EXPANDING
OUR REACH
AnnuAl RepoRt And Accounts 2019
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Our focus
empowering consumers to
manage their own data and
digital security online.
INTRODUCTION
Who we are
Kape is a ‘privacy first’
cybersecurity company focused
on helping consumers around the
world have a better experience
and protection in their digital life.
contents
Strategic Report
Highlights
At a glance
Chairman’s statement
Market overview
Chief Executive Officer’s review
Strategic priorities
Our user acquisition model
Strategy in action
Chief Financial Officer’s review
Product development
Principal risks and uncertainties
Corporate Governance
Board of Directors
Corporate governance statement
Remuneration Committee report
Directors’ report
Statement of Directors’ responsibilities
Financial Statements
Independent Auditor’s report
Consolidated statement of
comprehensive income
Consolidated statement of
financial position
Consolidated statement of
changes in shareholders’ equity
Consolidated statement of cash flows
Notes to the consolidated
financial statements
Shareholder information and advisors
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76
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
Digital marketing expertise
Our vision
Growth business model and
strong revenue visibility driven
by a saas-based financial model.
Kape’s vision is to provide online
autonomy for a secure and
accessible personal digital life.
Financial highlights
operational highlights
$66.1m
• Strong SaaS metrics, increase in
subscribers to 2.35 million at
year-end.
Revenues
+27%*
$14.6m
Adjusted eBitdA**
+40%
$17.9m
Adjusted cash flow from
operations attributable
to current year
+12.5%
6.5 cents
Adjusted Fully diluted
earnings per share
+30%
22.0%
Adjusted eBitdA
margins
$51.5m
Recurring revenues
from subscriptions
+87%
40.2%
organic growth
• Strong revenue visibility from
existing users increased to
$98.8 million.
• Completed the successful
integration of Intego and ZenMate.
• Completed acquisition of Private
Internet Access in December.
• Strong R&D and product
development:
launched proprietary infrastructure
technology.
Consumer cybersecurity centre
developed and expected to launch
in Q2 2020.
* Revenues from continuing operations only.
** Adjusted EBItDA from continuing
operations only. Adjusted EBItDA is a
non- GAAP measure and a company-
specific measure which excludes other
operating income and expenses which are
considered to be one-off and non-recurring
in nature.
*** Represents a cash conversion of 123%
(2018: 153%), this excludes movement in
Deferred contract costs. Adjusted cash flow
from operation of $1.0 million (2018: $5.7
million).
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
1
036912152016Underlying Adjusted EBITDA** ($ million)($ million)201740% Growth201820192.86.010.414.6 AT A GLANCE
Kape’s core
software products
We have built a core SaaS product suite over
a number of years, with a primary focus on
digital privacy and digital security.
Our products
Digital Privacy
Digital Security
2
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
Our products
stRAteGic
RepoRt
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FinAnciAl
stAtements
COMPANY OVERVIEW
Successful integration
experience
CyberGhost
• Grew CyberGhost’s user base by 400
•
per cent since acquisition
Increased our digital privacy revenue
excl. PIA by 81.5 per cent
• 75 per cent reduction in cost per user
ZenMate
• $1.7 million in annualised cost savings
•
identified relating to ZenMate
Integration has been proven to be
highly complementary to CyberGhost
strengthening its presence in Europe
Intego
•
Increased Intego’s visibility across
antivirus related publications
• Doubled Intego’s Malware
protection team growing our
ability to protect our users
398
employees
9
Global hubs
2.35m
subscribers
160+
subscriber countries
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
3
CHAIRMAN’S STATEMENT
2019 overview
We made significant progress in 2019, strategically,
operationally and financially. Clearly the acquisition
of Private Internet Access (“PIA”) in December will be
particularly important in our ongoing development,
but over and above this, management delivered
strong organic growth and seamlessly integrated
prior acquisitions, Intego and ZenMate. this proved
the team’s expertise in integrating software
solutions into the Group to deliver cost synergies
and material growth. the integration of PIA has
already begun, and we look forward to realising the
significant benefits that this transaction will bring
our business.
Growth strategy
Our ongoing growth strategy will continue to be
focused on a combination of organic growth and
the execution of select acquisitions. We expect that
2020 will be focused on the integration of PIA and
specifically the implementation of our business
intelligence systems and proprietary infrastructure
management technology as well as our user
acquisition. Our over-arching strategy will focus
on the following 3 pillars, which we intend to
leverage to generate material growth:
• Product – our internal R&D developments,
as well as the acquisition of PIA, significantly
enhanced our suite of solutions and R&D team,
giving us a significant platform from which to
further broaden our technology stack.
• Brand and market presence – Private Internet
is a well-recognised brand, which we intend to
leverage globally, with the enlarged Group
servicing a significant user-base through which
to grow.
• Business model – we operate a robust
SaaS-based business model which continues
to deliver strong levels of recurring revenue
growth and earnings predictability.
corporate Governance
At Kape we strive to create a company culture
which adheres to the highest levels of corporate
governance. One of the many initiatives we have
undertaken is to ensure a constant dialogue
between internal and external stakeholders.
this includes holding regular meetings with key
employees across the business and engaging
proactively with all our Board members, ensuring
the highest levels of transparency across the
organisation. Employees are the key to our success
and as such we endeavour to sustain an inclusive
environment across all our global offices, always
ensuring open lines of communication.
DON ELGIE
NON-EXECUTIVE CHAIRMAN
Kape’s growing range of ‘privacy first’
solutions are now well-positioned to
capitalise on this sizeable global
market opportunity.
introduction
Consumers’ awareness of the importance of digital
privacy reached new heights in 2019, given the
significant number of high-profile data breaches,
which saw hundreds of millions of data records
exposed. this included, in some instances,
sensitive medical data and financial data, as well as
the unprecedented 600 million passwords revealed
by the largest social networks. Consumers are now
even more mindful of the need to protect their data
given the apparent inability of some of the world’s
largest companies to keep data safe. It has also
highlighted to consumers the true value of their
personal data to those businesses. this ongoing
desire for personal information by corporates has
driven consumers to control and protect their
online footprint.
this strong macro landscape continues to fuel our
end-markets, and consequently our addressable
market expands almost daily. Kape has now
developed a strong suite of solutions that directly
help consumers maintain their online privacy to
combat the ever evolving and diverse threats
to individuals’ online security.
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KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
investment case
01
Fully focused on the high growth
privacy-first digital security space
02 Strong customer proposition
underpinned by proven user
acquisition model
03 Market leading privacy and software
security products designed for global
consumer markets model
04 Proven track record of revenue and
EBITDA growth
05 Strong revenue visibility underpinned
by a SaaS-based financial model
outlook
I am confident in Kape’s prospects and that the
combination of organic growth, coupled with
selected acquisitions and a clear vision and
strategy in mind, provides us with an unrivalled
platform through which to drive material growth.
I would like to take this opportunity to thank the
Kape team for their continued hard work and
dedication to the ongoing success of our business.
As per Corona Virus we would like to note that we
do not see material effect on demand for our
products as a result of recent global developments;
we have also made full preparations across our
different locations to ensure we can continue our
business operations and provide a full service to
our customers through remote working
arrangements.
DON ELGIE
NON-EXECUTIVE CHAIRMAN
16 March 2020
One of our key stakeholders is our worldwide
customer base, whose satisfaction we constantly
monitor and review as we believe it sets us apart
from many of our peers. We now service over 2.35
million customers worldwide and this emphasis on
service is evidenced in the 81 per cent retention
rate achieved in the period. therefore, customer
support is at the front of Management’s mind and
prioritised through our wholly-owned customer
support centres, where we have expanded our
24/7 support to additional product lines, as well
as constantly improving response times.
With regards to the environmental impact of the
business, given that we are a digital business, our
environmental footprint is low, but despite this,
we constantly monitor our travel and infrastructure
footprint and have strict guidelines and
technologies in place to minimise our impact.
piA bonus award
Following the transformational acquisition of PIA,
the Kape Remuneration Committee has approved
an exceptional bonus award of $900,000 to
Ido Erlichman (CEO) and $675,000 to Moran laufer
(CFO), (the “PIA Bonus”). No other bonuses will be
paid to the Executive Directors for the financial
year ended 31 December 2020. this exceptional
award, due to be paid in 2020 based on the
completion of integration milestones in the first
quarter of 2020, is separate from the 2019 bonus
awards (which relate to performance in that year
and will be set out in the Remuneration Report in
the Kape Annual Report).
On a pro-forma basis this transaction is a
significant contribution to revenues of over $120
million and EBItDA of over $35 million in 2020,
with the prospect of increased growth in the
future. Underpinning this are the addition of 1.1
million SaaS subscribers, bringing the group’s total
subscribers to over 2.35 million. this enlarged
subscriber group will now benefit from Kape’s
high-quality digital marketing channels which will
further strengthen the PIA revenues.
the PIA bonus is subject to clawback of up to
20 per cent of the award in relation to meeting
revenue and EBItDA targets in FY2020.
the grant of the PIA Bonus is a related party
transaction under Rule 13 of the AIM Rules for
Companies. Myself, David Cotterell and Martin
Blair, being the independent directors, consider,
having consulted the Company’s Nominated
Adviser, Shore Capital & Corporate limited, that
the terms of the related party transaction are fair
and reasonable insofar as the Company’s
shareholders are concerned.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
5
MARKET OVERVIEW
The global privacy market is
a fast growing billion-dollar market.
• Fast-growing internet penetration
globally has increased the number
of cyber attacks, resulting in
heightened concerns around
data privacy
• As more data breaches and cyber
attacks occur, consumers are
increasingly concerned about their
data security
• proliferation of mobile phone use
and internet-linked devices is
driving the need to protect users’
data-research indicates that
48 per cent of phishing attacks
occur on mobile devices
81% of Americans
say they have little/
no control over the
data collected
about them*
Digital privacy
awareness is
growing, supported
by new regulations
and a more
educated market
* Source: Pew research center
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KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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stAtements
High-profile data breaches with identities compromised
• Verizon
• Ashley madison
14m (identities
compromised)
11m (identities
compromised)
• eQuiFAX
• Home depot
143m (identities
compromised)
50m (identities
compromised)
• Yahoo
• tARGet
500m (identities
compromised)
70m (identities
compromised)
• linkedin
• ebay
117m (identities
compromised)
148m (identities
compromised)
High-profile breaches and
regulation have contributed
to growing public concern for
online privacy
Regulatory changes
the Senate joint resolution to do away with FCC
broadband privacy rules (S.J. Res. 34) passed through
Congress and was subsequently signed by the
President on 3 April 2017.
Allowing internet
service providers to:
• Sell confidential data pertaining to how
consumers use the internet
• Share consumers’ information without consent
• Withhold news of a data breach from
consumers and law enforcement, even where
consumer information is at risk.
Themes driving growth in digital privacy market*
81%
of consumers
concerned they
have little control
Consumers have
little/no control over
the data collected
Market drivers
81%
of consumers
believe the risks
outweigh benefits
Potential risks of
collecting personal
data outweigh the
benefits
79%
of consumers
concerned over
data use
Consumers are
concerned about
how the data
collected is used
59%
of consumers have
lack of understanding
about data use
Consumers have very little
to no understanding about
what is done with the data
collected
Internet Of Things (IoT)
increasing levels of
data and connected
devices
B2C market
replicating B2B trends
Individuals
increasingly
becoming targets
of cybercrime
Rise in personal data
stored in the cloud
Increasing awareness
of need to protect
digital presence
* Source: Pew research center
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
7
CHIEF EXECUTIVE OFFICER’S REVIEW
Kape now has a significant base from which to
capture the explosive growth in the digital privacy
and security market, underpinned by our recent
acquisition which has established our business as
the pre-eminent digital privacy company globally.
the enlarged Group has a sizeable global footprint
and boasts an enviable portfolio of privacy-first
products, positioning it at the forefront of this
rapidly expanding market.
Beyond the acquisition, the Group traded strongly
in the year-ended 31 December 2019, delivering
Adjusted EBItDA of $14.6 million, which was
slightly above management expectations and
represents a 40% increase on the prior year (2018:
$10.4 million). this was achieved with revenues of
$66.1 million (2018: $52.1 million), representing an
increase of 27% and an increase in net profit to
$2.0 million (2018: ($0.5) million) as the Group
continued its focus on profitable growth.
operational overview
Key Performance Indicators
Kape continues to deliver a strong return on
investment and attractive unit economics,
supported by its subscription revenue stream
and innovative customer acquisition model.
