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A LEADER IN REAL-TIME,
HIGH PERFORMANCE,
DDOS PROTECTION.
Corero Network Security plc
Corero Network Security is a leader in
real-time, high-performance Distributed
Denial of Service (“DDoS”) defence solutions.
Service providers, cloud providers and digital
enterprises rely on Corero’s award winning
SmartWall® Network Threat Defense System
and Threat Defense Director (“SmartWall”)
technology to eliminate the DDoS threat.
THE IMPACT OF
DDOS ATTACKS
62%of companies are forecasting
an increase in DDoS spending1
45%of companies consider
DDoS to be a top cyber
security concern2
43%of organisations received
a DDoS attack3
$250k (p/h)
revenue at risk in the face of
a DDoS attack* 4
28%of organisations believe that large scale
Terabit DDoS attacks such as the
Memcached attacks in March 2018
will become the “norm” 3
WHY IS THERE A NEED FOR BUSINESSES
TO ADDRESS DDOS THREATS?
High availability of Cloud services and
applications are critical for modern businesses
and institutions
Any DDoS downtime brings risk:
Lost revenue or loss of control
Operational costs to mitigate or recover
from attacks
Increased costs to retain unhappy
customers and attract new customers
Brand and reputation damage leading
to competitive disadvantage or loss
of confidence
Regulatory fines, legal action, resignations
What is a DDoS attack
A Distributed Denial of Service attack is a cyber threat, in which
multiple 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 provide a smokescreen while they access sensitive corporate
information, and they are doing it in increasingly creative ways
that circumvent traditional security solutions or reduce the
previous effectiveness of DDoS scrubbing centres.
DDoS attacks can be found in a multitude of sizes and are
launched for any reason imaginable. They can now be used to
expose vulnerabilities, to extort payments, and as a smokescreen-
like distraction for other nefarious activities. Today’s organised
criminals are able to focus on the results that they want and simply
buy or rent the malware or botnets they need to get there.
1
2
IHS Markit “Data Center Security Strategies and Vendor Leadership: North America
Enterprise Survey” January 2019
CDW “The Cybersecurity Insight Report” 2018
3
4
*
Neustar “The Changing Face of Cyber Attacks” July 2018
Neustar “Global DDoS Attacks & Cyber Security Insights Report” October 2017
As estimated by 49% of over 1,000 respondents in a Neustar survey
Contents
Overview
01 Highlights
02 At a Glance
06 Our Proposition
Strategic Report
08
Chief Executive’s
Strategic Update
16 Market Overview
20 Business Model
22 Our Strategy
23 Principal Risks and Uncertainties
25
26 Key Performance Indicators
Financial Review
Corporate Governance Report
Governance
28 Board of Directors
30 Chairman’s Introduction
31
39 Committee Reports
40 Directors’ Report
43
Statement of Director’s
Responsibilities
Financial Statements
44
48
Independent Auditor’s Report
Consolidated Statement of
Comprehensive Income
Consolidated Statement of
Financial Position
Company Statement of
Financial Position
Consolidated Statement
of Cash Flows
Consolidated Statement
of Changes in Equity
Company Statement
of Changes in Equity
49
50
51
52
53
54 Notes to the Financial Statements
Notice of AGM
85 Notice of Annual General Meeting
Corporate Directory
88 Corporate Directory
HIGHLIGHTS
INCREASING TRACTION FOR CORERO’S SMARTWALL
SOLUTION FROM TARGET MARKETS.
Revenue
SmartWall revenue growth
23.1%increase over the prior year
SmartWall
Legacy
SmartWall recurring1
revenue growth
43.2%
increase over the prior year
18
17
16
15
18
17
16
15
$10.0m
(2017: $8.5 million)
Reduced EBITDA loss2
$2.1m(2017: restated EBITDA
loss $5.0 million3)
Net cash
$4.4mat 31 December 2018
(2017: $1.4 million)
Loss per share
1.4c
(2017: restated loss per
share 3.0 cents3)
OPERATING HIGHLIGHTS
Global resale partnership with
Juniper Networks (NYSE: JNPR)
Increase in average new
customer order intake value
Perpetual license sales orders
$275,000 (2017: $250,000)
As-a-service contract value
$55,000 per annum (2017:
$40,000)
Follow-on orders from existing
customers $4.4 million
(2017: $2.8 million)
Continued high levels of
customer satisfaction
Services renewal rate remained
strong at 98.5% (2017: 97.5%)
1
2
comprises maintenance, support services and as-a-service recognised revenue
comprises the operating loss less unrealised foreign exchange differences on an intercompany loan,
depreciation excluding DDoS protection as-a-service assets depreciation which is charged to cost of
sales, amortisation and impairment of goodwill. The Directors consider EBITDA to be a better measure
of profitability as it excludes non-cash items
3
restated as a result of a change in accounting policy related to the implementation of IFRS 15 as
explained in note 2.5
For more information
www.corero.com
01
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory
AT A GLANCE
CORERO IS DEDICATED TO IMPROVING
THE SECURITY AND AVAILABILITY OF THE
INTERNET THROUGH THE DEPLOYMENT
OF INNOVATIVE DDOS MITIGATION SOLUTIONS.
DDOS ATTACKS
CONTINUE TO RISE
IN SIZE, FREQUENCY
AND COMPLEXITY,
IMPACTING THE
SECURITY AND
AVAILABILITY OF
THE INTERNET.
“ The simple fact is that
if you’re online, you’re
susceptible to an attack.”
Neustar
Service providers, cloud providers and Internet
connected businesses require real-time protection
against the evolving DDoS threat landscape. The
Corero SmartWall® family of products can be deployed
in various topologies including in-line, scrubbing or
in conjunction with third party network and security
products such as the Juniper MX Series router.
The SmartWall family of products utilises
innovative technology to automatically
and surgically remove DDoS attack
traffic, while allowing good 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 SmartWall
real-time DDoS mitigation solution is
to protect service availability, revenues
and brand reputations from harmful
DDoS attacks.
The Corero solutions are among 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 DDoS protection
as-a-service offering for service providers.
The Corero SmartWall protects against
DDoS attacks in seconds, rather than the
minutes or tens of minutes taken by
legacy solutions.
100%increase in attacks
over 10Gbps*
8attacks per
customer per day*
1 in 5
victims are attacked
again within 24 hours
of an initial attack*
02
*
Source: Corero Full Year
2018 DDoS Trends Report
AUTOMATIC REAL-TIME DDOS PROTECTION
Internet
SmartWall®
Good Traffic Allowed
Attack Traffic Blocked
Protected
Network
Revenue-protecting
real-time DDoS
mitigation product
for service providers
and cloud providers.
Available for rapid
deployment within the
provider’s infrastructure
delivering compelling
ROI.
Revenue and
reputation-protecting
real-time DDoS
mitigation product
for digital enterprises.
Solves for the
scalability* and accuracy
demands of both
service cloud providers
and digital enterprise
businesses.
Corero’s product can
mitigate attacks in less
than one second, unlike
competing technologies
which can take tens
of minutes.
WHY
HOW
WHAT
We believe in a safe Internet protected from cyber attacks.
We strive to eliminate the threat of DDoS attacks.
We do this by combining our patents and algorithms with more than
a decade of cyber security experience and DDoS threat analytics.
Our SmartWall product automatically detects and mitigates DDoS attacks in
seconds allowing our customers to stay open for business during an attack.
PRODUCT OVERVIEW
Corero has a market leading SmartWall
product portfolio endorsed by over 100
customers, many of whom are using it to
protect hundreds or thousands of their
customers. It is recommended by NSS Labs
(the world’s leading independent product
testing laboratory) and selected by Juniper
Networks as their DDoS mitigation solution.
In September 2018, Corero signed a global
partnership with Juniper to sell Corero’s
SmartWall Threat Defense Director
(“SmartWall TDD”) software product in
conjunction with Juniper’s MX Series router.
Juniper and Corero have developed an
integrated solution for network-based
DDoS defence that leverages powerful
capabilities in the latest generation of
Juniper’s MX Series router.
* up to unrivalled tens of terabits of capacity
SmartWall NTD120/280
SmartWall NTD1100
NTD120 Family
10/20 Gbps
Highly Scalable
NTD280 Family
up to 80 Gbps
in 1RU
n x 10 or 20 Gbps
1RU @ 100 Gbps
1Tbps in only 10RU
Smartwall vNTD (Virtual Appliance)
Smartwall TDD (Virtual Appliance)
n x 100 Gbps
N
N
7 x vCPU
@ 10 Gbps
N
KVM
N
N
N
N
vmware
n x m Gbps
Corero SmartWall TDD
Filter
Export
Sampled mirror
of ingress ports
Streaming
telemetry
Filter export
for ingress
Ingress Traffic
Egress Traffic
Juniper Networks MX Series
n x 10 Tbps
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03
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory
AT A GLANCE CONTINUED
CORERO IS A LEADER IN REAL-TIME, HIGH-PERFORMANCE,
SCALABLE DDOS DEFENCE SOLUTIONS FOR SERVICE PROVIDERS,
CLOUD PROVIDERS AND DIGITAL ENTERPRISES.
Automatic real-time
DDoS Protection
Corero protects organisations’ online
systems, information, data, revenues and
brand reputations against the growing
cyber threat of DDoS with dedicated
technology for real-time mitigation of
attacks, allowing good user traffic to
flow uninterrupted.
When an organisation selects Corero to
protect their assets from the threat of
DDoS attacks, they strengthen their
Internet facing security defences and
ensure service availability.
DDoS attacks can be
found in a multitude of sizes
and are launched for any reason
imaginable. They can now be
used to expose vulnerabilities,
to extort payments, and as a
smokescreen-like distraction
for other nefarious activities.
Today’s organised criminals
are able to focus on the results
that they want and simply buy
or rent the malware or botnets
they need to get there.
Corero Cloud Provider customer – single large attack
100000
90000
80000
70000
s
p
b
M
60000
50000
40000
30000
20000
10000
1
0
2
.
2
0
2
.
3
0
2
.
4
0
2
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5
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6
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7
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8
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9
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5
2
2
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6
2
2
.
7
2
2
.
8
2
2
.
9
2
2
.
5 December 2018 – Time (EST)
Good Traffic Allowed
Attack Blocked
Corero US regional Service Provider customer – multi-vector-attack
(eight vectors in a single attack over a 15-minute period)
9000
8000
7000
6000
s
p
b
M
5000
4000
3000
2000
1000
0
4
2
.
1
4
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2
4
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5
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3
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4
1
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5
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3
23 December 2018 – Time (EST)
Good Traffic Allowed
Attack Blocked – UDP IP Fragment
Attack Blocked – DNS Amplification
Attack Blocked – UDP Server Flood
Attack Blocked – uPNP Reply
Attack Blocked – Other
Attack Blocked – NTP MONLIST
Attack Blocked – CHARGEN Response
Attack Blocked – TCP SYN packetz
04
Corero Cloud Provider customer – multiple attacks, of varying sizes, over a single month
40000
35000
30000
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p
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25000
20000
15000
10000
5000
12/01/2018
12/03/2018
12/05/2018
12/07/2018
12/09/2018
12/11/2018
12/13/2018
12/15/2018
12/17/2018
12/19/2018
12/21/2018
12/23/2018
12/26/2018
12/28/2018
12/30/2018
Good Traffic Allowed
Attack Blocked
“ The drivers and target customers are an ever-
widening and diversifying group as enterprises
invest in products for on-premises and
hybrid deployments to increase the speed of
mitigation and decrease costs. Service providers
of all sizes and types are adding (or upgrading)
on-premises capacity because of massive
attacks, network upgrades, and demand from
customers for managed DDoS services.”
IHS Markit research, 19 November 2018.
05
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory OUR PROPOSITION
What we do
Corero provides dedicated technology
for real-time mitigation of DDoS attacks
in seconds, versus the minutes taken by
legacy solutions, allowing good user traffic
to flow uninterrupted.
How we do it
With varied deployment topologies (in-line,
scrubbing, or directly on edge routers) the
SmartWall family of solutions utilise
innovative technology to automatically
and surgically remove DDoS attack traffic.
Corero enables revenue protection,
customer retention and competitive
differentiation in the face of DDoS attacks,
for Internet Service Provider, Cloud Provider
and Digital Enterprise customers.
Protection is provided in cost effective
scaling increments from 1Gbps, 10Gbps
and 100Gbps to tens-of-terabits,
to support customers bandwidth and
inspection requirements.
The Corero solutions are among 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 Cloud
Providers to protect their infrastructure
from DDoS attacks and to deliver high value
DDoS protection services to their customers,
allowing for incremental service revenues.
Corero has combined advances in Intel
x86 multicore CPU technology, Data Plane
Development Kit (“DPDK”) software for
packet processing acceleration, and
high-performance network interface cards
(“NICs”), together with its innovative and
highly efficient software architecture, to
develop a new generation of appliances
providing breakthrough price/performance
for DDoS defence.
SmartWall appliances perform sampled
Deep Packet Inspection (“DPI”) to generate
security metadata from traffic flows. The
internal rules engine examines this metadata
to flag offending packet flows in real-time and
instantly block attacks. At the same time, the
security metadata is streamed to the Corero
SecureWatch Analytics platform, where
further analysis, involving correlation with
other performance metrics and event data,
enables rapid identification of new attack
vectors. SecureWatch Analytics also
formulates new mitigation rules for these
vectors that are distributed out to each
SmartWall instance.
Corero SecureWatch Analytics leverages
Splunk’s analytics engine and provides
robust reporting to transform
sophisticated DDoS event data into easily
consumable dashboards accessed via the
SecureWatch Analytics web portal.
Corero protects Digital Enterprises from
DDoS attacks thereby ensuring availability
and security of Internet services and
applications essential for digital / on-line
businesses and, in the process:
• Protecting revenues by avoiding
downtime and additional post DDoS
attack remediation costs
• Keeping customers happy and
avoiding increased costs for retention
of existing customers and acquisition
of new customers
• Protecting brand and reputation damage
• Avoiding the risk of non-compliance,
legal liability and fines.
06
Network-Based DDos Defense
Across the Expanding Internet
Access Edge
Backbone
Multi-Cloud Edge
Broadband
Mobile
IoT Access
5G Wireless
SD-WANs
Peering
Transit
CDN
DNS
Content
Mobile Apps
Business SaaS
Public Cloud
Private Cloud
The portal allows customer security
operators to monitor and manage incident
response, with the ability to conduct
sophisticated forensic analysis.
Corero’s SmartWall solution is highly
automated, detecting and mitigating
attacks without the intervention of security
analysts or network operators, who may
not even know the network is under attack,
unless they are monitoring Corero’s
dashboard for alerts.
The Corero Service Portal enables a
provider and their customers to gain
visibility into attacks with per-tenant
dashboards. Providers can assign tenant
service levels and automatically distribute
reports which showcase the value of the
protection they are receiving.
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.
Corero’s DDoS defence solution is more
than 99% effective in rapidly detecting and
automatically mitigating real-world attacks
within seconds. This degree of effectiveness,
speed and accuracy would not be possible
without incorporating the results from a Big
Data analytics engine that can perform
analysis of high velocity security metadata.
Big Data analytics also provides the foundation
for machine learning and AI techniques that
can further improve the speed and
effectiveness of DDoS defence. These
techniques may prove very useful in thwarting
future attacks that are more complex than
those seen today.
Next-Generation DDoS Defence
for the Expanding Internet Edge
Corero’s SmartWall solutions deliver high-
performance DDoS protection for customers that
include shared hosting facilities, large enterprises,
government agencies, critical infrastructure providers
and cloud-native digital enterprises such as online
gaming and SaaS providers. Service Providers and
Cloud Providers can deploy SmartWall appliances
always-on at the edge, or in scrubbing centres for
on-demand mitigation; and are also deploying Corero
as a key component of managed security service
offerings. These customers are benefiting from
Corero’s ability to automatically detect and mitigate
DDoS attacks in real-time with a platform that leads
the industry in price/performance.
The SmartWall TDD software is an extension of the
solution that was developed by Corero to meet the
demand for massive-scale, tens-of-terabits, mitigation
by innovatively leveraging the built-in filtering power
of Juniper Networks’ latest generation of
infrastructure edge routing devices. This Juniper-
Corero network-based DDoS defence solution can be
deployed by any provider, large and small, but is
particularly well-suited for mitigating attacks in
large-scale networks supporting a large number of
high speed links (10 Gbps – 100 Gbps) and large
numbers of routers at the Internet edge.
07
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 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 100 customers
and a growing number of GTM
partners including Juniper Networks
and GTT Communications.”
Ashley Stephenson, Corero CEO
Results
Corero revenue for the year ended
31 December 2018 was $10.0 million
(2017: $8.5 million) up 16.6% over the prior
year. Recurring revenue increased to $5.1
million (2017: $4.0 million). The EBITDA loss
reduced significantly to $2.1 million (2017:
restated EBITDA loss $5.0 million).
Revenue growth and progress towards
EBITDA break-even was impacted by the
longer time required to enable new
go-to-market partners and secure
contracts. However, we expect this to
ramp-up in 2019.
Operating performance
against strategy
Corero continued to make good operational
progress. Delivery against our 2018
strategic objectives is summarised below:
Expand routes to market
Grow customer base
• Progress made in the year, with new
customer acquisition to be accelerated:
– Continued demand for the SmartWall
solution (over 100 SmartWall customers
at year end)
– Over $1.5 million order intake for
SmartWall 100Gbps product in 2018
(2017: $0.4 million from initial orders
following product release in
December 2017)
– Juniper global resale partnership
expected to increase customer
numbers in 2019
• 53% growth in sales order intake
from Digital Enterprise customers
Maintain competitive advantage
in real-time DDoS mitigation
• Delivered two new major SmartWall
software releases to customers
• Signed global resale partnership with
Juniper Networks in September 2018
• Developed the SmartWall TDD product for
the Juniper global resale partnership:
– Juniper partnership enabled with SKUs,
sales and support training
• Corero and Juniper are now actively
engaged in a number of prospects and
trials with a strong pipeline of Juniper
customer resale opportunities developing
– Market leading software solution for
DDoS mitigation for large Tbps scale
networks
• Fully integrated 100Gbps DDoS Appliance –
SmartWall NTD1100
– Market leading solution for migration
to 100Gpbs connectivity
08
Market dynamics
Cyber attacks remain one
of the top 5 global risks
Technology continues to promise
significant enhancements to business
models in terms of both driving
competitiveness and revenue growth
through the deployment of digital
strategies and technology platforms.
However, as reported in the World
Economic Forum Global Risks Report for
2019, technology also continues to play a
profound role in shaping the global risks
landscape, with cyber attacks remaining
one of the top 5 global risks in terms
of likelihood.
Corero Network Security plc Annual Report and Accounts 2018 CHIEF EXECUTIVE’S STRATEGIC UPDATE
KEY INSIGHT
DDOS MARKET
TRENDS – CORERO
PREDICTIONS
FOR 2019
The need for real-time
DDoS mitigation will
continue to increase
While we can be confident the record for
the largest DDoS attack will be broken in
the future, it’s difficult to predict when this
will happen or if it will in 2019. However, we
can confidently say that the need for
organisations to deploy solutions which
provide real-time mitigation of DDoS
attacks will increase. These solutions allow
organisations to eliminate attacks in
real-time, allowing good user traffic to flow
uninterrupted, and avoid the risk of costly
outages or downtime.
Organisations will become
more proactive with security
and actively cooperate with
security vendors
As awareness around cybersecurity
increases and regulations like GDPR and
the NIS Directive are brought into force,
organisations will become more proactive
with their security. Organisations will start
taking a more risk-based approach to
security where they assess which threats
could pose the most damage to their
businesses and working to prioritise
security to defend against these incidents.
Organisations will also become more
dependent on vendor collaboration,
where security companies combine their
expertise to develop robust, state-of-the-
art security protection.
The security of Critical
National Infrastructure
will become a top concern
As critical national infrastructure (CNI)
organisations become more reliant on the
Internet, and the IoT, to conduct operations,
the risk of these systems falling victim to
attack will increase. However, awareness
of security within CNI organisations is
increasing and will continue to do so in 2019.
Botnets will continue to
feature heavily in the growing
threat landscape
Despite the upcoming introduction of
legislation around security for connected
devices, IoT devices will still be a key target
for attackers building botnets. These IoT
devices will still be recruited to build large
botnets, similar to that of Mirai in 2016, and
used to launch massive DDoS attacks. This is
why botnets will still be a key concern for
security professionals throughout 2019.
We can confidently say that the need for organisations
to deploy solutions which provide real-time mitigation
of DDoS attacks will increase.
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09
Notice of AGMCorporate DirectoryOverviewGovernanceFinancial Statements
CHIEF EXECUTIVE’S STRATEGIC UPDATE CONTINUED
“ I am delighted to announce the agreement of a global
go-to-market partnership with Juniper Networks for
the sale and support of Corero SmartWall software and
services in conjunction with Juniper’s MX Series.
Many of our common customers have independently
deployed Juniper and Corero products to protect their
networks against DDoS attacks. This new partnership
extends the scalability and automation of DDoS protection
to unprecedented price-performance levels, securing these
networks in real time against large-scale attacks.”
