourned, on the day which is two business days before the time fixed for the adjourned AGM)
shall be entitled to attend and vote at the AGM in respect of the number of shares registered in their name at that time. Any changes to the register of members
after such time shall be disregarded in determining the rights of any person to attend or vote at the AGM.
2. Information regarding the annual general meeting, including information required by section 311A of the Act, is available from www.corero.com.
3. CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the AGM to be held at 10.00 a.m.
on 20 June 2017 and any adjournment(s) thereof by using the procedures described in the CREST Manual. CREST personal members or other CREST sponsored
members, and those CREST members who have appointed a voting service provider should refer to their CREST sponsors or voting service provider(s), who will be
able to take the appropriate action on their behalf.
In order for a proxy appointment or instruction made by means of CREST to be valid, the appropriate CREST message (a “CREST Proxy Instruction”) must be
properly authenticated in accordance with Euroclear UK & Ireland Limited’s specifications and must contain the information required for such instructions, as
described in the CREST Manual. The message must be transmitted so as to be received by the Company’s agent, Capita Asset Services (CREST Participant ID: RA10),
no later than 10.00 a.m. on 16 June 2017. For this purpose, the time of receipt will be taken to be the time (as determined by the time stamp applied to the message
by the CREST Application Host) from which the Company’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST.
CREST members and, where applicable, their CREST sponsor or voting service provider should note that Euroclear UK & Ireland Limited does not make available
special procedures in CREST for any particular messages. Normal system timings and limitations will therefore apply in relation to the input of CREST Proxy
Instructions. It is the responsibility of the CREST member concerned to take (or, if the CREST member is a CREST personal member or sponsored member or has
appointed a voting service provider, to procure that his CREST sponsor or voting service provider takes) such action as shall be necessary to ensure that a message
is transmitted by means of the CREST system by any particular time. In this connection, CREST members and, where applicable, their CREST sponsor or voting
service provider are referred in particular to those sections of the CREST Manual concerning practical limitations of the CREST system and timings.
The Company may treat as invalid a CREST Proxy Instruction in the circumstances set out in Regulation 35(5)(a) of the Uncertificated Securities Regulations 2001.
4. If you wish to attend the AGM in person, you should make sure that you arrive at the venue for the AGM in good time before the commencement of the meeting.
You may be asked to prove your identity in order to gain admission.
5. A member who is entitled to attend, speak and vote at the AGM may appoint a proxy to attend, speak and vote instead of him. A member may appoint more than
one proxy provided each proxy is appointed to exercise rights attached to different shares (so a member must have more than one share to be able to appoint
more than one proxy). A proxy need not be a member of the Company but must attend the AGM in order to represent you. A proxy must vote in accordance with
any instructions given by the member by whom the proxy is appointed. Appointing a proxy will not prevent a member from attending in person and voting at the
AGM (although voting in person at the AGM will terminate the proxy appointment). A proxy form is enclosed. The notes to the proxy form include instructions on
how to appoint the Chairman of the AGM or another person as a proxy. You can only appoint a proxy using the procedures set out in these Notes and in the notes
to the proxy form.
6. To be valid, a proxy form, and the original or duly certified copy of the power of attorney or other authority (if any) under which it is signed or authenticated,
should reach the Company’s registrar, Capita Asset Services, PXS, 34 Beckenham Road, Beckenham BR3 4TU, by no later than 10.00 a.m. on 16 June 2017.
7. In the case of joint holders of shares, the vote of the first named in the register of members who tenders a vote, whether in person or by proxy, shall be accepted
to the exclusion of the votes of other joint holders.
8. A member that is a company or other organisation not having a physical presence cannot attend in person but can appoint someone to represent it. This can be
done in one of two ways: either by the appointment of a proxy (described in Notes 1 and 3 to 5 above) or of a corporate representative. Members considering the
appointment of a corporate representative should check their own legal position, the Company’s articles of association and the relevant provision of the
Companies Act 2006.
9. The following documents are available for inspection at the registered office of the Company during usual business hours on any weekday (Saturday,
Sunday or public holidays excluded) from the date of this notice until the conclusion of the AGM and will also be available for inspection at the place of the AGM
from 9.00 a.m. on the day of the AGM until its conclusion:
(a) copies of the Executive Directors’ service contracts with the Company and any of its subsidiary undertakings; and
(b) letters of appointment of the Non-Executive Directors.
60
Corero Network Security plc Annual Report & Accounts 2016
Corporate Directory
Directors
Jens Montanana (Non-Executive Chairman)
Ashley Stephenson (CEO)
Andrew Lloyd (President and EVP Sales & Marketing)
Andrew Miller (CFO)
Richard Last (Non-Executive Director)
Secretary and Registered Office
Duncan Swallow
Regus House
Highbridge
Oxford Road
Uxbridge
Middlesex
UB8 1HR
Nominated Adviser and Broker
Cenkos Securities plc
6.7.8 Tokenhouse Yard
London
EC2R 7AS
Auditor
BDO LLP
55 Baker Street
London
W1U 7EU
Solicitors
Dorsey and Whitney LLP
199 Bishopsgate
London
EC2M 3UT
Bankers
Santander
2 The Forbury
Reading
RG1 3EU
Square 1 Bank
406 Blackwell Street
Suite 240
Durham
North Carolina
27701
USA
Registrars
Capita Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Website address
www.corero.com
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Corero Network Security plc Annual Report & Accounts 2016Strategic ReportGovernance
Registered Office
Regus House
Highbridge
Oxford Road
Uxbridge
Middlesex
UB8 1HR
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Annual Report and
Accounts 2016
Corero Network Security plc