In order to ensure the ongoing profitability, growth
and earnings predictability of the Group, Kape
reports against the following key KPIs:
• Subscriber base demonstrates the
development of our SaaS business model and
future revenue potential
• Retention rate indicates levels of customer
satisfaction and the high quality of our services
and products
• Deferred income and Adjusted operating
cash flow are indicators of the high visibility
over revenues and quality of earnings
Adjusted EBItDA
Subscribers (000s)
Retention rate
Deferred income ($’000)
Adjusted operating cash flow:
31 Dec
2019
‘000
14,559
2,350
81%
35,312
31 Dec
2018
‘000
10,374
830
74%
9,514
Attributable to current year ($’000)
Investment in growth ($’000)
17,902
(16,928)
15,936
(10,215)
Adjusted operating cash flow ($’000)1
974
5,721
1 Adjusted operating cash flow attributable to current year
is calculated as Adjusted operating cash flow excluding
change in deferred contract costs.
IDO ERLICHMAN
CHIEF EXECUTIVE OFFICER
We are now fast-tracking our
vision into a reality by creating
one of the most prominent privacy
companies globally.
introduction
We have entered 2020 in a very strong position.
2019 was a landmark year for Kape, in which
we delivered extensive organic growth and
successfully executed our mergers and acquisition
strategy. During 2019, our core Digital Privacy
segment revenues grew by 81.6% (excluding PIA)
compared to last year, we made the game-
changing acquisition of Private Internet Access and
completed the successful integration of Zenmate
and Intego.
42%
growth in paying
subscribers
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KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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december 2019
acquired private
internet Access for
total consideration of
december 2020
expected group revenue
december 2020
expected eBitdA
$130.1m
$120-123m
$35-38m
In 2019, Kape performed strongly against its KPIs,
with a combination of strong organic growth and
the acquisition of PIA transforming our user base.
At year-end the Group serviced 2.35 million
subscribers (31 December 2018: 830,000), an
increase of 42.2% in organic growth, excluding the
user base of PIA. Kape also expects to generate
a much higher level of visibility over income with
expected revenues of $98.8 million in future
financial years, anticipated to be generated
from existing customers, an increase of 230%
(31 December 2018: $30.0 million), driven by the
increase in the Group’s user base. the decrease in
adjusted operating cashflow is due to our strategy
to invest in expanding our user base. In addition,
Kape sustains a high retention rate across its user
base of 81%, which is very strong for a consumer-
focused software business.
Kape generated significant adjusted operating
cash flow in 2019, up 12.3% to $17.9 million
(31 December 2018: $15.9 million), supported by its
subscription revenue stream, which enabled the
Company to increase its investment in growth by
65.7% to $16.9 million in 2019 (31 December 2018:
$10.2 million).
Another important capability, which we continue
to measure, is our success in both integrating and
growing acquired businesses. Since the acquisition
of CyberGhost in March 2017, we have grown our
paying customer base at Cyberghost by 400%
and we have organically grown our digital privacy
revenue by 81.5% (in the year ended 31 December
2019), demonstrating our ability to leverage our
digital marketing engine to grow a business
servicing both consumers and SMEs.
Furthermore, in 2019, we have been able to
successfully complete the integration of both
Zenmate and Intego, acquired in 2018, reducing
the cost-base while continuing to develop our core
cybersecurity capabilities. these successful
transactions gave us the confidence to proceed
with the much larger Private Internet Access
acquisition and are testament to our success in
integrating businesses to enhance revenue growth
rates, optimise synergies and realise cost benefits.
Acquisition of private internet Access
On the 16 December 2019, Kape acquired Private
Internet Access. this deal is transformational for
the Group, both strategically and financially. Kape
has now doubled its paying customer base, whilst
creating a significant foothold in the US market
with 49% of the Group’s customers based in
the US.
In addition, the PIA brand has positioned Kape as a
top player in the North American market within the
digital privacy and security space. the enlarged
business is also highly cash-generative and the
acquisition was significantly earnings-enhancing,
with the enlarged Group expected to generate
over US$120 million in revenues and over $35
million in Adjusted EBItDA, in the year ended
31 December 2020.
Moving forward, the acquisition provides 3 core
levers for growth and we are already ahead of
schedule in leveraging these:
• User growth: we are currently implementing
our customer acquisition engine to increase
users as, prior to its acquisition, PIA’s customer
acquisition strategy was primarily organic.
• Brand expansion: Private Internet Access is
a well-established brand in the US and, when
combined with our growth-engine, has the
potential to be the largest global brand in
this space.
• Product development: as part of the
transaction, we added new digital privacy
products, which are currently being launched
or are in the late stages of development. We
expect these to provide further opportunity to
grow our user base:
• libreBrowser – a completely private browser
• Private.sh – a private and encrypted search
engine based on cryptography technology
• Private Storage – a cloud-based, secure,
private storage solution.
Our integration programme is now well-underway
and has been progressing ahead of expectations.
We plan to realise between $3.5 to $4.5 million
in annualised cost-savings by the end of 2020.
Savings will mainly be driven by the implementation
of our infrastructure and capacity management
technology, developed in-house, into PIA’s
infrastructure, delivering a reduction in the cost to
serve our users, while increasing the quality of our
service across our entire customer base.
In addition, economies of scale allow us to improve
our capacity management as well as vendor
relations. Already, we have almost completed the
integration of the customer service side where
we are providing PIA’s customers with our 24/7
customer support.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
9
CHIEF EXECUTIVE OFFICER’S REVIEW
organic growth
the Group’s existing solutions performed strongly
in 2019, benefiting from growing demand coupled
with the ongoing implementation of our digital
marketing expertise. Growth was derived mainly
from our Digital Privacy segment, driven by overall
growth in the market, as well as management’s
focus on privacy solutions given the high retention
rates in that division.
Overall, we have experienced 42% growth in paying
subscribers from 830,000 (December 2018) to 1.18
million (December 2019) excluding PIA. We have
also demonstrated a substantial growth in
revenues from $52.1 million (December 2018) to
$63.6 million (December 2019) excluding PIA.
product development
We have made significant progress on the R&D front,
including the launch of a landmark infrastructure
revamp for our privacy solution, Gen4, an internal
technology development which allows Kape to
upgrade our infrastructure in a modular way,
facilitating technological updates at a speed
well-above industry standards. this upgrade
increases the speed of connection by an average of
35% in key geographies and our server fleet performs
significantly more efficiently than before the upgrade.
this provides our customers with better performance
and increased scalability; and improves our security
levels with server encryption, ‘man-in-the-middle’
attack prevention and other protections. Most
notably, we have already started integrating this
solution into the PIA infrastructure.
In addition, in 2019, the Group continued to
demonstrate its ability to launch innovative
solutions to combat the increasing diversity of
digital threats to consumers. In June 2019, the
Group launched the ZenMate Ultimate app, the
most comprehensive update of ZenMate’s VPN
platform to-date, which has seen strong traction
since launch. Furthermore, in July 2019, our macOS
security analyst team was the first to discover
several important malware security threats for
Apple users, against which Intego’s users are now
fully protected.
looking forward, we expect to launch our privacy
and security control centre in Q2 2020, which will
allow our customers to have visibility over their
exposure and to control their security and privacy
measures from 1 dashboard. this will deliver a
complete solution of digital privacy and security
features in a unified experience.
Growth strategy
We believe Kape is very well-placed to markedly
increase its market share in what is a rapidly
expanding space. Central to this are our core
growth engines, which aim to:
• Expand our global customer base
— Utilise the strong foundation of the Group’s
2.35 million plus paying subscribers to
accelerate future growth
• Drive product innovation and R&D
— Execute on opportunities to increase the
breadth of solutions we currently provide
globally
• leverage brand recognition
— take advantage of the significant
opportunity to further leverage the ‘Private
Internet’ brand internationally, beyond North
America
• Utilise our unique technology platform
— Further bolster the implementation of our
user acquisition technologies
• Continue to evaluate select acquisitions
— Build upon our track-record of integrating
and growing SaaS products to create a
dominant, global business
outlook
2019 was undoubtedly a seminal year for the
Group, in which we created a strong launchpad
from which to accelerate our growth. these
excellent foundations have enabled the Group to
make a strong start to 2020 and we expect this to
continue beyond the current financial year.
We are pleased to be able to deliver on what we
have previously pledged to our partners and
shareholders and have a clear roadmap to
continue delivering profitable growth in future
periods.
We are now fast-tracking our vision into a reality
by creating one of the most prominent privacy
companies globally. In one acquisition, I believe
we have positioned Kape to become one of the
leading digital privacy service providers in the
world, empowering consumers to manage their
own data and digital security.
IDO ERLICHMAN
CHIEF EXECUTIVE OFFICER
16 March 2020
10
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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STRATEGIC PRIORITIES
Following our ongoing
and successful strategic priorities.
eXpAnd GloBAl
customeR BAse
Utilise the strong foundation of the
Group’s 2.35 million plus paying
subscribers to accelerate future growth
leVeRAGinG
BRAnd RecoGnition
take advantage of the significant
opportunity to further leverage the
‘Private Internet’ brand internationally,
beyond North America
dRiVe FuRtHeR
pRoduct innoVAtion
Execute opportunities to increase the
breadth of solutions we currently
provide globally
utilise uniQue
tecHnoloGY plAtFoRm
Further bolster the implementation of
our user acquisition technologies
continue
AcQuisitiVe eXpAnsion
Build upon our track record of integrating
and growing SaaS products to create a
truly dominant business globally
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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OUR USER ACQUISITION MODEL
Through digital distribution
technology, we can optimise
customer reach and create a
superb user experience.
1
2
3
Target market
Digital funnel optimisation
Existing customers
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
Funnel expertise
• Proprietary data-driven
automatic funnel
• Ongoing customisation of
product
• Automatic personalisation of
user journey
• Proprietary targeting of
• Highly efficient method to drive
purchase process
traffic
Organic
• High brand awareness drives
users to products
• Referrals from existing
customers
• Consumers go directly to
product websites or search for
product as a result of growing
media presence
Retention and cross-selling
• Once acquired, provide a
subscription model to grow
customer’s life time value
• Provide servicing such as remote
technician and 24/7 support to
increase customer retention
• Convert users to additional Kape
products by channelling
customers to other owned
software solutions
Increase the value of the user
In-house support personnel in
Manila, supporting main market
languages
•
•
2.35m
subscribers
target market
User acquisition
digital funnel optimisation
Funnel expertise
existing customers
Retention and Cross-Selling
12
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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Our ability to manage and implement highly-
targeted customer acquisition methodologies
enables our team to reach millions of
customers daily, and has enabled
management to both accelerate organic
growth and enhance the customer traction of
the software solutions we have acquired
– Ido Erlichman, CEO
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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STRATEGY IN ACTION
Private Internet Access Acquisition
Kape acquired ltMI Holdings (“ltMI”),
the holding company of Private Internet
Access, for a total consideration of
c. US$130.1 million* (“the total
Consideration”) and an enterprise
value of c. US$162.3 million. this is
to be satisfied by a combination of
c$52.9 million in cash and the issue of
42,701,548 new Kape ordinary shares
which will repay c. $32.1 in ltMI’s debt.
$130.1m
Acquisition
Accelerates Kape’s
product innovation and
R&D capabilities
delivers a privacy product suite at
the forefront of the privacy
technology space, which comprises:
• Plus Ultra- a software that speeds up
internet connection
• libreBrowser- a completely private browser
• Private.sh private and encrypted search
engine based on proprietary cryptography
technology
• Expanding Kape’s R&D team to include PIA’s
market-leading development team
Creates a global
brand that uniquely
positions Kape as a
market leader
14
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Significantly earnings-
enhancing
earnings growth
• the enlarged Group is expected to generate
consolidated proforma 2020 revenues of
between $120-123 million and Adjusted
EBItDA of between $35 and $38 million;
earning accretion
• 90% earnings accretion anticipated in the
year ending 31 December 2020;
cash generation
• ltMI is a highly cash-generative business,
generating c. $16.3 million of adjusted
operational cash flow in 2018 and cash
conversion of over 100% with expectations
of ongoing strong cash generation;
integration upside down
• Expected immediate annual cost synergies
of either between $3.5 and $4.5 million to
be achieved within 12 months primarily in the
infrastructure and back-office functions.
Broadens Kape’s
customer reach
to over 2 million
paying subscribers
globally
Operational leverage
customer reach
• Doubling Kape’s existing customer base,
with the enlarged Group servicing over
2 million paying subscribers globally;
product extension
• Enhances Kape’s product stack with a suite
of privacy-based software solutions focused
on browsing, encryption and connectivity;
Brand awareness
• Uniquely positions Kape as a truly global
leader within the fast-growing digital privacy
sector with a strong presence in North
America;
technology platform
• Provides the opportunity to leverage Kape’s
proprietary technology platform to deliver
continued, strong organic growth.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
15
CHIEF FINANCIAL OFFICER’S REVIEW
MORAN LAUFER
CHIEF FINANCIAL OFFICER
Strong performance, the Digital Privacy
Segment has seen continued growth
with a 98% increase in revenues.
overview
Revenue from continued operations for the year
to 31 December 2019 increased by 26.9% to $66.1
million (2018: $52.1 million). Adjusted EBItDA1 from
continued operations increased by 40.3% to $14.6
million (2018: $10.4 million) with the increase in
Adjusted EBItDA driven by the strong performance
of Kape’s Digital Privacy activity, with an overall
increase of 98.0% in revenues and 72.3% in
segment results. Organically, excluding the
contribution of PIA, the Digital Privacy segment
revenues and segment results increased by 81.5%
to $27.6m and 48.3% to $13.4m respectively.