Ashley Stephenson, Corero CEO
25bnIoT-connected
devices by 2021
(Internet World Stats)
Along with email spam, phishing, malware,
DDoS attacks remain a persistent blight
on the Internet. Technically sophisticated
attackers using automated methods for
launching attacks have escalated from an
occasional but often severe nuisance into a
widespread, ever-present and constantly
worsening threat. Corero’s Full Year 2018
DDoS Trends Report shows the average
number of attacks per customer was up
16% over 2017.
An ever-expanding attack surface
The vast complex of public networks
spanning the globe is constantly growing
and evolving, reaching into every corner of
society. New users, endpoints and networks
come online every hour of every day,
presenting bad actors with a constantly
expanding surface with new targets
potentially vulnerable to attacks or
exploitable for launching them.
Financially motivated criminal organisations
and nation state actors bent on cyber warfare
have combined forces with malicious hackers
to pool knowledge and experience to launch
increasingly complex, multi-vector attacks
that are more difficult to detect and mitigate.
The vast majority of DDoS attacks are still
either volumetric in nature – consuming a
high percentage of network bandwidth – or
focused on exhausting protocol-processing
resources in the host systems under attack.
Both types are highly effective in knocking
out Internet applications and services, for
minutes to sometimes hours and with
negative consequences for service providers,
businesses and consumers.
A clear and present danger
Attacks are often launched utilising large-
scale botnets that attackers create by
hijacking poorly secured endpoints, including
servers, PCs, laptops and, in recent years,
consumer IoT devices such as webcams. The
majority (according to Verizon, over 75%)
still leverage amplification techniques
that jack up attack intensity by exploiting
vulnerabilities in Internet services and host
systems to increase the flood of traffic
directed at targets.
10
Internet evolution is shifting the DDoS
battlefield in two directions: out toward
the rapidly growing IoT edge and up into
the hyperscale datacentres supporting
the ever-expanding cloud.
“ Growth in revenue,
retention of existing
clients and broadened
go-to-market strategy
support our 2019
growth ambitions.”
IoT
Infected IoT devices
Botnet Operator
$
DDoS
ISPs carrying DDoS Traffic
$$$
Botnet DDoS Victim
$$$$
Corero Network Security plc Annual Report and Accounts 2018 KEY INSIGHT
RISE OF IOT
DRAMATICALLY
INCREASES THE
ATTACK SURFACE
The Internet of Things (IoT) and the
proliferation of its relatively cheap
internet-enabled devices has opened up a
whole new opportunity for cybercriminals
over recent years. Despite its advantages,
IoT comes with a host of security
challenges. The manufacturers of IoT
devices have been mainly focused on
speed to market, for their next ‘must-have’
product. Security of these devices has not
been a priority and, as a result, they are
typically equipped with the most basic of,
easily bypassed, protection. This makes
them prime targets for hacker infiltration
and takeover, aside from the personal
privacy and security concerns that result
from these security gaps.
Exploitation of these devices, en masse, for
DDoS attacks first came to light in late 2016
with ‘Mirai’, a now infamous botnet
consisting of hundreds of thousands of IoT
devices. Mirai itself was used to launch the
well-publicised attack on Dyn, the Internet
DNS provider, which took down the
websites and services of many of the
largest names on the Internet, for users
on the Eastern seaboard of America, for
several hours. Since then, publication of
the source-code by its author has led to
many variants, of increasing sophistication
and potency.
The real game changer here is the low
barrier to entry this now presents for
those intent on launching damaging DDoS
attacks. The ability to take and modify the
existing Mirai code reduces the level of
knowledge required by a would-be
cybercriminal. And, the simple to use
interfaces they add to these botnets to
turn them into DDoS-for-hire services
means that anyone with a motive can now
leverage them to launch damaging attacks,
often for as little as a few dollars an hour.
The costs are heavily weighted in favour of
those launching attacks – with lost business
and recovery costs for the victims typically
reaching six figures and more.
“ Massive attacks fuelled by billions of connected devices are
the future, and the entire industry is investing and gearing up
solutions to protect against this new generation of attacks.
The move to 5G infrastructure will only compound the problems,
greatly increasing the bandwidth for connected mobile devices
(and the volume of attack traffic they can generate).”
IHS Markit Research, 19 November 2018
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Notice of AGMCorporate DirectoryNotice of AGMCorporate DirectoryFinancial StatementsGovernanceOverview
CHIEF EXECUTIVE’S STRATEGIC UPDATE CONTINUED
Rapid IoT adoption is driving a proliferation
of intelligent devices that will ultimately
exceed the number of user endpoints.
Machine-to-machine connections from
the edge will power a wide range of IoT
applications, healthcare, environmental
sensing and “smart” infrastructure –
cities, buildings, homes and vehicles.
Cybercriminals have already hijacked
consumer IoT devices to create large-scale
botnets and emerging mission-critical
IoT networks will become targets for
potentially catastrophic DDoS attacks.
Cloud-based services supporting mobile
apps, streaming video, e-commerce, SaaS
and enterprise IT are growing at an
astounding rate, deployed in massive
hyperscale data centres consisting of
thousands of servers, which are both
targets for attack and potential launch
platforms. Content delivery networks
(CDNs), that are instrumental in scaling
cloud service delivery, are also targets for
crippling attacks that can disrupt services
for millions of users.
Bandwidth at the Internet edge continues
to scale up. Gigabit consumer broadband is
here, now. Multi-gigabit wireless over 5G
networks is just over the horizon. More
bandwidth at the edge is driving more
capacity in the backbone. Service provider
Internet connections are moving from
10Gbps to 100Gbps. A faster edge enables
higher intensity attacks, and fewer
endpoints are needed to launch crippling
volumetric attacks.
The never-ending battle
DDoS defence is still a never-ending battle.
Attackers discover and exploit vulnerable
hosts or services to launch attacks.
Defenders monitor network activity to
compile a catalogue of attack profiles that
are then used to generate rules to detect
and identify attacks to take the necessary
mitigation actions.
Massive-scale, high-intensity DDoS attacks
measured in hundreds of gigabits, and now
even into the terabits, make headlines, but
the every day battle is fought in an endless
series of smaller-scale skirmishes. High-
intensity attacks may rise for a period of
time but then attackers are forced to
regroup as network defences are mounted
and operators reconfigure or protect
vulnerable hosts. Yet the DDoS attack-and-
defend cycle continues, with no end in sight,
because there is no foolproof method to
eradicate attacks. The Internet is too vast,
complex, decentralised and constantly
evolving. Defenders need to be ever-vigilant
– individually and collectively – to deal with
attacks when, not if, they occur.
Opportunities for Corero
Adoption of faster 100Gbps links
As transit providers start pushing tenants
towards using fractional committed data
rates on 100Gbps connections, for cost and
efficiency, versus two or more individual
10Gbps connections, we expect increased
adoption of 100Gbps links. The challenge with
faster 100Gbps links is that tenants can then
be hit by up to 100Gbps of attack traffic, even
if they are only subscribing to 20Gbps of
regular capacity.
We anticipate demand for Corero’s
SmartWall 100Gbps technology to
accelerate as a result of this and increasing
end-user service-level expectations
resulting in the requirement for Service
Providers, Cloud Providers and Enterprises
to deploy DDoS mitigation technology
upgrades. Corero’s 100Gbps line-rate
appliance ensures each 100Gbps connection
can be automatically protected from DDoS,
without impacting legitimate traffic.
5G will increase DDoS attack risk
Telecoms providers are in a race to
rollout 5G services that will empower
smart devices and the IoT. The new
telecommunications infrastructure
required to enable it will bring a huge leap
in the available bandwidth. This will enable
end-users (both machine and human) to
experience much faster access and
downloads, and share more data across
more devices.
Along with the benefits and opportunities
come new cybersecurity risks. For example,
as more powerful smart devices come
online, the networks hosting these devices
will have an increased attack surface, which
makes them bigger targets for malware,
security breaches and, of course, DDoS
attacks. It also increases the opportunity
for those devices to be harnessed for the
purposes of launching damaging DDoS
attacks against other targets.
12
Corero Network Security plc Annual Report and Accounts 2018 KEY INSIGHT
EMERGING
EVIDENCE OF
INDISCRIMINATE
DDOS ATTACKS
During 2018 Corero observed evidence of attacks that
disrupt larger numbers of victims but exhibit no obvious
or specific targeting.
Questions being asked are:
• Are the attacks trying to disrupt the
Internet in general?
• Are they broad anti-establishment or
anti-nation attacks?
• Are the attacks spread out over wide
ranges to avoid legacy detection
techniques?
• Are the attacks a side effect of increased
use of more aggressive scanning tools?
• Are the observed traffic levels side effects
of targeted campaigns causing indirect
damage as they are leveraged to attack
third parties?
The current assumption is that it’s
most likely a mix of several of the
above scenarios.
In November 2018, during a 24 hour period,
tens of thousands of IP addresses spanning
a wide range of unrelated sites, were
observed to be the target of excessive
traffic rates from the Internet.
The suspicious traffic appeared to be
part of the same event. The traffic levels
were sufficiently elevated to cause an
unprotected site to suffer a service impact
or an outage. It was not possible to account
for the number of victims impacted by this
incident but it is considered likely that the
vast majority of target sites were not
explicitly selected.
The Internet-connected world has grown more complex due
to faster connections, the widespread adoption of Internet
of Things (IoT) devices, and cloud services. Simultaneously,
DDoS threats have become more sophisticated and frequent.
Whilst unlawful in many countries, DDoS-for-hire services are
commonplace and inexpensive.
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Notice of AGMCorporate DirectoryOverviewGovernanceFinancial Statements
CHIEF EXECUTIVE’S STRATEGIC UPDATE CONTINUED
Outlook
Corero enters 2019 following a year of
solid growth in revenue and order intake
and with a significant resale partnership
agreement in place with Juniper Networks.
We are confident about Corero’s prospects
in the short to medium term, with the DDoS
mitigation market fundamentals remaining
strong and market analysts forecasting
double-digit growth, and continue to
believe the business is well placed for
further growth.
Ashley Stephenson
Chief Executive Officer
10 April 2019
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k
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8.5
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P
%
11.0
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5G will power more virtual reality,
artificial intelligence, remote surgery,
and automated machinery, all of which
will rely on highly available and low
latency connectivity. Downtime or service
disruption for networks that support
these critical applications will become
increasingly disastrous (or, at the very
least, much less tolerated).
Any organisation which relies on the
Internet for its business, needs to be
prepared for the increased cyber risks that
5G brings. In particular, Internet Service
Providers now face a significant challenge,
securing their increasingly complex and
exponentially faster networks in an era
where DDoS attacks have grown in
frequency and sophistication. It will be
critical that they prevent DDoS traffic from
disrupting their own network-based service
offerings, as well as those of their customers.
Super-scale DDoS protection
Carriers and other Tier-1 Service Providers
have traditionally adopted a bifurcated
approach to DDoS protection, for reasons
of cost and the practicalities of deploying
the available protection solutions. This
two-tier service results in only the smaller
DDoS attacks being filtered out, with larger
attacks being addressed by blocking all
traffic headed for the target, taking them
offline for the duration. This may have
been more accepted in the past but, as
organisations increasingly rely on their
Internet presence being available 24/7,
this presents an increasing challenge for
service providers.
Recent advances in the inherent traffic
filtering capabilities of network routers,
from vendors such as Juniper Networks, is
enabling a new generation of protection.
Security solutions can now leverage next
generation router filtering to deliver
super-scale protection directly at the
perimeter of a network.
We believe that Corero is the first DDoS
vendor to effectively leverage real-time
infrastructure-based traffic-filtering,
which is enabling protection to be extended
to an unprecedented tens-of-terabits scale.
Combined with Corero’s highly automated
approach, providers can deliver this
super-scale protection at a price-point
that was not previously possible.
14
Corero Network Security plc Annual Report and Accounts 2018 KEY INSIGHT
INCREASE IN
THE USE OF
MULTI-VECTOR
ATTACKS
Multi-Vector vs.
Single-Vector Attacks
There was an increase of 29% in the use of
multi-vector attacks in 2018 compared to
2017. Multi-vector attacks present several
additional challenges for both detection
and mitigation for the following reasons.
• For complete mitigation it is necessary
to recognise each and every vector and
respond with the appropriate mitigation
without impacting legitimate traffic.
• Multi-vector attack rates are usually
additive in terms of bandwidth and packet
rate. The total attack rate will be the sum
of vector1 + vector2 + vector3 etc.
• Multi-vector attacks often exhibit
more variability in rate, as different
vectors join and leave the attack. This
presents challenges for many traditional
detect-and-redirect DDoS solutions that
typically provide partial mitigation
capacity. Making a decision on the
mitigation method (e.g. redirection vs.
blackhole) based on the current attack
rate is flawed as this can vary on a
minute by minute basis.
Multi-vector attack example
• The most common contributors to
multi-vector attacks continue to be
volumetric UDP amplification vectors
including DNS, NTP, Chargen, SSDP
and CLDAP.
• Attackers frequently mix resource
exhausting TCP SYN floods from spoofed
sources to make tracking more
challenging.
• These vectors, and other variants,
are added or subtracted multiple times
during a typical 10 minute attack period.
The aggregate amplitude may vary up
to 10X during the attack as vectors surge
and fade.
Internet resilience can come down to a
fraction of a second. When the Internet goes
down, businesses that rely on that service go down
with it, and DDoS attacks are considered one of the
most serious threats to Internet availability today.
Downtime or latency can significantly impact brand
reputation, customer trust and revenue. Within
Europe, the introduction of the GDPR and NIS
legislation has significantly increased the
risk of punitive fines for cyber-resilience failures.
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Notice of AGMCorporate DirectoryNotice of AGMCorporate DirectoryOverviewFinancial StatementsGovernance
MARKET OVERVIEW
DDOS ATTACKS ARE ACCELERATING IN PURPOSE,
SOPHISTICATION, COMPLEXITY, SCALE AND FREQUENCY.
A wide range of critical cybersecurity issues
face every Internet connected organisation.
These threats include denial of service,
hacking, breach, phishing, fraud, data theft
and exfiltration. These threat vectors
present themselves via the essential
Internet connections that are required to
support the online business.
Today, the vast majority of leading Internet
service providers sell raw Internet transit
capacity. This raw capacity, usually sold via
1Gbps, 10Gbps and increasingly 100Gbps
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 their information security posture
should be prepared to detect and protect
against any associated malicious intent.
Corero focuses on one specific category of
these cyber threats encompassing denial of
service and has developed a real-time DDoS
detection and mitigation solution that
delivers automatic detection and protection
against DDoS attacks.
Businesses and public-sector organisations
are vulnerable to DDoS attacks and recent
years have seen some of the world’s
best-known companies fall victim with,
in some cases, catastrophic impact for
their customers.
The broad range of motives for executing
DDoS attacks, coupled with the relative
ease with which they can be performed,
means that they are carried out by a huge
variety of actors, including; criminal gangs,
activists, terrorist groups and nation state
“bad actors”. Aside from those who are
focused purely on disrupting services, many
of those who carry out DDoS attacks do so
for extortion, as a way to expose other
vulnerabilities, or as a smokescreen to
steal data, or plant malware.
atta
100%
In
cre
cks o
ase in D
er 10
v
D
o
G
b
S
ps
81%attacks lasted less
than 10 minutes
Low volume, short
duration attacks
16
Corero Network Security plc Annual Report and Accounts 2018 Our customers
Corero’s customers are
delighted with our ability
to protect their brand and
revenues in the face of
DDoS attacks. Because of
this we have an extremely
high renewal rate.
Renewal Rate
98.5%
x
o f
N u m b e r
t a c k s o v e r
1 0 G b p s
a t
2
16%
increase in attacks
(2018 v 2017)
While the frequency of attacks is concerning, their size
and duration are also important to highlight.
• 98% of mitigated DDoS attacks were less than 10Gbps
in volume in 2018 (2017: 99%).
• The nature of the DDoS threat landscape is the reason
attack size and duration remains the primary factor in
organisations choosing a DDoS Protection solution.
• The continuing trend is that attacks are getting shorter.
In 2018, 81% of attacks lasted less than 10 minutes; up
from 71% in 2017.
• The long-term trend of a reduction in the percentage of
attacks over 20 minutes continues with further decline
in average duration. In 2018, only 12% of attacks lasted
longer than 20 minutes; down from 19% in 2017.
In summary, attacks below 10Gbps and short duration
attacks continue to dominate with these attacks
trending larger and shorter to evade traditional
protection methods. Only fast acting, automatic,
solutions are able to defend against such attacks.
8attacks per
customer per day
Average attack
per customer
(Source: Corero Full Year 2018 DDoS Trends Report)
Average Duration of DDoS Attacks
Minutes
0 – 5
6 – 10
11 – 20
21 – 30
31 – 60
> 60
2015
63%
17%
7%
8%
3%
2%
2016
54%
18%
8%
11%
4%
5%
2017
58%
13%
10%
7%
6%
6%
Average Size of DDoS Attacks
Size
<1G
1G – 5G
5G – 10G
>10G
2015
87%
9%
3%
1%
2016
77%
18%
4%
1%
2017
82%
14%
3%
1%
2018
65%
16%
8%
4%
4%
4%
2018
82%
13%
3%
2%
(Source: Corero Full Year 2018 DDoS Trends Report)
17
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements
MARKET OVERVIEW CONTINUED
Within a 90-day window,
the trend is that victims
have a 1 in 5 chance (22%)
of being attacked again
within 24 hours and,
during the remainder of
that period, the probability
of follow-up attacks rises
to 1 in 3 (36%).
1 in 5 chance
(22%)
of being attacked again within 24 hours
Risk of
Repeat Attacks
(Source: Corero Full Year 2018 DDoS Trends Report)
Probability of Repeat DDoS Attacks by Elapsed Time
Days
2017 Q1
2017 Q2
2017 Q3 2017 Q4 2018 Q1
2018 Q2
2018 Q3 2018 Q4
<1
25%
23%
23%
22%
20%
21%
22%
23%
2 – 7
8 – 30
31 – 90
9%
4%
2%
8%
8%
4%
9%
7%
3%
8%
7%
3%
7%
6%
3%
7%
6%
3%
7%
5%
2%
6%
5%
2%
When combined with the data indicating that the majority of
attacks also last less than 10 minutes, the repeat attack findings
call into question the efficacy of traditional detect, redirect and
mitigate solutions, that typically need up to ten minutes, or more,
to initiate mitigation.
“ Interface upgrades on
security appliances will
continue in a big way in 2019;
63% of respondents say
upgrading security appliances
to gain access to high-speed
network interfaces is
a purchase driver.”
IHS Markit Research,
“Data Center Security Strategies and
Vendor Leadership – North American
Enterprise Survey” 29 January 2019
18
Corero Network Security plc Annual Report and Accounts 2018 “ Growth continues as nonstop attacks
plague a variety of industries and large
enterprises and as service providers
of all types look to protect their
networks from ever-larger and more
sophisticated attacks fueled by a new
generation of IoT devices and the
botnets they enable. The new normal
for attack sizes is ever increasing, and
mitigation capacity needs to scale with
those attacks.”
IHS Markit Research, 19 November 2018
DDoS market drivers
• Terabit DDoS attacks: 28% of organisations
believe that large-scale Terabit DDoS
attacks, such as the Memcached attacks
in March 2018, will become the “norm” 1
• Explosive Internet traffic growth*: Growth
has driven major carriers to upgrade their
backbone infrastructure to increase
capacity, driving a need for increased
capacity DDoS prevention solutions 2
* global IP traffic will grow from 1.2ZB in 2016 and reach
3.3ZB by 2021
• Mobile network upgrades: 5G-enabled
devices will dramatically increase how
much attack traffic a mobile network bot
can generate 2
• Data centre upgrades and roll-out of
Cloud infrastructure: Large enterprises
and hosting/cloud providers need DDoS
solutions with improved performance,
faster physical interfaces, and advanced
detection and mitigation technologies 2
1 Neustar “The Changing Face of Cyber Attacks” July 2018
2 IHS Markit, DDoS prevention Appliances Market Tracker,
19 November 2018
Corero is targeting a high
growth security market; the
market for DDoS prevention
appliances is forecast by IHS
Markit Technology research,
a leading analyst, to reach
$1.45 billion by 2022 with a
CAGR of 11.0% in that period.
Market
opportunity
19
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements BUSINESS MODEL
THE CORERO BUSINESS MODEL COMPRISES THE DEVELOPMENT, MARKETING
AND SALE OF NETWORK SECURITY PRODUCTS AND SERVICES TO PROVIDE
CUSTOMERS WITH COMPREHENSIVE PROTECTION FROM DDOS ATTACKS.
Price
Cost effective
entry point, with
price/performance
leadership, at
any scale
We apply our
sources of
competitive
advantage…
Automatic
mitigation
Goal 99%
no customer
intervention
required
Scalability
Modular and
distributed, pay as
you grow, for even the
largest Internet service
provider and carrier
networks
Real-time
Immediate
protection –
seconds rather
than minutes
Accuracy
Lowest false positive
rates, eliminate
downtime and
collateral damage
“ One of the main drivers for DDoS prevention
investment is the “increasing volume of highly
visible attacks, including a mix of politically motivated
attacks, state-sponsored electronic warfare, social
activism, organised crime, and good old fashioned
pointless mischief and mayhem, driven by the
easy availability of bots/botnets for hire and easily
distributed crowd-sourced attack tools.”
