(Formerly: Crossrider plc) Annual Report & Accounts 2017 K a p e T e c h n o l o g i e s p l c A n n u a l R e p o r t & A c c o u n t s 2 0 1 7 OVERVIEW Kape is a cybersecurity company which utilises its proprietary digital distribution technology to optimise its reach and create a superb user experience. Kape offers products which provide online security, privacy and an optimal online experience. Kape’s vision is to provide online autonomy for a secure and accessible personal digital life. STRATEGIC REPORT FINANCIALS Highlights Chairman’s statement Chief Executive Officer’s review Chief Financial Officer’s review 1 2 4 8 Principal risks and uncertainties 12 GOVERNANCE Independent auditor’s report to the members of Kape Technologies plc Consolidated statement of comprehensive income Consolidated statement of financial position 23 28 29 Consolidated statement of changes in equity 30 Board of Directors Corporate governance Remuneration Committee report Directors’ report 14 16 18 20 Directors’ responsibility statement 22 Consolidated statement of cash flows Notes to the consolidated financial statements Shareholder information and advisors 31 32 IBC HIGHLIGHTS 2017 $8.3m Adjusted EBITDA $66.4m Revenue $69.5m Cash balance and no debt $7.6m Adjusted cash flow from operations 92% Conversion of adjusted EBITDA R E P O R T S T R A T E G C I C O R P O R A T E G O V E R N A N C E I F N A N C A L I Acquisition of CyberGhost, a leading SaaS cybersecurity provider S T A T E M E N T S Significant growth in paying users Substantial progress made in transitioning the business towards a pure SaaS model KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 1 CHAIRMAN’S STATEMENT DON ELGIE NON-EXECUTIVE CHAIRMAN 2 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 2017 has been a pivotal year for our business in which we fully aligned our operations to focus on cybersecurity software. Introduction 2017 has been a pivotal year for our business in which we fully aligned our operations to focus on cybersecurity software. Our management team has worked tirelessly to deliver on our stated growth objectives which has now culminated in the renaming and rebranding of the business to Kape Technologies plc (previously Crossrider plc), an important milestone in the repositioning of the business. Since October 2016, the Company has focused on both acquiring and developing cybersecurity software solutions for consumers, whilst utilising its proprietary digital distribution technology to grow its user base across the Company’s product suite. The Company’s management has deployed Kape’s in-depth expertise and technological capabilities within its digital marketing platform to support and grow our expanded customer base and promote our own products and services. This market leading digital pedigree has enabled the Group to accelerate the Company’s successful transformation during 2017. Products In the last year, management has taken great strides to broaden our product stack, which includes our Reimage software and DriverAgent solutions. In March 2017, we acquired CyberGhost, a cybersecurity SaaS provider with specific focus on the provision of virtual private network (“VPN”) solutions, as well as a sizeable customer base. With CyberGhost now fully integrated into the Group, I am pleased to report it has performed ahead of management’s expectations both on a revenue and profit level. In addition, and as part of the expansion into new products, the Company has launched Reimage for Mac, expanding the product’s potential customer base. We continue to experience positive customer traction across all our products, further demonstrating our ability to successfully leverage our expertise and digital marketing platform in order to drive higher margins. Strategic priorities Our management team remains committed to delivering sustainable growth and is therefore focused on the following key strategic priorities: • to develop the Company’s product offering organically through internal R&D and to grow our user base across the Company’s growing portfolio of software products, leveraging Kape’s proprietary distribution technology and expertise; • to continue to implement our plan for new acquisitions that expand both the Company’s product offering and reach, with the potential to enter additional complementary sector verticals; and • to grow the Company’s recurring revenue stream by gradually transitioning to a fully SaaS-based model, which will improve both the visibility and quality of earnings, as well as increasing the lifetime value of our customers. Board appointments In February 2017, the Company appointed Moran Laufer, Chief Financial Officer of Kape, to the Board of the Company. Moran has been a key member of the Company’s management, supporting its recent acquisitions as well as being part of the finance team since 2012, successfully supporting the Group’s admission to AIM in 2014. Looking forward Kape’s management has been successful in demonstrating its ability to both drive organic growth initiatives alongside maximising the benefits from strategic acquisitions. The Board is therefore confident that with its new brand positioning, strategic growth priorities and ongoing focus on consumer cybersecurity, Kape will be able to continue to maximise shareholder value. The Board remains confident in delivering year-on-year growth in 2018. Don Elgie Non-Executive Chairman 12 March 2018 887,000 paying customers 82% growth in premium subscriptions KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 3 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S REVIEW IDO ERLICHMAN CHIEF EXECUTIVE OFFICER 172% underlying Adjusted EBITDA 4 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Over the past 12 months we have delivered on our growth strategy. The group has made significant headway in developing our product suite, which has been greatly enhanced. Introduction When I joined Kape (formerly Crossrider plc) in May 2016, I did so with a clear vision of where I, with the full support of the Board, wanted to take this business. It was clear that despite our pedigree in digital marketing, our future laid beyond adtech. I am therefore delighted to look back at 2017 as a year of significant strategic and operational progress. Over the past 12 months we have delivered on a number of key milestones and taken notable steps to becoming one of the leading next generation providers of consumer cybersecurity products. We have built on our existing PC repair (Reimage) and device driver update (DriverAgent) solutions, through both the acquisition and internal development of new products during the year, which is a clear sign of our ambition. Central to our strategy has been to shift our product focus to be B2C-driven and SaaS enabled thereby increasing our recurring revenue base, creating a more predictable sales platform from which to grow. We are therefore delighted to have delivered such a strong underlying EBITDA performance, up 172%, excluding the Web Apps and License segment, further demonstrating the excellent performance of our business model. Operational update In March 2017, we acquired CyberGhost, a leading cybersecurity SaaS provider with a focus on the provision of virtual private network (“VPN”) solutions. The acquisition was successfully integrated into Kape by June 2017 and I am delighted to report, made a positive net profit contribution in the year of $1.5 million. With CyberGhost now consolidated into the larger Kape operation, we have been successful in generating significant synergies and delivering superior customer traction post-integration with our digital user acquisition platform. This resulted in an increase in CyberGhost’s user base by over 30% compared to December 2016 and the last quarter of 2017 saw record sales for the business in terms of volume and EBITDA. We have grown Kape’s product portfolio this year and it now consists of four main products: the CyberGhost VPN, a SaaS product, as well as the Reimage PC, DriverAgent and Reimage for Mac, which are purchased on a one-time and yearly unlimited use basis with a technical support component. We have started to implement a SaaS model in the Reimage PC and expect to see the results of this change towards the end of 2018 when the licences come up for renewal. In addition, we started to utilise the growth in our product offering and user base and we now offer to purchase CyberGhost and Reimage as a package, providing our customers the best in class products in one place. 01 TARGET MARKET User acquisition 03 EXISTING CUSTOMERS Rent on/Upsell 02 PROSPECTIVE CUSTOMERS Funnel expertise 01 TARGET MARKET User acquisition › Advanced user acquisition technology and leveraging of digital marketing platform › Utilise extensive network to drive users to our products › Leverage wide user base for indirect user acquisition › Highly efficient method to drive traffic 02 PROSPECTIVE CUSTOMERS 03 EXISTING CUSTOMERS Organic › High brand awareness drives users to our products › Referrals from existing customers Funnel expertise › Proprietary data driven automatic funnel › Ongoing customisation of product › Automatic personalisation › Consumers go directly of user journey to our product websites or search for our product as a result of growing media presence › Proprietary targeting of purchase process Rent on/Upsell › Once acquired, provide a subscription model to grow customer’s LTV › Provide servicing such as remote technician and 24/7 support to increase customer retention › Convert users to additional Kape products by channelling customers to further owned software solutions › Increase the value of the user KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 5 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT CHIEF EXECUTIVE OFFICER’S REVIEW CONTINUED To implement the change in business model and focus on profitability, growth and earning predictability, we have instated five key performance indicators which guide how we measure the success of our operations across the business: • deferred income; • adjusted operating cash flow; • retention rate; • paying users; and • premium subscriptions. Deferred income and adjusted operating cash flow are key measures as they demonstrate the true value of each product purchase from our customers, given that they recognise the benefits across the lifetime of the contract. Paying users and premium subscriptions represent our ability to grow our customer base and we expect these to grow over time. The retention rate is an indication of the quality of our service and products and our aim is for this to remain constant over time and improve in the medium term. Key Performance Indicators Paying users (thousands) Premium subscriptions (thousands) Retention rate Adjusted operating cash flow ($’000) Deferred income ($’000) We have also been successful in growing our paying user base for Reimage and DriverAgent by over 18% and introduced a subscription based payment model. We also launched a Mac version of Reimage in September 2017 to complement our highly successful PC solution. We believe this new release will substantially grow our potential addressable market for this product. Given our focus on further strengthening our SaaS business model, 2018 will be the first year we are able to generate significant revenues from our existing customer base. Therefore, during 2018, we expect to deliver $8.0 million of recurring income from existing users2, which greatly improves both the visibility and quality of our earnings. 2017 887 260 69% 7,641 4,014 2016 734 143 69% 7,873 2,1871 6 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Cybersecurity market Management identified the consumer cybersecurity space as presenting a significant opportunity for Kape, as a sizeable growth market with few nimble B2C focused-players that can easily adapt to the ever-changing digital landscape. As the internet has become increasingly central to people’s lives and concurrently hacking has also evolved significantly, the sharing of data online is posing an increasing threat to individuals’ online security. In 2004, the global cybersecurity market was worth $3.5 billion and in 2017 it was worth over $120 billion, representing growth of over 35 times in 13 years, with key growth drivers including:3 • a growing number of internet users • to c. 3.17 billion globally; increased network and WiFi connectivity across the world; • commercial entities increasingly collecting personal data; • cybercrime targeting individuals, not just enterprise-level hacks; • heightened regulatory uncertainty around privacy and online security; and • the emergence of the Internet of Things. The proliferation of internet users has led to a sizeable B2C cybersecurity marketplace, with the addressable market for personal digital safety in 2018 estimated to be $10 billion. Kape is well-placed to capitalise on the increasing awareness of individuals to protect both their privacy and security online, as the Company has end-to end control over the user journey by leveraging its digital marketing technology and expertise. The Company’s renewed focus on the consumer cybersecurity market is increasingly coming to fruition, as evidenced by the strong performance of Kape’s core divisions and existing software solutions in 2017. This, coupled with the acquisition and successful integration and performance of CyberGhost, is a real testament to our ability to deliver in the cybersecurity space. Rebranding Given the extensive re-engineering of the business, we took the decision to rename and rebrand the Company to Kape Technologies plc. Kape will be the future umbrella for all our products and services as we focus on delivering upon the following strategic priorities: • strengthening and developing both our consumer and corporate brand globally; • better leveraging product cross- selling opportunities within the cybersecurity arena; • growing our product offering through both organic growth and acquisitions; • developing and increasing our • marketing reach under a unified banner; and further strengthening our SaaS business, thereby increasing our recurring revenue base. Kape’s core principles are to be proactive, accessible and bold. We believe there is a real need for innovative solutions for customers and a requirement for online privacy and security as individuals manoeuvre through today’s ever-changing online environment. It is this shift in buying and browsing behaviour that is ultimately driving demand for our products. Current trading and outlook Over the past 12 months we have delivered on our stated growth strategy. The Group has made significant headway in developing our product suite, which has been greatly enhanced by the addition of CyberGhost. The launch of Reimage for Mac is a great example of our internal development capability and our unique ‘in-house’ digital user acquisition expertise has enabled Kape to expand our user base globally. We are motivated by the opportunities that exist within our growing portfolio of products and continue to constantly evaluate selective acquisition opportunities which could potentially broaden our software portfolio and accelerate our expansion into the global consumer cybersecurity market. In 2018, we are focusing on two core growth initiatives: • to continue to grow organically against our key KPIs, including users and revenues from our existing product portfolio; and • to deliver on growth-enhancing acquisitions which incorporate the following criteria: – a sizeable and growing user base; – an established recurring revenue model; and – the ability to deliver strong synergies with both Kape’s digital distribution capabilities and expertise. We have made a strong start to 2018, with record monthly sales, compared to the equivalent period in 2017, achieved across our products as we continue to reap the benefits of our renewed focus on the cybersecurity market. The Board therefore remains confident in delivering year-on-year growth in 2018, in line with market expectations. Special dividend Following our robust performance this year and significant adjusted cash flow from operations of $7.6 million, the Board has declared a special dividend of 4.93 US$ cents per share, amounting to a total of $7.0 million. This is the first special dividend the Company has issued; it follows the successful transition of the business, will contribute to maintaining balance sheet efficiency and reflects our confidence in the business. The dividend shall be paid in sterling and therefore it will be subject to a conversion exchange rate from US dollars based on a GBP/USD rate of 1.3887, being the rate at 4.30 pm on 12 March 2018; as a result shareholders will receive 3.55 pence per share. The special dividend will become payable on 13 June 2018 to those shareholders on the Company’s register as at the record date of 25 May 2018. The ex-dividend date is 24 May 2018. Ido Erlichman Chief Executive Officer 12 March 2018 1 On a proforma basis if CyberGhost was part of the Group on 31 December 2016. 2 Based on deferred revenue balance and current retention rate for existing subscriptions. 3 The Cybersecurity Market Report, Q2 2017 edition by Cybersecurity Ventures. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 7 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT CHIEF FINANCIAL OFFICER’S REVIEW MORAN LAUFER CHIEF FINANCIAL OFFICER 35.7% App Distribution margin 8 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Strong financial performance of the core App Distribution and Media segments show a significant increase of 23.0% in revenue and 46.9% in combined segment results. Overview Revenue for the year to 31 December 2017 increased by 17.4% to $66.4 million (2016: $56.5 million) and Adjusted EBITDA1 by 28.9% to $8.3 million (2016: $6.4 million). The increase was driven by the strong financial performance of the core App Distribution and Media segments which, excluding the Web Apps and License segment, shows a significant increase of 23.0% in revenue and 46.9% in combined segment results. The increase in core activities was offset by the winding down of the Web Apps and License business that was completed in September 2017. Kape remains a highly cash generative business, with cash generated from operations after adjusting for one-off non-recurring items of $7.6 million (2016: $7.9 million). This represents adjusted cash conversion of 92% (2016: 123%). The Group balance sheet remains strong with cash of $69.5 million at 31 December 2017 (31 December 2016: $72.1 million) and no debt. In March 2017, Kape completed the acquisition of CyberGhost S.A for a maximum consideration of €9.1 million ($9.6 million) out of which €3.1 million ($3.3 million) was in cash at closing, €3.0 million ($3.2 million) in nominal value share options, which are subject to the continued employment of the founder over the vesting period, and a deferred earn-out consideration capped at €3.0 million ($3.2 million) million. €1.75 million ($1.9 million) was paid at closing as a prepayment of the deferred earn-out consideration. The fair value of the contingent consideration at acquisition was €1.4 million ($1.5 million). On 20 November 2017, the Company repurchased 3,810,667 options out of the 4,400,000 options granted to the founder for total cash consideration of €3.2 million ($3.8 million) following his reposition from Managing Director to Chairman and Corporate Development Manager of CyberGhost. Out of the total consideration, €1.6 million ($1.9 million) was paid upon execution of the repurchase agreement, while the remaining amount is to be paid in eight equal instalments. In April 2017, Kape increased its holding in Clearvelvet Trading Ltd (“Clearvelvet”), a programmatic video advertising company, from 16.67% to 50.01%, for an initial consideration of $1.7 million out of which $0.8 million was in cash and $0.9 million conversion of a loan balance. The cash balance of Clearvelvet at acquisition was $1.4 million. In addition, the sellers would have been entitled to receive up to a total of $1.4 million in earn-out consideration, to be satisfied in cash subject to their continued employment by Clearvelvet. The earn-out consideration was contingent on achieving EBITDA of $1.7 million in 2017 (pro-rated from 60% of target) and $2.2 million for 2018 (pro-rated from 67% of target). The 2017 EBITDA goal was not achieved, as a result no earn-out has been charged for 2017 and no accrual made for 2018 earn-out. The earn-out consideration is accounted for remuneration in the post-acquisition income statement rather than as part of the acquisition cost. Segment result Media Revenue Segment result 2017 $’000 2016 $’000 48,226 15,781 38,241 13,783 2017 $’000 17,207 4,464 2016 $’000 11,267 3,480 2,376 4,508 2,376 4,508 66,383 56,532 24,047 19,255 App Distribution Media Web Apps and License Revenue The segment result has been calculated using revenue less costs directly attributable to that segment. Cost of sales comprises commissions paid to publishers and payment processing fees. Direct sales and marketing costs comprise traffic acquisition costs. App Distribution Revenue Cost of sales Direct sales and marketing costs Segment result Segment margin % 2017 $’000 15,781 (11,317) 4,464 28.3 2016 $’000 13,783 – (10,303) 3,480 25.3 In the Media division, revenues increased by 14.5% and segment results increased by 28.3% to $4.5 million. The increase was driven by the contribution of the Clearvelvet programmatic video advertising activity that was consolidated, starting in April 2017 and compensating for a decrease in revenue from the mobile content and mobile apps marketing verticals. Web Apps and License Revenue Cost of sales Direct sales and marketing costs Segment result Segment margin (%) 2017 $’000 2016 $’000 48,226 (4,572) (26,447) 38,241 (2,360) (24,614) 17,207 11,267 Revenue Cost of sales Direct sales and marketing costs 35.7 29.5 Segment result Segment margin % 2017 $’000 2,376 – – 2,376 100.0 2016 $’000 4,508 – – 4,508 100.0 During the period, App Distribution margins significantly improved, reaching 35.7% compared to 29.5% in 2016. The improved return on marketing investment resulted in a $10.0 million increase in revenues and $5.8 million increase in the segment result, which represents a 52.7% uplift. The increase is attributable to organic growth due to improvement in user acquisition processes and traffic quality which resulted in better conversion rates, and a decrease in average user acquisition cost as well as the addition of the DriverAgent and CyberGhost software products to the Company’s portfolio in October 2016 and March 2017 respectively. In accordance with the Board’s decision to cease investment in the Web Apps and License segment, which Kape reported in 2016, revenue in the period came solely from a software licence and services agreement between Kape and Playtech Software pursuant to the terms of which Kape has granted to Playtech Software a licence to use certain software modules for Playtech Software’s licensees’ branded casino software. The agreement expired on 18 September 2017. Following the expiration of the licence and services agreement, no further revenue is expected to be generated from this segment and as such it is expected this will be the last time we report it. 1 Adjusted EBITDA is a company specific measure which is calculated as operating loss before depreciation, amortisation, exceptional and non-recurring costs, employee share-based payment charges and impairment of intangible assets which are considered to be one-off and non-recurring in nature as set out in note 6. The Directors believe that this provides a better understanding of the underlying trading performance of the business. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 9 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT CHIEF FINANCIAL OFFICER’S REVIEW CONTINUED Adjusted EBITDA Adjusted EBITDA for the year to 31 December 2017 was $8.3 million (2016: $6.4 million). Adjusted EBITDA is a non-GAAP company specific measure which is considered to be a key performance indicator for the Group’s financial performance. It excludes share-based payment charges and expenses which are considered to be one-off and non-recurring in nature and are excluded from the following analysis: Revenue Cost of sales Direct sales and marketing costs Segment result Indirect sales and marketing costs Research and development costs Management, general and administrative cost Adjusted EBITDA 2017 $’000 66,383 (4,572) (37,764) 24,047 (6,207) (696) 2016 $’000 56,532 (2,360) (34,917) 19,255 (4,265) (1,299) Loss before tax Loss before tax has decreased to $2.9 million compared to $10.0 million in 2016. Loss after tax Loss after tax was $3.4 million (2016: $10.7 million). The tax charge derives mainly from Group subsidiaries’ residual profits. The Group continues to recognise a deferred tax asset of $0.1m (2016: $0.2m) in respect of tax losses accumulated in previous years. Cash flow Cash flow from operations Exceptional and non-recurring payments Adjusted cash flow from operations 2017 $’000 6,533 1,108 7,641 92% 2016 $’000 5,922 1,951 7,873 123% (8,883) (7,278) % of Adjusted EBITDA 8,261 6,413 Operating loss A reconciliation of Adjusted EBITDA to operating loss is provided as follows: Adjusted EBITDA Employee share-based payment charge Charge for repurchase of employee options Exceptional and non-recurring costs Depreciation and amortisation Impairment of intangible assets Operating loss 2017 $’000 2016 $’000 8,261 6,413 (340) (716) (3,176) (899) (6,445) – – (862) (9,884) (4,683) (2,599) (9,732) Exceptional and non-recurring costs for the full year 2017 comprised $0.3 million of acquisition bonuses to employees, other non-recurring staff costs of $0.1 million, professional services related to business combination of $0.3 million and a $0.2 million expense from the repurchase of the founder of CyberGhost’s share options on 20 November 2017. The charge for repurchase of employee options of $3.2 million is following the acceleration of the repurchased share options. Cash flow from operations was strong at $6.5 million (2016: $5.9 million). Adjusted cash flows from operations after adding back payments that are one-off in nature and deferred payment for past acquisition that was treated as a remuneration expense in previous years, was $7.6 million (2016: $7.9 million). This represents a cash conversion of 92% of Adjusted EBITDA (2016: 123%). Tax paid net of refunds in the period was $0.1 million (2016: $0.9 million). Cash spent in the period on capital expenditure of $2 million (2016: $0.8 million) mainly comprises of capitalised development costs and purchase of fixed assets. Net cash paid for acquisitions in the period totalled $5.3 million (2016: $1.4 million), out of which the Company paid $5.7 million in relation to the CyberGhost acquisition and $0.4 million net inflow related to the acquisition of an additional 33.3% in Clearvelvet and the consolidation of its cash balance in April 2017. As a result, net cash outflow from investing activities was $7.4 million (2016: $3.1 million). In addition, $0.2 million paid in the period for past acquisitions is included in the operational cash flow as it is treated as remuneration as required by IFRS (2016: $1.1 million) In November 2017, the Company repurchased 3.8 million share options from CyberGhost’s founder for a total consideration of $3.8 million, out of which $1.9 million was paid in the year and the rest will be paid in eight equal quarterly instalments. 10 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Financial position At 31 December 2017, the Company had cash of $69.5 million (31 December 2016: $72.1 million), net assets of $79.4 million (31 December 2016: $80.5 million) and is debt free. At 31 December 2017, trade receivables were $8.5 million (31 December 2016: $5.6 million) which represented 42 days outstanding, (31 December 2016: 44 days). Early adoption of IFRS 15 In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers (“IFRS 15”), a new standard related to revenue recognition. Under the standard, revenue is recognised when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company has adopted IFRS 15 using the cumulative effect method applied to those contracts which were not completed as of 1 January 2017. Revenue recognition relating to most of our products and services remains substantially unchanged and, in consequence, the impact of the new standard on our opening balances (as at 1 January 2017) was immaterial. On an ongoing basis, the most significant impact of the standard relates to our accounting for user acquisition costs associated with subscription sales of CyberGhost and auto renewal sales of Reimage which commenced in 2017. These costs, which relate to sales and marketing, are considered incremental in obtaining the contract, and therefore capitalised and amortised over the expected customer relationship period under the new standard. The adoption of the new standard had no impact to cash from or used in operating, financing or investing on our consolidated cash flow statements. The impact of the adoption on our consolidated income statement and balance sheet for the period ended 31 December 2017 was as follows: Income statement Selling and marketing expenses Operation loss Adjusted EBITDA Total comprehensive loss 2017 as reported under IFRS 15 $’000 2017 according to previous policy under IAS 18 $’000 Effect of the application of IFRS 15 $’000 (44,117) (2,599) 8,261 (45,508) (3,990) 6,870 1,391 1,391 1,391 for the year (2,503) (3,894) 1,391 Basic earnings per share Diluted earnings per share (2.4) (2.4) (3.4) (3.4) 1 1 Balance sheet Balance at 31 December 2017 as reported under IFRS 15 $’000 Balance at 31 December 2017 under IAS 18 $’000 Effect of adjustment of IFRS 15 $’000 347 1,044 1,391 – – – 347 1,044 1,391 Assets recognised for costs incurred to obtain a contract Non-current assets – contract assets Current assets – contract assets Dividends Following our strong cash flow from operations and cash balance as of 31 December 2017, the Board has recommended a special dividend of 4.93 US$ cents per share (2016: nil) being a total payout of $7 million. Moran Laufer Chief Financial Officer 12 March 2018 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 11 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT PRINCIPAL RISKS AND UNCERTAINTIES There are a number of potential risks and uncertainties that could have a material impact on the Group’s long-term performance and could cause results to differ materially from expected and historical results. The risks to which the business is exposed are set out below. Risks Background Mitigating controls Regulatory, legislative or self-regulatory developments regarding internet privacy matters could adversely affect the Group’s ability to conduct its business. International regulatory bodies are increasingly focused on online privacy issues and user data protection. In particular, GDPR was approved by the European Union (EU) and takes effect from May 2018. It intends to strengthen and unify data protection for all individuals within the EU. It also addresses the export of personal data outside the EU. The GDPR aims primarily to give control back to citizens and residents over their personal data and to simplify the regulatory environment for international business by unifying the regulation within the EU. • All the information that the Group obtains regarding users and their profiling is information that may correspond to a particular person, account or profile, but does not identify, allow contact or enable Kape to locate the person to whom such information pertains. As a consequence, the Group is not regulated by any regulator or subject to any regulatory approval for its day-to-day operations. • Whilst not externally regulated, the Group adheres to a strict set of controls with its partners. Partners, developers, publishers and advertisers are required to comply with these contractually imposed controls, which have been jointly created by the Group and its legal advisers. • The Group actively monitors the developments of the large and established internet, Antivirus and technology companies to identify any threats that may impair the Group’s ability to operate. Large and established internet, Antivirus and technology companies may be able to significantly impair the Group’s ability to operate. Large and established internet, Antivirus and technology companies such as Symantec Corporation, Amazon.com, Inc. (“Amazon”), AOL, Inc., Apple, eBay Inc., Facebook, Inc. (“Facebook”), Google and Microsoft, may have the power to significantly change the very nature of the app-distribution and internet display advertising marketplace. These changes could materially disadvantage the Group. For example, Amazon, Apple, Facebook, Google and Microsoft have substantial resources and control a significant share of widely adopted industry platforms such as web browsers, mobile operating systems and advertising exchanges and networks. Changes to their web browsers, mobile operating systems, platforms, exchanges, networks or other products or services could be significantly harmful to the Group’s business. Such companies could also seek to replicate all or parts of the Group’s business. 12 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Risks Background Mitigating controls If the Group fails to innovate and respond effectively to rapidly changing technology, the Group’s solution may become less competitive or obsolete. To remain competitive, the Group’s future success will depend on its ability to continuously enhance and improve its solutions to meet client needs, add functionality to its product portfolio and address technological advancements. • The Group invests in research and development resources to ensure that the Group’s technology platforms are continually enhanced through evolution and innovation. • The Group also invests in acquisitions to expand its technology platforms and adapt to the rapidly changing technology environment. R E P O R T S T R A T E G C I C O R P O R A T E G O V E R N A N C E I F N A N C A L I Failures in the Group’s IT systems and infrastructure supporting its solution could significantly disrupt its operations and cause it to lose clients. In addition to the optimal performance of the Kape Engine, the Group’s business relies on the continued and uninterrupted performance of its software and hardware infrastructures. Sustained or repeated system failures of its software and hardware infrastructures, which interrupt its ability to deliver its software products and services or advertisements quickly and accurately, could significantly reduce the attractiveness of its solution to advertiser clients and publishers, reduce its revenue and affect its reputation. • The Group outsources hosting services, holding minimal server infrastructure itself. This allows the Group to flex and grow its operations efficiently. • Kape uses third party content distribution network services in order to offload traffic served directly from its own infrastructure and minimise network latency. S T A T E M E N T S The Group is a multinational organisation faced with increasingly complex tax issues in many jurisdictions, and it could be obliged to pay additional taxes in various jurisdictions as a result of new taxes, laws or interpretation, including sales taxes, which may negatively affect its business. As a multinational organisation, operating in multiple jurisdictions such as the Isle of Man, Cyprus, Israel, Romania and the United Kingdom, the Group may be subject to taxation in several jurisdictions around the world with increasingly complex tax laws, the application of which can be uncertain. The amount of taxes it pays in these jurisdictions could increase substantially as a result of changes in the applicable tax principles, including increased tax rates, new tax laws or revised interpretations of existing tax laws and precedents, which could have a material adverse effect on its liquidity and results of operations. • The Group uses advisers to review its tax position and ensure compliance with local tax legislation. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 13 BOARD OF DIRECTORS DON ELGIE NON-EXECUTIVE CHAIRMAN IDO ERLICHMAN CHIEF EXECUTIVE OFFICER MORAN LAUFER CHIEF FINANCIAL OFFICER Don has many years’ experience in marketing services including developing companies organically and by acquisition. Don retired as Group CEO of Creston plc, which was listed on the Main Market of the London Stock Exchange, at the end of March 2014. He founded Creston as a digitally focused communications and insight group in 2001 and built it into an international group which generated £75m revenue, £12m EBITDA and employed over 800 people as at March 2014. He is Chairman of Kape’s Nominations Committee. He is also Non-Executive Chairman of The Marketing Group plc, which is listed on the Nasdaq First North market in Sweden. Moran joined Kape as Group Financial Controller in 2012. He was a key member of the finance team that successfully supported the Group’s admission to AIM in September 2014. Prior to joining Kape, Moran was a Divisional Controller at SafeCharge International Ltd (AIM: SCH), a global provider of payments services, technologies and risk management solutions for online and mobile businesses. Previously Moran worked for Ernst & Young as a senior auditor of London Stock Exchange and NASDAQ traded companies primarily focused on the technology sector. Moran is a Certified Public Accountant, who graduated in Accounting and Economics and received an MBA from Tel Aviv University. Ido joined Kape plc in May 2016 as Group Chief Executive Officer. Ido has more than nine years’ experience in the technology sector garnered through roles in private equity, consulting and finance. Prior to joining Kape, Ido was acting Joint Chief Executive Officer of VisualDNA (which was acquired by The Nielsen Company), a leading psychographic data business, where he led its geographic expansion and oversaw significant EBITDA growth. Prior to VisualDNA, Ido worked as a Senior Associate within KPMG’s private equity deal advisory practice in London and as a Senior Manager within KPMG’s Transaction Services practice focusing on technology deals in Israel and with the Israeli Ministry of Finance. Ido is the author of the bestselling book ‘Battle of Strategies’, published in Israel by Yediot Books. Ido is a Certified Public Accountant, having graduated magna cum laude in Accounting and Economics from The Hebrew University of Jerusalem. He also obtained his Masters degree in Law from Bar-Ilan University, and has received an MBA from the University of Cambridge’s Judge Business School. 14 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS R E P O R T S T R A T E G C I C O R P O R A T E G O V E R N A N C E I F N A N C A L I S T A T E M E N T S DAVID COTTERELL NON-EXECUTIVE DIRECTOR MARTIN BLAIR NON-EXECUTIVE DIRECTOR David has over 30 years’ experience in the information technology software and service sector. He has held senior management roles with firms such as ACT Financial Systems, DST, Advent and SQS Group Plc and has led and successfully integrated many trade sales of technology companies. Between 2006 and 2011 David served as the CEO of UKIISA Region (UK, Ireland, South Africa and India) and as Board Director at SQS Group plc (LSE:SQS). David is currently Non- Executive Chairman of SyQic plc. Additionally, David is Chairman of IT services company Qualitest UK. David is Kape Group’s Senior Independent Director and also Chairman of the Company’s Remuneration Committee. Prior to joining the Board of Kape, Martin acted as CFO of Pilat Media Global plc, a company which previously traded on both AIM and the Tel Aviv Stock Exchange and developed, marketed and supported new generation business management software solutions for content and service providers in the media industry. Martin joined Pilat Media in 2001, ahead of its admission to AIM in 2002. Pilat Media was acquired by SintecMedia Ltd for £63.3 million in April 2014. Martin qualified as a chartered accountant with Ernst & Young in 1982 and between 1983 and 1986 worked for PwC. Martin is Chairman of Kape’s Audit Committee. Martin is also currently a Non-Executive Director and Chairman of the Audit Committees at both The Marketing Group and Green Biologics Ltd. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 15 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT CORPORATE GOVERNANCE The Board of Directors of the Company (“the Board”) are responsible for the Group’s system of corporate governance. Overview The current policies and procedures as adopted by the Group are set out below. Role of the Board The Board is responsible for the overall strategy and direction of the Group. It provides robust leadership of the Company within a framework of effective controls which enables risk to be assessed and managed. The Board, in setting the Company’s aims, ensures that the necessary financial and human resources are in place to meet its objectives. It regularly reviews management performance and upholds the Company’s values and standards so that its obligations to shareholders and others are understood and met. The Board is supplied with information in a quality form and in a timely manner to enable it to discharge its duties. The Board also reviews arrangements under which employees can raise concerns in confidence about possible improprieties in matters of financial reporting or other areas. Division of responsibilities During 2017, the Chairman, Donald (Don) Elgie had a clear and distinct responsibility for running the Board whilst the executive responsibility for running the Company’s business was delegated to the Chief Executive Officer, Ido Erlichman. Moran Laufer was appointed to the Board on 6 February 2017 having been appointed to the position of Chief Financial Officer on 27 October 2016. As at 31 December 2017, the Board comprised five Directors, three of whom were Non-Executive Directors. The Non-Executive Directors normally do not have any day-to-day involvement in the running of the business but are responsible for scrutinising the performance of management in meeting agreed goals and objectives and monitoring the reporting of performance. All Board members are considered to be able to allocate sufficient time to the Company to discharge their responsibilities as Directors effectively. The Board meets at regular scheduled intervals and follows a formal agenda; it also meets as and when required. No one individual has unfettered powers of decision. The Directors may take independent professional advice at the Group’s expense. Board Committees The Group has an Audit Committee, a Nominations Committee, and a Remuneration Committee, each consisting of three Non-Executive Directors. Each Committee has written terms of delegated responsibilities which will be available for review at the end of the 2018 Annual General Meeting and are available for review in the Investor Relations section of the Group’s website www.kape.com. The Board and its Committees are considered to have an appropriate balance of skills, experience, independence and knowledge of the Company to enable them to discharge their respective duties and responsibilities effectively. Remuneration Committee The Remuneration Committee is comprised of David Cotterell (Chair of the Committee), Don Elgie and Martin Blair, all of whom are Non-Executive Directors. It is responsible for making recommendations to the Board on remuneration policy as applied to the Company’s Executive Directors. The Remuneration Committee also considers grants of options under the Company’s share option schemes. The policy of the Remuneration Committee is to grant share options to employees as part of a remuneration package to motivate them to contribute to the growth of the Group over the medium to long term. The Chief Executive may, at the Remuneration Committee’s invitation, attend meetings except where his own remuneration is discussed. The Remuneration Committee met twice during the past financial year. The Remuneration Committee’s terms of reference, which can be found on the Company’s website www.kape.com, are reviewed on an annual basis and updated as required. The Remuneration Committee Report, which includes details of Directors’ remuneration, pension entitlements and Director’s interests, together with information on service contracts, is set out on pages 18 to 19. 16 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Audit Committee The Audit Committee is comprised of Martin Blair (Chair of the Committee), David Cotterell and Don Elgie, all of whom are Non-Executive Directors. The Committee meets at least twice a year and at other times as agreed between the members of the Committee. Executive Directors and the Group’s auditors may be invited to attend all or part of any meetings. The Committee also meets with the Group’s external auditor without the presence of the Executive Directors. Nominations Committee The Nominations Committee is comprised of Don Elgie (Chair of the Committee), Martin Blair and David Cotterell, all of whom are independent Non-Executive Directors. The Committee meets when appropriate and considers the composition of the Board, retirements and appointments of additional and replacement Directors and makes appropriate recommendations to the Board. The objective of the Committee is to review the composition of the Board and to plan for its progressive refreshing, with regard to balance and structure. The Committee is responsible for: › Reviewing the structure of the Board; › Evaluating the balance of skills, knowledge, experience and diversity of the Board; › Advising the Board on any areas where further recruitment may be appropriate; and › Succession planning for key executives at Board level and below. Where necessary and appropriate, recruitment consultants are used to assist the Committee in delivering its objectives and responsibilities. The Committee leads the process for the identification and selection of new Directors and makes recommendations to the Board in respect of such appointments. The Committee also makes recommendations to the Board on membership of its Committees. The Committee terms of reference, which can be found on the Company’s website www.kape.com, are reviewed on an annual basis and updated as required. The Committee’s terms of reference, which can be found on the Company’s website www.kape.com, are reviewed on an annual basis and updated as required. Risk management and internal controls During the year, the Audit Committee has reviewed the scope and effectiveness of systems to identify and address financial and non-financial risks. The review identified the key risks, risk control measures and the implementation status of the risk control measures. The report was presented to the Committee by the Chief Financial Officer. Audit of the Group’s Annual Report Financial Statements In advance of the audit of the Group’s Annual Report Financial Statements the Audit Committee reviewed the plans as presented by the Group’s external auditor, BDO LLP. The plan set out the proposed scope of work, audit approach, materiality and identified areas of audit risk. The Audit Committee also reviewed the Annual Report and Financial Statements along with the audit findings report presented by BDO LLP. Auditor independence The Audit Committee monitors the independence of the Group’s external auditor. During the year BDO LLP provided the Group with the following non-audit services: › Taxation compliance services; and › Taxation advisory services. The Audit Committee considered the threats to the independence of BDO LLP created by the provision of the non-audit services and concluded that sufficient safeguards were in place. BDO was appointed as auditor of the Group for the year ended 31 December 2013. The Audit Committee will keep under review, in consultation with major shareholders, the decision as to whether to conduct a tender in respect of the audit in line with the recommendations of the Financial Reporting Council. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 17 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT REMUNERATION COMMITTEE REPORT (UNAUDITED) The Remuneration Committee (for the purpose of the Remuneration Committee report, “the Committee”) is comprised of David Cotterell (Chair of the Committee), Don Elgie and Martin Blair, all of whom are Non-Executive Directors. The Directors (other than alternate Directors) shall be entitled to receive by way of fees for their services as Directors (in addition to fees paid for employment or executive services) such sum as the Board may from time to time determine, provided that such amount shall not exceed in aggregate £500,000 per annum or such greater sum as the Company in general meeting shall from time to time determine by ordinary resolution. Any fees payable shall be distinct from any salary, remuneration or other amounts payable to a Director. Each Director is entitled to be repaid all reasonable travelling, hotel and other expenses properly incurred by him in or about the performance of his duties as a Director, including any expenses incurred in attending meetings of the Board or any Committee of the Board or general meetings or separate meetings of the holders of any class of shares or of debentures of the Company. Directors emoluments Directors’ emoluments for the 2017 financial year are set in Pounds Sterling. These are set out in the tables below along with the US Dollar equivalent cost to the Company: Name Ido Erlichman Don Elgie David Cotterell Martin Blair Moran Laufer Base Salary/Fees GBP£ 300,000 80,000 50,000 50,000 97,030 Benefits GBP£ Pension GBP£ Bonus GBP£ Total GBP£ 41,000 – – – 33,004 9,000 – – – – 200,000 – – – 60,000 550,000 80,000 50,000 50,000 200,034 The US Dollar equivalent cost to the Company has been calculated using a USD/GBP rate of 1.29 Name Ido Erlichman Don Elgie David Cotterell Martin Blair Moran Laufer Base Salary/Fees $ 387,000 103,200 64,500 64,500 125,168 Benefits $ Pension $ Bonus $ Total $ 52,890 – – – 42,525 11,610 – – – – 258,000 – – – 77,400 709,500 103,200 64,500 64,500 258,044 The beneficial interests of the Directors who held office at 31 December 2017, together with that of persons connected with the Directors, in the share capital of the Company were as follows: Directors’ interests in shares 2017 2016 Percentage of issued share capital Number of ordinary shares Percentage of issued share capital Number of ordinary shares 0.07% 100,000 97,087 0.07% 19,417 0.01% 48,544 0.03% 50,000 0.04% 0.07% 100,000 97,087 0.07% 19,417 0.01% 48,544 0.03% – – Name Ido Erlichman Don Elgie Martin Blair David Cotterell Moran Laufer 18 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Directors’ interests in share options Name Ido Erlichman1 Moran Laufer1 Number of ordinary shares under option at 31 December 2016 Date of grant Exercise price 2,000,000 241,931 50,000 634,946 1 June 2016 29 May 2014 5 January 2016 26 October 2016 £0.275 £0.380 £0.555 £0.365 Number of ordinary shares under option at 31 December 2017 2,000,000 241,931 50,000 634,946 1. Vesting schedule: 25% one year from date of grant and then in 12 equal quarterly instalments thereafter. Annual bonus The bonuses for the Executive Directors for 2018 will be based on Adjusted EBITDA and non-financial and strategic objectives. The level of bonus payable by reference to the financial performance of the Company will be determined on a sliding scale based on the Company’s budget for the forthcoming financial year. Service contracts Executive Directors The service agreements of the Executive Directors are for an indefinite term and provide for formal notice of six months for the Chief Executive Director and three months for the Chief Financial Officer to be served to terminate the agreement, either by the Company or by the Director. In addition to their annual salaries, the Executive Directors are entitled to annual pension contributions of 3 per cent as well as other benefits commensurate with their positions including health-related benefits. Non-Executive Directors Fees for Non-Executive Directors are set with reference to time commitment, the number of Committees chaired and relevant external market benchmarks. The Non-Executive Directors each have specific letters of appointment, rather than service contracts. Non-Executive Directors are appointed for an initial term of three years and under normal circumstances would be expected to serve for additional three-year terms, up to a maximum of nine years, subject to satisfactory performance and re-election at the Annual General Meeting as required. David Cotterell Chairman, Remuneration Committee 12 March 2018 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 19 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT DIRECTORS’ REPORT The Directors present their Annual Report on the affairs of the Group, together with the financial statements and independent auditor’s report for the year ended 31 December 2017. The Corporate Governance Statement set out on pages 16 to 17 forms part of this report. The Company’s full name is Kape Technologies plc, domiciled in the Isle of Man with company number 011402V. Kape Technologies plc is a public listed company, listed on the AIM market of the London Stock Exchange (“AIM”). Principal activity Kape develops and distributes a variety of digital products in the online security space. The Company utilises its proprietary digital distribution technology to optimise its reach and distribute its software products to consumers. The Company offers products which provide online security, privacy and optimisation tools for the consumer system. A detailed overview of the Group’s activities is set out on pages 4 to 7. Review of business and future developments Details of the Group’s performance during the year under review and expected future developments are set out in the Strategic Report on pages 1 to 13. A description of the principal risks and uncertainties facing the Group is set out on pages 12 to 13. Dividends The Board has declared the payment of a special dividend of 4.93 US$ cents per share, being a total payout of $7 million (2016: nil), which will be paid to shareholders on the register as at 25 May 2018. Directors The Directors who served during the period were as follows: Active Ido Erlichman Donald (Don) Elgie Active Active David Cotterell Active Martin Blair Active, appointed 06 February 2017 Moran Laufer 20 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Re-election of Directors The articles of association require that at each Annual General Meeting one-third of the Directors (excluding any Director who has been appointed by the Board since the previous Annual General Meeting) or, if their number is not an integral multiple of three, the number nearest to one-third but not exceeding one-third shall retire from office (but so that if there are fewer than three Directors who are subject to retirement by rotation one shall retire). Any Director who is not required to retire by rotation but who has been in office for three years or more since his appointment or his last reappointment or who would have held office at not less than three consecutive Annual General Meetings of the Company without retiring shall retire from office. Appointment of a Director The articles of association require that any Director appointed by the Board shall, unless appointed at such meeting, hold office only until the dissolution of the Annual General Meeting of the Company next following such appointment. Directors’ responsibility statement The statement of Directors’ responsibility is set out on page 22. Directors’ indemnities The Directors have been granted an indemnity from the Company to the extent permitted by law in respect of liabilities incurred as a result of their office which remains in force at the date of this report. Employee policies At 31 December 2017, the Group employed 128 people, (31 December 2016: 74 people). The Group is committed to attracting and retaining personnel with the requisite technical skills and experience to implement its growth strategy and maintain its position in the competitive industry in which it operates. Kape therefore places significant emphasis on ensuring that it has a strong recruitment team as well as appropriate remuneration and bonus policies which are set by reference to appropriate objectives and include share-based incentive schemes, details of which are set out in note 18 to the financial statements. Financial instruments The Group does not currently use derivative financial instruments. A summary of the Group’s financial instruments, changes in share capital and related disclosures are set out in notes 15 and 17 to the financial statements. The Group has no material exposure to price, liquidity, or cash flow risk that would impact its objectives. Capital structure Under the IOM Companies Act, the Company is not required to have an authorised share capital. The ordinary shares in issue at 31 December 2017 have been created pursuant to the BVI Companies Act and the articles of association of the Company in place prior to the re-domiciliation of the Company from the BVI to the IOM on 13 August 2014 and are ordinary shares of USD 0.0001 par value. Details of the issued share capital as at 31 December 2017 of 148,496,073 ordinary shares of USD 0.0001 par value, together with details of the movements in the Company’s issued share capital during the year are shown in note 15 to the financial statements. The Company has one class of ordinary shares, which carry no right to fixed income. Each share carries the right to one vote at general meetings of the Company. There are no specific restrictions on the size of a holding nor on the transfer of shares, which are both governed by the general provisions of the articles of association and prevailing legislation. Save as provided by the terms of certain lock-in agreements entered into between the Company, the Directors and certain shareholders, the Directors are not aware of any agreements between holders of the Company’s shares that may result in restrictions on the transfer of securities or on voting rights. As at 31 December 2017 the Company held 6,644,738 shares in treasury and no shares in the capital of the Company are held by or on behalf of the Company or by any of the Company’s subsidiaries. Details of employee share schemes are set out in note 18 to the financial statements. Related party transactions Details of all related party transactions are set out in note 22 to the financial statements. Research and development The Group maintains an integrated global research and development team which has a staff of 44 (2016: 14). In the opinion of the Directors, continuity of investment in this area is essential for the maintenance of the Group’s market position and for future growth. The amount of research and development costs capitalised in the year was $1,432,000 (2016: $744,000). Going concern The Directors, having considered the Group’s resources financially and the associated risks with doing business in the current economic climate, believe the Group is capable of successfully managing these risks. The Board has reviewed the cash flow forecast and business plan as provided by management which includes the rate of revenue growth, margins and cost control. As such, the Directors are satisfied that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing these financial statements. Annual General Meeting The Annual General Meeting for 2018 will be held at 12 noon on Thursday, 17 May 2018. The notice convening the Annual General Meeting for this year, and an explanation of the items of non-routine business, are set out in the circular that accompanies the Annual Report. Auditor A resolution to reappoint BDO LLP as the Company’s auditor will be proposed at the 2018 Annual General Meeting. Each of the persons who are Directors at the date of approval of this Annual Report confirms that: › So far as the Director is aware, there is no relevant audit information of which the Company’s auditor is unaware; and › The Director has taken all the steps that he ought to have taken as a Director in order to make himself aware of any relevant audit information and to establish that the Company’s auditor is aware of that information. Signed on behalf of the Board by: Don Elgie Non-Executive Chairman 12 March 2018 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 21 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT DIRECTORS’ RESPONSIBILITY STATEMENT The Directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations. Isle of Man company law does not require the Directors to prepare financial statements for each financial year, however the Group is required to do so to satisfy the requirements of the AIM Rules for Companies. Under company law, when preparing the financial statements, the Directors are required to prepare the Group financial statements in accordance with an appropriate set of generally accepted accounting principles or practice. The Directors have elected to use International Financial Reporting Standards (IFRSs) as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 (revised) requires that directors: › Properly select and apply accounting policies; › Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; › Provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance; and › Make an assessment of the Company’s ability to continue as a going concern. The Directors are responsible for keeping adequate accounting records that correctly explain the transactions of the Company, enable the financial position of the Company to be determined with reasonable accuracy at any time and allow financial statements to be prepared. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. The Directors’ responsibility also extends to the continued integrity of the financial statements contained therein. Signed on behalf of the Board by: Don Elgie Non-Executive Chairman 12 March 2018 22 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KAPE TECHNOLOGIES PLC Conclusions relating to going concern We have nothing to report in respect of the following matters in relation to which the ISAs (UK) require us to report to you where: › the directors’ use of the going concern basis of accounting in the preparation of the financial statements is not appropriate; or › the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the group’s or the parent company’s ability to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. Key audit matters Key audit matters are those matters that, in our professional judgment, 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) 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. Opinion We have audited the financial statements of Kape Technologies Plc for the year ended 31 December 2017 which comprise the consolidated statement of comprehensive income, the consolidated statement of changes in equity, the consolidated statement of financial position, the consolidated cash flow statement and 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 financial statements is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union as applied in accordance with the provisions of the Isle of Man Companies Act 2006 and any other applicable laws and regulations. In our opinion: › the financial statements give a true and fair view of the state of the group’s affairs as at 31 December 2017 and of the group’s loss for the year then ended; and › the group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union. 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 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. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 23 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KAPE TECHNOLOGIES PLC CONTINUED Key audit matter Mitigating controls Revenue recognition and the transition to IFRS 15 Revenue recognition has historically been applied in accordance with IAS 18. However, the group have elected to early adopt IFRS 15 – Revenue from Contracts with Customers effective from 1 January 2017. We assessed whether the revenue recognition policies adopted by the Group comply with IFRS as adopted by the European Union and Industry standard. The relevant IFRS is International Financial Reporting Standard 15 Revenue from Contracts with Customers. The new revenue standard requires significant consideration as to the adoption of the new “5 step model” and as such, significant emphasis has been placed on this transition throughout the audit, resulting in the recognition of this key audit matter. The group has a number of revenue streams for which the accounting must be individually considered. International Standards on Auditing note that there is a presumed significant audit risk arising from inappropriate or incorrect recognition of revenue unless conditions exist that permit the rebuttal of that risk. Due to the different nature of agreements entered into by the group, and the fact that revenue is recognised both point in time and over a period of time, there is a key risk of material misstatement arising from both the recognition of revenue around the year end (cut-off) and the revenue recognition policy itself, as detailed in note 2 to these financial statements. Noting the above, including revenue streams where an agency presentation is adopted, as well as a new revenue stream in respect of an acquired entity in the year, we feel it is inappropriate to rebut the presumed risk. With the exception of the CyberGhost revenue stream, we tested revenue through substantive procedures, including confirmation of cash receipts over material revenue streams. In respect of the newly acquired subsidiary CyberGhost, we performed cut-off procedures including recalculations around the year-end in order to g et comfort over subscription revenues. We have further reviewed the requirements of the IFRS 15 transition and reviewed the assessment of expected impacts against the disclosure adjustments proposed by the group. Alongside discussions held with management, our work involved the audit of supporting documentation through to source data for all IFRS 15 adjustments, for which the most significant impact relates to the capitalisation of incremental customer acquisition costs. By critically challenging the group’s proposed adoption of the new revenue standard we have been able to assess the reasonableness of this adoption. 24 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Key audit matter Mitigating controls Business combinations See accounting policy in note 2, and the intangibles assets note (note 10) and the business combinations note (note 21) on pages 54 to 56. The Group completed the following principal acquisitions in the year: • On 1 April 2017, the Company increased its holding in Clearvelvet Trading Limited to 50.01% by acquiring an additional 33.34% of its issued share capital. • On 14 March 2017, the Group acquired 100% of the share capital of CyberGhost S.A. Prior to the acquisition date, CyberGhost acquired Mobile Concept, a software development company based in Germany. There are risks present as a result of management’s requirement to make significant judgements in assessing the fair values of consideration including contingent consideration (whether arising on acquisitions made in the current year or previous years) and of the assets and liabilities acquired. Management have engaged external valuations experts to undertake the purchase price allocation exercise required. We focused on this area because the fair value adjustments, which included the creation of intangible assets and associated deferred tax liabilities, were judgmental in nature and also material. The two acquisitions resulted in the group holding, on consolidation, goodwill and intangible assets of $5.69m and $1.829m respectively. Goodwill should be allocated to each of the groups cash generating units (“CGU’s”). Further, an annual impairment review is required by management to ensure the level of goodwill and intangibles are supported by the performance and position of the underlying group where impairment indicators exist. Given the judgement involved surrounding the inputs for the impairment review, a risk arises with respect to the recoverable amount of goodwill and intangibles. We challenged the assumptions underpinning the significant judgements and estimates used by management in the assessment of the fair values of the assets and liabilities acquired and consideration paid including; underlying cash flow projections, royalty rates, discount rates applied and the long term growth rates. Our testing focused on both material and more judgmental fair value adjustments that were recorded. Particular adjustments we tested were: Intangible assets – intangible assets in CyberGhost and Clearvelvet of $1.829m and $204,000 respectively were valued, representing customer relationships, brand and domain names and technology. The directors obtained external valuations for the acquired intangible assets. Utilising our own valuations expertise, we evaluated the valuation methodologies used for each type of asset and satisfied ourselves that the methodology was appropriate and consistent with market practice. We also examined the key assumptions used as inputs to the valuation models to assess whether these were consistent with our understanding of the businesses acquired, their historical performance and the markets in which they operate. These assumptions included revenue and profit forecasts, discount rates, customer attrition rates, technology obsolescence rates and royalty rates. We found that the key valuation assumptions were within our expected range and that the valuation methodologies applied were appropriate. We challenged management’s assessment of the fair value of contingent consideration in respect of acquisitions made in the current year and previous periods, including principally the level of expected profitability over the forecast period. In accordance with accounting standards, the creation of these intangible assets resulted in the creation of deferred tax liabilities on acquisition of $366,000. We examined and satisfied ourselves with the methodology and tax rates used to calculate these liabilities. This involved reference to the tax jurisdictions in which the group operates, levels of business in those jurisdictions and the manner in which profits are expected to be repatriated and taxed. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 25 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF KAPE TECHNOLOGIES PLC CONTINUED Our application of materiality We determined materiality for the financial statements as a whole to be $646,000 (2016 – $596,000) which represents approximately 1% of revenues (2016 – 1% of revenues). We agreed with the audit committee that we would report to them misstatements identified during our audit above $32,300 (2016 – $29,800). Revenue Revenue has been concluded as the most relevant performance measure to the stakeholders of the group, while also providing a more stable measure year on year when compared to the group loss before tax. Individual component audits were carried out using component materialities of between 25-50% of overall financial statement materiality. Adjusted EBITDA Total Assets An overview of the scope of our audit We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the geographic structure of the Group, the accounting processes and controls, and the industry in which the Group operates. In establishing the overall approach to the Group audit, we assessed the audit significance of each reporting unit in the Group by reference to both its financial significance and other indicators of audit risk, such as the complexity of operations and the degree of estimation and judgement in the financial results. We also considered the changes to the overall Group as a result of the acquisitions of CyberGhost SA and Clearvelvet Trading Limited and where the key business activities and transactions reside. We instructed BDO Romania and BDO Cyprus as component auditors, to perform full scope audits of financial information of the significant components accounted for locally in those territories. BDO Romania performed a full scope audit of CyberGhost SA, and BDO Cyprus performed full scope audits of Reimage Limited, Crossrider Technologies Limited, Blueroad Trading Limited and Frontbase Trading Limited. We visited these locations during the year to ensure we obtained a full understanding of the operational activities and appropriately scoped risks and agreed responses to those risks. We also attended audit clearance meetings in these locations and took an active part in reviewing the work undertaken by our component auditors. We also instructed BDO Israel as component auditors, to perform specific procedures of financial information of the non-significant reporting unit accounted for locally in the territory. This, together with the additional procedures performed at Group level over the acquisition accounting and consolidation process gave us the evidence we needed for our opinion on the financial statements as a whole. 26 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Full scope audit Specific procedures Group level procedures Full scope audit Specific procedures Group level procedures Full scope audit Specific procedures Group level procedures Classification of components We identified two individually significant (determined as those that were greater than 15% revenue) components, which make up 63% of Group revenue. A further four components have been scoped in as significant to ensure sufficient coverage was obtained across the group. This includes both of the newly acquired entities in the year, CyberGhost SA and Clearvelvet Trading Limited which together make up a further 28% of Group revenue. Specific procedures have been performed over Definiti Media Limited by BDO Israel. This included reporting over material movements in the year, taxation and related party transactions. The remaining components not subject to full scope audit or specific procedures have been reviewed for group reporting purposes, using analytic procedures to corroborate the conclusions reached that there are no significant risks of material misstatement of the aggregated financial information of those components. Summary of audit scope Based on the above scope we were able to conclude that sufficient and appropriate audit evidence had been obtained as a basis to form our opinion on the group financial statements as a whole. Auditor’s responsibilities for the audit of the financial statements This report is made solely to the company’s members, as a body, in accordance with the Isle of Man Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed. 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 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 at: www.frc.org.uk/ auditorsresponsibilities. This description forms part of our auditor’s report. Iain Henderson (Senior Statutory Auditor) For and on behalf of BDO LLP, Statutory Auditor London 12 March 2018 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127). Other information The directors are responsible for the other information. The other information comprises the information included in the annual report, 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. Responsibilities of directors As explained more fully in the directors’ responsibilities statement set out on page 22, 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 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 to cease operations, or have no realistic alternative but to do so. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 27 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER 2017 Revenue Cost of sales Gross profit Selling and marketing costs Research and development costs Management, general and administrative costs Depreciation and amortisation Impairment of intangible assets Total operating costs Operating loss Adjusted EBITDA Employee share-based payment charge Charge for repurchase of employee options Exceptional and non-recurring costs Depreciation and amortisation Impairment of intangible assets Operating loss Share of results of equity accounted associates Finance income Finance costs Loss before taxation Tax charge Loss for the year Other comprehensive income: Foreign exchange differences on translation of foreign operations Total comprehensive loss for the year Total profit/(loss) for the year attributable to: Owners of the parent Non-controlling interests Total comprehensive income/(loss) attributable to: Owners of the parent Non-controlling interests Basic earnings per share (cents) Diluted earnings per share (cents) Note 4 4a 10,11 10 2017 $’000 2016 $’000 66,383 (4,572) 56,532 (2,360) 61,811 54,172 (44,117) (1,016) (12,832) (6,445) – (39,915) (1,661) (7,761) (9,884) (4,683) (64,410) (63,904) 6 (2,599) (9,732) 18 18 6 10,11 10 8 9 19 19 8,261 (340) (3,176) (899) (6,445) – 6,413 (716) – (862) (9,884) (4,683) (2,599) (9,732) (40) 277 (532) (2,894) (467) 47 4 (332) (10,013) (665) (3,361) (10,678) 858 (2,503) – (10,678) (3,561) 200 (2,703) 200 (2.4) (2.4) – – – – (7.6) (7.6) 28 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2017 Non-current assets Intangible assets Property, plant and equipment Investments in equity accounted associates Non-current investments Deferred contract costs Deferred tax asset Current assets Software licence inventory Deferred contract costs Trade and other receivables Cash and cash equivalents Total assets Equity Share capital Additional paid in capital Foreign exchange differences on translation of foreign operations Retained earnings Equity attributable to equity holders of the parent Non-controlling interests Total equity Non-current liabilities Contract liabilities Deferred tax liabilities Deferred consideration Current liabilities Trade and other payables Contract liabilities Deferred consideration Total equity and liabilities Note 2017 $’000 2016 $’000 10 11 16 4c 9 4c 12 13 4b 9 25 14 4b 25 12,350 815 – 50 406 97 13,718 65 1,386 11,071 69,502 7,113 591 859 – – 166 8,729 – – 7,950 72,064 82,024 80,014 95,742 88,743 15 130,728 852 (53,200) 14 130,292 (6) (49,747) 78,395 80,553 977 – 79,372 80,553 892 349 993 2,234 10,094 3,120 922 14,136 – 691 160 851 7,096 – 243 7,339 95,742 88,743 The financial statements were approved by the Board and authorised for issue on 13 March 2018. Ido Erlichman Chief Executive Officer Moran Laufer Chief Financial Officer KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 29 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER 2017 At 1 January 2016 Loss for the year Other comprehensive income: Foreign exchange differences on translation of foreign operations Total comprehensive loss for the year Transactions with owners: Share-based payments Exercise of employee options (note 15) Purchase of own shares (note 15) At 31 December 2016 At 1 January 2017 Loss for the year Other comprehensive income: Foreign exchange differences on translation of foreign operations Total comprehensive loss for the year Non-controlling interest from acquisition of subsidiary Transactions with owners: Share-based payments Exercise of employee options (note 15) Purchase of own share options (note 15) Foreign exchange differences on translation of foreign operations $’000 Equity attributable to equity holders of the parent $’000 Retained earnings $’000 Non– controlling interests $’000 (6) – (39,785) (10,678) 91,510 (10,678) – – – – – (6) (6) – – (10,678) (10,678) 716 – – 716 – (995) (49,747) 80,553 (49,747) (3,561) 80,553 (3,561) – – – – – – – – – 200 Share capital $’000 Additional paid in capital $’000 14 – 131,287 – – – – – – – – – – (995) 14 14 – 130,292 130,292 – Total $’000 91,510 (10,678) – (10,678) 716 – (995) 80,553 80,553 (3,361) – – – – 1 – – – – – 436 – 858 858 – – – – – 858 – 858 (3,561) (2,703) 200 (2,503) – – 777 777 3,516 – (3,408) 3,516 437 (3,408) – – – 3,516 437 (3,408) At 31 December 2017 15 130,728 852 (53,200) 78,395 977 79,372 30 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2017 Cash flow from operating activities Loss for the year after taxation Adjustments for: Amortisation of intangible assets Impairment of intangible assets Depreciation