16
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
Adjusted cash flow from operations attributable
to the year ended 31 December 2019 was $17.9
million (2018: $15.9 million), which represents cash
conversion of 123%. In addition, during the period
$16.9 million was reinvested in user-acquisition
costs that will be expensed in future periods (2018:
$10.2 million). When including this investment,
adjusted cash flow from operations decreased to
$1.0 million (2018: $5.7 million). At 31 December
2019 the Group’s cash balance was $8.2 million
(31 December 2018: $40.4 million) and the net debt
was $32.0 million after a cash investment of
$64.3 million for the acquisition of PIA.
On 16 December 2019, the Group acquired 100%
of the share capital of ltMI Holdings, trading as
Private Internet Access, for a total consideration
of $130.1 million2 and enterprise value of
$162.3 million3. PIA was established in 2009 and is
a security software business, based in Denver,
Colorado, with a focus on the provision of virtual
private network (“VPN”) solutions. Since its
inception, PIA has grown to become a leading VPN
service provider focused on the consumer market
and employing 65 employees of which just over a
third work in R&D. PIA has over 1 million paying
subscribers globally, with around half of them
based in North America.
the divestment of the Media division in July 2018,
resulted in changes to its management reporting
system and we now operate with 2 reportable
segments:
• Digital Privacy – comprising the Group’s
Virtual Private Network products which
comprise Cyberghost, Private Internet Access
and Zenmate;
• Digital Security – comprising the Group’s
end-point security and PC performance
products
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segment result
digital security
Digital
Security
Digital
Privacy
Revenue
Revenue
Segment result
2019
$’000
2018
$’000
2019
$’000
2018
$’000
35,949 36,849 17,873 16,672
Revenue
Cost of sales
30,111 15,211 15,536
9,018
Direct sales and marketing costs
Segment result
66,060 52,060 33,409 25,690
Segment margin (%)
2019
$’000
2018
$’000
35,949
(2,085)
(15,991)
17,873
36,849
(2,569)
(17,608)
16,672
49.7
45.2
the segment result has been calculated using revenue less
costs directly attributable to that segment. Cost of sales
comprises payment processing fees and infrastructure costs
of the group’s privacy products. Direct sales and marketing
costs are user-acquisition costs.
digital privacy
During the period, the Digital Security segment margins have
improved to 49.7% (2018: 45.2%) resulting in an increase of
7.2% in segment results to $17.9 million (2018: $16.7 million),
despite a 2.4% decrease in revenues to $35.9 million (2018:
$36.9 million). the increase in margins is driven by the higher
proportion of recurring revenue of Intego’s end-point
security products.
Revenue
Cost of sales
Direct sales and marketing costs
Segment result
Segment margin (%)
2019
$’000
2018
$’000
30,111
(5,440)
(9,135)
15,536
15,211
(3,036)
(3,157)
9,018
51.6
59.3
During the period, the Digital Privacy segment has seen
continued growth with a 98% increase in revenue to $30.1
million (2018: $15.2 million) and a 72.3% increase in segment
result to $15.5 million (2018: $9.0 million). the segment margin
has decreased to 51.6% (2018: 59.3%) mainly because the
revenue growth is driven by user-acquisition activities.
Following the acquisition of PIA in December 2019, PIA
contributed $2.5 million to revenues and $2.0 million to
segment results. Excluding the acquisition of PIA, the
segment results increased by 48.3% to $13.4 million in 2019.
51.6%
digital privacy
segment margin
49.7%
digital security
segment margin
1 Adjusted EBItDA is a company specific measure which is calculated as
operating profit before depreciation, amortisation (including right to
use asset amortisation), exceptional and non-recurring costs, employee
share-based payment charges and charge of repurchase of employee
options which are considered to be one-off and non-recurring in nature
as set out in note 4. the Directors believe that this provides a better
understanding of the underlying trading performance of the business.
2 total consideration as per note 19 plus cash paid to PIA’s phantom
shareholder: the value of the share consideration was calculated based
on the closing share price on 16 December 2019.
3 total consideration in (2) above plus cash paid to repay long-term debt.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
17
operating profit
A reconciliation of Adjusted EBItDA to operating profit is
provided as follows:
Adjusted EBITDA
Employee share-based payment
charge
Charge for repurchase of employee
2019
$’000
2018
$’000
options
Other operating income
2019
$’000
2018
$’000
14,559
10,374
(1,680)
(1,490)
–
(91)
–
Exceptional and non-recurring costs
Depreciation and amortisation
(2,331)
(6,314)
(1,441)
(3,800)
Operating profit
4,143
3,643
Exceptional and non-recurring costs in 2019 comprised
restructuring costs of $0.4 million due to restructuring of
Zenmate and Intego, acquired in 2018, and $1.9 million for
professional services and other acquisition-related costs that
derive from the acquisition of PIA (2018: $0.8 million).
profit before tax from continuing operations
Profit before tax from continuing operations was $2.8 million
(2018: $3.3 million).
profit after tax from continuing operations
Profit from continuing operations was $2.5 million (2018:
$2.2 million). the tax charge derives mainly from Group
subsidiaries’ residual profits. the Group recognises a
deferred tax asset of $1.6 million (2018: $0.2 million) in
respect of tax losses accumulated in previous years. the
increase is due to recognition of tax assets in Germany
following the merger of 2 subsidiaries, ZenGuard GMBH
and Mobile Concepts GMBH.
CHIEF FINANCIAL OFFICER’S REVIEW CONtINUED
Adjusted eBitdA from continued operations
Adjusted EBItDA from continued operations for the year to
31 December 2019 was $14.6 million (2018: $10.4 million).
Adjusted EBItDA is a non-GAAP company-specific measure
which is considered to be a key performance indicator of 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
66,060
(7,525)
(25,126)
52,060
(5,605)
(20,765)
33,409
25,690
Indirect sales and marketing costs
Research and development costs
Management, general and
administrative costs
Adjusted EBITDA
(7,903)
(3,149)
(6,398)
(1,389)
(7,798)
(7,529)
14,559
10,374
18
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ANNUAl REPORt AND ACCOUNtS 2019
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$155.0m
net assets at
31 december 2019
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
19
cash flow
Cash flow from operations
Exceptional and non-recurring
payments
Net cash flow from discontinued
operating activities
Net cash paid due to restructuring plan
Adjusted cash flow from operations
% of Adjusted EBITDA
Excluding increase of deferred
contract costs
Adjusted cash flow from operations
attributable to current year
% of Adjusted EBITDA
2019
$’000
2018
$’000
1,357
3,695
2,331
1,441
–
–
974
7%
336
249
5,721
55%
16,928
10,215
17,902
15,936
123%
154%
Cash flow from operations was $1.4 million (2018: $3.7 million).
Adjusted cash flows from operations, after adding back
payments that are one-off in nature was $1.0 million (2018:
$5.7 million). this represents a cash conversion of 7% of
Adjusted EBItDA (2018: 55%). the decrease in operating cash
flow is due to an increase in user acquisition investment
attributable to future periods to $16.9 million (2018: $10.2
million). Excluding the investment, adjusted operating cash
flow attributable to the current financial period increased to
$17.9 million (2018: $15.9 million), which represents a cash
conversion of 123%.
tax paid, net of refunds, in the period was $1.4 million (2018:
$0.5 million). the increase was mainly due to prepayments in
France and the United States by Group subsidiaries related
to Intego.
Cash spent in the period on capital expenditure of $67.5
million (2018: $23.6 million) mainly comprises $64.4 million
for the acquisition of PIA, $2.6 million (2018: $2.3 million)
capitalised development costs and $0.5 million (2018:
$0.2 million) purchase of fixed assets.
Financial position
At 31 December 2019, the Company had cash of $8.2 million
(31 December 2018: $40.4 million), net assets of $155.0 million
(31 December 2018: $73.0 million) and net debt of $32 million
(2018: Nil). At 31 December 2019, trade receivables and
contract assets were $3.4 million (31 December 2018:
$3.6 million).
MORAN LAUFER
CHIEF FINANCIAL OFFICER
16 March 2020
PRODUCT DEVELOPMENT
Product innovation and R&D to
further competitive advantage
and user satisfaction
Our products
Kape’s enhanced product stack includes a
suite of privacy based software solutions
focused on browsing, encryption
and connectivity.
Better speed
Increase in speed, providing our customers
with better service worldwide with up to 45%
improvement in speed in major locations.
Drive retention
Better scalability
Our server fleet performs 1,000% more efficiently
than before the upgrade; providing our customers
with better performance and increased scalability.
Allow for hyper-growth
Better flexibility
Infrastructure is completely modular which allows
for agile development, and the ability to constantly
improve enables Kape to be ahead of the
competition with new developments.
Fast to react and agile tech
17.40
17.45
17.
20
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
Product development progress
last year we demonstrated a technology
leap in our product development efforts.
End Point
Security for PC
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CyberGhost
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
21
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
• 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 with, 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 vendors
are required to comply with these
contractually-imposed controls,
which have been jointly created by
the Group and its legal advisers.
• the regulation also increases public
awareness to the importance of
digital privacy, which the company
believes was one of the drivers for
the digital privacy market growth.
• 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.
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 EU and it took effect
from May 2018. It intends to strengthen and
unify data protection for all individuals within
the European Union (EU). It also addresses the
export of personal data outside the EU. the
GDPR aims primarily to give back control of
their personal data to citizens and residents,
and to simplify the regulatory environment for
international business by unifying the
regulations within the EU.
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, 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 and mobile operating systems.
Changes to their web browsers, mobile
operating systems, platforms, exchanges,
networks or other products or services could
be very harmful to the Group’s business. Such
companies could also seek to replicate all or
parts of the Group’s business.
22
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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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 even
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, to add functionality to its
product portfolio and to address technological
advancements.
Failures in the Group’s it
systems and infrastructure
supporting its solution
could significantly disrupt
its operations and cause it
to lose clients.
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.
price pressure as a result
of competition.
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 quickly and reliability,
could significantly reduce the attractiveness of
its solution to advertiser clients and publishers,
reduce its revenue and affect its reputation.
In addition, a breach of its infrastructure which
results in exposure of user data may harm the
Group’s reputation.
As a multinational organisation, operating in
multiple jurisdictions such as the Isle of Man,
Cyprus, Israel, Romania, Germany, France,
the Philippines, the United States and the
United Kingdom, the Group may be subject to
taxation in several jurisdictions around the
world, with diverse and 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
from operation.
As a company operating in a primarily
consumer-driven space, price competition
is an element the business is exposed to.
Competitors might lower their prices and this
could affect the business’s ability to grow,
as well as Kape’s margins.
• the Group invests in research and
development staff and 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 enable it to adapt to the
rapidly-changing technology
environment.
• the Group outsources hosting
services, holding minimal server
infrastructure itself. this allows
the Group to flex and grow its
operations efficiently.
• Kape invests significant resources in
research and development relating
to its It infrastructure, to make sure
it is reliable, efficient and secure.
• the Group uses advisers to review its
tax position and ensure compliance
with local tax legislation.
• Kape’s cost structure is focused on
continuously reducing our cost to
serve; we have been developing
technology on the infrastructure side
that allows us to grow substantially
without growing our costs, thus
allowing us to be more flexible
on prices.
• Kape has an advantage of scale on
the cost side as well as the user-
acquisition side. New incumbents will
find it hard to compete in this space.
•
• We are expanding our vertical
integration across our user-
acquisition operations allowing us
to control a growing percentage of
our margins.
In addition, we operate a multi-brand
strategy which allows us to capture
a wider price range across the
competitive landscape.
•
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
23
BOARD OF DIRECTORS
24
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
Don Elgie Non-Executive Chairman
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.
Ido Erlichman Chief Executive Officer
Ido joined Kape Plc in May 2016 as Group Chief Executive Officer.
Ido has more than 9 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.
Moran Laufer Chief Financial Officer
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 on
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.
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David Cotterell 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 a director of David
Cotterell Partnership limited. 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.
Martin Blair Non-Executive Director
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 Green Biologics ltd and
Cake Box PlC.