IHS Markit Research, 19 January 2019
Sales orders intake for the year
ended 31 December 2018
51%
49%
Service Providers and Cloud Providers
Digital Enterprises
20
Corero Network Security plc Annual Report and Accounts 2018 BUSINESS MODEL
Channel
partners
(distributors
and resellers)
Cloud
Providers
Direct sales
To our
chosen target
markets…
To create
value
Service
Providers
Digital
Enterprises
Go-to-market
partners
Routes to market
Corero has, in 2018, focused on developing
and expanding its routes to market which
include:
• Direct sales: Corero sales team selling
directly in its chosen markets of North
America, Europe, and Australia (in certain
markets channel partners are used for
order fulfilment);
• Indirect sales: Value added resellers and
distributors selling the SmartWall solution
to their customer base; and
• Partner sales: The principal partners
SecureWatch managed services include:
• Software updates delivered to the Corero
appliances and software instances in
customer networks, to provide proactive
on-going protection from the latest DDoS
threats; and
• 24x7x365 monitoring and support services
including DDoS attack mitigation tuning
delivered by the highly experienced
Corero Security Operations Centre team.
include Juniper and GTT Communications
who resell the Corero SmartWall solution
or a DDoS protection service to their
customers thereby leveraging these
partner’s customer and geographic
market reach. Further go-to-market
partner relationships will be developed
to amplify Corero’s market reach.
Corero sells the SmartWall technology to
customers in the form of either (a) an
appliance sale and perpetual software
license, plus annual SecureWatch services,
(b) as a software subscription for its virtual
appliance software, or (c) as-a-service which
enables the customer to utilise the
technology on a subscription or revenue
share basis (without owning the appliance
and software).
21
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements OUR STRATEGY
EXECUTING ON THREE-PRONGED GO-TO-MARKET FOCUS.
THE CORERO STRATEGY IS TO DEVELOP
SOFTWARE AND PROVIDE SERVICES TO
PROTECT AGAINST A CONTINUOUSLY EVOLVING
DDOS ATTACK LANDSCAPE THAT THREATENS
ANY INTERNET CONNECTED BUSINESS,
OR THE PROVIDERS THAT SERVE THEM.
Scaling the business
towards profitability
• Three-pronged go-to-market focus:
Investment in sales and
marketing to drive growth
• Sales investment to support growth plans
– Direct sales: Corero sales team
focused on the SmartWall target
market to leverage success to date
– Indirect sales: channel partner
proposition
– Partner sales: close engagement
with go-to-market partners such as
Juniper and GTT Communications and
development of additional partner
relationships
• Channel leverage: utilise Juniper channel
partners given close alignment between
Corero and Juniper’s customer focus
(service providers, cloud providers and
digital enterprises)
• Marketing spend focused on new
customer sales lead generation
Maintaining competitive
advantage
• Incremental product enhancements
with stable R&D investment
– New DDoS attack defences
– New machine learning and artificial
intelligence capabilities
Continuing to focus on
customer delight
• Superior customer service and support
• Target world class support and services
renewal rates of >90%
“ Providers are facing the challenge of securing increasingly
complex and exponentially faster networks. By leveraging
Corero’s SmartWall DDoS detection and mitigation technology
to automatically control Juniper’s SDN-enabled MX Series,
we are able to offer an integrated solution that protects the
Provider Edge against the increasing risk posed by DDoS
attacks. Juniper’s expanded relationship with Corero provides
our customers with additional security options to make the
self-driving network a reality.”
Wayne Cheung, Product Marketing Director, Juniper Networks
“ Juniper Networks
provides the routing
infrastructure for some
of the world’s largest and
most critical IP networks,
including key subscriber,
mobile, enterprise,
government, and academic
networks. “This partnership
raises the bar for automated,
scalable and secure IP
networks by integrating
Juniper’s proven routing
technology and Corero’s
high-performance DDoS
protection, and delivering
the combined solution to
large, strategic customers
through Juniper’s global
sales force and channel.”
Jeff Wilson, Senior Research Director
Cybersecurity Technology, IHS Markit
22
Corero Network Security plc Annual Report and Accounts 2018 PRINCIPAL RISKS AND UNCERTAINTIES
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.
Market
awareness
Technology
change and
innovation
People
Sales
growth
The Company manages these risks by monitoring the key
performance indicators which are set out on pages 26 and 27.
Corero is an emerging player
in the DDoS prevention
market and competes with
much larger organisations. If
Corero is not successful in
connecting with the market
and raising its profile this will
compromise growth plans.
To raise market awareness
of Corero and its DDoS
mitigation solutions, the
Group will invest in targeted
digital marketing and lead
generation programs.
The DDoS mitigation
market is competitive and
characterised by constant
changes in technology,
customer requirements
and frequent new product
introductions and
improvements.
Cybersecurity and DDoS
attacks are constantly
evolving and changing as
attackers develop new
methods and tools to evade
defences.
Corero is focused on its
chosen markets and
delivering continuous
innovation by adding new
DDoS attack defences and
new machine learning and
artificial intelligence
capabilities.
Retaining and recruiting
people with the necessary
skills and experience. To grow
and address the challenges
resulting from technology
change and innovation in
the DDoS mitigation market,
the Company needs to retain
and recruit the required
sales, business development,
and 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.
Corero targets paying in
the upper quartile for
comparable positions and
has a share options plan to
provide an incentive for
employees.
Corero’s business success
depends on growing
SmartWall product and
SecureWatch and DDPaaS
service sales to new
customers in its target
market of service providers,
cloud providers and digital
enterprises. If Corero is not
successful in identifying
customer prospects with
a business need Corero
can solve, or developing
go-to-market partner and
channel partner relationships
which generate revenue, this
will compromise growth
plans and success.
To be successful Corero will:
• Focus its lead generation
and sales resources, and
product development, on
its target markets
• Work closely with
go-to-market partners
and in particular with
Juniper to progress sales
opportunities and
generate revenue
• Develop relationships
with go-to-market
partners, channel
partners and system
integrators to expand its
routes to market.
23
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements PRINCIPAL RISKS AND UNCERTAINTIES CONTINUED
Brexit
The impact of Brexit, whilst giving rise to
uncertainty, is not expected to have a
significant impact on Corero.
• EU customer impact. In the year ended
31 December 2018, 7.5% (2017: 4.4%) of
Corero’s order intake was generated from
customers in the EU (excluding the UK),
and 25.4% from customers in the UK
(2017: 21.9%). Any potential short-term
Brexit related impact on the movement
of goods from the UK is not expected to
materially impact Corero as hardware
products can be shipped to EU based
customers from Corero’s US subsidiary.
• The risk of a downturn in the
UK and EU economies.
Brexit may impact economic conditions in
the UK and EU which may have an impact
of customer’s IT budgets. It is too early to
forecast whether such an impact would
materially impact Corero’s business.
• Sustained reduction in the value of
GBP sterling. Corero equity fund raises
are in GBP and its debt is denominated in
GBP. To the extent such funds are required
to support US dollar denominated funding
requirements, the lower value of GBP
reduces the value of US dollar denominated
funding requirements that can be funded
from such fund raises. The Group mitigates
this risk by utilising US denominated funds
received by the Group’s UK subsidiary to
fund the Group’s US subsidiary to the
extent such funding is required, with the
GBP funding requirements satisfied from
the GBP denominated funds generated
from GBP equity and debt fund raises.
• EU citizen employees UK working
rights. Corero’s UK workforce includes
EU citizens. The UK government has as
part of the Brexit negotiations made a
commitment to allow EU workers
employed at the date of Brexit to apply
for “settled status in the UK”. However,
the uncertainty regarding Brexit is having
a negative impact on such EU citizens.
Corero believes such uncertainty can be
managed and the sufficient talent will be
available post Brexit albeit that salary
costs may increase.
“ We welcome the investment
from a global corporation of
Juniper Network’s reputation
and scale, in addition to our
previously announced global
resale partnership.
We feel this represents a
further endorsement of our
vision for SmartWall products
as a critical component in securing
IT networks from DDoS attacks.
We look forward to working
closely with Juniper to capitalise
on our partnership and jointly
pursuing the market opportunity
for DDoS protection via its global
sales force and channel.”
Ashley Stephenson,
Corero CEO
24
Loss per share
1.4c
(2017: restated loss
per share 3.0 cents2)
Corero Network Security plc Annual Report and Accounts 2018 FINANCIAL REVIEW
CORERO ENDED THE YEAR
STRONGLY, WITH A RECORD
FINAL QUARTER ORDER INTAKE
The 2018 operating loss of $5.0 million (2017:
restated loss $8.5 million2) includes amortisation
of capitalised development expenditure of $2.9
million (2017: $2.4 million). $1.7 million was spent
on the continuing development of the
SmartWall product portfolio (2017: $2.2 million).
The loss for the year after taxation
amounted to $5.2 million (2017: restated
loss $8.4 million2) and includes:
• Unrealised exchange gain of
$0.4 million (2017: loss $0.6 million)
arising on an intercompany loan;
• Finance costs of $0.3 million
(2017: $0.004 million).
The loss for the year reflects the
continuing investment in Corero’s
technology and sales and marketing
activities. Corero is focused on delivering
accelerated sales growth through
expanded routes to market, which, with
gross margins exceeding 75%, is expected
to result in improved profitability and
targeted EBITDA breakeven by the end
of 2019.
• Loss per share 1.4 cents (2017: restated
loss per share 3.0 cents2)
• Group’s net assets at 31 December 2018
$19.0 million (2017: restated $17.6 million2)
Andrew Miller
Chief Financial Officer
10 April 2019
“ The Corero management
team is focused on delivering
on its objective of being
EBITDA profitable and cash
generating by the end of 2019.”
Revenue growth and progress towards
EBITDA break-even was impacted by the
longer time required to ramp up new
go-to-market partners and secure contracts.
Despite this, the EBITDA loss1 decreased by
57.9% over the prior year as a result of a
16.6% increase in revenue and 13.3%
reduction in adjusted operating expenses3 in
the year with a focus on cost management.
1
2
3
comprises the operating loss less unrealised foreign exchange differences on an intercompany loan, depreciation
excluding DDoS protection as-a-service assets depreciation which is charged to cost of sales, amortisation and
impairment of goodwill. The Directors consider EBITDA to be a better measure of profitability as it excludes
non-cash items
restated as a result of a change in accounting policy related to the implementation of IFRS 15
as explained in see note 2.5
operating expenses less unrealised foreign exchange differences on an intercompany loan, depreciation
excluding DDoS protection as-a-service assets depreciation which is charged to cost of sales, amortisation
and impairment of goodwill
up 16.6
Revenue$10.0m
(2017: $8.5 million)
% over the prior year
EBITDA1 loss
$2.1m(2017: restated EBITDA
loss $5.0 million2)
Group’s net assets
at 31 December 2018
$19.0m
(2017: $17.6 million2)
O
v
e
r
v
i
e
w
S
t
r
a
t
e
g
i
c
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e
p
o
r
t
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o
v
e
r
n
a
n
c
e
F
i
n
a
n
c
i
a
l
S
t
a
t
e
m
e
n
t
s
25
25
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements
KEY PERFORMANCE INDICATORS
2
0
1
8
2
0
1
7
2
0
1
6
2
0
1
8
2
0
1
7
2
0
1
6
2
0
1
8
2
0
1
7
2
0
1
6
SmartWall
Revenue
$9.8m
+23.1%
Definition
Represents statutory
revenue for the SmartWall
product, which is generated
from the sales of SmartWall
products and services and
DDPaaS services. This
revenue excludes the
legacy product revenue
of $0.2 million (2017:
$0.6 million).
Performance
SmartWall revenue
increased by 23.1% in 2018.
Sales order intake
$11.1M
+18.9%
Definition
Represents purchase orders
from customers including
multi-year services and
support orders.
Performance
Order intake for the year
ended 31 December 2018
was $11.1 million, with $6.2
million (56.4%)
representing recurring
revenue in the form of
support, services, and
as-a-service contracts
(2017: order intake was $9.3
million including recurring
revenue order intake of
$4.9 million).
The average perpetual
license order value in 2018
was $275,000 (2017:
$250,000), and the average
as-a-service contract value
(excluding revenue share
contracts) was $55,000
per annum (2017: $40,000
per annum).
SmartWall
Recurring Revenue
$4.9m
+43.2%
Definition
Represents maintenance,
support services and
as-a-service revenue for
the SmartWall product
recognised as part of the
statutory revenue for the
year. This recurring revenue
excludes the legacy product
revenue of $0.2 million
(2017: $0.6 million).
Performance
SmartWall recurring
revenue grew by 43.2% in
the year ended 31
December 2018 to $4.9
million (2017: $3.4 million).
Total recurring revenue for
the year ended 31
December 2018 was $5.1
million including $0.2
million relating to legacy
products (2017: $4.0 million
including $0.6 million
relating to legacy products),
representing 51.1% of total
revenue (2017: 47.1%).
Revenue from DDPaaS
contracts increased over
150% to $0.8 million (2017:
$0.3 million).
26
Corero Network Security plc Annual Report and Accounts 2018 2
0
1
8
2
0
1
6
2
0
1
7
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
6
2
0
1
7
2
0
1
8
2
0
1
6
2
0
1
8
2
0
1
7
Gross margin %
EBITDA
Net cash
78.0%
Definition
Represents statutory
gross profit divided by
statutory revenue. It
measures the Group’s
underlying profitability
before overheads.
Performance
Corero’s gross margin in
2018 increased to 78.0%
(2017: 75.1%) as a result of
the increase in services
and DDPaaS revenue.
-$2.1m
+57.9%
Definition
Represents the operating
loss less unrealised foreign
exchange differences on
an intercompany loan,
depreciation excluding
DDoS protection as-a-
service assets depreciation
which is charged to cost of
sales, amortisation and
impairment of goodwill.
The Directors consider
EBITDA to be a better
measure of profitability as
it excludes non-cash items.
Performance
The EBITDA loss reduced
by 57.9% in 2018 to $2.1
million as a result of a
16.6% increase in revenue
and a 13.3% reduction
in adjusted operating
expenses in the year.
$4.4m
+214%
Definition
Represents cash at bank
less total debt.
Performance
The cash at bank balance at
31 December 2018 was $8.0
million (2017: $1.4 million).
The debt balance at 31
December 2018 was $3.6
million (2017: $0). The net
cash used in operating
activities in the year ended
31 December 2018 was $1.8
million (2017: $6.0 million). In
the year ended 31 December
2018, the Company raised
$5.3 million (after costs) from
an equity fund raise in April
2018 and $2.0 million from
an equity investment from
Juniper Networks in October
2018, and concluded and
drew down on a $4.1 million
term bank loan in May 2018.
Security service and
support contract renewals
98.5%
Definition
Renewal rate of annuity
SecureWatch® service
contracts (typically
one-year contracts)
by value.
Performance
Corero continues to
generate market leading
renewal rates of 98.5% in
2018, a strong endorsement
of Corero’s customer
satisfaction. The renewal
rate for the year ended 31
December 2016 reflects
that 2016 was the first
contract renewal cycle
following the SmartWall
product launch in the
second half of 2014. The
number of SmartWall
customers has increased
from less than 30 at 31
December 2015 to over
100 at 31 December 2018.
The Strategic Report on pages 8 to 27
is signed by order of the Board.
Duncan Swallow
Company Secretary
10 April 2019
27
27
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements
Corero Network Security plc
Annual Report and Accounts 2018
BOARD OF DIRECTORS
Jens Montanana (58)
Non-Executive Chairman
COMMITTEE MEMBERSHIP
Richard Last (61)
Independent
Non-Executive Director*
Peter George (60)
Independent
Non-Executive Director
APPOINTED
9 August 2010
BACKGROUND & EXPERIENCE
Jens has spent the majority of his over
30-year career in the technology
industry with considerable operational
and commercial experience in the resale
and distribution of information
technology hardware and software
solutions. He is the founder and CEO of
Datatec Limited, established in 1986
which listed on the Johannesburg Stock
Exchange in 1994. 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 IP
bandwidth management, which was
subsequently sold to Lucent Corporation
in 1999 for $246 million. He has
previously served on the boards and
sub-committees of various public
companies.
CURRENT APPOINTMENTS
CEO of Datatec Limited and Director of
various Datatec Limited subsidiary
companies.
22 May 2008
3 January 2019
Peter George is a US based executive
with over 30 years’ experience in the IT
networking and cybersecurity industry.
He has a successful track record as CEO of
leading IT network and security companies
and provides sales and marketing
leadership experience to the Board.
Peter was most recently President and
CEO of empow cybersecurity, a market
innovator in AI, machine learning and
advanced security analytics. Prior to
empow, between 2008 to 2017, he was
President and CEO of Fidelis Cybersecurity
a leading US-based Advanced Threat
Defense business. Before joining Fidelis,
Peter was President and CEO of Crossbeam
Systems, a market leader in Unified Threat
Management. Prior to that he was the
President of Nortel Networks’ enterprise
business where he was responsible for
growing a $2 billion and 5,000 employee
voice and data business in EMEA.
Director of EJ2 Communications Inc.
(trading as Flashpoint).
Richard has over 20 years’ senior
experience in information technology
having worked at board level for a
number of publicly quoted and private
companies in the technology sector.
He is a Fellow of the Institute of
Chartered Accountants in England
and Wales (“FCA”).
*As Richard Last is a Corero shareholder (0.5%
of the Corero issued share capital) and holder
of share options (830,000 options), and has been
a Non-Executive Director of the Company for over
10 years, his independence has been considered
by the Board. The Board is satisfied that Richard
Last is independent.
Chairman of ITE Group plc which is
quoted on the London Stock Exchange.
Chairman of AIM listed Gamma
Communications plc, a UK
telecommunications service provider,
Tribal Group plc, a technology company
and Arcontech Group plc, a provider of IT
solutions for the financial services sector.
In addition Richard is chairman of BSC
VCT2 Plc and Lighthouse Group plc
(Richard will be stepping down from both
of these boards in the near future).
28
Nominations and
Remuneration Committee
Audit, Risk and
Compliance Committee
Ashley Stephenson (60)
Chief Executive Officer
Andrew Miller (55)
Chief Financial Officer
Duncan Swallow (54)
Company Secretary
COMMITTEE MEMBERSHIP
APPOINTED
6 September 2013
9 August 2010
1 November 2007
BACKGROUND & EXPERIENCE
Ashley is an IT industry executive and
Internet technology entrepreneur, with
operating experience in the United
States, Europe and Asia. His previous
experience includes: CEO of Reva Systems,
which was acquired by ODIN, and CEO of
Xedia Corporation, which was acquired
by Lucent. He has provided strategic
advisory services to a number of leading
multinational 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 is an Associate of the Royal
College of Science.
Ashley has deep technology and software
development skills and experience.
Ashley also acts as Corero’s Chief
Technology Officer.
CURRENT APPOINTMENTS
Eyealike, Inc.
StepVest LLC
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.
Prior to joining the Company, Andrew
was with the Datatec Limited group in
a number of roles between 2000 and
2009 including Logicalis Group
Operations Director and Corporate
Finance and Strategy Director. He ran
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.
Andrew is a Chartered Accountant with
over 15 years’ experience in the
technology industry.
None
None
29
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory Corero Network Security plc
Annual Report and Accounts 2018
CHAIRMAN’S INTRODUCTION
CORERO IS WELL PLACED
FOR ACCELERATED GROWTH.
“ I am pleased to present
Corero’s Corporate Governance
Report for the year ended
31 December 2018.”
Board commitment
to governance
The Board is committed to upholding high
standards of corporate governance,
protecting and growing shareholder value,
and engaging in a fair and transparent
manner with all of the Group’s stakeholders.
The Board therefore supports and is
committed to the principles of the QCA
Corporate Governance Code which was
published on 25 April 2018 and which has
been applied by Corero with effect from
28 September 2018.
The Board takes responsibility for
approving the Group’s long-term goals and
strategies, and provides overall financial
and organisational control. The Board also
ensures that the Group has appropriate
and effective internal control and risk
management systems.
Board leadership
and effectiveness
The Board recognises that to remain
effective it must ensure that it has the right
balance of skills, experience, knowledge and
independence to enable it to discharge its
duties and responsibilities. The Directors
believe in the necessity for challenge and
debate in the boardroom and consider that
existing Board dynamics and processes
encourage honest and open debate with
the Executive Directors. We have for the
first time conducted an internal Board
evaluation review earlier this calendar year.
The review showed that the Board is
operating effectively.
Board composition
The Board currently comprises two executive
Directors and three Non-Executive Directors
(including the Chairman), two of whom are
independent. Peter George was appointed to
the Board on 3 January 2019 to both broaden
our US reach and deliver a greater balance of
independence to our Board.
The notice of AGM will include a resolution
to reappoint Richard Last and Ashley
Stephenson who retire by rotation in
accordance with the Company’s Articles
of Association, and Peter George who was
appointed since the last AGM.
Our culture
Successful companies have a strong culture
and deeply rooted shared values. In common
with most intellectual property businesses,
at Corero, we know that the skills,
experiences and passion of our employees
are genuinely what make our products and
services market leading. The Corero culture
has been shaped by both our long-standing
experience in the United States and our
more recent expansion into Europe.
With a growing business, the level of team
diversity and multi-site operations, we have
recognised the importance of our culture
and values. Corero’s agreed values, which
have been defined in conjunction with our
employees, are:
• Integrity
• Customer delight
• Innovation
• Open and honest communications
• Empowerment
Corero has invested in an online tool,
known as Kudos, which is being used to
acknowledge, reinforce and measure the
values-supporting behaviours and actions
taken by Corero team members.