of property, plant and equipment Loss on sale of property, plant and equipment Tax charge Interest income Interest expenses Share-based payment charge Share of results of associates Movement in deferred and contingent consideration Remeasurement gain on equity interest in associate Expense from repurchase of employee share options Interest received Unrealised foreign exchange differences Operating cash flow before movement in working capital Decrease in trade and other receivables Increase in software licences inventory Decrease in trade and other payables Decrease in other current liabilities Increase in deferred contract costs Increase in contract liabilities Cash flow from operations Tax paid net of refunds Cash generated from operations Cash flow from investing activities Purchases of property, plant and equipment Sale of property, plant and equipment Net cash paid on business combination Intangible assets acquired Net cash paid on investment in associates Capitalisation of development costs Net cash used in investing activities Cash flow from financing activities Repurchase of employee share options Exercise of options by employees Net payment for purchase of own shares Net cash generated from financing activities Net (decrease)/increase in cash and cash equivalents Revaluation of cash due to changes in foreign exchange rates Cash and cash equivalents at beginning of year Note 2017 $’000 2016 $’000 (3,361) (10,678) 10 10 11 11 9 8 18 16 16 11 21 10 16 10 5,18 15 15 6,046 – 399 101 467 (277) 411 3,516 40 (90) (52) 208 277 240 7,925 967 (65) (2,113) (209) (1,330) 1,358 6,533 (109) 6,424 (540) 39 (5,337) (115) – (1,432) 9,421 4,683 463 35 665 (4) 51 716 (47) – – – – 4 5,309 8,327 – (6,625) (1,089) – – 5,922 (904) 5,018 (108) 24 (1,089) (850) (350) (744) (7,385) (3,117) (1,914) 437 – (1,477) (2,438) (124) 72,064 – – (995) (995) 906 (178) 71,336 Cash and cash equivalents at end of year 13 69,502 72,064 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 31 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS 1 Basis of preparation The financial information provided is for Kape Technologies plc (“the Company”) and its subsidiary undertakings (together the “Group”) in respect of the financial years ended 31 December 2017 and 2016. The Company is incorporated in the Isle of Man. The financial information has been prepared in accordance with International Financial Reporting Standards (IFRS), International Accounting Standards (IAS) and interpretations (collectively IFRS) as adopted by the European Union (EU). Going concern The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. They therefore continue to adopt the going concern basis of accounting in preparing the financial statements. Adoption of new and revised standards New standards and amendments to existing standards that have been published and are mandatory for the first time for the financial year beginning 1 January 2017 have been adopted but had no significant impact on the Group. In May 2014, the IASB issued IFRS 15 Revenue from Contract with Customers (“IFRS 15”), a new standard related to revenue recognition. Under the standard, revenue is recognised when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company has early adopted IFRS 15 for the financial year beginning 1 January 2017, as set out in note 4. Standards issued but not yet effective IFRS 16 ‘Leases’ is effective for annual periods beginning on or after 1 January 2019 subject to EU endorsement. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise right of use assets and lease liabilities for all applicable leases. IFRS 16 is not expected to have a significant impact on the amounts recognised in the Group’s consolidated financial statements. On adoption of IFRS 16 the Group will recognise within the balance sheet a right of use asset and lease liability for all applicable leases. Within the income statement, rent expense will be replaced by depreciation and interest expense. This will result in a decrease in management, general and administrative costs and an increase in finance costs. The standard will also impact a number of statutory measures such as operating profit and alternative performance measures used by the Group. The full impact of IFRS 16 is currently under review, and the Company will provide an estimate of the full financial effect on the annual results for the year ending at 31 December 2018. IFRS 9 ‘Financial instruments’ replaces IAS 39 ‘Financial instruments: Recognition and Measurement’ with the exception of macro hedge accounting. The standard is effective for accounting periods beginning on or after 1 January 2018. The standard covers three elements: • Classification and measurement: changes to a more principle-based approach to classify financial assets as either held at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss, dependent on the business model and cash flow characteristics of the financial asset; Impairment: moves to an impairment model based on expected credit losses based on a three-stage approach; and • • Hedge accounting: the IFRS 9 hedge accounting requirements are designed to allow hedge accounting to be more closely aligned with the Group’s underlying risk management. A new International Accounting Standards Board (IASB) project is in progress to develop an approach to better reflect dynamic risk management in entities’ financial statements. The full impact of IFRS 9 is currently under review, and the Company will provide an estimate of the full financial effect of the interim results for the period ending at 30 June 2018. 32 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 2 Significant accounting policies Basis of consolidation The Group consolidated financial statements comprise the financial statements of the Parent Company Kape Technologies Plc and the financial statements of the subsidiaries as shown in note 20 of the consolidated financial statements. The Group has been partly formed from a series of common control transactions. The financial statements of all the Group companies are prepared using uniform accounting policies. All transactions and balances between Group companies have been eliminated on consolidation. Business combinations and goodwill Acquisitions of businesses not under common control are accounted for using the acquisition method. The consideration transferred in a business combination is measured at fair value, which is calculated as the sum of the acquisition date fair values of the assets transferred by the Group, liabilities incurred by the Group to the former owners of the acquiree and the equity interests issued by the Group in exchange for control of the acquiree. Acquisition-related costs are recognised in profit or loss as incurred. Contingent consideration that is classified as an asset or a liability is initially recognised at fair value and subsequently at fair value thorough profit and loss in accordance with IAS 39 as appropriate. At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the acquisition date. Goodwill is measured as the excess of the sum of the consideration transferred and the fair value of the acquirer’s previously held equity interest in the acquiree (if any) over the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. Consideration which is contingent on completion of a service period by an employee of the Group is treated as remuneration and is expensed over the service period. Common control transactions Common control transactions have been accounted for using merger accounting. Under merger accounting, the assets and liabilities of both entities are recorded at book value, not fair value (although adjustments are made to achieve uniform accounting policies), intangible assets and contingent liabilities are recognised only to the extent that they were recognised by the legal acquiree in accordance within applicable IFRS, no goodwill is recognised, any expenses of the combination are written off immediately to the income statement and comparative amounts, if applicable, are restated as if the combination had taken place at the beginning of the earliest accounting period presented. The result is that the merged groups are treated as if they had been combined throughout the current and comparative accounting periods. Non-controlling interests For business combinations, the Group initially recognises any non-controlling interest in the acquiree at the non-controlling interest’s proportionate share of the acquiree’s net assets. The total comprehensive income of non-wholly owned subsidiaries is attributed to owners of the parent and to the non-controlling interests in proportion to their relative ownership interests. Foreign currencies (a) Presentational currency Items included in the Group’s financial statements are measured using the currency of the primary economic environment in which each entity of the Group operates (the “functional currency”). The financial statements are presented in United States Dollars ($000). KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 33 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 2 Significant accounting policies continued (b) Transactions and balances Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss. Exchange rates gains and losses are recognised net within Finance cost. (c) Consolidation The functional currency of the Company, and the presentation currency for the consolidated financial statements is United States Dollars. For the purpose of the consolidated financial statements, the assets and liabilities of the Group’s foreign operations with a functional currency other than United States Dollars are translated into United States Dollars using exchange rates prevailing on the reporting date. Income and expense items (including comparatives) are translated at the exchange rates at the dates of the transactions. Exchange differences arising, if any, are recognised directly in equity. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing rate. Associates Where the Group has the power to participate in (but not control) the financial and operating policy decisions of another entity, it is classified as an associate. Associates are initially recognised in the consolidated statement of financial position at cost. Subsequently associates are accounted for using the equity method, where the Group’s share of post-acquisition profits and losses and other comprehensive income is recognised in the consolidated statement of profit and loss and other comprehensive income (except for losses in excess of the Group’s investment in the associate unless there is an obligation to make good those losses). Revenue recognition Revenue is measured based on the consideration specified in a contract with customer and excludes amounts collected on behalf of third parties. The Company recognises revenue when it transfers control over a product or service to a customer. Sales from App Distribution The Company sells products to customers in a B2C model. • The CyberGhost product is a SaaS product which contains one performance obligation that is satisfied over time. Since the service is being provided evenly across the contract period, revenue is recognised on a straight-line basis. All payments from customers are received upfront. Some of these contracts’ term are greater than one year, mostly for 24 and 36 months. The Company determined that the upfront payments are for reasons other than providing a financing benefit to the Company and thus there are no significant financing components in its contracts. The following factors were considered in the analysis: • The intent of the payment terms that require all payments in advance is to preserve the customers, and to make it economically unlikely for them to stop using the Company’s services. 1. The Company has no need for financing and it charges its customers with an upfront payment, since otherwise it would incur high administration costs related to renewals and collection of payments. 2. An upfront payment of the entire consideration is in accordance with the typical payment terms in the industry. • The Reimage PC and DriverAgent products contain three performance obligations: one-time repair, unlimited use of the repair software for one year and technical support for one year. Revenue for performing the one-time repair obligation is recognised at the time of the sale. For the unlimited use package, customers benefit from the use of the repair software and technical support for one year, revenues are recognised in line with the pattern of usage of the products and technical support, which is substantially within the first 30 days of the 12-month period. In the fourth quarter of 2017 the Company started to sell the CyberGhost and Reimage products as a bundle. For software bundles, the Company allocates revenue to each of the performance obligations based on their relative stand-alone selling price. The stand-alone selling prices are determined based on the prices charged to customers who acquire software packages individually. In respect of the App Distribution CGU, customers are provided with a 30-60 day refund period in which they can receive a full refund. Historical experience and information post year-end allows management to estimate the value of products that will be returned which are not material to the Group and a refund liability has therefore not been recognised. 34 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Sales from advertising The Company provides advertisers with the ability to manage and monetise publishers’ inventory and manage advertisers’ campaigns. These services represent one performance obligation and are recognised in the accounting period in which the services are rendered based on clicks/views/impressions as detailed below. The determination of whether revenue should be reported on a gross or net basis is based on an assessment of whether the Company controls the specified services before the transfer to its customers. In determining this, the Company follows the accounting guidance for principal-agent considerations. This determination involves judgement and is based on an evaluation of the terms of each arrangement. The Company determined that it is the principal in these transactions and therefore revenue is recognised on a gross basis since it is primarily responsible for fulfilling of the services. The Company also bears inventory risk as it pays the majority of publishers according to cost per mille impressions (CPM) but charges the payment from the customer according to cost per acquisition (CPA)/cost per click (CPC)/DCPC/or cost per install (CPI). Stated differently, an impression can be purchased from a publisher with no corresponding sale to an advertiser if the final user does not click on the advertisement delivered. Moreover, the Company has the discretion in establishing the prices. Sales from Ajillion – Ad-exchange The Company provides ad-exchange services which allow the Company’s partners to seamlessly buy and sell from each other through a real-time bidding process. Revenue is recognised in the accounting period in which the services are rendered. In this case, the Company determined that it is acting as an agent and therefore revenue is recognised on a net basis. While the Company is primarily responsible for the connectivity services, it does not bear inventory risk nor has discretion in establishing the prices. The customer chooses the inventory to purchase on a real-time basis, the amount spent on the campaign is determined by the customer through a real-time bidding process and the amount earned by the Company is based on a fixed percentage. Sales from licence of web apps platform The Company licence its web apps platform to customers on a SaaS basis. The benefits simultaneously provided to and consumed by the customers therefore revenues were recognised on a straight-line basis over the period of the contract. The following policy was applied before adoption of IFRS 15: Revenue is measured at the fair value of the consideration received or receivable and represents amounts receivable for goods and services provided in the normal course of business, net of discounts, VAT and other sales-related taxes. (a) Revenue from advertising The Group generates revenues from its customers’ advertising campaigns on fixed bases such as cost per mille impressions (“CPM”), cost-per-acquisition (‘‘CPA’’), cost-per-sale (‘‘CPS’’), cost-per-lead (‘‘CPL’’), cost-per-download (‘‘CPD’’) and cost-per-install (‘‘CPI’’). These revenues are recognised only when the amount of revenue can be measured reliably, it is probable that the economic benefits associated will flow to the Group, the transactions are complete and the related costs can be measured reliably. (b) Revenue from sale of software tools Revenue from sales of software tools is recognised at electronic point of sale when payment is identified by the respective credit card payment processor and rights to use the software have been granted. (c) Presentation of net revenues Revenues are recognised net when it is identified that the Group is acting as an agent and gross when it is identified that the Group is acting as a principal in accordance with the terms of the arrangement. Costs to obtain and fulfil a contract According to IFRS 15, Incremental costs of obtaining a contract are those costs that the entity would not have incurred if the contract had not been obtained (for example, sales commissions). Incremental costs of obtaining a contract with a customer are recognised as assets if they are recoverable. The Company recognises an asset in relation to marketing costs to obtain a contract. The costs include fees paid to marketing partners on behalf of subscription sales of CyberGhost or Reimage to customers referred by the partners. The Company believes that the costs are recoverable as the proceeds from the customer over the expected relationship period exceed the costs to obtain the contract. The asset is amortised on a systematic basis over the expected customer relationship period including expected contract renewals by customers. The expected customer relationship period is an estimation, which is based on historical renewal data. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 35 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 2 Significant accounting policies continued In addition, the Company recognises an asset for fulfilment costs that is considered directly attributable in fulfilling a contract. The fulfilment costs comprised of processing fees paid to third party processing service providers. This asset is amortised on a systematic basis over the contract period. Assets recognised from the costs to obtain or fulfil a contract are subject to impairment testing. An impairment loss should be recognised in profit or loss to the extent that the carrying amount of an asset exceeds: a. The remaining amount of consideration that the entity expects to receive in exchange for the goods or services to which the asset relates, less b. The costs that relate directly to providing those goods or services and that have not been recognised as expenses. Intangible assets Amortisation for all classes of intangible assets is included within amortisation and depreciation costs in the income statement. (a) Externally-acquired intangible assets Externally-acquired intangible assets comprise intellectual property (“IP”), customer lists, trademarks and internet domains. All such intangible assets are stated at cost less any accumulated amortisation and any accumulated impairment losses. Amortisation of these intangible assets is calculated using the straight-line method over their useful economic lives. Where intangible assets are acquired as part of a business combination they are recorded initially at their fair value. The useful economic life of IP, customer lists and trademarks is three to seven years. Internet domains are generally considered to have an indefinite useful economic life. They are purchased due to the marketability of the related domain name, are not specific to a particular product, brand, market or service and therefore are not expected to diminish in value or use as a function of time. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised. Internally-generated intangible assets (development costs) (b) An internally-generated intangible asset arising from the Group’s e-business development is recognised only if all of the following conditions are met: • An asset is created that can be identified (such as software and new processes); It is probable that the asset created will generate future economic benefits; and • • The development cost of the asset can be measured reliably. Internally-generated intangible assets are amortised on a straight-line basis over their estimated useful lives, which is two to three years. Amortisation commences when the asset is available for use. Where no internally-generated intangible asset can be recognised, development expenditure is charged to profit or loss in the period in which it is incurred. An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset are recognised in profit or loss when the asset is derecognised. (c) Goodwill Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment losses. The Group tests goodwill annually for impairment, or more frequently if there are indicators that goodwill might be impaired. Intangible assets are tested separately from goodwill only where impairment indicators exist. 36 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Property, plant and equipment Property, plant and equipment are stated at historical cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated on the straight-line method so as to write off the cost of each asset to its residual value over its estimated useful life. The annual depreciation rates used are as follows: • Computer equipment: 2–3 years • Furniture, fixtures and office equipment: 6–15 years • Leasehold improvements: 10 years or the term of the lease if shorter • Cars: 4 years The assets residual values and useful lives are reviewed and adjusted, if appropriate, at each reporting date. Where the carrying amount of an asset is greater than its estimated recoverable amount, the asset is written down immediately to its recoverable amount. Expenditure for repairs and maintenance of property, plant and equipment is charged to profit or loss in the year in which it is incurred. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in profit or loss. Impairment of property, plant and equipment and internally-generated intangible assets Assets that have an indefinite useful life are not subject to depreciation or amortisation and are tested annually for impairment. Assets that are subject to depreciation or amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash generating units). Trade receivables Trade receivables are measured at initial recognition at fair value and are subsequently measured at amortised cost using the effective interest rate method. Appropriate allowances for estimated irrecoverable amounts are recognised in profit or loss when there is objective evidence that the asset is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition. Cash and cash equivalents For the purpose of the consolidated cash flow statement, cash and cash equivalents comprise cash at bank and short- term bank deposits. Trade payables Trade payables are initially measured at fair value and are subsequently measured at amortised cost, using the effective interest rate method. Current and deferred tax Income tax expense represents the sum of the tax currently payable and deferred tax. Current tax Current tax liabilities and assets are measured at the amount expected to be paid to or recovered from the taxation authorities, using the tax rates and laws that have been enacted, or substantively enacted, by the reporting date. Deferred tax Deferred tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised. Deferred tax is calculated at the tax rates that are expected to apply KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 37 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 2 Significant accounting policies continued in the period when the liability is settled or the asset realised, based on tax rates that have been enacted or substantively enacted by the period end date, and is not discounted. Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when the deferred taxes relate to the same fiscal authority. Operating leases Leases where a significant portion of the risks and rewards of ownership are retained by the lessor are classified as operating leases. Payments made under operating leases are charged to profit or loss on a straight-line basis over the period of the lease. Share-based payments Kape operates equity-settled, share-based compensation plans, under which the entity receives services from employees as consideration for Kape equity instruments (options). The fair value of the options and share awards is recognised as an employee benefit expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the options granted, excluding the impact of any non-market vesting conditions (for example, profitability and sales growth targets). Non-market vesting conditions are included in assumptions about the number of options that are expected to vest. At each balance sheet date, the entity revises its estimates of the number of options that are expected to vest. It recognises the impact of the revision of original estimates, if any, in the income statement, with a corresponding adjustment to equity. The proceeds received net of any directly attributable transaction costs are credited to share capital (par value) and share premium when the options are exercised. Cancellation or settlement is accounted for as an acceleration of the vesting period, and therefore the amount that otherwise would have been recognised for services received over the remainder of the vesting period is recognised immediately. Repurchase of cancelled or settled share-based compensation plan, is accounted for as a deduction from equity, except to the extent that the payment exceeds the fair value of the equity instruments granted, measured at purchase date. Such excess is accounted as expense. Share capital Ordinary shares are classified as equity. The difference between the fair value of the consideration received by the Group and the nominal value of the share capital being issued is classified as additional paid in capital. Critical accounting estimates and judgements The preparation of consolidated financial statements under IFRS requires the Group to make estimates and judgements that affect the application of policies and reported amounts. Estimates and judgements are continually evaluated and are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. The following accounting policies cover areas that the Directors consider require estimates and assumptions which have a significant risk of causing a material adjustment to the carrying amount of assets and liabilities within the next financial year: (a) Capitalisation of development expenses Research and development costs which create identifiable assets and are expected to generate future economic benefits are capitalised, and the remainder is expensed to the income statement. This requires the Group to perform judgements in apportioning costs to identifiable assets and making judgements about which assets are expected to give rise to future economic benefits. (b) Presentation of net revenues The Group makes judgements in assessing whether it has acted as a principal or agent in transactions for selling and acquiring advertising media space, and therefore whether it reports its revenues gross or net respectively. The Group assesses a number of criteria in making these judgements, including the party, who is responsible for price setting and credit risk of the transaction, the losses the Group would suffer for non-delivery of service as well as the perceived and contractual relationship between the media publisher and seller or ad network. 38 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 3 Financial risk management The Group is exposed to interest rate risk, credit risk, liquidity risk, currency risk, and capital risk management arising from the financial instruments it holds (see also note 17). The risk management policies employed by the Group to manage these risks are discussed below: Interest rate risk Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. The Group has no material interest-bearing financial instruments and is therefore not exposed to changes in market rates of interest or fair value interest rate risk. Credit risk Credit risk arises when a failure by counterparties to discharge their obligations could reduce the amount of future cash inflows from financial assets on hand at the reporting date. The principal credit risk is considered to result from new relationships with customers with which the Group does not have a long working relationship and for which reliable information as to their credit ratings cannot be obtained. In such cases the Group limits the initial credit facility afforded to these customers. Cash balances are held with high credit quality financial institutions and the Group has policies to limit the amount of credit exposure to any financial institution or customer. Liquidity risk Liquidity risk is the risk that arises when the maturity of assets and liabilities does not match. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Group has procedures with the object of minimising such losses such as by having available an adequate amount of committed credit facilities from the ultimate shareholder and related parties, and maintaining sufficient cash and other highly liquid current assets. Currency risk Currency risk is the risk that the value of financial instruments will fluctuate due to changes in foreign exchange rates. Currency risk arises when future commercial transactions and recognised assets and liabilities are denominated in a currency that is not the Group’s measurement currency. The Group is exposed to foreign exchange risk arising from various currency exposures primarily with respect to the Israeli New Shekel, British Pound, Euro, Australian Dollar and Romanian Leu. The Group’s management monitors the exchange rate fluctuations on a continuous basis and acts accordingly and also avoids engaging in a significant level of transactions in currencies which are considered volatile or exposed to risk of significant fluctuations. 4 Revenue Revenue from advertising Sale of software licence 2017 $’000 2016 $’000 18,157 48,226 18,291 38,241 66,383 56,532 Revenues from sales of software tools and provision of virtual private network (“VPN”) solutions are generated from the App Distribution CGU, while revenues from advertising are generated mainly from the Media CGU. On January 1, 2017, the Company adopted IFRS 15 using the cumulative effect method applied to those contracts which were not completed as of January 1, 2017. The impact of the new standard on our opening balances was immaterial. On an ongoing basis, the most significant impact of the standard relates to our accounting for marketing costs of the Reimage and CyberGhost products which commenced as of FY 2017. These costs are considered incremental in obtaining the contract, and therefore capitalised and amortised over the expected customer relationship period under the new standard. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 39 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 4 Revenue continued Revenue recognition related to most of our products and services remains substantially unchanged. (a) Disaggregation of revenue The following table presents our revenues disaggregated by the timing of revenue recognition in accordance with our reporting segments: Revenue recognised over a period Revenue recognised at a point in time 6,454 41,772 App Distribution 2017 (USD, in thousands) 2016 (USD, in thousands) Web Apps and License 2,376 Media – 15,781 Total 8,830 57,553 App Distribution – 38,241 Media – 13,783 Web Apps and License 4,508 Total 4,508 52,024 Total 48,226 15,781 2,376 66,383 38,241 13,783 4,508 56,532 In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet for the period ended December 31, 2017 was as follows: Income statement Costs and expenses Selling and marketing expenses Total operations cost Operation loss Adjusted EBITDA Total comprehensive loss for the year Basic earnings per share Diluted earnings per share Balance sheet Assets recognised for costs incurred to obtain a contract Non-current assets – deferred expenses Current assets – deferred expenses Fiscal year ended 31 December 2017 as reported under IFRS 15 (USD, in thousands) Fiscal year ended 31 December 2017 under IAS 18 (USD, in thousands) Effect of adjustment of IFRS 15 (USD, in thousands) (44,117) (64,410) (2,599) 8,261 (2,503) (2.4) (2.4) (45,508) (65,801) (3,990) 6,870 (3,894) (3.4) (3.4) 1,391 1,391 1,391 1,391 1,391 1 1 Balance at 31 December 2017 as reported under IFRS 15 (USD, in thousands) 347 1,044 1,391 Balance at 31 December 2017 under IAS 18 (USD, in thousands) Effect of adjustment of IFRS 15 (USD, in thousands) – – – 347 1,044 1,391 The marketing costs to obtain a contract include fees paid to marketing partners on behalf of subscription sales of CyberGhost or Reimage to customers referred by the partners. (b) Contract liabilities The Company has recognised the following revenue-related contract liabilities: Contract liabilities1 Total 1. The balance is relating to CyberGhost, which was purchased on March 2017. 31 December 2017 (USD, in thousands) 4,012 4,012 40 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Significant changes in relation to contract liabilities The following table shows the significant changes in the current reporting period which relate to carried-forward contract liabilities. Significant changes in the contract liabilities balances during the period are as follows: Business combination Revenue recognised that was included in the contract liability balance from business combination Increases due to cash received, excluding amounts recognised as revenue during the period Revaluation of contract liabilities in foreign currency 31 December 2017 (USD, in thousands) (2,324) 2,181 (3,537) (332) Management expects that 77.8% of the transaction price allocated to the unsatisfied contracts (which represent to contract liabilities) as of 31 December 2017 ($3,120,000), 12.5% and 4.6% ($500,000 and $185,000) will be recognised as revenue during the next annual reporting period and will be primarily recognised in the 2019 and 2020 financial years, respectively. The remaining 5.2% ($207,000) will be primarily recognised in the following financial years. (c) Assets recognised from costs to obtain and fulfil a contract The Company recognises an asset in relation to marketing costs to obtain a contract. The asset is recognised as the Company expects to recover the cost over the expected relationship period with the customer which includes the initial contract period and expected renewals. The expected relationship period with the customer is estimated based on historical contract renewals data. The asset is amortised on a straight-line basis over the expected relationship period with the customer. In addition, the Company recognised an asset for fulfilment costs that are considered directly attributable in fulfilling a contract. The fulfilment costs comprised of processing fees paid to third party processing service providers. This asset is amortised on a systematic basis over the initial contract period. Asset recognised from marketing cost to obtain a contract Asset recognised from fulfilment cost to fulfil a contract Amortisation recognised during the period – marketing costs Amortisation recognised during the period – fulfilment cost 31 December 2017 (USD, in thousands) 1,386 406 (294) (804) 5 Segmental information Segments’ revenues and results Based on the management reporting system, the Group operates three reportable segments: • App Distribution – comprising the Group’s own software and SaaS products and distribution platform; • Media – comprising the Group’s ad network activities and associated technology platforms; and • Web Apps and License – comprising revenue generated from monetising web apps and licencing the associated technology Year ended 31 December 2017 Revenue Cost of sales Direct sales and marketing costs Segment result Central operating costs Adjusted EBITDA(1) Depreciation and amortisation Employee share-based payment charge Charge for repurchase of employee options Exceptional and non-recurring costs Operating loss Share of results of associates Finance income Finance costs Loss before tax Taxation Loss after taxation App Distribution 2017 $’000 Media 2017 $’000 Web Apps and License 2017 $’000 48,226 (4,572) (26,447) 15,781 – (11,317) 17,207 4,464 2,376 – – 2,376 Total 2016 $’000 66,383 (4,572) (37,764) 24,047 (15,786) 8,261 (6,445) (340) (3,176) (899) (2,599) (40) 277 (532) (2,894) (467) (3,361) KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 41 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 5 Segmental information continued Exceptional and non-recurring costs in 2017 comprised $0.3 million of acquisition bonuses to employees, other non- recurring staff costs of $0.1 million, professional services related to business combination of $0.3 million and a $0.2 million expense from repurchase of CyberGhost’s founder’s share options on 20 November 2017. Year ended 31 December 2016 Revenue Cost of sales Direct sales and marketing costs Segment result Central operating costs Adjusted EBITDA1 Depreciation and amortisation Impairment of intangible assets Employee share-based payment charge Exceptional and non-recurring costs Operating loss Share of results of associates Finance income Finance costs Loss before tax Taxation Loss after taxation App Distribution 2016 $’000 Media 2016 $’000 Web Apps and License 2016 $’000 38,241 (2,360) (24,614) 13,783 – (10,303) 11,267 3,480 4,508 – – 4,508 Total 2016 $’000 56,532 (2,360) (34,917) 19,255 (12,842) 6,413 (9,884) (4,683) (716) (862) (9,732) 47 4 (332) (10,013) (665) (10,678) Exceptional and non-recurring costs in 2016 comprised non-recurring staff restructuring costs of $0.6 million and a $0.3 million one-time onerous contract written-off in the period. The decrease in the employee share-based payment charge is due to reversal of charges from previous periods for employees that left the Company during the year. The impairment of intangible assets charge of $4,683,000 relates to the Media segment. After allocating this charge to the Media segment, the segment result is $1,203,000 loss. 1 Adjusted EBITDA is a company specific measure which is calculated as operating loss before depreciation, amortisation, exceptional and non-recurring costs, employee share-based payment charges and impairment of intangible assets which are considered to be one-off and non-recurring in nature as set out in note 6. The Directors believe that this provides a better understanding of the underlying trading performance of the business. Information about major customers In 2017 and 2016 there were no customers contributing more than 10% of total revenue of the Group. Geographical analysis of revenue Revenue by origin Europe British Virgin Islands Asia 2017 $’000 48,800 9,878 7,705 2016 $’000 17,297 27,520 11,715 66,383 56,532 Reimage Limited was re-domiciled from British Virgin Islands to Isle of Man on 8 September 2016. 