Ted Kim Non-Executive Director
ted joined the Board in December 2019 with nearly 30 years of
professional experience as an attorney and corporate executive in
media and technology. Prior to joining KAPE, ted was the Chief
Executive Officer of london trust Media, Inc., the parent of Private
Internet Access. He became the CEO after successful stints as the
Chief Operating Officer and Chief Marketing Officer. Prior to joining
ltMI, ted was the CEO of MNEt America, a subsidiary of CJ ENM. ted
has a bachelors degree from the University of California, Berkeley and
a JD from the University of Arizona.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
25
CORPORATE GOVERNANCE
overview
2 years ago, Kape’s Board decided to adopt the Quoted
Company Alliance’s (QCA) Corporate Governance Code for
Small and Mid-Size Quoted Companies (“QCA Code”); the
Board believes this is still the relevant code and the company
continues to adhere to that code. the principal means of
communicating our application of the Code are this Annual
Report and our website (http://investors.kape.com/
corporate-governance). As Chairman, I am the custodian of
the corporate governance approach adopted by the Board to
ensure that the Company has the right people, strategy and
culture to deliver success in the medium to long term. Since
adopting the QCA Code I have led the Company’s application
of its 10 principles to ensure that the Company’s strategy is
linked to and supported by its governance arrangements.
the remainder of this statement sets out the Company’s
application of the Code including, where appropriate, cross
references to other sections of the Annual Report.
1. Establish a strategy and business model
which promote long-term value
for shareholders
the strategy and business operations of the Group are set
out in the Chairman’s Statement on page 4 to 5 and the Chief
Executive Officer’s Review on pages 8 to 10. the Group’s
strategy and business model and amendments thereto, are
developed by the Chief Executive Officer and the senior
management team and approved by the Board. the
management team, led by the Chief Executive Officer, is
responsible for implementing the strategy and managing the
business at an operational level.
the Group’s overall strategic objective is to become the
leading, next-generation provider of consumer and SME
cybersecurity products.
the Group continues to grow and develop its product
portfolio in the growing cybersecurity market, with a
renewed focus in consumer cybersecurity. the acquisition
of Private Internet Access towards the end of last year (2019)
is an illustration of how the Group intends to meet this
objective. Along with selected acquisitions that meet the
Group’s strategic objectives, the Group deploys its financial
and other resources towards developing products through
internal R&D, as well as growing and strengthening its
existing products in the SaaS business model.
the Board believes that this approach will continue to deliver
significant long-term value for shareholders through strong
share performance and ensure we perform well when
measured against the Group’s key performance indicators,
reported on a bi-annual basis. the Board also believes that
remaining admitted to trading on AIM is of long-term value to
shareholders as it offers a combination of access to capital
markets, flexibility to make acquisitions, incentives and
rewards to management through share schemes, and a
regulatory environment appropriate to the size of the
Company.
26
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
2. Seek to understand and meet shareholder
needs and expectations
the Group seeks to maintain a regular dialogue with both
existing and potential new shareholders in order to
communicate its strategy and progress and to understand
the expectations and needs of shareholders. Beyond the
Annual General Meeting, the Chairman, Chief Executive
Officer and Chief Financial Officer, and where appropriate,
other members of the senior management team, meet
regularly with investors (including institutional shareholders)
and analysts to actively build the relationship, provide them
with updates on the Group’s business and to obtain feedback
regarding the market’s expectations for the Group.
Shareholders also have access to current information on the
Group through its website http://investors.kape.com/, and via
its financial PR advisor and the Executive Directors who are
available to answer investor relation queries.
3. Take into account wider stakeholder and
social responsibilities and their implications
for long-term success
the Group is aware of its corporate social responsibilities and
the need to maintain working relationships across a range of
stakeholder groups. the Group’s operations and working
methodologies take account of the requirement to balance
the needs of all of these stakeholder groups while
maintaining focus on the Board’s primary responsibility to
promote the success of the Group for the benefit of
members as a whole. Our employees are key to our success
and therefore regular meetings are held with staff to ensure
the strategic vision of the Group is communicated. It also
provides a forum for employees to engage in open and
confidential dialogue and ensures successful 2-way
communication on goals, targets and aspirations of
employees and the Group. this is done through regular
meetings with senior management in our different locations
as well as regular email and Slack communications. In
addition, the Group is now finalising its whistleblowing
policies which will be shared with all employees. these
feedback processes help to ensure that the Group can
respond to new issues and opportunities that arise to further
the success of employees and the Group. In addition, there
are a range of processes and systems in place with other
stakeholders to ensure that there is close oversight and
contact with key stakeholders; such as our move to 24/7
support for our products and minimum response time,
holding a bi-annual meeting with key employees and the
Board, and facilitating direct communications between
management and all employees in the form of Slack, emails
and ongoing site visits. these relationships are addressed at
regular Board meetings. the Group also sees its
environmental responsibility in highest regard; as a digital
business our environmental footprint is minimal, but we
always strive to improve it, focusing on only allowing air travel
when required, having strict policies around travelling in
basic class to reduce our footprint. In addition, we are
constantly improving the efficiency of our infrastructure,
allowing for a lower environmental footprint while improving
the service to our customers.
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4. Embed effective risk management,
considering both opportunities and threats,
throughout the organisation
the Board is responsible for the systems of risk management
and internal control and for reviewing their effectiveness.
the internal controls are designed to manage rather than
eliminate risk, and provide reasonable but not absolute
assurance against material misstatement or loss. through
the activities of the Audit Committee, the scope and
effectiveness of these internal controls is reviewed annually,
identifying key financial and non-financial risks, risk-control
measures and the implementation status of risk-control
measures. the review was presented to the Audit Committee
by the Chief Financial Officer. A summary of the principal
risks and uncertainties facing the Group, as well as mitigating
controls, are set out on pages 22 to 23. All material contracts
are required to be reviewed and signed by a senior Director
of the Company and reviewed by our General Counsel. Whilst
not externally regulated, the Group adheres to a strict set of
controls with its partners. Partners, developers and
publishers are required to comply with these contractually-
imposed controls, which have been jointly created by the
Group and its legal advisers. A comprehensive budgeting
process is completed once a year and is reviewed and
approved by the Board. Actual results are monitored
on a weekly and monthly basis and compared to the
yearly budget. In addition, the Group performs quarterly
re-forecasts for expected performance over the remainder
of the financial period. these cover profits, cash flows,
capital expenditure and balance sheets. the Group maintains
appropriate insurance cover in respect of actions taken
against the Directors because of their roles, as well as
against material loss or claims against the Group. the
insured amounts and type of cover are reviewed periodically.
the Board has ultimate responsibility for the Group’s system
of internal control and for reviewing its effectiveness.
However, any such system of internal control can provide
only reasonable, but not absolute, assurance against
material misstatement or loss. the Board considers that the
internal controls in place are appropriate for the size,
complexity and risk profile of the Group.
5. Maintain the Board as a well-functioning,
balanced team led by the Chair
which could materially interfere with the exercise of their
independent judgment. 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 on a yearly basis 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 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.
the Board meets at regular, scheduled intervals 10 times a
year and follows a formal agenda. It also meets as and when
required. During 2019, all the Directors attended all the Board
meetings. No one individual has unfettered powers of
decision. the Directors may take independent, professional
advice at the Group’s expense. 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 able to allocate sufficient
time to the Company to discharge their responsibilities as
Directors effectively, with a minimum of 45 days a year
dedicated to fulfil their roles.
6. Ensure that between them the directors have
the necessary up-to-date experience, skills
and capabilities
the Board considers that all of the Non-Executive Directors
are of sufficient competence and calibre to add strength and
objectivity to its activities. the Directors’ biographies are set
out on page 24 to 25. the Board considers that the
combination of the complementary skills and experience of
its members provides it with an appropriate balance of
sector, financial and public-markets skills. the composition of
the Board is reviewed regularly to ensure that it has the
necessary breadth and depth of skills to support the ongoing
development of the Group. the Chairman has 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.
the Board currently comprises 4 Non-Executive Directors
(one of whom also acts as Senior Independent Director and
one who acts in an executive role in a Kape subsidiary) and
2 Executive Directors. As part of the Private Internet Access
Acquisition, Mr Kim was appointed Non-Executive Director on
the Board; ted Kim is 52 and is CEO of ltMI. Prior to taking
that position he was the CEO of MNEt America, and Head of
America at the Korean conglomerate CJ E&M.
7. Evaluate Board performance based on clear
and relevant objectives, seeking
continuous improvement
Board and Committee meetings are scheduled in advance for
each calendar year. Additional meetings are arranged as
necessary.
the Directors’ biographies are set out on page 24 to 25. the
Board is satisfied that it has a suitable balance between
independence on the one hand, and knowledge of the
Company on the other, to enable it to discharge its duties
and responsibilities effectively. the Board considers, after
careful review, the Non-Executive Directors to be
independent of management and free of any relationship
the Chairman assesses the individual contributions of each
member of the Board to ensure that:
their contribution is relevant and effective;
•
that they are committed;
•
•
they understand the business and its strategy;
• and where relevant, they have maintained their
independence.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
27
CORPORATE GOVERNANCE CONtINUED
8. Promote a corporate culture that is based on
ethical values and behaviours
the Board seeks to maintain the highest standards of
integrity and probity in the conduct of the Group’s
operations. these values are enshrined in written policies
and working practices adopted by all employees in the
Group; these are shared with each new employee who joins
the Group. We strive to create an agile, creative and open-
minded culture to support our success in a constantly-
evolving market where time to market and outside the box
thinking is essential for success. We promote cross-company
discussions as well as encourage the involvement of
employees in proposing new and innovative project initiatives
– we do that through cross-company activities as well as
regular subject-based meetings.
the Board believes that diversity is a key to the future
success of our business; we focus on monitoring and
improving the gender ratio in the company. We report that
the percentage of women in the company is high for the
industry, although it has fallen slightly year on year at 31%
(2018: 35%). We firmly believe that part of the company’s
success is the global and diverse nature of our workforce and
we intend to continue our effort to promote diversity.
9. Maintain governance structures and
processes that are fit for purpose and support
good decision-making by the Board
Our corporate governance structures and processes are
summarised and discussed under the heading “Role of the
Board” on page 28.
10. Communicate how the company is governed
and is performing by maintaining a dialogue
with shareholders and other
relevant stakeholders
In addition to the activities summarised under the QCA Code
principle, “Seek to understand and meet shareholder needs
and expectations” the Company provides information for
investors on its website, arranges Investor meetings and
maintains contact with institutional shareholders and fund
managers. the Company’s joint-brokers provide independent
feedback to the Board on market views and produce regular
research notes on the Company. this enables the Board to
understand the concerns of shareholders and the wider
investment community.
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.
28
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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 the arrangements under which
employees can raise concerns in confidence about possible
improprieties in matters of financial reporting or other areas.
division of responsibilities
During 2019, the Chairman, Donald (Don) Elgie had the clear
and distinct responsibility of running the Board, whilst the
executive responsibility of running the Company’s business
was delegated to the Chief Executive Officer, Ido Erlichman.
As at 31 December 2019, the Board comprised 6 Directors,
4 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 scrutinizing 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-making. 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 3 Non-Executive Directors. Each committee has written
terms of delegated responsibilities, available for review at the
end of the 2020 Annual General Meeting and also in the
Investor Relations section of the Group’s website https://
investors.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 comprises 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
Directors’ interests, together with information on service
contracts, is set out on pages 30 to 31.
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.
In 2019 the Committee met 4 times. 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 auditors without the presence of the Executive
Directors.
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 the systems in place 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 and
financial statements, the Audit Committee reviewed the
plans as presented by the Group’s external auditor, BDO llP.
the plans 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 in 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.
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nominations committee
the Nominations Committee comprises 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.
Signed on behalf of the Board by:
DON ELGIE
NON-EXECUTIVE CHAIRMAN
16 March 2020
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
29
REMUNERATION COMMITTEE REPORT
(unAudited)
the Remuneration Committee (for the purpose of the Remuneration Committee report) comprises David Cotterell (Chair of
the Committee), Don Elgie and Martin Blair, all of whom are Non-Executive Directors.
the 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 2019 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
ted Kim
Base
Salary/Fees
GBP£
300,000
80,000
50,000
50,000
116,700
10,150
Benefits
GBP£
50,000
–
–
–
39,950
1,569
Pension
GBP£
30,000
–
–
–
–
Bonus
GBP£
200,000
–
–
–
80,000
the US Dollar equivalent cost to the Company has been calculated using an average USD/GBP rate of 1.2765.