The Board undertakes informal enquiries
of employees to ensure these values are
upheld and promoted to ensure a healthy
corporate culture. Board meetings are
held at Corero’s offices in the US and UK
which gives the Board the opportunity
to informally interact with employees
based at those office locations.
2018 performance
Corero’s revenue of $10.0 million for the
year ended 31 December 2018 was below
expectations as a result of the longer time
required to ramp up new go-to-market
partners and secure contracts. Corero has
continued to manage its cost base with
adjusted operating expenses in 2018 13.3%
below the prior year; this contributed to the
significant reduction in the Group EBITDA
loss for the year of $2.1 million (2017:
restated EBITDA loss $5.0 million).
To achieve the stated goal of being EBITDA
positive and cash generative by the end of
2019, the focus for Corero is to scale its
revenue by executing on its three-pronged
go-to-market focus of direct sales, indirect
channel sales and partner sales.
In order to capitalise on the recently
announced global resale partnership
agreement with Juniper and to focus on
maximising revenues from both direct and
new go-to-market indirect sales channels,
Corero intends to expand its US-based
management team which will include the
appointment of a head of global sales.
Strategic focus
Corero is focused on delivering a step
change in revenue and scaling the business
for profitability. In SmartWall, Corero has
a market leading product and the
development focus is to maintain this
competitive advantage.
Looking ahead
Corero enters 2019 against a backdrop
of positive momentum underpinned by
a broader go-to-market strategy and
a stronger new business pipeline.
Management is focused on delivering
revenue growth, adding new customers,
and targeting being EBITDA positive and
cash generative by the end of 2019.
I would like to give thanks to our
institutional and private investors for
their continued support. Finally, thank
you to all our employees for their hard
work and commitment.
Jens Montanana
Chairman
10 April 2019
30
CORPORATE GOVERNANCE REPORT
CORERO HAS APPLIED ALL TEN PRINCIPLES
DETAILED IN THE QCA CODE.
The Board recognises the importance of sound corporate governance and have developed
governance policies appropriate for the size of the Group. Corero is committed to compliance
with the provisions of the QCA Corporate Governance Code (“the QCA Code”) published by
the Quoted Companies Alliance. The following is a list of the 10 core principles of the QCA
Code applied by the Company.
#1
ESTABLISH A STRATEGY
AND BUSINESS MODEL
TO PROMOTE LONG-
TERM VALUE FOR
SHAREHOLDERS
#2
UNDERSTANDING
AND MEETING
SHAREHOLDERS
NEEDS AND
EXPECTATIONS
#3
TAKE INTO ACCOUNT
WIDER STAKEHOLDER AND
SOCIAL RESPONSIBILITIES
AND THEIR IMPLICATIONS
FOR LONG-TERM
SUCCESS
#10
COMMUNICATE HOW
THE COMPANY IS GOVERNED
AND IS PERFORMING BY
MAINTAINING DIALOGUE
WITH SHAREHOLDERS
AND OTHER RELEVANT
STAKEHOLDERS
APPLIED
CODE PRINCIPLES
#4
EMBED EFFECTIVE
RISK MANAGEMENT,
CONSIDERING BOTH
OPPORTUNITIES AND
THREATS, THROUGHOUT
THE ORGANISATION
#9
MAINTAIN GOVERNANCE
STRUCTURES AND
PROCESSES THAT ARE
FIT FOR PURPOSE
AND SUPPORT GOOD
DECISION-MAKING BY
THE BOARD
#8
PROMOTE A
CORPORATE CULTURE
THAT IS BASED ON
ETHICAL VALUES AND
BEHAVIOURS
#6
ENSURE THAT BETWEEN
THEM THE DIRECTORS HAVE
THE NECESSARY UP-TO-DATE
EXPERIENCE, SKILLS AND
CAPABILITIES
#7
EVALUATE BOARD
PERFORMANCE
BASED ON CLEAR AND
RELEVANT OBJECTIVES,
SEEKING CONTINUOUS
IMPROVEMENT
#5
MAINTAIN THE
BOARD AS A
WELL-FUNCTIONING,
BALANCED TEAM LED
BY THE CHAIR
31
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory CORPORATE GOVERNANCE REPORT CONTINUED
#1
ESTABLISH A STRATEGY
AND BUSINESS MODEL TO
PROMOTE LONG-TERM VALUE
FOR SHAREHOLDERS
#2
UNDERSTANDING AND
MEETING SHAREHOLDERS
NEEDS AND EXPECTATIONS
Corero’s strategy is focused on the following key areas:
• Scaling the business for profitability
• Investment in sales and marketing to drive sales growth
• Maintaining competitive advantage
• Continuing to focus on customer satisfaction
The Company is focused on maintaining high gross margins,
a high proportion of recurring revenue, and an appropriate
operating cost base with the goal of being EBITDA profitable
and cash generating by the end of 2019.
The key challenges in the execution of the Company’s strategy,
and risk factors, are:
• Sales growth
• Market awareness
• Technology change and innovation
• Retention of senior management and employees
All of these are covered in greater detail in the Strategic
Report on pages 8 to 27.
Corero is committed to listening and communicating openly
with its shareholders to ensure that is strategy, business
model and performance are clearly understood.
Understanding the views of analysts and investors, and
seeking an active dialogue to help these audiences understand
the Corero business, is important to driving the business
forward. Corero does this via investor roadshows, attending
investor conferences and regular financial reporting.
Corero engages with shareholders in the following ways:
• Meetings with institutional and material private
shareholders (those holding more than 1% of Corero
issued shares) as part of the year end and interim results
announcement roadshows. The Board is kept informed of
the views and concerns of any major shareholders, with any
significant reports from analysts circulated to the Board.
• The Chairman meets with major shareholders at least annually.
• Attendance at private investor conferences and forums.
Shareholders will be informed of such events by Corero
issuing an RNS Reach announcement.
• Corero utilises both regulatory and non-regulatory channels
to keep shareholders informed on Company progress and
performance.
• Corero engages with shareholders and responds to
questions sent by email to investorrelations@corero.com.
In addition, Corero’s AGM is a forum for dialogue with all
shareholders. The Notice of AGM is sent to shareholders at
least 21 days prior to the meeting.
Corero’s web site, under the “Investors” section, contains
information to satisfy shareholder needs.
Andrew Miller, Corero’s CFO, is primarily responsible
for shareholder liaison. Andrew can be contacted on
+44 1895 876 382 or by email at andrew.miller@corero.com.
If shareholders wish to discuss any matters with Corero’s
Chairman, Jens Montanana, he can be contacted by email at
jens.montanana@corero.com.
32
Corero Network Security plc Annual Report and Accounts 2018 #3
TAKE INTO ACCOUNT WIDER
STAKEHOLDER AND SOCIAL
RESPONSIBILITIES AND
THEIR IMPLICATIONS FOR
LONG-TERM SUCCESS
#4
EMBED EFFECTIVE RISK
MANAGEMENT, CONSIDERING
BOTH OPPORTUNITIES AND
THREATS, THROUGHOUT
THE ORGANISATION
Corero recognises that long-term success is underpinned
by good relations with its key stakeholders, both internal
(workforce) and external (suppliers, customers, regulators
and others). As part of Corero’s annual planning and budgeting
process, the Company identifies its stakeholders and their
respective needs, interests and expectations. In addition,
the strategy for engaging with these stakeholder groups is
formulated and implemented. Corero values feedback from
its stakeholders and proactively endeavours to address any
matter identified. To date feedback has been gathered from:
customers and partner feedback relating to Corero’s products
and services; employees as part of quarterly Company
updates; and shareholders.
The Directors believe that the employees of the Company
are one of its most important assets and the continued and
sustained development of the Company relies on its ability to
retain and attract employees of a high standard. Corero is
proud to have over one-third of its employees with more than
five years’ service.
The Corero equal opportunities policy ensures that all job
applicants and employees are treated fairly and without
favour or prejudice. We are committed to applying this policy
throughout all areas of employment, recruitment and
selection, training, development and promotion.
Employees are regularly informed of matters concerning their
interest and the financial factors affecting the Company. The
Company uses company-wide forums to communicate matters
as well as team and individual meetings.
Corero is committed to promoting sustainability. We aim to
follow and to promote good sustainability practice, to carry
out our operations in a way which manages and minimises any
adverse environmental impacts from our activities.
Corero encourages the reuse or recycling of office waste,
including paper, packaging, computer supplies and redundant
equipment. Wherever possible Corero ensures that waste
materials are disposed of in an environmentally safe manner
and in accordance with regulations.
The Company operates a risk assessment process, which is
embedded in day-to-day management and governance
processes. As part of the annual planning and budgeting
process, Corero management document 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 Board reviews the annual risk assessment including an
annual assessment of the effectiveness of the Company’s
internal control system, comprising financial, operational
and compliance controls, to ensure that the Company’s risk
management framework identifies and addresses all relevant
risks in order to execute and deliver the Company’s strategy.
The Directors are responsible for the Company’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 Company’s system of internal
control is designed to manage, rather than eliminate, the risk
of failure to achieve the Company’s business objectives and
can only provide reasonable, and not absolute, assurance
against material misstatement or loss.
The Company 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, and
forecasts to the Board.
The Audit, Risk and Compliance Committee (“ARCC”) reviews the
effectiveness of internal controls. The ARCC 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 for consideration. The auditors report, assessment
of the effectiveness of the internal control system and key
judgements report for the Annual Report and Accounts for the
year ended 31 December 2017 were tabled and reviewed by the
ARCC during the year ended 31 December 2018, as well the
Corero Risk Register and Stakeholder Analysis.
Given the size of the Company, the Board has concluded it is
not appropriate to establish a separate, independent internal
audit function. The Board will keep this under review.
33
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory CORPORATE GOVERNANCE REPORT CONTINUED
#5
MAINTAIN THE BOARD
AS A WELL-FUNCTIONING,
BALANCED TEAM LED
BY THE CHAIR
The Board
The Board sets Corero’s overall strategic direction, reviews management performance and ensures that the Company has the
necessary financial and human resource in place to meet its objectives. The Board is satisfied that the necessary controls and
resources exist within the Company to enable these responsibilities to be met.
Operational management of the Company is delegated to the Chief Executive Officer.
The Board comprises the Non-Executive Chairman, two Executive Directors and two independent Non-Executive Directors whose
Board and Committee responsibilities are set out below:
Non-Executive /
Executive Director
Non-Executive
Non-Executive
Non-Executive
Executive
Executive
Board
Chairman
Member
Member
Member
Member
Audit, Risk and
Compliance
Committee
Nomination and
Remuneration
Committee
Member
Chairman
Chairman
Member
Member**
Jens Montanana
Richard Last
Peter George*
Ashley Stephenson
Andrew Miller
* appointed 3 January 2019
** appointed 8 April 2019
The composition of the Board is reviewed regularly. Appropriate
training, briefings, and inductions are available to all Directors on
appointment and subsequently as necessary, taking into account
existing qualifications and experience.
The Director employment and service contracts are summarised
below:
Non-Executive Directors, per their letters of appointment, have
a time commitment to the Company of not less than eight days
per annum including the attendance of Board meetings and the
Company AGM. In addition, Non-Executive Directors are
expected to devote appropriate preparation time ahead of
each meeting.
• Ashley Stephenson has an employment agreement which
provides for the payment of six months’ base salary if the
agreement is terminated by the Company without cause.
• Andrew Miller, Executive Director, has an employment
agreement which can be terminated by either party on not
less than six months’ written notice. The agreement contains
provisions for early termination in certain circumstances.
• The Non-Executive Directors letters of appointment 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.
One third of all Directors are subject to annual reappointment
by shareholders as well as any Director appointed to the Board in
the period since the last AGM, any Non-Executive Director whose
tenure is more than nine years or whose independence is the
subject of Board judgement. Richard Last and Ashley Stephenson
will be offering themselves for re-election at the forthcoming
AGM, as well as Peter George who was appointed since the
Company’s last AGM.
The Board meets on average once a quarter; additional meetings
or conference calls are held as required. 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.
34
Corero Network Security plc Annual Report and Accounts 2018 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.
The Board has a formal schedule of matters reserved to it for
consideration and approval. These include:
Strategy and management
• Responsibility for the overall strategy and management of
the Company
• 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
• Changes relating to the Company’s capital structure
• Delegation of the Board’s powers and authorities
Financial matters and internal controls
• Oversight of the Company’s operations ensuring competent
and prudent management, sound planning and management
of adequate accounting and other records
• Approval of the annual and interim financial statements and
accounting policies
• Approval of the dividend policy
• Ensuring an appropriate system of internal control and risk
management is in place
Corporate Governance
• 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 Nominations and Remuneration
Committee, approval of remuneration policies
• Consideration of the independence of the Non-Executive
Directors
• Receiving reports on the views of the Company’s shareholders
The Board receives monthly briefings on the Company’s
performance (including detailed commentary and analysis), key
issues and risks affecting the Company’s business.
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 2018, the Board met on four
scheduled occasions; further meetings and conference calls were
held as and when necessary (with five additional such meetings
in the year ended 31 December 2018). Details of Directors’
attendance at scheduled meetings in the year to 31 December
2018 is shown in the table below:
Meetings attended
Jens Montanana
Richard Last
Ashley Stephenson
Andrew Miller
Andrew Lloyd*
9/9
9/9
9/9
9/9
9/9
* appointment terminated on 4 January 2019
Note: Peter George was appointed on 3 January 2019
Directors’ conflict of interest
The Company has effective procedures in place to monitor and
deal with conflicts of interest. The Board is aware of the other
commitments and interests of the Directors, and changes to
these commitments and interests are reported to and, where
appropriate, agreed with the rest of the Board.
35
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory CORPORATE GOVERNANCE REPORT CONTINUED
#6
ENSURE THAT BETWEEN
THEM THE DIRECTORS HAVE
THE NECESSARY UP-TO-DATE
EXPERIENCE, SKILLS AND
CAPABILITIES
#7
EVALUATE BOARD
PERFORMANCE BASED
ON CLEAR AND RELEVANT
OBJECTIVES, SEEKING
CONTINUOUS IMPROVEMENT
The Board is satisfied that, between the Directors, it has an
effective and appropriate balance of skills and experience,
including operational, commercial and technology expertise
and experience. All members of the Board have at least 15
years’ technology experience through investing in and working
for a range of companies from start-ups to large established
technology companies, with complementary financial,
commercial, sales and marketing skills.
All Directors are able to take independent legal advice in
relation to their duties, if necessary at the Company’s expense.
In addition, the Directors have direct access to the advice and
services of the Company Secretary and Chief Financial Officer.
The Directors keep their skills up to date through a
combination of their other roles (if applicable), attending
appropriate training courses and seminars funded by the
Company if appropriate, and by reading widely.
Corero’s Chairman, Jens Montanana, is a material shareholder
with an equity interest in Corero of 38.4% at 9 April 2019, and
is the Company’s largest shareholder. His interests are
strongly aligned with all shareholders.
The Corero Board members biographies and their relevant
experience, capabilities and skills and are set out on pages 28
and 29.
There are no external advisers to the Board or any of its
committees, other than the auditors (BDO LLP).
It has not been deemed necessary to formalise a training and
development programme for each Director.
Corero has established a Board effectiveness review to enable
the Board to stand back and assess its strengths and areas for
development. This review will be conducted internally and will
be performed annually. The first such review was conducted in
January 2019. The review showed that the Board is operating
effectively. The recommendations following this review were:
• Annual away-day strategy review to be held.
• Chairman to meet with each Director annually to undertake
a formal review of each individuals’ performance,
development plans and performance of the Board and
committees.
The Board plans to refresh the performance assessment
process based on external advice and if appropriate engage a
third-party facilitator to assist in the performance of such
effectiveness reviews every three years.
Given Corero’s size, the Company does not have internal
succession candidates for the Executive Directors. In the event
an Executive Director replacement is required, the Company
would seek to recruit a replacement through a recruitment
search process. The Board are satisfied that the Company’s
middle management will ensure the Company’s business is not
adversely impacted in the period between an Executive
Director leaving and a replacement being recruited.
The Corero NRC reviews and recommends nominees as new
Directors to the Board. Senior management appointments are
required to be approved by the Corero NRC.
The performance of the Executive Directors is measured
against the internal budget with a performance related bonus
for exceeding the internal budget targets.
The members of the NRC do not have any conflicts from
cross-directorships that relate to the business of the
committee. The members of the NRC do not have any
day-to-day involvement in the running of the Group.
The NRC’s remit is to measure the performance of and
determine the remuneration policy relating to Directors and
senior employees. To support this responsibility, it has access
to professional and other advice external to the Group. Taking
the performance factors into account, it then makes
recommendations to the Board.
36
Corero Network Security plc Annual Report and Accounts 2018 #8
PROMOTE A CORPORATE
CULTURE THAT IS BASED
ON ETHICAL VALUES AND
BEHAVIOURS
Corero recognises the importance of culture and values
and in conjunction with employees defined the Company’s
agreed values:
• Integrity
• Customer delight
• Innovation
• Open and honest communications
• Empowerment
Corero has invested in an online tool, known as Kudos, which
is being used to acknowledge, reinforce and measure the
values-supporting behaviours and actions taken by team
members.
The Corero equal opportunity policy sets out the Company’s
position on equal opportunity in all aspects of employment.
The policy has been developed to maintain the following
policy objectives:
• To provide a safe and welcoming environment, in which
individuals are valued, included and respected;
• To eliminate unfair discrimination;
• To advance equality of opportunity; and
• To foster good relations between different groups of people.
To assist the work of the NRC, the views of the Chief Executive
Officer and Chief Financial Officer are also invited where
appropriate. However, they do not participate in any decision
related to their own remuneration.
The Group is committed to the governing objective of
maximising shareholder value over time. Each year the
remuneration framework and the packages of the Directors
are reviewed to ensure they continue to achieve this objective.
The Group operates in the cyber security market which is a
market with significant growth potential. It is also a
competitive market with a number of players who are
significantly larger than Corero. The Group’s executive
Director remuneration policy is designed to attract and retain
Directors of the calibre required to maintain the Group’s
position in its marketplace. This is maintained through the use
of bonus and share option schemes, as follows:
Bonus
A cash bonus designed to incentivise specific short-term
financial goals. Goals and objectives are set for the executive
Directors with a significant weight being put on meeting and
exceeding key financial performance metrics. Executive
Directors’ bonuses are set at two-thirds of base salary.
Share options
Share options are granted to encourage and reward delivery
of the Company’s long-term strategic objectives and provide
alignment with shareholders through the use of share-based
incentives.
All share-based incentives offered to Directors have a 3-year
vesting schedule, with one-third vesting on the first
anniversary of the grant/start date, a further third on the
second anniversary of the grant/start date and the final third
the third anniversary of the grant/start date. Shares acquired
on the exercise of options may not be sold until the second
anniversary of the grant date. Share options are granted with
an exercise price set at the higher of market price or such
other price as determined by the NRC.
37
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory CORPORATE GOVERNANCE REPORT CONTINUED
#9
MAINTAIN GOVERNANCE
STRUCTURES AND PROCESSES
THAT ARE FIT FOR PURPOSE
AND SUPPORT GOOD
DECISION-MAKING BY THE
BOARD
#10
COMMUNICATE HOW THE
COMPANY IS GOVERNED
AND IS PERFORMING BY
MAINTAINING DIALOGUE WITH
SHAREHOLDERS AND OTHER
RELEVANT STAKEHOLDERS
The Company communicates with shareholders through the
Annual Report and Accounts, full-year and half year results
announcements, the AGM and one-to-one meetings with
institutional and material private shareholders and potential
new shareholders. A range of corporate information (including
Company announcements and presentations) is also available
to all shareholders, investors and the public on the Company
website www.corero.com/investors
The Board receives regular updates on the views of
shareholders through briefings and reports from the
Chairman, Chief Executive Officer, Chief Financial Officer and
the Company’s brokers and financial public relations advisers.
The Company communicates with institutional and material
shareholders through briefings with management, and with
retail shareholders and potential investors through investor
conferences. The Company conducts regular updates to
maintain an open dialogue with employees and reviews with
customers as part of its strategy to maintain high levels of
customer delight.
The Board
The Board sets Corero’s overall strategic direction, reviews
management performance and ensures that the Company has
the necessary financial and human resource in place to meet
its objectives. The Board is satisfied that the necessary
controls and resources exist within the Company to enable
these responsibilities to be met.
Audit, Risk and Compliance Committee
(“ARCC”)
The ARCC has responsibility for planning and reviewing the
Group’s interim and preliminary reports and accounts.
The ARCC determines the application of the financial reporting
and internal control and risk management procedures and the
scope, quality and results of the external audit.
Nominations and Remuneration Committee
(“NRC”)
The remuneration committee is responsible for the policy
for the remuneration of the executive Directors and senior
management.
The NRC reviews and recommends nominees as new Directors
to the Board and reviews the performance of the Executive
Directors and sets the remuneration of the Executive
Directors. In addition, the NRC determines the payment of
bonuses to Executive Directors and approves the Company’s
bonus and incentive arrangements for employees.
Evolution of the Company’s governance
framework
The Board will on an on-going basis, and as the Company’s
business develops and grows, review the appropriateness of
the governance framework, including the composition of the
Board and the requirement for an internal audit function, to
ensure the Company delivers on its strategy and goals whilst
maintaining appropriate governance structures.