42 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Geographical analysis of non-current assets Europe British Virgin Islands Asia Total intangible assets and property, plant and equipment 6 Operating loss Operating loss has been arrived at after charging: Adjusted EBITDA Adjusted EBITDA is calculated as follows: Operating loss Depreciation and amortisation Impairment of intangible assets Employee share-based payment charge Exceptional and non-recurring costs: Non-recurring staff and restructuring costs Adjusted EBITDA Excluding Web Apps and License segment 2017 $’000 10,364 1,954 847 13,165 2016 $’000 3,990 – 3,714 7,704 2017 $’000 (2,599) 6,445 – 3,516 899 8,261 (2,062) 2016 $’000 (9,732) 9,884 4,683 716 862 6,413 (4,139) Adjusted EBITDA excluding Web Apps and License segment 6,199 2,274 Exceptional and non-recurring costs Non-recurring staff costs Professional services related to business combination Expenses from repurchase of employee share options Auditor’s remuneration: Audit Taxation services Amortisation of intangible assets Depreciation Impairment of intangible assets (note 10) Employee share-based payment charge (note 7) Rent payable under operating leases Operating costs Operating costs are further analysed as follows: Direct sales and marketing costs Indirect sales and marketing costs Selling and marketing costs Research and development costs Management, general and administrative cost Depreciation and amortisation Impairment of intangible assets Total operating costs 2017 $’000 398 293 208 899 158 8 6,046 399 – 3,516 717 2016 $’000 562 300 – 862 147 21 9,421 463 4,683 716 459 2017 Adjusted $’000 37,764 6,207 43,971 696 8,883 1,315 – 2017 Total $’000 37,764 6,353 44,117 1,016 12,832 6,445 – 2016 Adjusted $’000 34,917 4,265 39,182 1,299 7,278 1,379 – 2016 Total $’000 34,917 4,998 39,915 1,661 7,761 9,884 4,683 54,865 64,410 49,138 63,904 Adjusted operating costs exclude share-based payment charges, exceptional and non-recurring costs, amortisation of acquired intangible assets and impairment of intangible assets. See note 4. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 43 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 7 Staff costs Total staff costs comprise the following: Salaries and related costs Employee share-based payment charge (note 18) 2017 $’000 8,564 3,516 12,080 2016 $’000 7,204 716 7,920 The remuneration of the key management personnel of the Group which comprises the Executive Directors and senior management team, is set out below: The aggregate remuneration comprised: Wages and salaries Employee share-based payment charge Details of Directors’ remuneration are set out in the Remuneration Committee report on pages 18 to 19. 8 Finance costs Interest expense Net foreign exchange and Other finance expenses 2017 $’000 2016 $’000 1,932 3,608 5,540 1,490 185 1,675 2017 $’000 411 121 532 2016 $’000 51 281 332 The entire interest expense was incurred on deferred consideration payments that was originally recognised at fair value. 9 Taxation The Parent Company is domiciled, for tax purposes, in both the Isle of Man and the UK. The final tax charge shown below arises partially from the difference in tax rates applied in the different jurisdictions in which the subsidiaries operate. The Group continues to recognise a deferred tax asset of $97,000 (2016: $166,000) in respect of tax losses accumulated in previous years. The total tax charge can be reconciled to the overall tax charge as follows: Loss before taxation Tax at the applicable tax rate of 19% (2016: 20%) Tax effect of: Differences in overseas rates Expenses not deductible for tax purposes Deferred tax not recognised on losses carried forward Tax expense for previous years Tax charge for the year Analysed as: Deferred taxation in respect of the current year Current tax charge Tax charge for the year 44 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 2017 $’000 2016 $’000 (2,894) (10,013) (550) (2,003) (421) 1,253 122 63 467 (650) 1,117 467 976 1,327 440 (75) 665 263 402 665 The Group has maximum corporation tax losses carried forward at each period end as set out below: Corporate tax losses carried forward Details of the deferred tax asset recognised (arising in respect of losses) is set out below: 2017 $’000 2016 $’000 33,235 28,320 At the beginning of the year Additions through business combinations Derecognised in the year Foreign exchange revaluation At the end of the year 2017 $’000 166 10 (100) 21 97 Details of the deferred tax liability recognised (arising from timing differences on intangible valuations on business combinations) is set out below: At the beginning of the year Arising from business combinations Foreign exchange differences Movement in the year due to temporary differences At the end of the year In addition, the Group has an unrecognised deferred tax asset in respect of the following: 2017 $’000 691 366 42 (750) 349 2016 $’000 716 – (558) 8 166 2016 $’000 986 – – (295) 691 Tax losses carried forward 10 Intangible assets Cost At 1 January 2016 Additions At 31 December 2016 Additions Acquisition through business combination Foreign exchange differences At 31 December 2017 Accumulated amortisation At 1 January 2016 Charge for the year Impairment losses At 31 December 2016 Charge for the period Foreign exchange differences At 31 December 2017 Net book value At 1 January 2016 At 31 December 2016 At 31 December 2017 Intellectual property $’000 Trademarks $’000 Customer lists $’000 35,205 1,219 36,424 – 1,706 212 9,462 – 9,462 90 546 70 2,383 – 2,383 – 743 92 Goodwill $’000 7,684 – 7,684 – 5,690 479 38,342 10,168 3,218 13,853 (27,031) (6,528) – (33,559) (2,320) (12) (6,474) (1,494) – (7,968) (1,595) (4) (932) (483) – (1,415) (1,128) (5) (2,316) – (4,683) (6,999) – – (35,891) (9,567) (2,548) (6,999) 8,174 2,865 2,451 2,988 1,494 601 1,451 968 670 5,368 685 6,854 2017 $’000 2016 $’000 33,026 28,047 Capitalised software development costs $’000 Internet domains $’000 Total $’000 57,509 1,963 59,472 1,547 8,889 869 70,777 2,706 744 3,450 1,432 204 16 5,102 (1,502) (916) – (38,255) (9,421) (4,683) (2,418) (52,359) (1,003) (1) (6,046) (22) (3,422) (58,427) 1,204 1,032 1,680 19,254 7,113 12,350 69 – 69 25 – – 94 – – – – – – – 69 69 94 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 45 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 10 Intangible assets continued On 14 March 2017, the Group acquired 100% of the share capital of CyberGhost S.A (“CyberGhost”), a leading cybersecurity SaaS provider, with a focus on the provision of virtual private network (“VPN”) solutions. Prior to the acquisition date, CyberGhost acquired Mobile Concepts GmbH, a software development company based in Germany, for an amount of €1.5 million, as set out in note 21. On 1 April 2017, the Company increased its holding in Clearvelvet Trading Limited (“Clearvelvet”) to 50.01% of the share capital by acquiring an additional 33.34% of its issued share capital. In September 2015, the Group acquired 16.67% of the share capital of Clearvelvet for a total consideration of $850,000, of which $350,000 was paid in 2016 with the completion of certain milestones. Clearvelvet’s founders hold the remaining 49.99% of the shares. Following completion Clearvelvet is considered to be a subsidiary undertaking and has been included in the Company’s consolidated statements on a basis of full consolidation, as set out in note 21. In October 2016, the Group exercised an option to acquire the intellectual property of PC maintenance software product, DriverAgent, from eSupport.com Inc. for a total consideration of $1,208,000. $150,000 from the consideration was paid in the year ending 31 December 2015 for the option and $850,000 was paid during the year ending 31 December 2016. Another $208,000 is deferred consideration which is contingent on future results of the product. Goodwill acquired in a business combination is allocated at acquisition to the cash generating units (CGUs), or group of units that are expected to benefit from that business combination. The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period. At 31 December 2017, before impairment testing, the carrying value of intangible assets allocated to the Media CGU was $2,889,000, including goodwill of $2,524,000. The carrying value of the goodwill has not been changed due to the impairment testing and no impairment loss was recognised. For the Media CGU, the Group has prepared calculations based on cash flow projections for the next five years from the most recent budgets approved by management and extrapolated cash flows beyond this period using an estimated growth rate of 1 per cent (2016: 1 per cent). This rate does not exceed the average long-term growth rate for the relevant markets. The rate used to discount these forecast cash flows is 25 per cent (2016: 25 per cent). The discount rate used in the valuation of the Media CGU was 25 per cent. If the discount rate was increased by 1 percentage point the effect would have been nil. There is no reasonably possible change in assumption that would give rise to an impairment. At 31 December 2016, before impairment testing, the carrying value of intangible assets allocated to the Media CGU was $9,417,000, including goodwill of $5,368,000. As a result of the reduction in the management forecasted cash flows attributable to the acquired intangible assets, the carrying value of the goodwill has therefore been reduced to its recoverable amount of $685,000 through recognition of an impairment loss of $4,683,000. Carrying value before impairment losses at 1 January 2016 Provisions for impairment Net book value at 31 December 2016 Web Apps and License $’000 974 – 974 Media $’000 9,417 (4,683) 4,734 App Distribution $’000 1,405 – 1,405 Total $’000 11,796 (4,683) 7,113 The Group tests the useful economic life of the Intangible asset whenever events or changes in circumstances indicate that the useful economic life may need to be changed. The brought-forward media CGU intellectual property, customer lists and trademark were fully amortised in the year ended 31 December 2017 due to a change in management assumptions with the expected useful life of these assets. If the management assumption was not changed, the amortisation attributed to the media intellectual property and customer lists would have been $2,416,000 instead of $3,629,000. 46 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 11 Property, plant and equipment Cost At 1 January 2016 Additions Disposals At 31 December 2016 Additions Disposals Acquisition through business combination Foreign exchange differences At 31 December 2017 Accumulated depreciation: At 1 January 2016 Charge for the period Disposals Foreign exchange differences At 31 December 2016 Charge for the period Disposals Foreign exchange differences At 31 December 2017 Net book value At 1 January 2016 At 31 December 2016 At 31 December 2017 12 Trade and other receivables Trade receivables and accrued income Prepayments Other receivables Furniture, fixtures and office equipment $’000 Leasehold improvements $’000 Computer equipment $’000 917 78 (19) 976 215 (67) 94 22 1,240 (574) (150) 11 2 (711) (250) 55 (9) (915) 343 265 325 374 3 (98) 279 40 (140) 60 6 245 (87) (50) 49 – (88) (29) 44 (1) (74) 287 191 171 736 27 (313) 450 174 (350) 14 2 290 (363) (263) 311 – (315) (106) 304 (117) 373 135 173 Other receivables as of 31 December 2017 include VAT receivable balance of $742,000 (2016: $187,000) The ageing of trade receivables that are past due but not impaired is shown below: Between 1 and 30 days Between 31 and 60 days More than 60 days Cars $’000 – – – – 111 – 42 9 162 – (14) (2) (16) – – 146 2017 $’000 8,536 663 1,872 11,071 Total $’000 2,027 108 (430) 1,705 540 (557) 210 39 1,937 (1,024) (463) 371 2 (1,114) (399) 403 (12) (1,122) 1,003 591 815 2016 $’000 5,604 391 1,955 7,950 2017 $’000 455 411 1,734 2,600 2016 $’000 685 219 247 1,151 The fair values of trade and other receivables due within one year approximate to their carrying amounts as presented above. The exposure of the Group to credit risk and impairment losses in relation to trade and other receivables is set out in note 17 of the consolidated financial statements. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 47 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 13 Cash and cash equivalents Cash in bank accounts Bank deposits The carrying value of these assets represents a reasonable approximation to their fair value. 14 Trade and other payables Trade payables Accrued expenses Employee liabilities Current tax liability Other payables 2017 $’000 2016 $’000 17,844 51,658 59,857 12,207 69,502 72,064 2017 $’000 2,469 4,643 655 1,573 754 10,094 2016 $’000 1,879 3,367 709 484 657 7,096 The Group’s management consider that the carrying value of trade and other payables approximates their fair value. The Group has financial risk management policies in place to ensure that all payables are paid within the credit timeframe and no interest has been charged by any suppliers as a result of late payment of invoices. 15 Shareholder’s equity Issued and paid up ordinary shares of $0.0001 2017 Number of shares 2016 Number of shares 148,496,073 148,496,073 During the year a total of 801,175 new ordinary shares of $0.0001 par value from treasury were sold for cash in relation to share option schemes resulting in cash consideration of $437,000 (2016: $nil). During the year a total of 3,810,667 of share options of $0.0001 par value were repurchased by the Company for a total cash consideration of $3,800,000 (2016: $nil). During 2016 a total of 1,250,000 of ordinary shares of $0.0001 par value were purchased by the Company for a total cash consideration of $994,952 and are held in treasury at the reporting date. As at 31 December 2017, the Company held in the treasury a total of 6,650,248 of ordinary shares of $0.0001 per value (2016: 7,451,423). During 2017, 801,175 of ordinary shares of $0.0001 par value were transferred out of treasury to satisfy the exercise of options by the Company employees (2016: nil). The following describes the nature and purpose of each reserve within owner’s equity: Reserve Description and purpose Additional paid in capital Share premium (i.e. amount subscribed or share capital in excess of nominal value) Retained earnings Cumulative net gains and losses recognised in the consolidated statement of comprehensive income Foreign exchange Cumulative foreign exchange differences of translation of foreign operations In accordance with Isle of Man company law, all of the reserves with the exception of share capital are distributable. 48 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 16 Interests in associates On 1 April 2017, the Company increased its holding in Clearvelvet Trading Limited (“Clearvelvet”) to 50.01% of the share capital of Clearvelvet by acquiring an additional 33.34% of its issued share capital. In September 2015, the Group acquired 16.67% of the share capital of Clearvelvet for a total consideration of $850,000, of which $350,000 paid in 2016 on completion of certain milestones. Although the Group held less than 20% of the equity shares of the voting power at shareholder meetings, until 1 April 2017, the Group exercises significant influence by virtue of its contractual right to appoint one of four Directors to the Board of Directors of Clearvelvet and to veto certain significant trading and investment decisions. The acquisition details are set-off on note 21. Interest in associates at the beginning of the year Investment in associates in the year Share of results Re-measurement gain on equity interest in associate Transfer on increase in stake (note 21) Interest in associates at the end of the year Aggregated amounts relating to Clearvelvet as an equity accounted associate are as follows: Total current assets Total current liabilities Revenues Profit (Loss) 1 Clearvelvet loss until 1 April 2017. 2017 $’000 859 (40) 52 (871) – 2016 $’000 812 – 47 859 2017 $’000 – – – (240)1 2016 $’000 6,117 5,467 11,793 288 17 Financial instruments The Group is exposed to the risks that arise from its use of financial instruments. This note describes the objectives, policies and processes of the Group for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout this financial information. Principal financial instruments The principal financial instruments used by the Group, from which financial instrument risk arises are as follows: • Trade and other receivables • Trade and other payables • Cash and cash equivalents • Loans receivable • Deferred consideration Financial assets The Group held the following financial assets: Trade receivables and accrued income Other receivables Cash 2017 $’000 8,536 1,872 69,502 2016 $’000 5,604 1,955 72,064 79,910 79,623 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 49 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 17 Financial instruments continued Financial liabilities The Group held the following financial liabilities: Amortised cost Trade payables Other payables and accrued expenses Deferred consideration (see note 25) 2017 $’000 2016 $’000 2,469 5,939 1,915 10,323 1,879 4,611 403 6,893 The Group’s Directors monitor and manage the financial risks relating to the operation of the Group. These risks include market risk (including foreign currency risk and interest rate risk), credit risk and liquidity risk. Market risk (a) Foreign currency risk management The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as follows: Israeli New Shekel Euro British Pound Australian Dollar Romanian Lei Liabilities Assets 2017 $’000 541 308 74 – 269 2016 $’000 473 761 209 – 38 1,192 1,481 2017 $’000 524 6,028 259 – 219 7,030 2016 $’000 703 2,300 48 11 107 3,169 A 10% weakening of the United States Dollar against the following currencies at 31 December 2017 would have increased/ (decreased) equity and profit or loss by the amounts shown below. This analysis assumes that all other variables, in particular interest rates, remain constant. For a 10% strengthening of the United States Dollar against the relevant currency, there would be an equal and opposite impact on the profit and other equity. Israeli New Shekel Euro British Pound Australian Dollar Romanian Lei Interest rate risk management (b) At the reporting date the interest rate analysis of financial instruments was: Fixed rate financial instruments Financial assets Profit or loss 2017 $’000 (2) 572 19 – (5) 584 2016 $’000 23 154 (16) 1 7 169 2017 $’000 2016 $’000 69,502 72,064 69,502 72,064 Any increase/ (decrease) in interest rates will have no effect on results and equity of the Group because all financial instruments are fixed rate. 50 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Credit risk The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk at the reporting date was: Trade and other receivables Cash at bank Bank deposits Receivables from related companies 2017 $’000 9,527 17,844 51,658 881 2016 $’000 5,738 59,857 12,207 1,821 79,910 79,623 Before accepting a new customer, the Group assesses each potential customer’s credit quality and risk. Customer contracts are drafted to reduce any potential credit risk to the Group. Where appropriate the customer’s recent financial statements are reviewed. Trade receivables are regularly reviewed for bad and doubtful debts. The Group holds a provision of $239,000 at 31 December 2017 against bad and doubtful debts (2016: $230,000). At 31 December 2017, the Group had trade receivables of $2,600,000 (2016: $1,151,000) that were past due but not impaired. The ageing analysis of these past due receivables is set out in note 12. In determining the recoverability of trade receivables, the Group considers any change in the credit quality of the trade receivable from the date the credit was initially granted up to the reporting date. The Group does not hold any collateral as security. Impairments of trade receivables are expensed as operating expenses. The fair value of receivables equates to their book value. The Group does not collect external credit ratings for customers but uses its own methods for determining creditworthiness. The Group and Company seek to limit the level of credit risk on cash and cash equivalents by depositing funds with banks that have high credit ratings. Liquidity risk management The Group’s liquidity risk is monitored using regular cash flow reporting and projections to ensure that it is able to meet its obligations as they fall due. The following tables detail the Group’s remaining contractual maturity for its financial liabilities. The tables have been drawn up based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Group can be required to pay. The table includes both interest and principal cash flows. 