Name
Ido Erlichman
Don Elgie
David Cotterell
Martin Blair
Moran laufer
ted Kim
Base
Salary/Fees
$
383,435
102,120
63,825
63,825
148,968
12,952
Benefits
$
68,894
–
–
–
50,996
2,002
Pension
$
44,997
–
–
–
–
Bonus
$
255,300
–
–
–
102,120
total
GBP£
580,000
80,000
50,000
50,000
236,650
11,719
total
$
752,626
102,120
63,825
63,825
302,084
14,954
the beneficial interests of the Directors who held office at 31 December 2019, together with those persons connected with
the Directors, in the share capital of the Company were as follows:
directors’ interests in shares
Name
Ido Erlichman
Don Elgie
Martin Blair
David Cotterell
Moran laufer
ted Kim
2019
2018
Percentage of
issued share
capital
Number of
ordinary
shares
Percentage of
issued share
capital
0.06%
0.06%
0.01%
0.06%
0.05%
0.41%
100,000
97,087
19,417
88,544
74,000
627,597
0.07%
0.07%
0.01%
0.03%
0.04%
–
Number of
ordinary
shares
100,000
97,087
19,417
48,544
50,000
–
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KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
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directors’ interests in share options
Name
Ido Erlichman
Moran laufer
Number of
ordinary shares
under option at
31 December
2018
2,000,000
1,200,000
215,054
50,000
634,946
600,000
Date of grant
Exercise price
1 June 2016(*)
24 August 2018(**)
29 May 2014(*)
5 January 2016(*)
26 October 2016(*)
24 August 2018(**)
£0.275
£0.000
£0.380
£0.555
£0.365
£0.000
Number of
ordinary
shares under
option at
31 December
2019
2,000,000
1,200,000
215,054
50,000
634,946
600,000
(*) Vesting schedule: 25% 1 year from date of grant and then in 12 equal quarterly instalments thereafter.
(**) the Awards vest equally over the 3 year period from grant, subject to the achievement of certain performance metrics relating to the 3 financial years
of the Company commencing 1 January 2018, as set out below:
FY 2018
FY 2019
FY 2020
SaaS Revenue Target
50% of Award
Adjusted EPS Target
25% of Award
G&A Target
25% of Award
25% of total Company revenues
40% of total Company revenues
55% of total Company revenues
$0.049
$0.065
$0.130
the adjusted G&A expenses
as a proportion of the total
revenue of the Company is
15% for each financial year
Total Vesting
33.33%
33.33%
33.34%
For the purposes of the above:
•
•
•
“SaaS Revenue” means revenues from customer contracts that will renew automatically at the end of their term unless
actively terminated by the customer;
“Adjusted EPS” means the fully diluted adjusted Earnings Per Share of the Company (as presented in the annual accounts
related to each financial year of the Performance Period); and
“G&A” means the general and administrative expenses after adjusting for one-off or non-recurring expenses of the
Company (as presented in the annual accounts related to each financial year of the Performance Period).
Should the SaaS Revenue, Adjusted EPS or G&A expenses fail to meet these target levels in any of the financial years, the
proportion of the Award for that financial year will be lost and will not be capable of vesting for the Executives.
the Awards have been granted as Jointly Owned Equity Awards (“JOE Awards”). the Company will transfer 1,800,000 Ordinary
Shares out of treasury to Intertrust Employee Benefit trustee limited as trustee of the Kape technologies plc Employee
Benefit trust, to be held jointly with the Executives in order to satisfy the proposed JOE Awards. Under the terms of the
Awards, the Executives will benefit from the growth in value of their respective Award from the date of grant along with the
right to acquire the trustee’s interest by way of a nil cost option in the event that the Awards vest.
Annual bonus
the bonuses for the Executive Directors for 2019 are based on Revenue, Adjusted EBIDtA, Cash conversion 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.
All targets for 2018 and 2019 were met. Adjusted EPS target for 2020 was updated from $0.072 following the acquisition of
ltMI Holdings.
service contracts
Executive Directors
the service agreements of the Executive Directors are for an indefinite term and provide for formal notice of 6 months for the Chief
Executive Director and 3 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 starting at 1
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 3 years and, under normal circumstances would be expected to serve for
additional 3-year terms, up to a maximum of 9 years, subject to satisfactory performance and re-election at the annual
general meeting as required.
DAVID COTTERELL
CHAIRMAN, REMUNERATION COMMITTEE
16 March 2020
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
31
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 2019. the Corporate Governance Statement
set out on pages 26 to 29 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 consumers. A detailed
overview of the Group’s activities is set out on pages 2 to 13.
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
Chairman and Chief Executive Officer statements on pages
4 to 10. A description of the principal risks and uncertainties
facing the Group is set out on pages 22 to 23.
dividends
the Directors do not recommend the payment of a dividend
(2018: $nil). the declaration and payment by the Company of
any future dividends on the Ordinary Shares will depend on
the results of the Group’s operations, its financial condition,
cash requirements, future prospects, profits available for
distribution and other factors deemed to be relevant at
the time.
Any Director who is not required to retire by rotation but
who has been in office for 3 years or more since his
appointment or his last re-appointment, or who would have
held office at not less than 3 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 next
Annual General Meeting of the Company following
such appointment.
directors’ responsibility statement
the statement of Directors’ responsibility is set out on page 34.
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 the 31 December 2019, the Group employed 398 people,
(31 December 2018: 344 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 16 to the financial statements.
the Board recognises the importance of dividend income to
Shareholders and intends to adopt, at the appropriate time,
a progressive dividend policy to reflect the expectation of
future cash-flow generation and long-term earnings potential
of the Company. However, it is not the current intention of the
Board to declare any dividends in the near term. the Board
may revise the Company’s dividend policy from time to time
in line with the actual results of the Company.
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 14 and 15 to the financial statements. the Group has
no material exposure to price, liquidity, or cash-flow risk that
would impact its objectives.
the Directors who served during the period were as follows:
Ido Erlichman
Donald (Don) Elgie
David Cotterell
Martin Blair
Moran laufer
theodore (ted) Kim
Active
Active
Active
Active
Active
Active
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 3, the number nearest to one third but
not exceeding one third shall retire from office (but so that if
there are fewer than 3 Directors who are subject
to retirement by rotation 1 shall retire).
32
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ANNUAl REPORt AND ACCOUNtS 2019
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 2019 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 2019
of 160,144,132 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 14 to
the financial statements. the Company has 1 class of
ordinary shares, which carry no right to fixed income. Each
share carries the right to 1 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 2019 the Company held 3,865,223 shares
in treasury and 1,800,000 are held by Intertrust Employee
Benefit trustee limited as trustee of the Kape technologies
plc Employee Benefit trust. No other 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 16 to
the financial statements.
Related party transactions
Details of all related party transactions are set out in note 21
to the financial statements.
Research and development
the Group maintains an integrated global research and
development team which has a staff of 102 (2018: 68). 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 $2,620,000
(2018: $2,289,000).
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. the bridge loan term granted by
Unikmind for the acquisition of ltMI Holdings has been
extended until 31 March 2021. the directors of Kape
consider, having consulted with the Company’s nominated
adviser, that the grant of the option to extend the term of the
term loan to 31 March 2021 is fair and reasonable insofar as
the Company’s shareholders are concerned. the Company is
currently working on refinancing it with a long-term bank
debt. 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 2020 will be held on
thursday, 21 May 2020 at 12 noon. 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.
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
Auditor
A resolution to reappoint BDO llP as the Company’s auditor
will be proposed at the 2020 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
16 March 2020
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
33
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 practices. the Directors have
elected to use International Financial Reporting Standards
(IFRSs) as issued by the IASB.
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
16 March 2020
34
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
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 ability to
continue to adopt the going concern basis of accounting
for a period of at least 12 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), 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 (the ‘Parent Company’) and its subsidiaries
(the ‘Group’) for the year ended 31 December 2019 which
comprises the consolidated statement of comprehensive
income, consolidated statement of financial position,
consolidated statement of changes in equity, the
consolidated statement of cash flows and notes to the
consolidated financial statements, including a summary of
significant accounting policies.
the financial reporting framework that has been applied in
their preparation is applicable law and International Financial
Reporting Standards (IFRSs) as issued by the International
Accounting Standards Board (IASB).
In our opinion:
•
the financial statements give a true and fair view of the
state of the Group’s affairs as at 31 December 2019 and of
the Group’s profit for the year then ended;
the Group financial statements have been properly
prepared in accordance with IFRSs as issued by the IASB.
•
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.
Key audit matter
How we addressed the matter in our audit
Revenue recognition and contract costs
We assessed whether the revenue recognition policies adopted by the
Group comply with relevant accounting standards.
the Group has a number of revenue streams for
which the accounting must be individually
considered. Due to the different nature of
agreements entered into by the Group, and the
fact that revenue is recognised both at a 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 and
the revenue recognition policy itself, as detailed
in note 2 to these financial statements and
expanded on below.
In particular, estimation is required to allocate
the transaction price to standalone performance
obligations in the contract.
We performed specific substantive testing including selecting a sample of
items and tracing to source documentation such as third-party payment
processor reports or to bank.
We performed procedures including re-calculations of contract liabilities
around the year-end based on the contract dates, in order to get comfort
over contracts spanning the year-end. For those contracts spanning the
year-end, a sample of the balances deferred were re-calculated.
We reviewed the revenue recognition policy with respect to the significant
revenue streams of the Group to identify the method by which the Group
unbundles its contracts and allocates the transaction price across the
separate elements of the contract. We performed substantive procedures
to test a sample of the transaction prices back to supporting
documentation, such as standalone prices identifiable via current or
historic sales, or by reference to market prices for similar products.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
35
independent AuditoR’s RepoRt to tHe memBeRs oF KApe tecHnoloGies plc
CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
Key audit matter
How we addressed the matter in our audit
In accordance with accounting standards, costs
that are directly incremental to obtaining a
contract are eligible to be recognised as an
asset, provided the entity expects to recover the
costs. A material deferred contract cost asset
has been capitalised in respect of costs incurred
to obtain and fulfil contracts. there is a key risk
of material misstatement or overstatement due
to the judgement surrounding costs meeting the
capitalisation criteria and the expected life of
the asset used to amortise the deferred cost.
Business combinations
See accounting policy in note 2, and the
intangible assets note (note 9) and the business
combinations note (note 20).
there is a risk of material misstatement on the
accounting for the business combination of
Private Internet Access (“PIA”) in the year as a
result of the Directors’ requirement to make
significant judgements in assessing the fair
values of consideration and of the assets and
liabilities acquired. the directors engaged
external valuations experts to undertake the
purchase price allocation exercise required.
the acquisition resulted in the Group
recognising, on consolidation, goodwill and
intangible assets of $111.79m and $96.28m
respectively.
We performed specific substantive procedures to test a sample of
capitalised customer acquisition costs back to incremental amounts paid
for direct marketing, or fulfilment costs to obtain the customer, and we also
ensured such costs met the definition of contract costs per the accounting
standard. We reviewed the length of time over which costs are amortised
based upon evidence of customer lifetime value, which exceeds the licence
length. We also generated an expectation of the expected amortisation of
the deferred contract costs recognised in the year to ensure the calculation
used by the Directors was appropriate.
Key observations
there were no material issues identified by our testing of revenue
recognition and contract costs in the year.
With input from our valuations team, we challenged the assumptions
underpinning the significant judgements and estimates used by the
Directors in the assessment of the fair values of the assets and liabilities
acquired and consideration paid including; reviewing underlying cash flow
projections and comparing against historical and post-acquisition
performance, royalty rates, discount rates applied and the long-term growth
rates.
We performed specific substantive testing over material assets and
liabilities acquired. We also focused on both material and more
judgemental fair value adjustments that were recorded including:
Intangible assets – the Directors obtained external valuations for the
acquired intangible assets. Utilising our valuations experts we evaluated
the completeness and appropriateness of the assets recognised, the
valuation methodologies used for each type of asset and used these to
check that the methodology used by the Directors 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 underlying understanding of the business acquired,
its historical performance and the market in which it operates. these
assumptions included revenue and profit forecasts, discount rates,
customer attrition rates, technology obsolescence rates and royalty rates.
Share consideration – the consideration for the acquisition included
shares to be issued in the future and the issuance of shares that are
subject to a lock-in period. In order to "fair value" this consideration the
Directors applied a discount to the share price at the date of completion
for the time value of money and the lack of marketability of this share
consideration. We generated an independent expectation of the deferred
share based on tracing the inputs to source documentation.
With the input of our tax team, we examined and satisfied ourselves with
the methodology and tax rates used to calculate the associated deferred
tax liabilities arising from the creation of intangible assets. this involved
reference to the tax jurisdictions in which PIA operates.
Key observations
there were no material issues identified by our testing on the PIA business
combination in the year.
36
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
We also attended an audit clearance meeting in Romania,
and reviewed the work undertaken by our component
auditor.
In addition, the Group audit team performed the full scope
audit of the 2 remaining significant components, Intego Inc
and Reimage. the accounting for these entities is based on
Cyprus and the Group audit team visited this location to
complete the necessary audit procedures.
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.
classification of components
Revenue
Adjusted EBITDA
Total Assets
Full Scope Audit Procedures
Analytical Reviews - Group Level
We identified 3 individually significant components, being
Intego Inc, Reimage and CyberGhost, which together make
up 89% of Group revenue.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
37
our application of materiality
We apply the concept of materiality both in planning and
performing our audit, and in evaluating the effect of
misstatements. We consider materiality to be the magnitude
by which misstatements including omissions, could influence
the economic decisions of reasonable users that are taken on
the basis of the financial statements. Importantly,
misstatements below these levels will not necessarily be
evaluated as immaterial as we also take into account the
nature of identified misstatements and the particular
circumstances of their occurrence, when evaluating the
effect on the financial statements as a whole.