38
Corero Network Security plc Annual Report and Accounts 2018 COMMITTEE REPORTS
Audit, Risk and Compliance Committee
(“ARCC”) Report
The ARCC members comprise Richard Last, who is the
Committee Chairman, and Jens Montanana, and meets at least
twice a year. The Company’s Chief Financial Officer and Group
Financial Controller, and the Company’s external auditors attend
the meetings.
In the year ended 31 December 2018, the ARCC met on two
occasions. The attendance of individual Committee members at
ARCC meetings in the year to 31 December 2018 is shown in the
table below:
Nominations and Remuneration Committee
(“NRC”) Report
The NRC comprises Peter George (appointed the Committee
Chairman on 8 April 2019), Jens Montanana (who was the
Committee Chairman up to 8 April 2019), and Richard Last.
The NRC meets at least twice a year.
In the year ended 31 December 2018, the NRC met on two
scheduled occasions; further meetings and conference calls were
held as and when necessary (with four additional such meetings in
the year ended 31 December 2018). The attendance of individual
Committee members at NRC meetings in the year to 31 December
2018 is shown in the table below:
Richard Last
Jens Montanana
Meetings
attended
2/2
2/2
Richard Last
Jens Montanana
Meetings
attended
6/6
6/6
The ARCC’s activities during the year, based on its terms of
reference, are set out below:
• Reviewed the scope and results of the external audit, its cost
effectiveness and the objectivity of the auditors.
• Reviewed prior to publication, the interim financial statements,
preliminary results announcement, the annual financial
statements and the other information included in the Annual
Report.
• Considered the regulatory, technical and operational risks of
the Company and ensured these risks are properly assessed,
monitored and reported on and the appropriate policies and
procedures are in place
The key financial reporting judgements relating to the financial
statements for the year ended 31 December 2018 which the ARCC
have considered and discussed with the auditors, include:
Financial
Statements
note
Going concern basis for financial statements
Revenue recognition and the application of IFRS 15
Carrying value of goodwill and intangible assets
2.2
2.5
8
The ARCC are satisfied with the treatment in the financial
statements and the disclosure in the notes.
Note: Peter George was appointed to the NRC on 8 April 2019
The NRC’s activities during the year, which are based on its terms
of reference, are set out below:
• Reviewed and recommended nominees as new Directors to
the Board.
• Reviewed the performance of the Executive Directors and set
the remuneration of the Executive Directors.
• Determined the payment of bonuses to Executive Directors
and approved the Company’s bonus and incentive arrangements
for employees.
• Ensured the Company’s share option schemes were operated
properly and approved the share option grants to Executive
Directors and employees.
The remuneration of the Chairman and Non-Executive Directors is
decided upon by the Board.
Details of Directors’ remuneration for the year ended 31 December
2018 is set out in note 22 of the financial statements. Jens
Montanana has elected to waive the fees payable to him for
the financial year ended 31 December 2018.
39
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory The market price of the ordinary shares at
31 December 2018 was 12.5p and the shares
traded in the range 5.5p to 13.35p during
the year.
Issue of shares
At the AGM held on 5 June 2018,
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 £1,283,276.20.
Also at the AGM held on 5 June 2018,
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 £384,982.86 without application
of the statutory pre-emption rights
contained in section 561 (1) of the Act.
DIRECTORS’ REPORT
Group results
The Group’s Statement of Comprehensive
Income on page 48 shows a loss for the
year of $5.2 million (2017: restated loss
$8.4 million).
Going concern
The financial position and cash flows are
described in the Financial Review on pages
25 to 27. An indication of likely future
developments affecting the Company is
included in the Strategic Report on pages
8 to 27.
The Directors are, based on detailed
financial projections, of the opinion that the
Group and Company 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 financial projections take into account
the operational progress made by the
Company over the past year and future
opportunities as described in the Chief
Executive Strategic Update on pages 8 to 15,
and the Group’s Strategy as detailed on
page 22 which is focused on scaling the
business towards profitability.
On this basis, the Directors have therefore
concluded that it is appropriate to prepare
the financial statements on a going concern
basis. The financial statements do not
include the adjustments that would result
if the Group and Company was unable to
continue as a going concern. Further details
are included within notes 2 and 3 to the
financial statements.
However, the ability of the Company and
Group to achieve the future profit and cash
flow projections cannot be predicted with
certainty. Failure of the Company and the
Group to meet these projections and deliver
revenue growth may adversely impact the
achievability of the bank loan covenants
which may result in the bank loan being
required to be repaid before the maturity
date if the revenue covenants are not met
and cannot be renegotiated. This would
adversely impact the Company and the
Group’s working capital position and would
require the Company to raise additional
funding, with no guarantee such funding
would be secured. Taken together, the
achievability of the projections and
availability of additional funding if required
indicate a material uncertainty that may
cast significant doubt on the Company and
the Group’s ability to continue as a going
concern for the foreseeable future.
Dividends
The Directors have not recommended a
dividend (2017: $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 20 to the
financial statements.
As at the date of this report, 401,995,161
ordinary shares of 1p each (“ordinary
shares”) were in issue and fully paid with an
aggregate nominal value of $5.7 million.
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 10 April 2019:
Ordinary shares of 1 pence each
Jens Montanana*
Miton UK Microcap Trust PLC
Richard John Koch
Herald Investment Management
Sabvest Capital Holdings Limited
Peter Kennedy Gain**
Juniper Networks Inc.
Number
154,382,609
61,223,917
32,936,500
30,306,406
28,000,000
21,278,246
17,008,969
%
38.40
15.23
8.19
7.54
6.97
5.29
4.23
*
of which 25,987,889 are held in the name of JPM International Limited, which is wholly owned by Jens Montanana, and 94,258,302 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
40
Corero Network Security plc Annual Report and Accounts 2018 Directors’ shareholdings
9 April 2019
31 December 2018
31 December 2017
Number
154,382,609
2,000,000
–
38,000
1,091,437
–
%
38.4
0.5
–
0.0
0.3
–
Number
154,382,609
2,000,000
–
38,000
1,091,437
400,000
%
38.4
0.5
–
0.0
0.3
0.1
Number
138,000,000
1,316,667
–
38,000
1,091,437
300,000
%
43.8
0.4
–
0.0
0.4
0.1
Jens Montanana
Richard Last
Peter George
Ashley Stephenson
Andrew Miller
Andrew Lloyd*
* resigned 4 January 2019
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.
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 above.
The biographical details of the current
Directors of the Company are set out on
pages 28 and 29.
Jens Montanana, Richard Last, Ashley
Stephenson, and Andrew Miller hold share
options, details of which are shown in note
25 to the financial statements. In addition,
Peter George was granted 750,000 options
over new ordinary shares of 1p each on 4
January 2019 at an exercise price of £0.1125
per share.
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 a risk that the Group
will encounter difficulty in meeting its
financial obligations, including a
repayment term bank loan drawn down
by the Company in May 2018 ($3.6m at 31
December 2018) details of which are set
out in note 16, as they fall due. Liquidity
risk is managed by the finance function.
Annual budgets are agreed by the Board,
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 seeks 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 as far as possible minimise
interest rate cash flow risk exposure on its
financing. The Group is exposed to
interest rate increases on the term bank
loan ($3.6 million at 31 December 2018)
details of which are set out in note 16,
which bears interest at 3-month GBP Libor
plus 7.5%. The bank loan does not have
early repayment penalties and thus the
Group can if GBP interest rates increase to
punitive levels, seek to refinance the loan.
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 was no material
impact from trading currency risk 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. Exchange rate risks do
arise in relation to (i) the bank loan which
is GBP denominated and equity fund
raises which are in GBP, given the
Company’s AIM listing, to the extent such
funds are required to support US dollar
denominated funding requirements, and
(ii) GBP denominated obligations of the
Group given the invoicing currency of the
Group is US dollar denominated. The
Group has not hedged such GBP debt and
equity fund raises or GBP denominated
expenses in the past as US denominated
funds received by the Group’s UK
subsidiary have been used to fund the
Group’s US subsidiary to the extent such
funding has been required, with the GBP
funding requirements satisfied from the
GBP denominated funds generated from
GBP debt and equity fund raises. The
Group keeps this policy under review
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.
41
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory 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.
By order of the Board
Duncan Swallow
Company Secretary
10 April 2019
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 $1.7 million (2017: $2.2 million)
was made during the year. Amortisation of
$2.9 million (2017: $2.4 million) and costs not
capitalised of $0.9 million (2017: £1.5 million)
were charged to the Statement of
Comprehensive Income during the year.
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.
Annual General Meeting
The AGM will be held at 68 Lombard Street,
London, EC3V 9LJ on 21 May 2019 at 11.00
a.m. The notice convening the meeting is
on page 85 together with details of the
business to be considered.
DIRECTORS’ REPORT CONTINUED
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 Financial Controller who
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.”
42
Corero Network Security plc Annual Report and Accounts 2018 STATEMENT OF DIRECTORS’ RESPONSIBILITIES
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.
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
financial statements in accordance with
International Financial Reporting Standards
as adopted by the European Union (“IFRSs”).
The Directors have chosen to prepare the
Company financial statements in
accordance with FRS101. 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.
43
OverviewStrategic ReportGovernanceFinancial StatementsNotice of AGMCorporate Directory INDEPENDENT AUDITOR’S REPORT
to the members of Corero Network Security plc
Opinion
We have audited the financial statements of Corero Network Security plc (the ‘Parent Company’) and its subsidiaries (the ‘Group’) for the
year ended 31 December 2018 which comprise the consolidated statement of comprehensive income, the consolidated and company
statements of financial position, the consolidated statement of cash flows, the consolidated and company statements of changes in
equity and the notes to the financial statements, including a summary of significant accounting policies.
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,
including Financial Reporting Standard 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice).
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2018
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 United Kingdom Generally Accepted
Accounting Practice; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the financial statements section of our
report. We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our
audit of the financial statements in the UK, including the FRC’s Ethical Standard as applied to listed entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Material uncertainty related to going concern
We draw attention to note 2.2 to the financial statements which states that the ability of the Group and Parent Company to continue as a
going concern is reliant on the continued availability of its bank loan, the terms of which require compliance with certain covenants. Failure
to achieve revenue and cashflow projections may adversely impact the achievability of the bank loan covenants which could result in the
bank calling in the loan. This would require the Company to raise additional funding, with no guarantee such funding would be secured.
These events and conditions indicate a material uncertainty exists that may cast significant doubt on the Group and Parent Company’s
ability to continue as a going concern. Our opinion is not modified in respect of this matter.
Given the conditions and uncertainties noted above, we considered going concern to be a key audit matter. We have performed the
following work as part of our audit:
• we reviewed the bank loan documents to understand the terms and covenants which the Group and Parent Company is required to
comply with, comparing these to the Group’s forecasts;
• we recalculated management’s covenant compliance calculations for the period under audit using the Directors’ forecasts for a period of
at least 12 months from the date of approval of the financial statements, and compared them to the covenants in place for each period;
• we obtained confirmations from the lending bank in relation to covenant requirements and compliance during 2018; and
• we challenged the forecasts and sensitivity analysis used by the Director's to assess the Group’s and Parent Company’s ability to meet
its financial obligations as they fall due for a period of at least 12 months from the date of approval of the financial statements, by
examining post year end order values compared to forecast financial information and by comparing previous forecast financial
performance to subsequent actual results.
Key audit matters
In addition to the matter described in the material uncertainty related to going concern section above, key audit matters are those
matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and
include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified including those
which had the greatest effect on the overall audit strategy, the allocation of resources in the audit, and directing the efforts of the
engagement team. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming
our opinion thereon, and we do not provide a separate opinion on these matters.
44
Corero Network Security plc Annual Report and Accounts 2018 Key Audit Matter
Revenue recognition
See accounting policy at note 2.5, the key accounting
estimate at note 3.2 and note 4.
The Group generates revenue primarily from the sale
of hardware and associated software and related
maintenance and support contracts. It does this directly
through arrangements with end-users (either through
the sale of hardware and a software licence or by selling
the software as a service) as well as to distributors.
The sales of licences may be on a perpetual or a fixed
term basis.
We considered there to be a significant audit risk arising
from the allocation of the value of the transaction
between the multiple elements or deliverables included
in the sale as well as the timing of revenue recognition
with regard to proper deferral of support revenues and
cut off around the year end.
Management also undertook an exercise prior to 2018 to
evaluate the impact of IFRS 15 Revenue from Contracts
with Customers on its financial statements. This is a
complex development in IFRS which we considered to be
part of the revenue recognition risk in the current year.
Goodwill and intangible asset impairment
See accounting policy at note 2.12 and note 8.
In accordance with IAS 36, goodwill is tested for
impairment annually and other non-current tangible
assets with finite lives are tested for impairment
whenever an indicator of impairment arises.
Management performed an impairment review over
its sole cash generating unit (CGU) – Corero Network
Security (CNS) – as at 31 December 2018 using a
discounted cash flow model to calculate fair value less
costs to sell. The impairment review necessitates
significant management judgement over the timing and
degree of certainty attaching to forecast net cash flows
and the rate at which those future cash flows should be
discounted to present value. Certain key assumptions
and data points are required to be disclosed along with
sensitivity calculations where reasonably possible
changes in key assumptions could give rise to an
impairment. The accurate disclosure of such information
formed part of the risk we assessed as being present.
The recoverable amount of the Group’s CNS CGU was
assessed as being higher than its carrying value at the
reporting date and therefore, management concluded
that the goodwill and intangible assets were not
impaired at the reporting date.
How we addressed the matter in our audit
Our audit procedures included assessing the appropriateness of the revenue
recognition policy in accordance with IFRS 15 and the work undertaken by
management on the transition to that new accounting standard.
We gained an understanding of the detail of the Group’s methodology in
determining the fair value of the different deliverables in multiple element
arrangements as set out in note 2.5 and examined management’s approach
to fair value measurement, to ensure it provided a suitable basis on which to
recognise revenues.
We selected a sample of contracts for testing covering the Group’s different
sales models. We assessed whether the revenue recognised was calculated in
accordance with the Group’s accounting policy and in the correct period.
We also tested the accuracy of the deferred income balance, which arises
most commonly on deferred maintenance and support income, and tested a
sample of transactions around the year end to ensure that they were
recorded in the correct period.
Our work on the impairment review prepared by management had a dual
focus: firstly, to ensure the model was mechanically accurate and prepared in
accordance with the detailed requirements of IAS36 and secondly, to ensure
that the assumptions regarding future cash flows and the rate at which they
had been discounted were appropriate to the Group’s circumstances.
We used valuations and tax specialists in order to assist with our
interrogation of the model and to support our assessment of the treatment
of future tax savings arising from available losses. This work also included
comparison to industry data, historic trading, and macro-economic factors.
Our audit procedures relating to the review of operating cash flows included
verification of the existence of selected post year end sales and company
internal sales initiatives which are expected to drive growth in 2019, as well
as a comparison of previous performance to expectations.
We took into account previous shortfalls against sales targets and discussed
key sensitivities with those charged with governance. Fundamental to this
evaluation was a comparison of the forecasts in the impairment review to
recent financial performance and budgets approved by the Board, verifying
that the sensitivities prepared by management were sufficiently challenging.
We examined development cost intangible assets and property, plant and
equipment to determine that no additional impairment indicators in respect
of specific assets within the CGU were present.
We also considered the appropriateness of the disclosures made in notes 2.12,
12 and 8 to the financial statements, ensuring these were balanced in terms
of content, factually and arithmetically accurate and included all information
required under IAS 36 Impairment of Assets.
45
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements INDEPENDENT AUDITOR’S REPORT CONTINUED
to the members of Corero Network Security plc
Our application of materiality
We apply the concept of materiality both in planning and performing our audit, and in evaluating the effect of misstatements. For planning,
we consider materiality to be the magnitude by which misstatements, including omissions, could influence the economic decisions of
reasonable users that are taken on the basis of the financial statements. In order to reduce to an appropriately low level the probability that
any misstatements exceed materiality, we use a lower materiality level, performance materiality, to determine the extent of testing needed.
Misstatements below these levels will not necessarily be evaluated as immaterial as we also take account of the nature of identified
misstatements, and the particular circumstances of their occurrence, when evaluating their effect on the financial statements as a whole.
Level of materiality applied and rationale
Having re-examined the basis for setting materiality, we considered that using aggregate operating expenses and cost of sales as a benchmark
is, at the current time, the most appropriate measure for assessing the Group’s scale of operations and level of activity. In the prior year, we
referred to the EDITDA loss as our materiality benchmark. As the Group expects to move towards profitability, continuing to use EBITDA loss
would in time have led to our materiality level becoming disproportionate to the scale of the Group’s activities. Using this benchmark, we set
materiality at $297,000, being 2% of aggregate operating expenses and cost of sales (2017: $291,000, being 5% of EBITDA).
Materiality in respect of the audit of the Parent Company has been set at $148,500 (2017: $145,000) based on 50% of Group materiality.
Performance materiality was set at 75% of materiality for both the Group and Parent Company audits. In setting the level of performance
materiality we considered a number of factors including the expected total value of known and likely misstatements (based on past
experience and other factors) and management’s attitude towards proposed adjustments.
Component materiality
We set materiality for the Corero Network Security, Inc. component of the Group based on 80% (2017: 90%) of Group materiality as it makes up
the majority of the Group’s external revenue generating activities. UK components were audited to a lower materiality of between 5% and 25%
(2017: between 10% and 50%) of Group materiality. In the audit of each component, we further applied a performance materiality level of 75%
of the component materiality level to our testing to ensure that the risk of errors exceeding component materiality was appropriately mitigated.
Agreement with the Audit Committee
We agreed with the Audit Committee that we would report to the Committee all Group audit differences individually in excess of $14,850
(2017: $13,000) and, in our audit of the Parent Company, those in excess of $7,500 (2017: $7,250). We also agreed to report differences
below this threshold that, in our view, warranted reporting on qualitative grounds.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding of the Group and its environment, including the Group’s system of internal
control, and assessing the risks of material misstatement in the financial statements at the Group level.
We obtained an understanding of the entity-level controls of the Group as a whole which assisted us in identifying and assessing risks of
material misstatement due to fraud or error, as well as assisting us in determining the most appropriate audit strategy.
A full scope audit was performed for each component included in the consolidation. All audit work was undertaken by the Group audit team.
Other information
The Directors are responsible for the other information. The other information comprises the information included in the Annual Report
and Accounts other than the financial statements and our auditor’s report thereon. Our opinion on the financial statements does not
cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance
conclusion thereon.
In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider
whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or
otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material misstatements, we are
required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other
information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information,
we are required to report that fact. We have nothing to report in this regard.
Opinions 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 the Directors’ report for the financial year for which the financial statements are
prepared is consistent with the financial statements; and
• the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
46
Corero Network Security plc Annual Report and Accounts 2018 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 in relation to which 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.
Responsibilities of Directors
As explained more fully in the Directors’ responsibilities statement set out on page 43, the Directors are responsible for the preparation of
the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.
In preparing the financial statements, the Directors are responsible for assessing the Group’s and the Parent Company’s ability to
continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting
unless the Directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative
but to do so.
Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement
when it exists.
Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these financial statements.
A further description of our responsibilities for the audit of the financial statements is located on the Financial Reporting Council’s
website: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
Use of our report
This report is made solely to the Parent 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 Parent 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 Parent Company and the Parent Company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
Julian Frost
(Senior Statutory Auditor)
For and on behalf of BDO LLP, Statutory Auditor
55 Baker Street
London
W1U 7EU
United Kingdom
10 April 2019
BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127).
47
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
for the year ended 31 December 2018
Revenue
Cost of sales
Gross profit
Operating expenses before highlighted items
Depreciation and amortisation of intangible assets
Operating expenses
Operating loss
Finance income
Finance costs
Loss before taxation
Taxation
Loss for the year
Other comprehensive expense
Items that will or may be reclassified to profit and loss:
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
See note 2.5 for details regarding the restatement as a result of a change in accounting policy.
The notes on pages 54 to 84 form part of these financial statements.
Total
2018
$’000
9,951
(2,188)
7,763
(9,427)
(3,300)
(12,727)
(4,964)
9
(268)
(5,223)
–
Total
2017
Restated
$’000
8,531
(2,126)
6,405
(11,993)
(2,938)
(14,931)
(8,526)
5
(4)
(8,525)
116
(5,223)
(8,409)
(711)
805
(5,934)
(7,604)
(5,223)
(5,223)
(8,409)
(8,409)
(5,934)
(7,604)
(5,934)
(7,604)
2018
Cents
(1.4)
2017
Restated
Cents
(3.0)
Note
4
9,10,11
6
7
48
Corero Network Security plc Annual Report and Accounts 2018 CONSOLIDATED STATEMENT OF FINANCIAL POSITION
as at 31 December 2018
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
Borrowings
Deferred income
Net current assets
Non-current liabilities
Trade and other payables
Borrowings
Deferred income
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
2018
$’000
2017
Restated
$’000
8
9
10
11
14
13
14
15
16
18
15
16
18
20
21
8,991
14
6,447
611
227
8,991
37
7,664
770
76
16,290
17,538
125
2,977
8,026
11,128
(1,799)
(849)
(2,034)
(4,682)
6,446
(134)
(2,757)
(846)
(3,737)
94
1,925
1,365
3,384
(1,305)
–
(1,702)
(3,007)
377
–
–
(287)
(287)
18,999
17,628
5,740
7,051
4,556
7,051
79,338
73,239
344
(2,029)
(71,445)
18,999
322
(1,318)
(66,222)
17,628
See note 2.5 for details regarding the restatement as a result of a change in accounting policy.