2017 Trade and other payables Payables to related parties Deferred consideration 2016 Trade and other payables Payables to related parties Deferred consideration Carrying amounts $’000 Contractual cash flows $’000 3 months or less $’000 Between 3–12 months $’000 Between 1–5 years $’000 More than 5 years $’000 8,318 90 1,915 8,318 90 2,249 10,323 10,657 8,318 90 236 8,644 – – 728 728 – – 1,285 1,285 – – – Carrying amounts $’000 Contractual cash flows $’000 3 months or less $’000 Between 3–12 months $’000 Between 1–5 years $’000 More than 5 years $’000 6,470 20 403 6,893 6,470 20 503 6,993 6,265 20 – 6,285 205 – 253 458 – – 250 250 – – – – KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 51 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 18 Employee share-based payments Options have been granted under the Group’s share option scheme to subscribe for ordinary shares of the Company. At 31 December 2017, the following options were outstanding (2016: 10,259,383): Group Group 1 Group 2 Group 3 Group 4 Group 5 Group 6 Group 7 Total Grant date 29 May 2014 21 April 2015 5 January 2016 31 May 2016 26 October 2016 3 April 2017 15 June 2017 Number of shares under option 1,338,570 523,063 384,000 2,000,000 2,232,272 884,000 1,128,424 8,490,329 Subscription price per share $0.538 $1.376 $0.749 $0.371 $0.492 $0.0001 $0.890 Vesting conditions Groups 1-5 and 7 – 25% at the end of the first year following the grant date. 6.25% on a quarterly basis during 12 quarters period thereafter. Group 6 – 50% at the end of the second year following the grant date and the remainder at the end of the third year following the grant. The total number of shares exercisable as of 31 December 2017 was 2,973,348 (2016: 3,840,679). The weighted average fair value of options granted in the year using the Cox, Ross and Rubinstein’s Binomial Model (the “Binomial Model”) was $0.50. The inputs into the Binomial model are as follows: Early exercise factor Fair value of Group’s stock Expected volatility Risk free interest rate Dividend yield Forfeiture rate 2017 $’000 2016 $’000 150% $0.78 70% 0.16%-1.11% – 43% 100%-150% $0.40-$0.80 60% 0.25%-1.89% – 7%-14% Expected volatility was determined based on the historical volatility of comparable companies. Forfeiture rate is assumed to be 7%-14% for senior management and 43% for other employees. The risk-free interest rate was estimated based on average yields of UK Government Bonds. The Group recognised total share-based payments relating to equity-settled share-based payment transactions as follows: Share-based payment charge Charge for repurchase of employee options 2017 $’000 340 3,176 2016 $’000 716 – Movements in the number of share options outstanding and their related weighted average exercise prices are as follows: At the beginning of the year Granted Lapsed Exercised Repurchased by the Company At the end of the year 52 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 2017 2016 Weighted average exercise price Number of options Weighted average exercise price Number of options $0.66 $0.17 $0.81 $0.55 $0.0001 10,259,383 5,843,424 (3,000,633) (801,178) (3,810,667) $0.55 8,490,329 $0.66 $0.51 $0.56 – – $0.66 14,481,158 5,338,272 (9,560,047) – – 10,259,383 The options outstanding at 31 December 2017 had a weighted average remaining contractual life of 8.2 years (2016: 7.9 years). On 20 November 2017, following his reposition from Managing Director to Chairman and Corporate Development Manager of CyberGhost, the Company repurchased and cancelled 3,810,667 options that were granted to the founder of CyberGhost on 3 April 2017. The total cash consideration for the options was of €3.2 million ($3.8 million) out of the total consideration, €1.6 million ($1.9 million) was paid upon execution of the repurchase agreement, while the remaining amount is to be paid in eight equal instalments. The fair value as of 20 November 2017 was €3.0 million ($3.4 million) and deducted from equity in accordance to IFRS 2. Following the cancellation of the options a $3.2 million charge was expensed as a result of vesting terms acceleration. An additional $0.2 expense was recorded as the consideration exceeded the fair value of the options. 19 Earnings per share Basic loss/earnings per share is calculated by dividing the loss /earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the year. Basic Diluted Adjusted basic Adjusted diluted 2017 cents (2.4) (2.4) 3.8 3.7 2016 cents (7.6) (7.6) 2.7 2.7 Adjusted earnings per share is a non-GAAP measure and therefore the approach may differ between companies. Adjusted earnings have been calculated as follows: Loss for the year Post tax adjustments: Employee share-based payment charge Exceptional and non-recurring costs Amortisation on acquired intangible assets Impairment of intangible assets Exceptional tax charge Adjusted profit for the year 2017 $’000 2016 $’000 (3,361) (10,678) 3,535 793 4,439 – – 5,406 823 774 8,208 4,683 – 3,810 Denominator – basic: Weighted average number of equity shares for the purpose of earnings per share Denominator – diluted: Weighted average number of equity shares for the purpose of diluted earnings per share Number Number 141,547,496 141,068,557 145,260,658 141,182,911 The diluted denominator has not been used where this has anti-dilutive effect. Basic and diluted loss per share are therefore the same for reporting purposes. The difference between weighted average number of ordinary shares used for basic earnings per share and the diluted earnings per share is 114,354, being the effect of all potentially dilutive ordinary shares derived from the number of share options granted to employees. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 53 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 20 Subsidiaries Name BestAd Hi Tech Media Limited2 Crossrider Advanced Technologies Limited2 Crossrider (Israel) Limited2 Crossrider Technologies Limited (formerly Market Connect (Cyprus) Limited) Crossrider Sports Limited2 Country of incorporation Principal activities Israel Israel Israel Development technical support and marketing services Development services and technical and marketing support Provision of marketing services to related parties Cyprus Licensing of IP software and agency services to related parties United Kingdom Provision of consulting services Reimage Limited1 Isle of Man Development and sale of the “Reimage” software tool. Reimage Limited2 R.S.F Remote Software Fixing Limited2 Cyprus Israel Consulting, market research and software development services Provision of development, technical support and marketing support services to its parent company Crosspath Trading Limited British Virgin Islands Performance of commercial activity through the licensing of technology from Crossrider Technologies Ltd Blueroad Trading Limited Cyprus Provision of agency services to Crosspath Limited Frontbase Trading Limited Cyprus Provision of agency services to Crosspath Limited Crossrider ROM SRL2 Romania Provision of marketing and development services Definiti Media Ltd(**) Israel Providing digital advertising services for mobile platforms CyberGhost SRL2 Romania Leading cybersecurity SaaS provider, with a focus on the provision of virtual private network (“VPN”) solutions Mobile Concept2 Germany Provision of software development services to its parent company Clearvelvet Trading Ltd2 British Virgin Islands Performance of programmatic video advertising activity through the licensing of technology from Strongmove Consultants Ltd Strongmove Consultants Ltd2 Cyprus Licensing of agency services to related parties Holding % 100 100 100 100 100 100 100 100 100 100 100 100 100 100 100 50.01 50.01 Spartacs Technologies2 Israel Provision of marketing support services to its parent company 50.01 1. 2. Re-domiciled from British Virgin Islands on 8 September 2016. Indirect shareholding. The Group has been formed from a series of common control transactions which have been accounted for using merger accounting; and acquisitions from third parties which have been accounted for using the acquisition method. 21. Business combinations (a) Acquisition of CyberGhost SA On 14 March 2017 the Group acquired 100% of the share capital of CyberGhost S.A (“CyberGhost”), a leading cybersecurity SaaS provider, with a focus on the provision of virtual private network (“VPN”) solutions. Prior to the acquisition date, CyberGhost acquired Mobile Concepts GmbH, a software development company based in Germany, for an amount of €1.5 million. The acquisition is in line with the Company’s stated strategy to broaden its product offering to service high-growth consumer markets, of which cybersecurity is a key vertical. 54 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Brand and domain name Customer relations Technology Deferred tax liability Cash and cash equivalents Trade and other receivables Property, plant and equipment Deferred revenues Trade and other payables Fair value of consideration Cash Contingent consideration Total consideration Goodwill Net cash outflow on acquisition of business Initial consideration Prepayment in relation of deferred consideration Cash and cash equivalents acquired Acquiree’s carrying amount before combination $’000 – – 1,166 – 1,070 1,181 199 (2,324) (1,857) (565) Fair value $’000 546 743 1,706 (366) 1,070 1,181 199 (2,324) (1,857) 898 3,272 1,477 4,749 3,851 2017 $’000 3,272 1,871 (1,070) 4,073 CyberGhost was acquired for a total consideration of up to $9.6 million (€9.1 million). The consideration comprises of $3.3 million (€3.1 million) in cash at closing, $3.2 million (€3.0 million) in nominal value share options and deferred earn-out consideration capped at $3.2 million (€3.0 million), to be satisfied in cash on a Euro for Euro basis for the EBITDA of CyberGhost in the 12-month period post completion. $1.9 million (€1.75 million) was paid at closing as a prepayment of the deferred earn-out consideration. The share options consideration comprised of 4,400,000 options that issued over ordinary shares in the capital of the Company (“ordinary shares”) exercisable at the nominal value of the shares (“Consideration Options”). The Consideration Options are exercisable in two equal portions on the second and third anniversary of the acquisition completion and contingent on the continued employment of the founder. If exercised in full, the share options would represent 2.87% of the existing issued share capital of the Company. On 20 November 2017, the Company repurchased 3,810,667 options out of the 4,400,000 option granted to the founder for total cash consideration of $3.8 million (€3.2 million). Out of which $1.9 million (€1.625 million) was paid upon execution of the repurchase agreement, while the remaining amount is to be paid in eight equal instalments amounting to $235 thousand (€197 thousand) per quarter over the course of two years. The Company accelerated the vesting of the share options purchased and recognised immediately the amount that otherwise would have been recognised for services received over the remainder of the vesting period. Following the repurchase the Company recognised expenses of $0.2 million for the excess of the consideration over the fair value. Following the acquisition date, CyberGhost has issued additional shares to the Company for a consideration amount of €1.9 million that been paid in cash during the period ended 31 December 2017. Since the acquisition date, CyberGhost has contributed $6.4 million to Group revenues, and loss of $1.7 million to Group loss. When excluding the expense for the repurchase of CyberGhost’s founder’s options CyberGhost contributes $1.5 million profit to the Group loss. In addition, since the acquisition date, CyberGhost contributed $4.4 million to segmental results of the App Distribution segment (as set out in note 5). If the acquisition had occurred on 1 January 2017, Group revenue would have been $67.6 million, Group loss for the period would have been $3.3 million and the App Distribution segmental result would have been $18.1 million. KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 55 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 21. Business combinations continued (b) Acquisition of Clearvelvet Trading Limited On 1 April 2017, the Company increased its holding in Clearvelvet Trading Limited (“Clearvelvet”) to 50.01% of the share capital by acquiring an additional 33.34% of its issued share capital. In September 2015, the Group acquired 16.67% of the share capital of Clearvelvet for a total consideration of $850,000, of which $350,000 was paid in 2016 with the completion of certain milestones. Clearvelvet’s founders hold the remaining 49.99% of the shares. Following completion Clearvelvet is considered to be a subsidiary undertaking and has been included in the Company’s consolidated statements on a basis of full consolidation. Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill are as follows: Intangible assets Investment Property, plant and equipment Trade and other receivables Deferred tax asset Cash and cash equivalents Trade and other payables Fair value of consideration Cash Conversion of convertible loan Conversion of previously held interest in associate Total consideration Goodwill Non-controlling interest Acquiree’s carrying amount before combination $’000 204 50 11 3,992 10 1,387 (4,101) 1,553 Fair value $’000 204 50 11 3,992 10 1,387 (4,101) 1,553 850 894 871 2,615 1,839 (777) The initial consideration for the acquisition of Clearvelvet was $1.7 million out of which $894,000 was conversion of the loan given by the Group on January 2016 and cash consideration of $850,000. The cash consideration was paid during July 2017. In addition, the sellers will be entitled to receive up to a total of $1.4 million earn-out consideration, to be satisfied in cash subject to their continued employment by Clearvelvet. The earn-out consideration is contingent on achieving EBITDA goals of $1.7 million in 2017 (pro-rated from 60% of target), which was not achieved, and $2.2 million for 2018 (pro-rated from 67% of target). The earn-out consideration is accounted as remuneration in the post-acquisition income statement rather as part of the acquisition cost. Net cash outflow on acquisition of business Cash and cash equivalents acquired 2017 $’000 (1,387) (1,387) Since the acquisition date, Clearvelvet has contributed $10.8 million to Group revenues, profit of $0.4 million to Group loss and $1.8 million to segmental results of the Media segment (as set out on note 5). If the acquisition had occurred on 1 January 2017, Group revenue would have been $68.9 million, Group loss for the period would have been $3.6 million and the Media segmental result would have been $4.9 million. 56 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 22 Related party transactions The Group is controlled by Unikmind Holdings Limited incorporated in the British Virgin Islands, which owns 73% of the Company’s shares. The controlling party is the Solidinsight Trust, established under the laws of the Isle of Man. Mr. Teddy Sagi is the sole ultimate beneficiary of the Solidinsight Trust. (a) Related party transactions The following transactions were carried out with related parties: Revenue from common controlled company Technical support services to end customers provided by common controlled company Payment processing services provided by common controlled company Office rent expenses to common controlled companies Revenue from equity investments (b) Receivables owed by related parties (see note 17) Name Parent Company Equity investments Companies related by virtue of common control Trade Nature of transaction Unpaid share capital Loan and Trade (c) Payables to related parties (see note 17) Name Nature of transaction Companies related by virtue of common control Other 23 Operating leases Due less than 1 year Due between 1 and 5 years The table above summarises the minimum commitments under the Group’s office rental agreements. 24 Contingent liabilities The Group had no contingent liabilities as at 31 December 2017. 2017 $’000 2,587 (2,704) (208) (230) – 2016 $’000 5,034 (2,105) (300) (82) 100 (555) 2,647 2017 $’000 10 – 881 891 2017 $’000 90 90 2017 $’000 356 222 578 2016 $’000 10 799 1,022 1,831 2016 $’000 20 20 2016 $’000 553 868 1,421 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 57 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED 25 Deferred consideration (a) Acquisition of Definiti Media Limited The consideration for the acquisition of Definiti Media Ltd in May 2014 included $2,489,000 deferred consideration. Of this, $845,000 was repaid during the year ending 31 December 2014 and $746,000 was repaid during the year ending 31 December 2015. The remainder was repaid during the year ending 31 December 2016. (b) Acquisition of AjillionMax The consideration for the acquisition of certain assets of AjillionMax Limited in May 2014 included $654,000 deferred consideration. Of this, $104,000 was repaid during the year ending 31 December 2014, $156,000 was repaid during the year ending 31 December 2015, $189,000 was repaid during the year ending 31 December 2016 and the remainder was repaid during the year ending 31 December 2017. In addition, $435,000, included as part of the acquisition arrangements, has been recognised directly in the income statement during the year ending 31 December 2015, out of which $209,000 was paid in May 2017. Investment in Clearvelvet Trading Ltd (c) In September 2015, the Group acquired 16.67% of the share capital of Clearvelvet Limited for a total consideration of $850,000, of which $350,000 was paid in 2016 on completion of certain development milestones. (d) Acquisition of DriverAgent intangibles In October 2016, the Group acquired the intellectual property of PC maintenance software product, DriverAgent, from eSupport.com, Inc for a total consideration of $1.2 million. As of 31 December 2017, the consideration included $0.17 million of deferred consideration (2016: $0.2 million) which is contingent on future results. (e) Repurchase of share-based consideration On 20 November 2017, the Company repurchased 3,810,667 options out of the 4,057,813 option granted to CyberGhost’s former founder for total cash consideration of $3.8 million (€3.2 million). Out of which $1.9 million (€1.625 million) paid upon execution of the purchase agreement, with the remaining amount to be paid in eight equal instalments amounting to $235 thousand (€197 thousand) per quarter over the course of two years and recognised as deferred consideration. 26 Subsequent events On 7 March 2018, Crossrider plc announced the renaming of the Company to Kape Technologies plc. Trading in the Company’s shares under the new name and TIDM, “KAPE”, will commence on 13 March 2018. 58 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS NOTES KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS 59 CORPORATE GOVERNANCEFINANCIAL STATEMENTSSTRATEGIC REPORT NOTES 60 KAPE TECHNOLOGIES PLC ANNUAL REPORT AND ACCOUNTS SHAREHOLDER INFORMATION AND ADVISERS Shareholder information, including financial results, news and information on products and services, can be found at www.kape.com Independent Auditor BDO LLP 55 Baker Street London W1U 7EU Nominated Advisor Shore Capital & Corporate Limited Bond Street House 14 Clifford Street London W1S 4JU Investor Relations Vigo Communications 180 Piccadilly London W1J 9HF Corporate Legal Advisers Morrison Foerster City Point One Ropemaker Street London EC2Y 9AW Broker Shore Capital Stockbrokers Limited Bond Street House 14 Clifford Street London W1S 4JU Registrars Computershare Investor Services (Jersey) Limited Queensway House Hilgrove Street St Helier Jersey JE1 1ES Registered Office Sovereign House 14-16 Nelson Street Douglas Isle of Man IM1 2AL Stock exchanges The Company’s ordinary shares are listed on the AIM market of the London Stock Exchange under the symbol “KAPE”. The Company does not maintain listings on any other stock exchanges. Kape Technologies plc LABS Atrium Stables Market Chalk Farm Road London NW1 8AH Tel: +44 (0) 203 355 7926 K a p e T e c h n o l o g i e s p l c A n n u a l R e p o r t & A c c o u n t s 2 0 1 7