We determined materiality for the financial statements as a
whole to be $637,000 (2018: $560,000) which represents
approximately 1% of revenues (2018: 1% of revenues).
Revenue has been determined to be the most relevant
performance measure to the stakeholders of the Group given
the Directors’ current focus on expansion and growth of
customer numbers.
Performance materiality is the application of materiality at
the individual account or balance level set at an amount to
reduce to an appropriate level the probability that the
aggregate of uncorrected and undetected misstatements
exceeds materiality for the financial statements as a whole.
Performance materiality was set at $478,000 (2018:
$420,000), which represents 75% (2018: 75%) of the above
materiality levels based on our overall risk assessment and
history of misstatements.
Individual component audits were carried out using
component materialities of 20-75% of overall financial
statement materiality (this ranged from $135,000 to $460,000).
We agreed with the Audit Committee that we would report to
them all individual audit differences in excess $32,000 (2018:
$28,000) as well as differences below that threshold that, in
our view, warranted reporting on qualitative grounds.
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 will also considered the changes to
the overall Group as a result of the acquisition of ltMI
Holdings Inc. (trading as “Private Internet Access”) and where
the key business activities and transactions reside.
We instructed BDO’s member firm in Romania as
component auditor, to perform a full scope audit of financial
information of CyberGhost, the significant component
accounted for in that territory. We visited this location
during the year to ensure we obtained a full understanding
of the operational activities and appropriately-scoped risks
and agreed responses to those risks.
Misstatements can arise from fraud or error and are
considered material if, individually or in the aggregate,
they could reasonably be expected to influence the
economic decisions of users taken on the basis of these
financial statements.
A further description of our responsibilities for the audit of
the financial statements is located on the Financial Reporting
Council’s website: www.frc.org.uk/auditorsresponsibilities.
this description forms part of our auditor’s report.
use of our report
this report is made solely to the Parent Company’s members,
as a body, in accordance with our engagement letter dated
5 March 2020. Our audit work has been undertaken so that
we might state to the Parent Company’s members those
matters we are required to state to them in an auditor’s
report and for no other purpose. to the fullest extent
permitted by law, we do not accept or assume responsibility
to anyone other than the Parent Company and the Parent
Company’s members as a body, for our audit work, for this
report, or for the opinions we have formed.
LEIGHTON THOMAS
FOR AND ON BEHALF OF BDO LLP
london, UK
16 March 2020
BDO llP is a limited liability partnership registered in
England and Wales (with registered number OC305127).
In addition we have performed full scope audit procedures at
a Group level to give coverage of 98% of Group total assets.
the remaining components not subject to full scope audit
have been reviewed for Group reporting purposes by the
Group team, using analytical procedures to corroborate the
conclusions reached that there are no significant risks of
material misstatement of the aggregated financial
information of those components.
other information
the Directors are responsible for the other information. the
other information comprises the information included in the
Annual Report and accounts, other than the financial
statements and our auditor’s report thereon. Our opinion on
the financial statements does not cover the other information
and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion
thereon.
In connection with our audit of the financial statements, our
responsibility is to read the other information and, in doing
so, consider whether the other information is materially
inconsistent with the financial statements or our knowledge
obtained in the audit or otherwise appears to be materially
misstated. If we identify such material inconsistencies or
apparent material misstatements, we are required to
determine whether there is a material misstatement in the
financial statements or a material misstatement of the other
information. If, based on the work we have performed, we
conclude that there is a material misstatement of this other
information, we are required to report that fact. We have
nothing to report in this regard.
Responsibilities of directors
As explained more fully in the Directors’ responsibilities
statement, 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.
Auditor’s responsibilities for the audit of the
financial statements
Our objectives are to obtain reasonable assurance about
whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, and
to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is
not a guarantee that an audit conducted in accordance with
ISAs (UK) will always detect a material misstatement when
it exists.
38
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
consolidAted stAtement oF compReHensiVe income
FOR THE YEAR ENDED 31 DECEMBER 2019
Revenue
Cost of sales
Gross profit
Selling and marketing costs
Research and development costs
Management, general and administrative costs
Depreciation and amortisation
Other operating expenses
total operating costs
Operating profit
Adjusted EBITDA
Employee share-based payment charge
Other operating expenses
Exceptional or non-recurring costs
Depreciation and amortisation
Operating profit
Finance income
Finance costs
Profit before taxation
tax charge
Profit from continuing operations
loss from discontinued operations (attributable to equity holders of the
company)
Profit/(Loss) for the year
Other comprehensive income:
Items that may be reclassified to profit and loss:
Foreign exchange differences on translation of foreign operations
Total comprehensive income/(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
Total profit/(loss) for the year attributable to Owners of the parent:
Continuing operations
Discontinuing operations
Earnings per share from continuing operations attributable to the ordinary
equity holders of the company:
Basic earnings per share (cents)
Diluted earnings per share (cents)
Earnings per share from discontinued operations attributable to the
ordinary equity holders of the company:
Basic earnings per share (cents)
Diluted earnings per share (cents)
Note
3,4
3c
9,10,22
5
5
16
5
9,10,22
7
8
20
17
17
17
17
2019
$’000
66,060
(7,525)
58,535
(33,124)
(3,349)
(11,514)
(6,314)
(91)
(54,392)
4,143
14,559
(1,680)
(91)
(2,331)
(6,314)
4,143
300
(1,644)
2,799
(314)
2,485
(465)
2,020
(81)
1,939
2,020
–
1,939
–
2,485
(465)
2,020
1.7
1.7
(0.3)
(0.4)
2018
$’000
52,060
(5,605)
46,455
(27,564)
(1,653)
(9,795)
(3,800)
–
(42,812)
3,643
10,374
(1,490)
–
(1,441)
(3,800)
3,643
587
(938)
3,292
(1,064)
2,228
(2,734)
(506)
7
(499)
(518)
12
(511)
12
2,228
(2,746)
(518)
1.5
1.5
(0.3)
(0.3)
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
39
consolidAted stAtement oF FinAnciAl position
AS AT 31 DECEMBER 2019
Non-current assets
Intangible assets
Property, plant and equipment
Right-of-use assets
Deferred consideration
Deferred contract costs
Deferred tax asset
Current assets
Software license inventory
Deferred contract costs
Deferred consideration
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
long-term lease liabilities
Deferred and contingent consideration
Current liabilities
trade and other payables
Shareholder loan
Contract liabilities
Short-term lease liabilities
Deferred and contingent consideration
Total equity and liabilities
Note
9
10
22
20,24
3c
8
3c
20,24
11
12
3b
8
22
24
13
21c
3b
22
24
2019
$’000
242,100
2,351
2,985
446
16,542
2,180
266,604
96
12,798
346
6,687
8,211
28,138
294,742
16
209,501
778
(55,291)
155,004
–
2018
$’000
36,265
713
1,769
934
7,196
728
47,605
52
5,216
323
6,101
40,405
52,097
99,702
15
131,091
859
(58,991)
72,974
–
155,004
72,974
6,013
22,102
1,753
14,578
44,446
19,632
40,221
29,299
1,365
4,775
95,292
294,742
2,165
3,125
1,693
143
7,126
11,131
–
7,349
226
896
19,602
99,702
the financial statements were approved by the Board and authorised for issue on 16 March 2020.
IDO ERLICHMAN
CHIEF EXECUTIVE OFFICER
MORAN LAUFER
CHIEF FINANCIAL OFFICER
40
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
consolidAted stAtement oF cHAnGes in eQuitY
FOR THE YEAR ENDED 31 DECEMBER 2019
At 1 January 2018
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
disposal of subsidiary
Transactions with owners:
Share-based payments
Exercise of employee options
(note 14)
Dividend paid to company’s
shareholders
At 31 December 2018
At 1 January 2019
Profit 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 14)
Issue of equity share capital (note 19)
Deferred share consideration
(note 19)
Share
capital
$’000
15
–
Additional
paid in
capital
$’000
130,728
–
–
–
–
–
*
–
–
–
–
–
363
–
15
15
–
131,091
131,091
–
–
–
–
255
21,656
–
–
–
*
1
–
Shares to be
issued
$’000
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
56,499
Foreign
exchange
differences
on
translation
of foreign
operations
$’000
852
–
Equity
attributable
to equity
holders of
the parent
$’000
78,395
(518)
Retained
earnings
$’000
(53,200)
(518)
Non–
controlling
interests
$’000
total
$’000
977
12
79,372
(506)
–
7
(518)
(511)
–
12
7
(499)
–
–
(989)
(989)
7
7
–
–
–
–
1,490
1,490
–
363
(6,763)
(6,763)
859
859
–
(58,991)
72,974
(58,991)
2,020
72,974
2,020
(81)
–
(81)
(81)
2,020
1,939
–
–
–
–
1,680
1,680
–
–
–
255
21,657
56,499
–
–
–
–
–
–
–
–
–
–
–
–
–
1,490
363
(6,763)
72,974
72,974
2,020
(81)
1,939
1,680
255
21,657
56,499
155,004
At 31 December 2019
16
153,002
56,499
778
(55,291) 155,004
* amounts below 1000.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
41
Note
9
20
22
10
10
8
7,20
16
10
10
19
20
9
9
24
22
21
14
12
2019
$’000
2,020
4,784
–
1,177
353
57
314
(300)
814
1,680
300
143
11,342
374
(44)
1,824
(16,928)
2,075
(1,357)
(1,416)
(2,773)
(518)
7
(64,324)
–
(2)
(2,620)
(67,457)
(880)
–
(1,246)
40,000
255
38,129
(32,101)
(93)
40,405
8,211
2018
$’000
(506)
2,617
2,252
1,209
288
58
1,230
(587)
232
1,490
587
(168)
8,702
3,142
13
82
(10,215)
1,971
3,695
(502)
3,193
(179)
10
(20,823)
(341)
(6)
(2,289)
(23,628)
(929)
(6,763)
(1,087)
363
(8,416)
(28,851)
(246)
69,502
40,405
consolidAted stAtement oF cAsH FloWs
FOR THE YEAR ENDED 31 DECEMBER 2019
Cash flow from operating activities
Profit/(loss) for the year after taxation
Adjustments for:
Amortisation of intangible assets
loss from selling the media activity
Amortisation of right-of-use assets
Depreciation of property, plant and equipment
loss on sale of property, plant and equipment
tax charge
Interest income
Interest expenses, fair value movements on deferred consideration
Share-based payment charge
Interest received
Unrealised foreign exchange differences
Operating cash flow before movement in working capital
Decrease in trade and other receivables
(Increase)/decrease in software licenses inventory
Increase in trade and other payables
Increase in deferred contract costs
Increase in contract liabilities
Cash (outflow)/inflow from operations
Tax paid net of refunds
Cash (used in)/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 combinations
Net cash paid on business sold
Intangible assets acquired
Capitalisation of development costs
Net cash used in investing activities
Cash flow from financing activities
Repurchase of employee share options
Dividend paid
Payment of leases
Proceeds from loan
Exercise of options by employees
Net cash generated/(used in) from financing activities
Net (decrease) in cash and cash equivalents
Revaluation of cash due to changes in foreign exchange rates
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
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notes to tHe consolidAted FinAnciAl stAtements
FOR THE YEAR ENDED 31 DECEMBER 2019
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 2019 and 2018. the company is incorporated in the Isle of Man.
the financial information has been prepared in accordance with International Financial Reporting Standards, International
Accounting Standards and interpretations (collectively IFRS) as issued by the International Accounting Standards Board (IASB).
the preparation of financial statements in compliance with adopted IFRS requires the use of certain critical accounting
estimates. It also requires Group management to exercise judgement in applying the Group’s accounting policies. the areas
where significant judgements and estimates have been made in preparing the financial statements and their effects are
disclosed in note 2.
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. the bridge loan term granted
by Unikmind for the acquisition of ltMI Holdings was due to expire on 12 June 2020, but post year-end was extended to expire
on 31 March 2021. the company is currently working on refinancing the bridge loan granted by Unikmind with long-term bank
debt. they therefore continue to adopt the going concern basis of accounting in preparing the financial statements.
Adoption of new and revised standards
A new standard impacting the Group that will be adopted in the annual financial statements for the year ended 31 December
2019, and which have given rise to changes in the Group’s accounting policies:
•
IFRIC 23 - Uncertainty over Income tax Positions (IFRIC 23);
IFRIC 23 - Uncertainty over Income Tax Positions
IFRIC 23 provides guidance on the accounting for current and deferred tax liabilities and assets in circumstances in which
there is uncertainty over income tax treatments. the Interpretation requires:
• the Group to determine whether uncertain tax treatments should be considered separately, or together as a group, based
on which approach provides better predictions of the resolution;
• the Group to determine if it is probable that the tax authorities will accept the uncertain tax treatment; and
•
If it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely
amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. this
measurement is required to be based on the assumption that each of the tax authorities will examine amounts they have a
right to examine and have full knowledge of all related information when making those examinations.
the Group elected to apply IFRIC 23 retrospectively with the cumulative effect recorded in retained earnings as at the date of
initial application, 1 January 2019. the Group has maintained provisions for potential historic tax liabilities, As at 31 December
2019 the amount of these provisions is $ 5.3 million (2018:$1.4 million). the increase in tax liabilities comprises $3.3 million
related to the acquisition of ltMI Holdings and $0.6 million from uncertainties over the income tax treatment related to
cross-border services and transactions that derive from the multi-national nature of the Company.