These financial statements were approved by the Board of Directors on 10 April 2019 and signed on their behalf.
Andrew Miller
Director
The notes on pages 54 to 84 form part of these financial statements.
49
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements COMPANY STATEMENT OF FINANCIAL POSITION (Company number 02662978)
as at 31 December 2018
Assets
Non-current assets
Investments in subsidiaries
Trade and other receivables
Current assets
Trade and other receivables
Cash and cash equivalents
Liabilities
Current Liabilities
Borrowings
Net current assets
Non-current liabilities
Trade and other payables
Borrowings
Net assets
Equity
Ordinary share capital
Capital redemption reserve
Share premium
Share options reserve
Translation reserve
Retained earnings
Total equity
Note
2018
$’000
2017
$’000
12
14
14
16
15
16
20
21
25,118
72
21,015
7,043
25,190
28,058
6
7,294
7,300
(849)
6,451
(134)
(2,757)
(2,891)
–
680
680
–
680
–
–
–
28,750
28,738
5,740
7,051
4,556
7,051
79,338
73,239
344
(12,073)
(51,650)
28,750
322
(10,019)
(46,411)
28,738
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 $5.2 million (2017: $10.5 million).
These financial statements were approved by the Board of Directors on 10 April 2019 and signed on their behalf.
Andrew Miller
Director
The notes on pages 54 to 84 form part of these financial statements.
50
Corero Network Security plc Annual Report and Accounts 2018 CONSOLIDATED STATEMENT OF CASH FLOWS
for the year ended 31 December 2018
Cash flows from operating activities
Loss for the year
Adjustments for non-cash movements:
Amortisation of acquired intangible assets
Amortisation of capitalised development expenditure
Depreciation
Finance income
Finance expense
Taxation
Qualifying research and development expenditure tax credit
Share-based payment charge
Decrease in inventories and as-a-service assets
Increase in trade and other receivables
Increase/(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 after costs of $232,000
Finance income
Finance expense
Net proceeds from borrowings after costs of $143,000
Net cash generated 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
See note 2.5 for details regarding the restatement as a result of a change in accounting policy.
The notes on pages 54 to 84 form part of these financial statements.
Group
2018
$’000
(5,223)
2017
Restated
$’000
(8,409)
Note
9
10
11
6
25
9
10
11
21
16
23
2,918
483
(9)
268
–
–
22
100
(701)
293
55
2,408
548
(5)
4
(116)
116
21
127
(592)
(201)
(1,826)
(6,044)
–
(1,701)
(459)
(2,160)
7,283
9
(222)
3,938
11,008
(361)
6,661
1,365
8,026
(10)
(2,171)
(497)
(2,678)
6,995
5
(4)
–
6,996
151
(1,575)
2,940
1,365
51
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2018
Share
capital
$’000
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
1 January 2017 (as previously stated)
3,119
7,051
67,681
Prior year adjustment – IFRS 15 Revenue
from Contracts with Customers
1 January 2017 (as restated)
Loss for the year
Other comprehensive income
Total comprehensive expense
for the year (as restated)
Contributions by and
distributions to owners
Share-based payments
Issue of share capital
Total contributions by and
distributions to owners
31 December 2017 and
1 January 2018 (as restated)
Loss for the year
Other comprehensive loss
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 2018
–
3,119
–
7,051
–
67,681
–
–
–
–
1,437
1,437
–
–
–
–
–
–
–
–
–
–
5,558
5,558
301
–
301
–
–
–
21
–
21
–
–
–
–
1,184
1,184
5,740
–
–
–
–
–
–
7,051
–
–
–
–
6,099
6,099
79,338
–
–
–
22
–
22
344
(2,123)
(57,813)
18,216
–
164
(2,123)
(57,649)
–
805
(8,573)
–
164
18,380
(8,573)
805
805
(8,573)
(7,768)
–
–
–
–
–
–
–
(711)
(5,223)
–
21
6,995
7,016
17,628
(5,223)
(711)
(711)
(5,223)
(5,934)
–
–
–
–
–
–
(2,029)
(71,445)
22
7,283
7,305
18,999
4,556
7,051
73,239
322
(1,318)
(66,222)
See note 2.5 for details regarding the restatement as a result of a change in accounting policy.
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, net of issuance costs.
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 54 to 84 form part of these financial statements.
52
Corero Network Security plc Annual Report and Accounts 2018 Capital
redemption
reserve
$’000
Share
premium
account
$’000
Share
options
reserve
$’000
Translation
reserve
$’000
Retained
earnings
$’000
7,051
67,681
301
(13,157)
Total
equity
$’000
29,050
(10,466)
3,138
–
3,138
(35,945)
(10,466)
–
COMPANY STATEMENT OF CHANGES IN EQUITY
for the year ended 31 December 2018
1 January 2017
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 2017
Opening adjustment – IFRS 9
Financial Instruments
1 January 2018
Loss for the year
Other comprehensive loss
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 2018
Share
capital
$’000
3,119
–
–
–
–
1,437
1,437
4,556
–
4,556
–
–
–
–
1,184
1,184
5,740
–
–
–
–
–
–
7,051
–
7,051
–
–
–
–
–
–
7,051
–
–
–
–
5,558
5,558
73,239
–
73,239
–
–
–
–
6,099
6,099
79,338
–
–
–
21
–
21
322
–
322
–
–
–
22
–
22
344
The notes on pages 54 to 84 form part of these financial statements.
3,138
(10,466)
(7,328)
–
–
–
–
–
–
(10,019)
(46,411)
–
(10,019)
–
(2,054)
(1,745)
(48,156)
(3,494)
–
21
6,995
7,016
28,738
(1,745)
26,993
(3,494)
(2,054)
(2,054)
(3,494)
(5,548)
–
–
–
–
–
–
(12,073)
(51,650)
22
7,283
7,305
28,750
53
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements NOTES TO THE FINANCIAL STATEMENTS
1. General information
Presentation currency
These consolidated financial statements are presented in US dollars (“$”) 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 2018 was 1.33 (2017: 1.29). The closing $-GBP exchange rate, used for the conversion of the Group’s assets and
liabilities, at 31 December 2018 was 1.28 (2017: 1.35).
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’.
New Standards impacting the Group that have been adopted in the annual financial statements for the year ended 31 December 2018,
and which give rise to a change in the Group’s accounting policies are:
• IFRS 9 Financial Instruments; and
• IFRS 15 Revenue from Contracts with Customers.
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 2020.
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 and Company will maintain a positive cash balance until at least December 2020. In addition, the
projections and sensitivity analyses confirm that the bank loan covenants will be met for a period of at least 12 months from the date of
approval of these financial statements.
On this basis, the Directors have therefore concluded that it is appropriate to prepare the financial statements on a going concern basis.
However, the ability of the Company and Group to achieve the future profit and cash flow projections cannot be predicted with certainty.
Failure of the Company and the Group to meet these projections and deliver revenue growth may adversely impact the achievability of
the bank loan covenants which may result in the bank loan being required to be repaid before the maturity date if the revenue covenants
are not met and cannot be renegotiated. This would adversely impact the Company and the Group’s working capital position and would
require the Company to raise additional funding, with no guarantee such funding would be secured.
Taken together, the achievability of the projections and availability of additional funding if required indicate a material uncertainty that
may cast significant doubt on the Company and the Group’s ability to continue as a going concern for the foreseeable future.
The financial statements do not include the adjustments that would result if the Group and Company was unable to continue as a
going concern.
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 2018.
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.
54
Corero Network Security plc Annual Report and Accounts 2018 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
acquisition, 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.
2.5 Revenue
The Group’s revenue is derived from the following products and services:
• Hardware and perpetual software licenses;
• Support services for a defined term;
• Installation and training services;
• DDoS protection as-a-service (“DDPaaS”) for a defined term;
• SecureWatch Managed Service (enhanced security monitoring services) for a defined term; and
• Software subscription licenses for a defined term.
The element of DDPaaS revenues pertaining to the lease of as-a-service assets is included in reported revenues and is recognised on a
straight line basis over the term of the contract.
Performance obligations, timing of revenue recognition and revenue recognition
Revenue is recognised when control of the goods (hardware and software) transfer to the customer and services are delivered. Goods are
shipped free on board (“FOB”) from Corero, or Corero’s contract manufacturer, to the customer. The point of transfer of control for
hardware is at the point of FOB shipment to the customer and for software at the point of electronic transfer to the customer.
Revenue recognised on transfer of control of hardware and
software products
Hardware, perpetual software licenses and software
subscription licenses
Revenue recognised over-time (over the term of the contract)
Support, DDPaaS and SecureWatch Managed services
Revenue recognised once the service has been delivered
Installation and training services
Determining the transaction price
The contract price is determined by reference to the Corero Sales Quotation or DDPaaS Agreement and is a fixed price. Certain DDPaaS
contracts have an element of the transaction value or all of the transaction value determined by reference to a share of the customers’
revenue generated from the Corero solution (“Revenue Share”). This Revenue Share revenue is recognised when the Revenue Share is
determined or can be reasonably estimated.
Corero does not have any other variable consideration payable by the customer and does not pay any consideration to the customer.
There is no provision for purchase price adjustments, right of return or price concessions.
Allocating amounts to performance obligations
For contracts containing only a single performance obligation (annual support services, DDPaaS and SecureWatch Managed Service)
there is no requirement to make an allocation of the contract price. For contracts containing multiple products, the transaction price is
allocated to the separate performance obligations based on relative stand-alone selling prices (“SSP”). SSP equates to the historic best
estimated selling price methodology previously applied consistently by Corero in prior year financial statements. The SSP is determined
using defined price lists and historic customer discount rates.
55
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 2. Significant accounting policies continued
Incremental costs of obtaining a contract
Sales commission paid to Corero sales employees is an incremental cost of obtaining a contract. Sales commission relating to the support
revenue from a new sales contract is recorded in prepayments and amortised over five years. Corero has considered the requirements of
the IFRS15 standard with regards to the amortisation period which requires amortisation on a systematic basis that is consistent with the
transfer to the customer of the goods or services to which the asset relates. The expectation, supported by historic evidence, is that
customers will generally renew their support contracts for more than three years with the additional expectation of follow-on hardware
and software (and associated services) business from a significant number of existing customers. Based on this, Corero has assessed that
a reasonable period for capitalised sales commission to be amortised is five years. Periodic customer reviews will be undertaken to
ascertain if there is any evidence that the value of the customer relationship has been negatively impacted, in which case the prepayment
will be appropriately written down. Applying the practical expedient, Corero recognises the incremental costs of obtaining contracts as
an expense when incurred if the amortisation period of the prepayment that Corero otherwise would have recognised is one year or less.
Fulfilment costs
Corero’s principal fulfilment costs relate to the costs of the Corero customer support team which delivers the customer support services,
DDPaaS services and the SecureWatch Managed services. These costs are not separately allocated or identifiable against specific
customers. Therefore, these costs are recognised in the period in which they are incurred.
The Group chose to adopt IFRS15 on a fully retrospective basis. After reviewing the requirements of IFRS15, Corero has concluded that no
restatement to previously recognised revenue was required and there was no requirement to amend existing contract liabilities. None of
the practical expedients relating to contracts with customers were therefore required to be applied.
The impact of adopting IFRS15 on a fully retrospective basis for the capitalisation and amortisation of sales commission was to reduce the
operating expenditure/loss for the relevant reporting periods and increase trade and other receivables (prepayments). The capitalised
sales commission balance at 31 December 2018 was $211,000 (2017: $164,000). The amortisation of sales commission was $50,000 in the
12 months ended 31 December 2018 (2017: $21,000).
Contract assets and liabilities
Contract assets arise when goods and services have been delivered and invoiced but payment is not yet due. Contract liabilities arise for
future delivery of services which have been invoiced and payment is due. Contract liabilities are shown as deferred income in the
Statement of Financial Position.
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
the 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 goods directly related to revenue, services delivery,
operation costs, DDoS as-a-service depreciation and amounts charged by external third parties for services. Examples of such costs
would include third party hardware costs and third party software license 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.
56
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 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 and 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
• 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.
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, evaluation assets and DDoS protection as-a-service assets – 3 years (straight line)
• Fixtures and fittings – 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. Evaluation assets are used by customers during
proof of concept trials. Evaluation assets are stated at cost less accumulated depreciation. When an evaluation asset is retained by a
customer as part of a sale, the net book value of the evaluation asset is charged to cost of sales. Depreciation of DDoS protection
as-a-service assets is charged to cost of sales.
57
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 2. Significant accounting policies continued
Subsequent costs are included in an asset 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 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 ("CGU") to which the asset
belongs is determined.
The recoverable amount of an asset or a CGU 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 CGU. 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 or CGU 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 CGU's or groups of CGU's 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 CGU's if the recoverable amount of the CGU is less than the carrying amount of the CGU. The
impairment loss is allocated to reduce the carrying amount of the assets of the CGU by first reducing the carrying amount of any goodwill
allocated to the CGU, and then reducing the carrying amounts of the other assets of the CGU pro rata.
If an impairment loss subsequently reverses, the carrying amount of the asset or CGU 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.
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 asset 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.
58
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 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.
Amounts receivable under DDPaaS agreements in relation to as-a-service assets are recognised as revenue as explained in note 2.5.
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.
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 modified retrospective basis has been used for the application of IFRS 9.
59
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 2. Significant accounting policies continued
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. The simplified approach is used for assessing the expected credit loss on trade receivables, requiring the lifetime
expected credit loss to be recorded as the provision for impairment.
An impairment provision is recorded against the loan note instrument between the Company and Corero Network Security, Inc based on
calculating the risk adjusted carrying value of the loan to take account of the credit loss which is expected to arise over the period until
the cash is realised. In situations where the loan amount is expected to be recovered, the expected credit loss is limited to the effect of
discounting the loan over the period until repayment is realised at the effective interest rate.
Cash and cash equivalents
Cash and cash equivalents include cash in hand and 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.
Debt obligations
Debt obligations include interest bearing bank borrowings which are stated at their fair value at time of initial recognition.
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. If an
option grant is cancelled the previously recorded expense is credited to the Statement of Comprehensive Income - Profit and Loss.
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 Standards and Interpretations not yet effective
There are a number of standards, amendments to standards, and interpretations which have been issued that are effective in future
accounting periods that the Group has decided not to adopt early. The most significant of these is:
IFRS 16 – Leases. Effective for periods beginning on or after 1 January 2019.
The adoption of IFRS16 will result in the Group recognising right-of-use assets and lease liabilities for all contracts that are, or contain, a lease.
For leases currently classified as operating leases, under current accounting requirements the Group does not recognise related assets or
liabilities, and instead spreads the lease payments on a straight-line basis over the lease term, disclosing the total future commitment.
The Group will apply the modified retrospective adoption method under IFRS16, and, therefore will recognise leases on balance sheet as
at 1 January 2019. In addition, the right-of-use assets measure will be determined by reference to the lease liability on that date. The
Group will use the practical expedient not to recognise leases whose term ends within 12 months of the initial application (1 January 2019)
and account for these leases as a short-term lease. For the Group’s one applicable lease at 31 December 2018, an office premises lease, it is
anticipated a right-of-use asset and lease liability of approximately $76,000 will be recognised on 1 January 2019. Instead of recognising an
operating expense for its applicable operating lease payments, the Group will recognise interest on its lease liabilities and amortisation
on its right-of-use assets. For the applicable lease, the application of IFRS 16 will reduce the 2019 operating expenses by $31,000 and
increase the interest charge by $3,000.
The Group does not expect any other standards issued by the IASB, but not yet effective, to have a material impact on the Group.
60
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 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.
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. Fair value less costs to sell 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 CGU are set out in note 8.
Impairment of investments (applies to the Company financial statements only)
The Directors have reviewed the cost of investments in subsidiaries of the Company with reference to current and future trading
conditions. The investment in subsidiaries has been reviewed with reference to a valuation based on a discounted free cash flow, in
conjunction with the goodwill impairment review, which the Directors consider to be an appropriate valuation methodology.
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.
Standalone Selling Price – Revenue recognition
On a quarterly basis the Group analyses the selling prices for each deal compared to the current Standalone Selling Price (“SSP”).
This analysis includes grouping similar deals based on qualitative factors such as customer profile, size, and region, together with
a quantitative comparison to the then current SSP. SSP fair value prices are adjusted for future quarters if management identifies
a pattern of variances of greater than 10% between actual selling prices and the then current SSP.
61
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 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
Germany
Switzerland
Other European countries
Australia
Ireland
APAC
Rest of World
Total
2018
Revenue
$’000
2018
Non-current
assets
$’000
5,372
2,526
390
440
237
523
119
190
154
16,060
230
–
–
–
–
–
–
–
2017
Revenue
$’000
5,660
1,866
2017
Non-current
assets
$’000
17,360
178
43
224
329
395
–
–
14
–
–
–
–
–
–
–
9,951
16,290
8,531
17,538
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.
An international SaaS customer, the Group’s largest customer, accounted for 14% of 2018 revenue (2017: 14%).
The revenue is analysed as follows for each revenue category:
Hardware and licence revenue
DDoS protection as-a-service revenue
Maintenance and support services revenue
Total
The revenue is analysed by timing of delivery of goods or services as:
Point in time delivery
Over time
Total
2018
$’000
4,866
819
4,266
9,951
2018
$’000
4,866
5,085
9,951
2017
$’000
4,510
323
3,698
8,531
2017
$’000
4,510
4,021
8,531
No unsatisfied performance obligations arise except from those revenues which are recognised over time. See note 18 for further details.
The as-a-service assets element of DDoS protection as-a service revenues arise under operating lease arrangements.
62
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 Contract balances
At 1 January
Transfers in the period from trade receivables
Amounts included in contract liabilities that were recognised
as revenue in the period from the opening balance
Amounts included in contract liabilities that were recognised
as revenue from amounts invoiced in the period
Amounts invoiced in the period and not recognised as revenue
in the period
At 31 December
Company
Contract assets
Contract liabilities
2018
$’000
764
596
2017
$’000
601
163
–
–
–
–
–
–
1,360
764
2018
$’000
1,989
–
2017
$’000
2,917
–
(1,702)
(2,062)
(3,383)
(1,959)
5,976
2,880
3,093
1,989
The Company has no contract assets or liabilities (2017: $nil).
5. Loss for the year
The following items have been included in arriving at the Group loss for the year before taxation:
DDoS protection as-a-service asset depreciation
Unrealised (gain)/loss on intercompany loan
Development expenditure not capitalised
Amortisation of acquired intangible assets (note 9)
Amortisation 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 financial statements 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
Fees payable to the Company’s auditor for taxation advisory services
2018
$’000
124
(425)
853
23
2,918
483
308
2017
$’000
74
627
1,486
55
2,408
548
319
2018
$’000
2017
$’000
80
29
2
30
6
147
84
23
8
27
3
145
63
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 6. Tax on loss on ordinary activities
Current tax credit
Total
2018
$’000
–
–
2017
$’000
116
116
The tax assessed on the loss on ordinary activities for the year differs from the weighted average UK corporate rate of tax of 19.0%
(2017: 19.25%). The differences are reconciled below:
Total tax reconciliation
Loss before taxation
Theoretical tax credit at UK Corporation tax rate 19.0% (2017: 19.25%)
Effect of:
– expenditure that is not tax deductible
– R&D tax credits
– accelerated capital allowances
– other timing differences
– losses not utilised
Actual taxation credit
(5,223)
(992)
(8,689)
(1,673)
241
–
(10)
(1)
762
–
53
116
(15)
1
1,634
116
Factors affecting future tax charges
As at 31 December 2018, the Group’s cumulative fixed asset timing differences were $394,000 (2017: $426,000) and no deferred tax asset
has been recognised in respect of these items.
In addition, the tax losses at that date amounted to $85.4 million (2017: $82.0 million). This comprised UK tax losses of $12.1 million and US
tax losses of $73.3 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 expire 20 years from the end of the accounting period in which the loss arose. UK
tax losses do not expire.
Deferred tax assets of $2.0 million (2017: $2.1 million) relating to the UK tax losses (applying a tax rate of 17.0%) and the deferred tax
assets of $15.5 million (2017: $14.6 million) relating to the US tax losses and taxable temporary fixed asset differences (applying a tax rate
of 21.0%) 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.
2018
weighted
average
number of
1p shares
Thousand
362,684
2018
loss
$’000
(5,223)
2018
loss per
share
Cents
2017
Restated
loss
$’000
2017
weighted
average
number of
1p shares
Thousand
2017
Restated
loss per
share
Cents
(1.4)
(8,409)
280,130
(3.0)
Basic and diluted loss per share
64
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 8. Goodwill
Group
Cost
At 1 January 2017
At 31 December 2017
At 31 December 2018
Impairment
At 1 January 2017
At 31 December 2017
At 31 December 2018
Carrying amount
At 31 December 2018
At 31 December 2017
At 1 January 2017
$’000
17,983
17,983
17,983
(8,992)
(8,992)
(8,992)
8,991
8,991
8,991
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 CGU, Corero Network Security (“CNS”).
The recoverable amount for the CNS CGU was determined based on a discounted cash flow calculation to calculate fair values less costs
to sell using cash flow projections over a 10 year period (2017: 10 year period). The discounted cash flow approach is a level 3 fair value
calculation in the IFRS 13 fair value hierarchy.