New standards, interpretations and amendments not yet effective
there are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are
effective in future accounting periods that the Group has decided not to adopt early. the following amendments are effective
for the period beginning 1 January 2020:
•
IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
(Amendment – Definition of Material)
IFRS 3 Business Combinations (Amendment – Definition of Business)
•
• Revised Conceptual Framework for Financial Reporting
In January 2020, the IASB issued amendments to IAS 1, which clarify the criteria used to determine whether liabilities are
classified as current or non-current. these amendments clarify that current or non-current classification is based on whether
an entity has a right at the end of the reporting period to defer settlement of the liability for at least 12 months after the
reporting period. the amendments also clarify that ‘settlement’ includes the transfer of cash, goods, services, or equity
instruments unless the obligation to transfer equity instruments arises from a conversion feature classified as an equity
instrument separately from the liability component of a compound financial instrument. the amendments are effective for
annual reporting periods beginning on or after 1 January 2022.
the Group is currently assessing the impact of these new accounting standards and amendments. the Group does not
expect any other standards issued by the IASB, but not yet effective, to have a material impact on the Group.
KAPE TECHNOLOGIES PLC
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notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
2 significant accounting policies
Basis of consolidation
the Group’s 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 18 of the consolidated financial statements.
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 or loss as appropriate.
Deferred cash consideration is measured initially at fair value and subsequently at amortised cost.
Deferred share consideration that is classified as equity instrument, measured at date of recognition at fair value using the
share price at the acquisition date adjusted for the time value of money and lack of marketability if needed.
At the acquisition date, the identifiable assets acquired and the liabilities assumed are recognised at their fair value at the
acquisition date.
Any provisional amounts are subsequently finalised within the 12-month measurement period, as permitted by IFRS 3.
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.
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. On disposal of non-wholly owned subsidiaries the
Group derecognises non-controlling interest with any resulting gain or loss recognised in profit or loss attributable to
the parent.
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 ($000).
(b) transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of
the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the
translation at year-end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in
profit or loss. Exchange rates gains and losses are recognised net within Finance costs.
(c) Consolidation
the functional currency of the Company, and the presentation currency for the consolidated financial statements is United
States Dollars. For the purpose of the consolidated financial statements, the assets and liabilities of the Group's foreign
operations with a functional currency other than United States Dollars are translated into United States Dollars using
exchange rates prevailing on the reporting date. Income and expense items (including comparatives) are translated at the
exchange rates at the dates of the transactions. Exchange differences arising, if any, are recognised within other
comprehensive income.
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Effective 31 March, 2018, the functional currency of one of the Company's subsidiaries, CyberGhost SRl, has changed to
United States Dollars ("USD" or "$") from Romanian lei ("lei"). the change was following an assessment by company's
management that found that the USD is the primary currency of the economic environment in which the subsidiary operates.
the exchange rate at that date was lei 1= $0.2646. Non-monetary assets and liabilities were translated permanently into the
new functional currency as of this date with any exchange differences recognised in other comprehensive income.
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.
Revenue recognition
Revenue is measured based on the consideration specified in a contract with a 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.
the majority of the Group revenue is derived from sales of products to customers in a B2C model; transaction price being
determined by the fixed price of each product which may be changed according to management decision.
• the CyberGhost, Zenmate, Private Internet Access, VirusBarrier and ContentBarriar products are SaaS products which
contain 1 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 1 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.
• 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.
• An upfront payment of the entire consideration is in accordance with the typical payment terms in the industry.
• the Reimage PC, Restoro and DriverFix products contain 3 performance obligations: 1-time repair, unlimited use of the
repair software for 1 year and technical support for 1 year. Revenue for performing the 1-time repair obligation is
recognised at the time of the sale. For 1 year package of the Reimage, Restoro and DriverFix products, customers benefit
from the use of the repair software and technical support for 1 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 months period.
• Revenue from the sale of Intego Mac Washing Machine, NetBarrier and Backup products is recognised at the time of sale
as the customer is able to use the products independently without any additional resources of the company.
• the Company also offers its products for sale as a bundle. For software bundles, the company allocates revenue to each of
the performance obligations based on their relative standalone selling price. the stand-alone selling prices are determined
based on the prices charged to customers who acquire software packages individually or by reference pricing for similar
products sold in the market.
Customers are provided with a 30-60 day refund period in which they can receive a full refund. Historical experience allows
management to estimate the value of products that will be returned; these are not material to the Group and a refund liability
has therefore not been recognised.
Costs to obtain and fulfil a contract
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). 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 the Group Digital Security and
Privacy products 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 through the selling and marketing costs 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 over
the expected customer life on a systematic basis.
In addition, the company recognises an asset for fulfilment costs that are considered directly attributable to fulfilling a
contract. the fulfilment costs comprise payment processing fees paid to third party processing service providers. this asset
is amortised through the cost of sales 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.
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notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
2 significant accounting policies continued
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 each of these assets is deemed to be as follows:
•
• trademarks: 5 to 12 years
• Customer lists: 4 to 5 years
Intellectual property: 3 to 8 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 de-recognised on disposal, or when no future economic benefits are expected from use or disposal.
Gains or losses arising from de-recognition 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 de-recognised.
(b) Internally-generated intangible assets (development costs)
An internally-generated intangible asset arising from the Group's e-business development is recognised only if all of the
following conditions are met:
• the technical feasibility of completing the intangible asset so that it will be available for use or sale;
• the intention to complete the intangible asset and use or sell it;
•
• the development cost of the asset can be measured reliably.
It is probable that the asset created will generate future economic benefits; and
Internally-generated intangible assets are amortised on a straight-line basis over their estimated useful life, which is 2 to 3
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.
(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.
Property, plant and equipment
Property, plant and equipment is 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: 4-5 years
the assets’ residual values and useful lives are reviewed and adjusted, if appropriate, at each reporting date.
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 de-recognised 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
or equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is
recognised in profit or loss.
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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).
Cash and cash equivalents
For the purpose of the consolidated balance sheet and cash flow statement, cash and cash equivalents comprise cash in
demand bank accounts and bank deposits that require notice of 3 months or less.
Financial assets
(a) Classification
the Group classifies its financial assets in the following measurement categories:
• those to be measured subsequently at fair value (either through OCI or through profit or loss), and
• those to be measured at amortised cost.
the classification depends on the Group's business model for managing the financial assets and the contractual terms of the
cash flows.
the Group’s financial assets are trade receivables, other receivables and cash and cash equivalents. these assets are held
within a business model whose objective is to collect contractual cash flows, and give rise on specified dates to cash flows
that are solely payments of principal and interest on the principal amount outstanding. As such, they are classified as
measured at amortised cost.
(b) Measurement
At initial recognition, the Group measures a financial asset at its fair value plus, in the case of a financial asset not at fair value,
through profit or loss (FVtPl), transaction costs that are directly attributable to the acquisition of the financial asset.
transaction costs of financial assets carried at FVtPl are expenses in profit or loss. Changes in the fair value of financial
assets at FVtPl are recognised in the statement of comprehensive income.
Financially assets measured at amortised cost arise principally through the provision of services to customers (e.g. trade
receivables), but also incorporate other types of contractual monetary asset. they are initially recognised at fair value plus
transaction costs that are directly attributable to their acquisition or issue and are subsequently carried at amortised cost
using the effective interest rate method, less provision for impairment.
trade receivables are amounts due from customers for goods sold or services performed in the ordinary course of business.
they are generally due for settlement within 365 days and therefore are all classified as current. trade receivables are
recognised initially at the amount of consideration that is unconditional. the Group holds the trade receivables with the
objective to collect the contractual cash flows and therefore measures them subsequently at amortised cost using the
effective interest method.
Due to the short-term nature of the current receivables, their carrying amount is considered to be the same as their fair value.
Other receivables consist of amounts generally arising from transactions outside the usual operating activities of the Group.
Due to the short-term nature of the other current receivables, their carrying amount is considered to be the same as their
fair value.
(c) Impairment
the Group applies the simplified approach to measuring expected credit losses which uses a lifetime expected loss allowance
for all trade receivables.
Financial liabilities
trade payables and other short-term monetary liabilities are initially recognised at fair value and subsequently carried at
amortised cost using the effective interest method.
Current and deferred tax
Income tax expense represents the sum of the tax currently payable and deferred tax.
KAPE TECHNOLOGIES PLC
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notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
2 significant accounting policies continued
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 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.
Uncertainty over income tax positions
It may be unclear how tax law applies to a particular transaction or circumstance. the acceptability of a particular tax
treatment under tax law may not be known until the relevant taxation authority or a court takes a decision in the future.
Consequently, a dispute or examination of a particular tax treatment by the taxation authority may affect the Group's
accounting for a current or deferred tax asset or liability.
If it is not probable that the uncertain tax treatment will be accepted, the Group measures the tax uncertainty based on the
most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. this
measurement is based on the assumption that each of the tax authorities will examine amounts they have a right to examine
and have full knowledge of all related information when making those examinations.
Leases
IFRS 16 requires lessees to recognise a lease liability that reflects future lease payments and a "right-of-use asset" in all lease
contracts within scope, with no distinction between financing and capital leases. IFRS 16 exempts lessees in short-term
leases or when the underlying asset has a low value.
the Company has elected to apply the practical expedient not to recognise right-of-use assets and lease liabilities for leases
of low-value assets only. the lease payments associated with these leases are recognised as an expense on a straight-line
basis over the lease term.
At inception of a contract, the Company assesses whether a contract is, or contains, a lease based on whether the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
the Company has elected to apply the practical expedient to account for each lease component and any non-lease
components as a single lease component.
the Company recognises a right-of-use asset and a lease liability at the lease commencement date.
the lease liability is initially measured at the present value of the following lease payments:
• Fixed payments
• Variable payments that are based on index or rate
• the exercise price of an extension or purchase option if reasonably certain to be exercised
• Payment of penalties for terminating the lease, if relevant
the lease payments are discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined,
the Company’s incremental borrowing rate. the Company uses its incremental borrowing rate as the discount rate.
the right-of-use asset is initially measured based on the initial amount of the lease liability adjusted for any lease payments
made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and
remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives
received. the assets are depreciated to the earlier of the end of the useful life of the right-of-use asset, or the lease-term,
using the straight-line method. the lease-term includes periods covered by an option to extend if the Company is reasonably
certain to exercise that option. In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and
adjusted for certain remeasurements of the lease liability.
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the lease liability is measured at amortized cost using the effective interest method. It is re-measured when there is a change
in future lease payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the
amount expected to be payable. When the lease liability is re-measured in this way, a corresponding adjustment is made to
the carrying amount of the right-of-use asset, or it is recorded in profit or loss if the carrying amount of the right-of-use asset
has been reduced to zero.
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, Recurring Revenue and
Earning Per Share targets). Non-market vesting conditions are included in assumptions about the number of options that are
expected to vest.
At each reporting 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 profit and loss, 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 recognised 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 plans, 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 an 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 judgments that
affect the application of policies and reported amounts. Estimates and judgments 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. the Group tracks research and development employees’ and advisors’, time invested in each research and
development project. the Group than estimates whether it has adequate technical, financial and other resources to complete
the development of the intangible asset and how the intangible asset will generate probable future economic benefits. Wrong
estimations might cause the Company to capitalise costs that otherwise would been recorded as operational expenses.
(b) Valuation of separately identifiable intangible assets
to determine the value of separately identifiable intangible assets in a business combination, the Group is required to make
judgements when utilising valuation methodologies. these methodologies include the use of discounted cash-flows, revenue
forecasts and the estimates for the useful economic lives of intangible assets. there are significant judgements involved in
assessing what amounts are recognised as the estimated fair value of assets and liabilities acquired through business
combinations, particularly the amounts attributed to separate intangible assets such as brands and customer relationships.
these judgements impact the amount of goodwill recognised on acquisitions. Any provisional amounts are subsequently
finalised within the 12-month measurement period, as permitted by IFRS 3. Details of acquisitions in the year are set out in
Note 19.
(c) Determining the customer lifetime
On recognising an asset in relation to marketing costs to obtain a contract, the Group determined the expected lifetime of the
customer. the lifetime value been determined after taking into consideration the product sold, the period of the license, and
the Group’s past experience.
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notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
the Group is monitoring changes which can affect the assessment during the period such as changes with the product,
renewal rate etc.