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
Cumulative annual growth rate (“CAGR”) for revenue used for the
forecast/extrapolated periods
Average annual 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
2018
2017
Years 1–2
Years 1–2
Years 3–10
Years 3–10
16.4%
17.8%
28.1%
24.9%
7.4%
2.5%
14.4%
36.1%
24.9%
7.4%
2.5%
17.7%
The pre-tax cash flows for the forecast period are derived from the most recent financial budget for the year ending 31 December 2019
and the plan for the year ending 31 December 2020 approved by the Board, with a downward revenue adjustment reflecting prior year
experience (37.5% applied to the 2019 budget and 50% to the 2020 plan). The extrapolation for the period 2021 to 2028 is based on
management estimates (with the key assumptions set out below).
The future pre-tax cash flows are discounted by a WACC of 14.4% (2017: 17.7%).
65
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 8. Goodwill continued
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 (ii) and the discount rate.
The cash flow forecasts assume a CAGR revenue growth of 26.2% in the period 2018 to 2023 (28.1% for the period 2018 to 2020) and 7.4%
for the period 2023 to 2028 (a CAGR of 16.4% for 10-year forecast extrapolated period). These revenue growth rates reflect a downward
revenue adjustment of 37.5% applied to the CNS 2019 budget revenues and 50% applied to the 2020 plan revenues (and a corresponding
reduction of 18.75% in 2019 operating costs and capital expenditure, and 20% in 2020 operating costs and capital expenditure) reflecting
prior year experience.
The management of the Group believe these growth rates are appropriate for the forecasts given the progress the business made in
2018, the strategy for 2019 which is focused on scaling the business for profitability through a three-pronged go-to-market focus (direct
sales, indirect channel sales, and go-to-market partner sales from partners such as Juniper) and the planned investment in sales and
marketing. This strategy is expected to deliver a step change in revenue in the forecast period.
The assumed growth rates are supported by the fact that the IT security market is forecast to grow strongly for the foreseeable future.
• The DDoS appliance market is expected to reach $1.45bn by 2022 (Source: IHS Markit technology research – DDoS Prevention
Appliances Worldwide, Biannual Market Tracker H2 2018 (published 19 November 2018)) – a CAGR of 11.0% in the period 2017 to 2022.
• According to IDC (one of the leading global IT analyst firms), the global spending on security-related hardware, software and services is
forecast to grow to $133.7bn in 2022 (a CAGR of 9.9% over the 2017-2022 forecast period). (Source: IDC Update to Worldwide Semi-
annual Security Spending Guide published 4 October 2018).
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 2.68% (based on 10-year US government bonds) (2017: 2.48%), comparable company betas, an equity risk premium of 7.4%
(2017: 7.4%), and small company risk premium of 4.5% (2017: 4.5%). The WACC has been assessed based on that fact that the Company
had debt at 31 December 2018 of $3.8 million. 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 14.4%% to 21.6%, this would result in a $1.2 million impairment of
goodwill. If the downward revenue adjustment of 37.5% applied to the CNS 2019 Budget and 50% to the 2020 Plan revenues (and
corresponding reduction of 18.75% in CNS Budget 2019 operating costs and capital expenditure, and 25% in the 2020 Plan operating
costs and capital expenditure) was increased by 20%, which in the assessment of management is reasonably possible, this would result in
a $6.6 million impairment of goodwill.
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.
66
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 9. Acquired intangible assets
Group
Cost
At 1 January 2017
Additions
At 31 December 2017 and at 1 January 2018
Additions
At 31 December 2018
Amortisation
At 1 January 2017
Charge for year
At 31 December 2017 and at 1 January 2018
Charge for year
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
At 1 January 2017
Company
The Company has no intangible fixed assets (2017: $nil).
Computer
software
$’000
Customer
relationships
$’000
5,993
10
6,003
–
6,003
(5,911)
(55)
(5,966)
(23)
(5,989)
14
37
82
197
–
197
–
197
(197)
–
(197)
–
(197)
–
–
–
Total
$’000
6,190
10
6,200
–
6,200
(6,108)
(55)
(6,163)
(23)
(6,186)
14
37
82
67
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 10. Capitalised development expenditure
Group
Cost
At 1 January 2017
Additions
At 31 December 2017 and at 1 January 2018
Additions
At 31 December 2018
Amortisation
At 1 January 2017
Charge for year
At 31 December 2017 and at 1 January 2018
Charge for year
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
At 1 January 2017
Company
The Company has no capitalised development expenditure (2017: $nil).
Total
$’000
15,668
2,171
17,839
1,701
19,540
(7,767)
(2,408)
(10,175)
(2,918)
(13,093)
6,447
7,664
7,901
68
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 11. Property, plant and equipment
Group
Cost
At 1 January 2017
Additions
Transfers
Disposals
Foreign currency translation
At 31 December 2017 and at 1 January 2018
Additions
Transfers
Disposals
Foreign currency translation
At 31 December 2018
Depreciation
At 1 January 2017
Charge for year
Transfers
Disposals
Foreign currency translation
At 31 December 2017 and at 1 January 2018
Charge for year
Transfers
Disposals
Foreign currency translation
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
At 1 January 2017
Sales
evaluation
assets
$’000
DDoS
protection
as-a-service
assets
$’000
Computer
Equipment
$’000
Fixtures
and
Fittings
$’000
Leasehold
Improvements
$’000
Total
$’000
2,084
213
–
–
9
2,306
243
–
–
(9)
2,540
(1,782)
(223)
–
–
(3)
(2,008)
(211)
–
–
6
(2,213)
327
298
302
819
149
(187)
(228)
–
553
216
(22)
(273)
–
474
(276)
(230)
68
76
–
(362)
(132)
13
143
–
(338)
136
191
543
62
135
187
(4)
–
380
–
22
–
–
402
–
(74)
(68)
–
–
(142)
(124)
(13)
–
(1)
(280)
122
238
62
69
–
–
–
1
70
–
–
–
(1)
69
(25)
(13)
–
–
–
(38)
(9)
–
–
–
(47)
22
32
44
22
3,056
–
–
–
1
23
–
–
–
(1)
22
(3)
(8)
–
–
(1)
(12)
(7)
–
–
1
497
–
(232)
11
3,332
459
–
(273)
(11)
3,507
(2,086)
(548)
–
76
(4)
(2,562)
(483)
–
143
6
(18)
(2,896)
4
11
19
611
770
970
DDoS protection as-a-service assets depreciation is charged to cost of sales.
Company
The Company has no property, plant and equipment (2017: $nil).
69
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 12. Investment in subsidiaries
Company
Cost
At 1 January 2017
Additions
Foreign currency translation
At 31 December 2017 and at 1 January 2018
Capitalisation of intercompany balances
Additions
Foreign currency translation
At 31 December 2018
Impairment
At 1 January 2017
Charge for the year
Foreign currency translation
At 31 December 2017
Opening adjustment –
IFRS 9 Financial Instruments
At 1 January 2018
Impairment charge
Foreign currency translation
At 31 December 2018
Net book value
At 31 December 2018
At 31 December 2017
At 1 January 2017
Investment in Corero Network
Security, Inc. and Corero
Network Security (UK) Limited
$’000
Investment in
Corero Group
Services Limited
$’000
Loan note
$’000
Total
$’000
50,761
8,303
4,820
63,884
2,736
–
(3,515)
63,105
(36,002)
(10,789)
(3,419)
(50,210)
–
(50,210)
–
2,763
(47,447)
15,658
13,674
14,759
–
–
–
–
7,565
–
–
7,565
–
–
–
–
–
–
(3,652)
–
(3,652)
3,913
–
–
6,378
342
621
7,341
–
370
(419)
7,292
–
–
–
–
(1,745)
(1,745)
–
–
57,139
8,645
5,441
71,225
10,301
370
(3,934)
77,962
(36,002)
(10,789)
(3,419)
(50,210)
(1,745)
(51,955)
(3,652)
2,763
(1,745)
(52,844)
5,547
7,341
6,378
25,118
21,015
21,137
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. As at 31 December 2018 the provision against investment in subsidiaries was $51.1 million (2017: $50.2 million).
The Company’s investment in Corero Network Security, Inc. includes a loan note instrument. These loan notes bear interest at 5.0%
per annum which at the election of Corero Network Security, Inc. is payable quarterly or added to the principal amount which is due
on 31 October 2021. As at 31 December 2018 the expected credit loss provision was $1.7 million (2017: $nil).
The Company owns:
• 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.
70
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 13. Inventories
Gross inventory
Less: provision for impairment
Net inventory
Group
2018
$’000
282
(157)
125
Group
2017
$’000
207
(113)
94
Net inventory comprises finished goods and raw materials. The value of inventory recognised as an expense was $1.5 million
(2017: $1.6 million).
Company
The Company holds no inventory (2017: $nil).
14. Trade and other receivables
Trade receivables
Contract assets (note 4)
Less: provision for impairment of trade receivables
Net trade receivables
Amounts owed by subsidiaries
Other debtors
Prepayments
Group
2018
$’000
831
1,360
–
2,191
–
109
904
3,204
Group
2017
$’000
Company
2018
$’000
Company
2017
$’000
223
764
–
987
–
137
877
2,001
–
–
–
–
–
78
–
78
–
–
–
–
6,967
76
–
7,043
None of the Company’s trade and other receivables are secured by collateral or credit enhancements.
The Group applies the simplified approach to measuring expected credit losses using a lifetime expected credit loss for trade
receivables and contract assets. To measure expected credit losses on a collective basis, trade receivables and contract assets are
grouped based on a similar credit risk and aging. The expected loss rates are based on the Group’s historical credit losses experienced
over a two year period prior to the period end. The historical loss rates are then adjusted for current and forward-looking information
on macroeconomic factors affecting the Group’s customers. The Group has identified gross domestic product growth rates,
unemployment rates and inflation rates as the key macroeconomic factors in the countries in which the Group operates. The
calculated expected credit loss allowance for the current and prior reporting periods has not been included as an impairment
provision as the Directors consider it to be immaterial.
The Directors consider that the carrying amount of trade and other receivables approximates their fair value.
71
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 14. Trade and other receivables continued
The maturity profile of trade and other receivables is set out in the table below:
In one year or less, or on demand
In more than one year, but not more than five years
Group
2018
$’000
2,977
227
3,204
Group
2017
$’000
1,925
76
2,001
Company
2018
$’000
Company
2017
$’000
6
72
78
–
7,043
7,043
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
2018
$’000
2,519
685
3,204
Group
2017
$’000
1,651
350
2,001
Company
2018
$’000
Company
2017
$’000
–
78
78
–
7,043
7,043
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.
15. Trade and other payables
Trade payables
Other payables
Accruals
Group
2018
$’000
895
186
852
1,933
Group
2017
$’000
720
16
569
1,305
Company
2018
$’000
Company
2017
$’000
–
–
134
134
–
–
–
–
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.
78% (2017: 90%) of the trade and other payables are due in less than three months.
The analysis of trade and other payables by foreign currency is set out in the table below:
US dollars
UK pound
Group
2018
$’000
1,064
869
1,933
Group
2017
$’000
903
402
1,305
Company
2018
$’000
Company
2017
$’000
–
134
134
–
–
–
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.
72
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 16. Borrowings
The Group and Company borrowings.
Bank loan
2018
$’000
3,606
2017
$’000
–
The Company bank loan comprises a four-year term GBP sterling bank loan of £3.0 million, which was drawn down in May 2018, with
quarterly repayments commencing on 31 March 2019. These quarterly repayments increase from £150,000 on 31 March 2019 to £310,000
on 31 March 2022 such that the loan will be repaid in full by 31 March 2022. The loan costs were $286,000, $143,000 of which are deferred
until 31 March 2022. The bank loan has no early repayment penalties or redemption premium. The bank loan terms include the payment
of a fee equal to 1.0% of the disposal proceeds on a sale or a change of control of the Company above a threshold amount of £100 million
if such disposal or change of control occurs before April 2025.
Interest is payable quarterly in arrears based on 3-month GBP Libor plus 7.5%. The loan principal repayment schedule by year for the
bank loan is:
Year
2019
2020
2021
2022
$’000
849
1,174
1,410
395
3,828
The contractual future cash flows, including undiscounted interest based on the interest rate at 31 December 2018 of 8.412% for the bank
loan, are:
Year
2019
2020
2021
2022
$’000
1,146
1,390
1,516
404
4,456
The bank loan is secured by debentures over the business assets of all Group companies and by Group company guarantees including a
guarantee from the Company. The bank loan terms include typical covenants for such a loan, as well as revenue and cash consumption
covenants, which are tested quarterly and monthly respectively. These covenants were met for each covenant reporting period in the
reporting period ended 31 December 2018.
The $1.5 million accounts receivable financing facility in place at 31 December 2017, which was not utilised at 31 December 2017, was repaid
and terminated in April 2018, and the related security, comprising a first lien on the corporate assets of Corero Network Security, Inc. and
guarantee from the Company, were discharged.
73
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 16. Borrowings continued
At 31 December 2018, 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
Company
Trade and other payables
Total
17. Financial instruments
The Group’s financial instruments are categorised as shown below:
Group
In one year or less,
or on demand
Between two
and five years
2018
$’000
1,799
1,799
2017
$’000
1,305
1,305
2018
$’000
134
134
2017
$’000
–
–
In one year or less,
or on demand
Between two
and five years
2018
$’000
–
–
2017
$’000
–
–
2018
$’000
134
134
2017
$’000
–
–
Financial assets
Trade and other receivables
Cash
Group
Financial liabilities
Trade and other payables
Borrowings
Book Value
2018
$’000
Book Value
2017
$’000
2,274
8,026
10,300
1,074
1,365
2,439
Book Value
2018
$’000
Book Value
2017
$’000
1,933
3,828
5,761
1,305
–
1,305
The Group manages liquidity and credit risk in line with the financial risk management objectives and policies as set out on page 41.
At the present time the Group does not have significant exposure to foreign exchange or interest rate risk. There are no differences
between the fair values and book values held by the Group.
74
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 18. Deferred income
Group
Current
More than one year but less than five years
2018
$’000
2,034
846
2,880
2017
$’000
1,702
287
1,989
The Group’s deferred income balance will be recognised as revenue evenly over the remaining term of the service and support
agreements in place. The service and support agreements expire at various times throughout the year with no particular seasonality.
Company
The Company has no deferred income (2017: $nil).
19. Pensions
The Group’s pension arrangements are operated through defined contribution schemes.
Defined contribution schemes
Defined contribution pension costs
Accounts accrued as payable to schemes
2018
$’000
160
3
2017
$’000
125
–
20. Share capital
Authorised share capital
The authorised share capital comprises 745,821,970 (2017: 745,821,970) ordinary shares of 1 pence (“p”) (1.28 cents (“c”)) each.
Issued ordinary share capital
1 January 2017
203,417,642 ordinary shares of 1p each
Issued
112,000,000 ordinary shares of 1p each (1.28c)
31 December 2017 and 1 January 2018
315,417,642 ordinary shares of 1p each
Issued
69,565,217 ordinary shares of 1p each (1.38c)
17,008,969 ordinary shares of 1p each (1.32c)
3,333 ordinary shares of 1p each (1.28c)
31 December 2018
401,995,161 ordinary shares of 1p each
$’000
3,119
1,437
4,556
959
225
–
5,740
On 25 April 2017, 112,000,000 ordinary shares with a nominal value of 1p were issued at 5.0p (6c) per share by way of a subscription
and placing.
On 27 April 2018, 69,656,217 ordinary shares with a nominal value of 1p were issued at 5.75p (8c) per share by way of a subscription and
placing. On 19 October 2018, 17,008,969 ordinary shares with a nominal value of 1p were issued at 8.9p (12c) per share by way of a
subscription. On 1 November 2018, 3,333 ordinary shares with a nominal value of 1p were issued at 8.0p (10c) per share as the result
of the exercise of an employee share option.
75
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 21. Share premium
1 January 2017
112,000,000 ordinary shares of 5p each (6c) less issue costs
31 December 2017 and at 1 January 2018
69,565,217 ordinary shares of 5.75p each (8c) less issue costs
17,008,969 ordinary shares of 8.9p each (12c) less issue costs
3,333 ordinary shares of 8.0p each (10c)
31 December 2018
$’000
67,681
5,558
73,239
4,355
1,744
–
79,338
Consideration received in excess of the nominal value of the 69,565,217 shares issued on 27 April 2018 as a result of the subscription and
placing has been included in share premium, less registration, commission and professional fees of $200,000. Consideration received in
excess of the nominal value of the 17,008,969 shares issued on 19 October 2018 as a result of the subscription has been included in share
premium, less registration and professional fees of $32,000.
The amount of such directly attributable costs deducted from share premium in 2017 was $193,000.
22. Employees and Directors
Employee expenses, including Directors, during the period
Group
Wages and salaries
Social security costs
Other pension costs (note 19)
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 (2017: nil).
Total
2018
$’000
6,958
671
160
7,789
Total
2017
$’000
7,846
753
125
8,724
2018
Number
2017
Number
14
31
6
51
19
32
8
59
76
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 Directors, being the Key Management personnel
Directors
Ashley Stephenson
Andrew Lloyd
Andrew Miller
Jens Montanana
Richard Last
Salary
& fees
$’000
270
346
202
33
25
876
Bonus
$’000
Benefits
$’000
Pension
$’000
Subtotal
$’000
Options
$’000
Company
National
Insurance
Contributions
$’000
50
11
48
–
–
109
21
–
7
–
–
28
–
13
20
–
–
33
341
370
277
33
25
1,046
125
–
78
21
10
234
8
46
32
–
2
88
Total
2018
$’000
Total
2017
$’000
474
416
387
54
37
352
328
310
36
29
1,368
1,055
Bonus payments of $109,000 were made to Directors in respect of the year to 31 December 2018 (2017: $124,000).
Ashley Stephenson has an employment agreement with a wholly owned subsidiary of the Company which provides for the payment of
six months’ base salary if the agreement is terminated by the Company without cause.
Andrew Miller has an employment agreement which can be terminated by either party on not less than six months’ written notice.
A subsidiary company provides for pension contributions (included in the table above) of 10% of basic salary payable to a personal
pension plan.
Andrew Lloyd’s employment agreement was terminated with effect from 4 January 2019, and he resigned as a Director of the Company
on this date, with such termination having been agreed on 31 December 2018. The salary and fees paid to Andrew Lloyd for the year
ended 31 December 2018 in the table above include contractual severance and holiday pay costs totalling $106,000. A subsidiary company
provided for pension contributions (included in the table above) of 5% of basic salary payable to the Group’s defined pension plan.
Jens Montanana notified the Company that he wished to waive his Non-Executive Director fees for the year ended 31 December 2018
of $33,000. Jens Montanana waived his Non-Executive Director fees for the year ended 31 December 2017 of $34,000.
23. Operating lease commitments
The Group has total future minimum lease payments under non-cancellable operating leases totalling $235,000 (2017: $360,000)
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 (2017: $nil).
2018
$’000
2017
$’000
84
91
60
–
235
83
53
1
223
360
77
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 24. Contingent liabilities
Corero Network Security (UK) Limited was in December 2015 awarded a grant of £600,000 for a development project over three years
from Scottish Enterprise. Any monies becoming repayable by Corero Network Security (UK) Limited under the grant terms for breaches
of the grant conditions are guaranteed by the Company. These conditions which are typical for a grant of this nature, and which apply for
a period of five years from the final grant payment date (being 14 March 2019), include maintaining minimum headcount in Scotland and
no change of control.
25. Share options
The Company has the following share option schemes:
• Enterprise Management Incentive Scheme for its employees, which has been approved by HMRC
• Executive Enterprise Management Incentive Scheme, which has been approved by HMRC
• Unapproved Share Option Scheme
• Deferred Payment Share Plan
In August 2010, 1,257,000 options were granted to certain Directors and employees under the Executive Enterprise Management
Incentive scheme and Unapproved Share Option Scheme. The options granted vested immediately upon grant.
All other options granted in the period 2010 to 2018 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. 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. With the exception of options
granted in April 2017 to Directors and certain employee which include a revenue growth performance vesting condition, there are no
vesting conditions for options granted.
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 otherwise determined by the Board or if such cessation is by reason of death in which case the option holder’s
personal representatives must exercise the option within 12 months following the date of the option holder’s death.
On 18 March 2014, the Enterprise Management Incentive Scheme was extended by 10 years to 20 April 2021.
78
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 Share options granted at 31 December 2018 were as follows:
Option Holders
Date
granted
Expiry
date
Enterprise Management Incentive Scheme
Exercise
price –
pence
(cents)
At
1 January
2018
Granted Exercised
Forfeit/
cancelled
At 31
December
2018
Other Holders
April 2015
April 2017
June 2017
April 2025
15p (23c)
500,000
April 2027
8p (10c)
1,613,569
June 2027
13.6 (18c)
1,715,305
September 2017
September 2027
9.1p (12c)
542,000
–
–
–
–
April 2018
April 2028
5.9p (7c)
October 2018
October 2028
11.0p (14c)
–
–
13,000
3,012,432
Executive Enterprise Management Incentive Scheme
Andrew Miller
August 2010
August 2020
25p (41c)
476,000
September 2012
March 2022 54.5p (89c)
80,000
April 2013
May 2014
May-2018
April 2023
25p (38c)
250,000
May 2024
25p (42c)
362,570
May-2028
13.6p (18c)
October 2018
October 2028
11.0p (14c)
–
–
2,356,000
599,479
Andrew Lloyd
April 2017
April 2027
8p (10c)
3,124,999
Unapproved Share Option Scheme
Jens Montanana
August 2010
August 2020
25p (41c)
165,000
March 2012
March 2022 54.5p (89c)
30,000
April 2013
April 2023
25p (38c)
80,000
January 2016
January 2026
20p (29c)
150,000
April 2017
May-2018
April 2027
8p (10c)
994,000
May-2028
13.6p (18c)
October 2018
October 2028
11.0p (14c)
–
–
425,000
400,000
Richard Last
Andrew Lloyd
Ashley Stephenson
Andrew Miller
April 2017
June 2017
April 2027
8p (10c)
450,000
June 2027
13.6 (18c)
180,000
–
–
October 2018
October 2028
11.0p (14c)
–
200,000
April 2017
June 2017
April 2017
June 2017
April 2027
8p (10c)
870,001
June 2027
13.6 (18c)
200,000
April 2027
8p (10c)
2,319,000
June 2027
13.6 (18c) 3,200,000
–
–
–
–
October 2018
October 2028
11.0p (14c)
–
2,400,000
May 2014
April 2015
May 2024
25p (42c)
387,430
April 2025
15p (23c)
300,000
January 2016
January 2026
20p (29c)
500,000
April 2017
April 2027
8p (10c)
1,919,000
–
–
–
–
October 2018
October 2028
11.0p (14c)
–
900,521
–
–
–
–
–
–
–
–
–
–
–
–
500,000
(3,333)
(18,667)
1,591,569
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(10,000)
1,705,305
(522,000)
–
20,000
13,000
(300,000)
2,712,432
(476,000)
(80,000)
(250,000)
(362,570)
–
–
–
–
–
–
–
2,356,000
599,479
3,124,999
(165,000)
(30,000)
(80,000)
(150,000)
–
–
–
–
–
–
–
–
–
–
–
(387,430)
(300,000)
(500,000)
–
–
–
–
994,000
425,000
400,000
450,000
180,000
200,000
870,001
200,000
2,319,000
3,200,000
2,400,000
–
–
–
–
–
1,919,000
900,521
79
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 25. Share options continued
Option Holders
Date
granted
Expiry
date
Exercise
price –
pence
(cents)
At
1 January
2018
Granted Exercised
Forfeit/
cancelled
At 31
December
2018
Other holders
August 2010
August 2020
31p (50c)
308,000
March 2011
March 2021
40p (65c)
290,000
September 2011
September 2021
37.5p (61c)
40,000
March 2012
March 2022 54.5p (89c)
140,000
April 2013
May 2014
April 2023
25p (38c)
100,000
May 2024
25p (42c)
670,666
September 2014
September 2024
25p (41c)
5,000
April 2015
April 2025
15p (23c)
53,000
October 2015
September 2025
15p (23c)
105,000
May 2016
May 2026
20p (29c)
100,000
September 2016
September 2026 22.5p (33c)
462,500
April 2017
June 2017
April 2027
8p (10c)
896,626
June 2027
13.6 (18c)
1,096,750
September 2017
September 2027
9.1p (12c)
505,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
October 2018
October 2028
11.0p (14c)
–
3,338,568
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
308,000
290,000
40,000
140,000
100,000
670,666
(5,000)
–
–
–
53,000
105,000
(80,000)
20,000
(7,500)
455,000
(273,000)
623,626
(331,250)
765,500
–
–
505,000
3,338,568
25,181,416 13,645,000
(3,333)
(4,328,417) 34,494,666
The closing mid-market price for the Company’s shares at 31 December 2018 was 12.5p (16c) and the high and low for the year was 13.35p
(17c) and 5.6p (8c).
In the 12 months to 31 December 2018, 3,333 options were exercised and 4,328,417 options were forfeited.
On 9 June 2017, the Company announced the cancellation and re-granting of options over Ordinary Shares to certain Directors and
employees, with an option re-grant price of 13.6p (“New Option Grant Price”) being the weighted average price of the Company’s historic
investment rounds. A total of 6,667,055 options were granted on 8 June 2017 at the New Option Grant price in return for the cancellation
of existing option grants. The new options have the same vesting, with no performance vesting conditions, and share sale conditions as
the other share option grants.
The Company also announced on 9 April 2017 that it intended to cancel 2,356,000 options previously granted to Andrew Miller and
425,000 options previously granted to Jens Montanana and grant an equal number of new options to each of them (the “New Concert
Party Options”) at the New Option Grant Price. Andrew Miller and Jens Montanana are considered to be a “Concert party” under the City
Code on Takeovers and Mergers. Since the terms of the New Concert Party Options were different from existing options currently held by
Andrew Miller and Jens Montanana, the Company required consent from the Panel on Takeovers and Mergers (“Panel”) to waive the
obligation on them to make a general offer to shareholders under Rule 9 of the Code that could otherwise arise if the New Concert Party
Options were exercised. On 8 May 2018, 2,356,000 previously granted to Andrew Miller and 425,000 options previously granted to Jens
Montanana were cancelled. On 9 May 2018, 2,356,000 options were granted to Andrew Miller and 425,000 options were granted to Jens
Montanana at the New Option Grant Price. The new options have the same vesting, with no performance vesting conditions, and share
sale conditions as the other share option grants. The Panel’s waiver was approved by independent shareholders, being shareholders other
than Andrew Miller and Jens Montanana, at the 2018 Annual General Meeting.
80
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 Share options granted at 31 December 2017 were as follows:
Option Holders
Date
granted
Expiry
date
Exercise
price
Enterprise Management Incentive Scheme
At
1 January
2017
Granted Exercised
Forfeit/
cancelled
At 31
December
2017
Other Holders
March 2011
March 2012
March 2021
40p (65c)
40,000
March 2022
54.5p (89c)
25,000
September 2012
September 2022
43p (70c)
110,000
April 2013
May 2014
April 2023
25p (38c)
85,000
May 2024
25p (42c)
40,000
September 2014
September 2024
25p (41c)
10,000
April 2015
April 2025
15p (23c)
750,000
October 2015
September 2025
15p (23c)
57,000
January 2016
January 2026
20p (29c)
1,067,000
May 2016
April 2017
June 2017
May 2026
22.5p (33c)
31,305
April 2027
8p (10c)
June 2027
13.6 (18c)
September 2017
September 2027
9.1p (12c)
–
–
–
1,620,569
1,715,305
542,000
Executive Enterprise Management Incentive Scheme
Andrew Miller
August 2010
August 2020
25p (41c)
476,000
September 2012
March 2022
54.5p (89c)
80,000
Andrew Lloyd
April 2013
May 2014
April 2017
April 2023
25p (38c)
250,000
May 2024
25p (42c)
362,570
April 2027
8p (10c)
–
3,124,999
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(40,000)
(25,000)
(110,000)
(85,000)
(40,000)
(10,000)
–
–
–
–
–
–
(250,000)
500,000
(57,000)
– (1,067,000)
(31,305)
–
–
–
(7,000)
1,613,569
–
–
–
–
–
–
–
1,715,305
542,000
476,000
80,000
250,000
362,570
3,124,999
81
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements Expiry
date
Exercise
price
At
1 January
2017
Granted Exercised
Forfeit/
cancelled
At 31
December
2017
August 2020
March 2022
April 2023
January 2026
April 2027
March 2022
April 2023
January 2026
April 2027
June 2027
April 2023
May 2024
January 2026
April 2027
June 2027
March 2022
April 2023
May 2024
April 2025
January 2026
April 2027
June 2027
May 2024
April 2025
January 2026
April 2027
August 2020
March 2021
March 2021
September 2021
March 2022
September 2022
April 2023
September 2023
May 2024
September 2024
April 2025
September 2025
May 2026
September 2026
April 2027
June 2027
September 2027
25p (41c)
54.5p (89c)
25p (38c)
20p (29c)
8p (10c)
54.5p (89c)
25p (38c)
20p (29c)
8p (10c)
13.6 (18c)
25p (38c)
25p (42c)
20p (29c)
8p (10c)
13.6 (18c)
54.5p (89c)
25p (38c)
25p (42c)
15p (23c)
20p (29c)
8p (10c)
13.6 (18c)
25p (42c)
15p (23c)
20p (29c)
8p (10c)
31p (50c)
36p (59c)
40p (65c)
37.5p (61c)
54.5p (89c)
43p (70c)
25p (38c)
25p (40c)
25p (42c)
25p (41c)
15p (23c)
15p (23c)
20p (29c)
22.5p (33c)
8p (10c)
13.6 (18c)
9.1p (12c)
165,000
30,000
80,000
150,000
–
20,000
60,000
100,000
–
–
60,000
40,000
100,000
–
–
–
–
–
–
994,000
–
–
–
450,000
180,000
–
–
–
870,001
200,000
–
180,000
–
400,000
–
1,720,000
–
200,000
–
700,000
–
2,319,000
– 3,200,000
–
–
–
1,919,000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,239,626
1,371,750
505,000
20,251,250
387,430
300,000
500,000
–
308,000
54,750
290,000
163,500
206,250
7,000
287,000
40,000
1,054,416
120,000
343,000
277,000
1,073,000
470,500
–
–
–
13,270,721
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(20,000)
(60,000)
(100,000)
–
–
(60,000)
(40,000)
(100,000)
–
–
165,000
30,000
80,000
150,000
994,000
–
–
–
450,000
180,000
–
–
–
870,001
200,000
–
(180,000)
–
–
–
(400,000)
–
– (1,720,000)
–
(200,000)
–
–
(700,000)
–
–
–
2,319,000
– 3,200,000
–
387,430
–
–
300,000
–
–
500,000
–
–
1,919,000
–
–
308,000
–
–
(54,750)
–
–
290,000
–
–
40,000
(123,500)
–
140,000
(66,250)
–
–
–
(7,000)
100,000
(187,000)
–
(40,000)
–
–
670,666
(383,750)
–
5,000
(115,000)
–
53,000
(290,000)
–
105,000
(172,000)
–
100,000
(973,000)
–
462,500
(8,000)
–
896,626
(343,000)
–
1,096,750
(275,000)
–
505,000
–
–
25,181,416
– (8,340,555)
25. Share options continued
Richard Last
Date
Option Holders
granted
Unapproved Share Option Scheme
August 2010
Jens Montanana
March 2012
April 2013
January 2016
April 2017
March 2012
April 2013
January 2016
April 2017
June 2017
April 2013
May 2014
January 2016
April 2017
June 2017
Andrew Lloyd
Ashley
Stephenson
Andrew Miller
Other holders
March 2012
April 2013
May 2014
April 2015
January 2016
April 2017
June 2017
May 2014
April 2015
January 2016
April 2017
August 2010
March 2011
March 2011
September 2011
March 2012
September 2012
April 2013
September 2013
May 2014
September 2014
April 2015
October 2015
May 2016
September 2016
April 2017
June 2017
September 2017
82
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 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.
Total number of options granted to Directors
31-Dec-18
Options
granted
31-Dec-17
Options
granted Relevant Share Option scheme
Ashley Stephenson
7,919,000
5,519,000 Unapproved Share Option Scheme
Andrew Lloyd
Andrew Miller
4,195,000
4,195,000 Executive Enterprise Management Scheme and Unapproved Share Option Scheme
5,915,000
4,415,000 Executive Enterprise Management Scheme and Unapproved Share Option Scheme
Jens Montanana
1,819,000
1,419,000 Unapproved Share Option Scheme
Richard Last
830,000
630,000 Unapproved Share Option Scheme
20,678,000
16,178,000
The options held by Andrew Lloyd at 31 December 2018 include 1,331,667 share options which were forfeited in accordance with the
settlement agreement with Andrew Lloyd dated 2 January 2019.
Share-based payments
The Nominations and Remuneration Committee (“NRC”) approves the grant of share options to employees of the Group under the
Group’s share option schemes.
Share 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 NRC. The share options granted are required to be exercised within 10 years from the date of grant.
Share options are valued using the Black-Scholes option-pricing model.
Share options granted
The weighted average fair value of the options granted in the year was 4.1p (5.5c). The value of share 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
Estimated years to exercise
Risk free interest rate
2018
2017
6p–11p (7c–14c)
8p–9p (10c–12c)
6p–13.6p (7c–18c)
8p–13.6p (10c–18c)
56.1–61.5%
4.3–4.8
1.1%
0.26%
9.3–9.7
0.39–0.74%
83
Notice of AGMCorporate DirectoryOverviewStrategic ReportGovernanceFinancial Statements 25. Share options continued
The table below 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
8.6 years
6.3 years
9,607,999
6p–55p (8c–70c)
9p (12c)
12p (15c)
0.2%–61.5%
0.35%–2.5%
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 $22,000 (2017: $21,000) relating to employee
share-based payments.
26. Related parties and transactions
As part of the subscription and placing on 27 April 2018, Jens Montanana contributed $1.3 million, Richard Last contributed $54,000 and
Andrew Lloyd contributed $8,000 (note 20).
As part of the subscription and placing on 25 April 2017, Jens Montanana contributed $4.4 million, Andrew Miller contributed $13,000 and
Andrew Lloyd contributed $19,000 (note 20).
The Directors consider the Group’s key management personnel to be the Board of Directors of the Company whose compensation is
detailed in note 22.
Company key management compensation was $nil (2017: $nil) as the key management are employed by subsidiaries.
84
NOTES TO THE FINANCIAL STATEMENTS CONTINUEDCorero Network Security plc Annual Report and Accounts 2018Corero Network Security plc Annual Report and Accounts 2018 NOTICE OF ANNUAL GENERAL MEETING
NOTICE IS HEREBY GIVEN that the annual general meeting of the Company will be held at 11.00 a.m. on 21 May 2019 at 68 Lombard Street,
London, EC3V 9LJ 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 2018, together with the Directors’ report and
the Auditor’s report on those annual accounts.
2. Re-election of Director
To re-elect Mr Richard Last, 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 Ashley Stephenson, who retires by rotation in accordance with the Company’s articles of association, as a Director of
the Company.
4. Re-election of Director
To re-elect Mr Peter George, who was appointed to the Board on 3 January 2019, as a Director of the Company.
5. 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.
6. 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 8 and 9 will be proposed as special resolutions:
7. 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 £1,339,972.76 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.
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Corporate DirectoryOverviewStrategic ReportGovernance
NOTICE OF ANNUAL GENERAL MEETING CONTINUED
8. 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 7, 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 7 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 8(a) above) of equity securities up to a
maximum nominal amount of £401,991.83, 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.
9. 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 £401,991.83
representing approximately 10% 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% 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
86
Corero Network Security plc Annual Report and Accounts 2018 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.
To be entitled to attend and vote at the AGM (and for the purpose of the determination by the Company of the number of votes they may cast), shareholders must be registered in the
Register of Members of the Company at close of trading on 17 May 2019. Changes to the Register of Members after the relevant deadline shall be disregarded in determining the rights of
any person to attend and vote at the AGM.
2. Shareholders, or their proxies, intending to attend the AGM in person are requested, if possible, to arrive at the AGM venue at least 20 minutes prior to the commencement of the AGM at
11.00 am (UK time) on 21 May 2019 so that their shareholding may be checked against the Company’s Register of Members and attendances recorded.
3. Shareholders are entitled to appoint another person as a proxy to exercise all or part of their rights to attend and to speak and vote on their behalf at the AGM. A shareholder may appoint
more than one proxy in relation to the AGM provided that each proxy is appointed to exercise the rights attached to a different ordinary share or ordinary shares held by that shareholder.
A proxy need not be a shareholder of the Company.
4.
5.
In the case of joint holders, where more than one of the joint holders purports to appoint a proxy, only the appointment submitted by the most senior holder will be accepted. Seniority is
determined by the order in which the names of the joint holders appear in the Company’s Register of Members in respect of the joint holding (the first named being the most senior).
A vote withheld is not a vote in law, which means that the vote will not be counted in the calculation of votes for or against the resolution. If no voting indication is given, your proxy will vote
or abstain from voting at his or her discretion. Your proxy will vote (or abstain from voting) as he or she thinks fit in relation to any other matter which is put before the AGM.
6. You can vote either:
• by logging on to www.signalshares.com and following the instructions;
• If you need help with voting online, or require a paper proxy form, please contact our Registrar, Link Asset Services, on 0871 664 0391 if calling from the UK, or +44 (0) 371 664 0391
if calling from outside of the UK, or email Link at enquiries@linkgroup.co.uk. Calls cost 12p per minute plus your phone company’s access charge. Calls outside the United Kingdom
will be charged at the applicable international rate. Lines are open between 09:00 – 17:30, Monday to Friday excluding public holidays in England and Wales.
• in the case of CREST members, by utilising the CREST electronic proxy appointment service in accordance with the procedures set out below.
In each case the appointment of a proxy must be received by Link Asset Services at 34 Beckenham Road, Beckenham, Kent, BR3 4TU by 11.00 am on 17 May 2019.
7.
8.
9.
If you return more than one proxy appointment, either by paper or electronic communication, the appointment received last by the Registrar before the latest time for the receipt of proxies
will take precedence. You are advised to read the terms and conditions of use carefully. Electronic communication facilities are open to all shareholders and those who use them will not be
disadvantaged.
The return of a completed form of proxy, electronic filing or any CREST Proxy Instruction (as described in note 11 below) will not prevent a shareholder from attending the AGM and voting in
person if he/she wishes to do so.
CREST members who wish to appoint a proxy or proxies through the CREST electronic proxy appointment service may do so for the AGM (and any adjournment of the AGM) by using the
procedures described in the CREST Manual (available from www.euroclear.com/site/public/EUI). CREST Personal Members or other CREST sponsored members, and those CREST members
who have appointed a service provider(s), should refer to their CREST sponsor or voting service provider(s), who will be able to take the appropriate action on their behalf.
10. 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 issuer’s agent (ID RA10) by 11.00 am on 17 May 2019. For this purpose, the time of receipt will be taken to mean the time (as determined by the
timestamp applied to the message by the CREST application host) from which the issuer’s agent is able to retrieve the message by enquiry to CREST in the manner prescribed by CREST.
After this time, any change of instructions to proxies appointed through CREST should be communicated to the appointee through other means.
11. CREST members and, where applicable, their CREST sponsors or voting service providers should note that Euroclear UK & Ireland Limited does not make available special procedures in
CREST for any particular message. 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(s), to procure that his CREST sponsor or
voting service provider(s) take(s)) 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 sponsors or voting system providers 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.
12. Any corporation which is a shareholder can appoint one or more corporate representatives who may exercise on its behalf all of its powers as a shareholder provided that no more than one
corporate representative exercises powers in relation to the same shares.
13. As at 10 April 2019 (being the latest practicable business day prior to the publication of this Notice), the Company’s ordinary issued share capital consists of 401,995,161 ordinary shares,
carrying one vote each. Therefore, the total voting rights in the Company as at 10 April 2019 are 401,995,161.
14. Under Section 527 of the Companies Act 2006, shareholders meeting the threshold requirements set out in that section have the right to require the Company to publish on a website
a statement setting out any matter relating to: (i) the audit of the Company’s financial statements (including the Auditor’s Report and the conduct of the audit) that are to be laid before
the AGM; or (ii) any circumstances connected with an auditor of the Company ceasing to hold office since the previous AGM at which annual financial statements and reports were laid in
accordance with Section 437 of the Companies Act 2006 (in each case) that the shareholders propose to raise at the relevant AGM. The Company may not require the shareholders
requesting any such website publication to pay its expenses in complying with Sections 527 or 528 of the Companies Act 2006. Where the Company is required to place a statement on
a website under Section 527 of the Companies Act 2006, it must forward the statement to the Company’s auditor not later than the time when it makes the statement available on the
website. The business which may be dealt with at the AGM for the relevant financial year includes any statement that the Company has been required under Section 527 of the Companies
Act 2006 to publish on a website.
15. Any shareholder attending the AGM has the right to ask questions. The Company must cause to be answered any such question relating to the business being dealt with at the AGM but
no such answer need be given if: (a) to do so would interfere unduly with the preparation for the AGM or involve the disclosure of confidential information; (b) the answer has already been
given on a website in the form of an answer to a question; or (c) it is undesirable in the interests of the Company or the good order of the AGM that the question be answered.
16. The following documents are available for inspection during normal business hours at the registered office of the Company on any business day from the date of this Notice until the time of
the AGM and may also be inspected at the AGM venue, as specified in this Notice, from 10.00 am on the day of the AGM until the conclusion of the AGM:
copies of the Directors’ letters of appointment or service contracts.
17. You may not use any electronic address (within the meaning of Section 333(4) of the Companies Act 2006) provided in either this Notice or any related documents (including the form of
proxy) to communicate with the Company for any purposes other than those expressly stated.
A copy of this Notice, and other information required by Section 311A of the Companies Act 2006, can be found on the Company’s website at www.corero.com
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Corporate DirectoryOverviewStrategic Report
CORPORATE DIRECTORY
Directors
Jens Montanana (Non-Executive Chairman)
Richard Last (Non-Executive Director)
Peter George (Non-Executive Director)
Ashley Stephenson (CEO)
Andrew Miller (CFO)
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
Link Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent
BR3 4TU
Website address
www.corero.com
88
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Registered Office
Regus House
Highbridge
Oxford Road
Uxbridge
Middlesex
UB8 1HR