Different assessment of the customer lifetime might impact the amount of Contract costs that are capitalised to the balance
sheet and the rate in which the deferred contract costs are amortised.
3 Revenue
Sale of Digital Security, malware protection and PC performance products
Sale of Digital Privacy software solutions
2019
$’000
35,949
30,111
66,060
2018
$’000
36,849
15,211
52,060
Revenues from software and SaaS products offering security, malware protection and PC performance are generated from
the Digital Security CGU, while revenues from provision of Digital privacy software solutions are generated from the Digital
Privacy CGU. the revenues generated from the Media CGU in the period ended 31 December 2019 are presented as
discontinued operations.
(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
2019
(USD ‘000s)
Digital
Privacy
20,191
9,920
Digital
Security
4,294
31,655
Total
24,485
41,575
Digital
Security
1,817
35,032
2018
(USD ‘000s)
Digital
Privacy
9,971
5,240
total
11,788
40,272
Total
35,949
30,111
66,060
36,849
15,211
52,060
(b) Contract liabilities
the company has recognised the following revenue-related contract liabilities:
Contract liabilities
31 December
2019
(USD ‘000s)
31 December
2018
(USD ‘000s)
35,312
9,514
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:
31 December
2019
(USD ‘000s)
31 December
2018
(USD ‘000s)
Business combinations
Revenue recognised that was included in the contract liability balance from business combinations
Revenue recognised that was included in the contract liability balance at the beginning of the period
Increases due to cash received, excluding amounts recognised as revenue during the period
Revaluation of contract liabilities in foreign currency
(23,723)
1,946
7,349
(11,370)
–
(3,415)
1,863
3,189
(7,022)
(117)
Management expects that 83.0% of the transaction price allocated to the unsatisfied contracts (which represent to contract
liabilities) as of 31 December 2019 will be recognised as revenue during the next annual reporting period ($29,299,000), 13.6%
and 2.9% ($4,812,000 and $1,032,000) will be recognised in the financial years 2021 and 2022, respectively. the remaining 0.5%
($169,000) will be recognised in the following financial years.
50
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
(c) Assets recognised from costs to obtain and fulfil a contract
Significant changes in relation to assets recognised from costs to obtain and fulfil a contract
Short-term asset recognised from marketing cost to obtain a contract
long-term asset recognised from marketing cost to obtain a contract
Short-term asset recognised from fulfilment cost to fulfil a contract
long-term asset recognised from fulfilment cost to fulfil a contract
Significant changes in the deferred contract costs’ balances during the period are as follows:
Business combinations
Amortization recognised during the period - marketing costs
Amortization recognised during the period - fulfilment costs
Increases due to cash paid - marketing costs
Increases due to cash paid - fulfilment costs
Revaluation of contract costs in foreign currency
31 December
2019
(USD, in
thousands)
31 December
2018
(USD, in
thousands)
12,057
16,325
741
217
–
(12,033)
(2,963)
28,725
3,199
–
4,624
7,066
592
130
387
(3,954)
(1,318)
14,054
1,443
8
4 segmental information
Segments revenues and results
the divestment of the Media division in July 2018 (note 20), resulted in changes to its management reporting system and now
operates 2 reportable segments:
• Digital Security – comprising software and SaaS products offering security, malware protection and PC performance.
• Digital Privacy – comprising virtual private network (“VPN”) solutions and privacy SaaS products.
the Media division which represented a separate reportable segment in the prior year and this has been accounted for as a
discontinued operation, as set-out in note 20.
Year ended 31 December 2019
Revenue
Cost of sales
Direct sales and marketing costs
Segment result
Central operating costs
Adjusted EBItDA(1)
Other operating income
Depreciation and amortisation
Employee share-based payment charge
Exceptional or non-recurring costs
Operating profit
Finance income
Finance costs
Profit before tax
taxation
Profit from continuing operations
loss from discontinued operation (attributable to equity holders of the company)
Profit from the year
Digital Security
2019
$’000
Digital Privacy
2019
$’000
35,949
(2,085)
(15,991)
17,873
30,111
(5,440)
(9,135)
15,536
Total
2019
$’000
66,060
(7,525)
(25,126)
33,409
(18,850)
14,559
(91)
(6,314)
(1,680)
(2,331)
4,143
300
(1,644)
2,799
(314)
2,485
(465)
2,020
Exceptional or non-recurring costs in 2019 comprised restructuring costs of $0.4 million mainly due to the restructuring of
ZenMate and Intego both acquired during 2018, $1.9 million (2018: $0.8 million) for professional services and other business
combinations’ related costs which derive from ltMI Holdings’ acquisition.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
51
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
4 segmental information continued
Year ended 31 December 2018
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
Exceptional or non-recurring costs
Operating profit
Finance income
Finance costs
Profit before tax
taxation
Profit from continuing operations
loss from discontinued operations (attributable to equity holders of the company)
loss from the year
Digital
Security
2018
$’000
36,849
(2,569)
(17,608)
Digital
Privacy
2018
$’000
15,211
(3,036)
(3,157)
16,672
9,018
total
2018
$’000
52,060
(5,605)
(20,765)
25,690
(15,316)
10,374
(3,800)
(1,490)
(1,441)
3,643
587
(938)
3,292
(1,064)
2,228
(2,734)
(506)
Exceptional or non-recurring costs in 2018 comprised non-recurring staff costs of $0.5 million mainly due to payments made
to option-holders in parallel to the special dividend paid in June, $0.8 million for professional services for acquisitions and
rebranding expenses and $0.1 of onerous costs related to lease contracts.
(1) Adjusted EBItDA is a company-specific measure which is calculated as operating loss before depreciation (including right to use assets amortisation),
amortisation, exceptional or non-recurring costs, employee share-based payment charges and charges for repurchase of employees options which
are considered to be one-off and non-recurring in nature as set out in note 5. the Directors believe that this provides a better understanding of the
underlying trading performance of the business.
Information about major customers
In 2019 and 2018 there were no customers contributing more than 10% of total revenue of the Group.
Geographical analysis of revenue
Revenue by origin of the recording entity
Europe
US
Geographical analysis of non-current assets
Europe
Asia
US
total intangible assets and property, plant and equipment
52
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
2019
$’000
56,793
9,267
66,060
2019
$’000
23,212
160
221,079
244,451
2018
$’000
49,302
2,758
52,060
2018
$’000
23,972
90
12,916
36,978
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
5 operating profit
Adjusted EBITDA
Adjusted EBItDA is calculated as follows:
Operating profit
Depreciation and amortisation
Other operating income
Employee share-based payment charge
Exceptional or non-recurring costs:
Non-recurring staff and restructuring costs
Exceptional costs
Adjusted EBItDA
Operating profit has been arrived at after charging:
Exceptional or non-recurring operating costs
Non-recurring staff costs
Professional services related to business combinations
Costs related to onerous rent agreement
Auditor’s remuneration:
Audit
taxation services
Amortisation of intangible assets
Depreciation
Amortisation of Right-of-use assets
Employee share-based payment charge (note 16)
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
Other operating expenses
Depreciation and amortisation
total operating costs
2019
$’000
4,143
6,314
91
1,680
416
1,915
14,559
2019
$’000
416
1,915
–
2,331
210
21
4,784
353
1,177
1,680
2018
Adjusted
$’000
20,765
6,398
27,163
1,389
7,529
–
2,079
2018
$’000
3,643
3,800
–
1,490
543
898
10,374
2018
$’000
543
813
85
1,441
220
7
2,305
286
1,209
1,490
2018
total
$’000
20,765
6,799
27,564
1,653
9,795
–
3,800
38,160
42,812
2019
Adjusted
$’000
25,126
7,903
33,029
3,149
7,798
–
2,652
46,628
2019
Total
$’000
25,126
7,998
33,124
3,349
11,514
91
6,314
54,392
Adjusted operating costs exclude share-based payment charges, exceptional or non-recurring costs, other operating
expenses and amortisation of acquired intangible assets. See note 4.
6 staff costs
total staff costs comprise the following:
Salaries and related costs
Expenses for defined contribution plans
Employee share-based payment charge (note 16)
2019
$’000
14,280
893
1,680
16,853
2018
$’000
9,988
421
1,490
11,899
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
53
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
6 staff costs continued
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
Expenses for defined contribution plans
Employee share-based payment charge
Details of Directors’ remuneration are set out in the Remuneration Committee report on pages 30 to 31.
7 Finance costs
Interest expense on short-term shareholder loans (note 21)
Interest expense on lease liabilities (note 22)
Fair value movements on deferred consideration
Net foreign exchange and other finance expenses
2019
$’000
2,197
86
1,461
3,744
2019
$’000
221
77
82
1,264
1,644
2018
$’000
2,504
54
655
3,213
2018
$’000
–
93
219
626
938
8 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 are based.
the Group recognised a deferred tax asset of $1,598,000 (2018: $159,000) in respect of tax losses accumulated in
previous years.
the total tax charge can be reconciled to the overall tax charge as follows:
Profit from continuing operations before income tax expense
loss from discontinuing operation before income tax expense
tax at the applicable tax rate of 19% (2018: 19%)
tax effect of
Differences in overseas rates
Expenses not deductible for tax purposes
Previously unrecognised tax losses now recouped to reduce current tax expense
Deferred tax not recognised on losses carried forward
Recognition of previously unrecognised deferred tax assets
tax expense for previous years
tax charge for the year
Income tax expenses is attributable to:
Profit from continuing operations
loss from discontinued operation
the tax expense/(credit) from continuing operations analysed as:
Deferred taxation in respect of the current year
Current tax charge
tax charge for the year
54
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
2019
$’000
2,799
(465)
2,334
443
(386)
999
(14)
454
(1,561)
379
314
314
–
314
(1,608)
1,922
314
2018
$’000
3,292
(2,568)
724
137
83
835
–
81
–
94
1,230
1,064
166
1,230
173
891
1,064
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
the Group has maximum corporation tax losses carried forward at each period-end as set out below:
Corporate tax losses carried forward
2019
$’000
2018
$’000
35,671
38,974
Details of the deferred tax asset recognised arising in respect of losses and timing differences is set out below:
At the beginning of the year
Additions through business combinations
Disposal of the media division
Recognised/(de-recognised) in the year from continuing operations
Foreign exchange revaluation
At the end of the year
Details of the deferred tax liability recognised arising from timing differences is set out below:
2019
$’000
728
–
–
1,443
9
2,180
Business
combinations
$’000
Deferred
contract costs
$’000
Capitalised
software
development
costs
$’000
At 1 January 2018
Arising from business combinations
Foreign exchange differences
Movement in the year due to temporary differences from
continuing operations
At 31 December 2018
Arising from business combinations
Foreign exchange differences
Movement in the year due to temporary differences from
continuing operations
At 31 December 2019
349
2,631
–
(262)
2,718
19,145
(3)
(726)
21,134
–
87
–
11
98
–
–
261
359
In addition, the Group has an unrecognised deferred tax asset in respect of the following:
tax losses carried forward
Unrecognised deferred tax assets due to tax losses carried forward
–
–
–
309
309
–
–
300
609
2019
$’000
30,457
4,057
2018
$’000
97
770
(12)
(115)
(12)
728
total
$’000
349
2,718
–
58
3,125
19,145
(3)
(165)
22,102
2018
$’000
38,218
6,603
the Group maintained provisions for potential historic tax liabilities presented in Other payables. In 2019 the Group increased
its provision of corporate tax liabilities by $0.6 million to $2.0 million (2018: $1.4 million). the increase in tax liabilities is driven
by the multi-national nature of the Company which gives rise to uncertainty over the income tax treatment related to cross
border services and transactions. In addition, Other payables as of 31 December 2019 include a tax exposure balance of $3.3
million (2018: $Nil) following the due diligence performed with ltMI Holding acquisition.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
55
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
9 intangible assets
Cost
At 1 January 2018
Additions
Acquisition through business
combinations
Disposals
Foreign exchange differences
Intellectual
property
$’000
trademarks
$’000
Customer
lists
$’000
38,342
–
10,168
6
5,751
(3,663)
(81)
2,491
(2,035)
10
3,218
–
2,342
(2,078)
24
Goodwill
$’000
6,854
–
16,168
(2,524)
125
At 31 December 2018
40,349
10,640
3,506
20,623
Additions
Acquisition through business
combinations
Disposals
Foreign exchange differences
–
–
–
–
31,991
–
(76)
36,257
–
–
27,796
–
–
111,794
–
–
At 31 December 2019
72,264
46,897
31,302
132,417
Accumulated amortisation
At 1 January 2018
Charge for the year
Disposals
Foreign exchange differences
At 31 December 2018
Charge for the period
Disposals
Foreign exchange differences
(35,891)
(1,031)
3,663
15
(33,244)
(2,050)
–
37
(9,567)
(241)
2,035
(5)
(7,778)
(544)
–
–
(2,548)
(450)
2,078
(4)
(924)
(1,069)
–
–
At 31 December 2019
(35,257)
(8,322)
(1,993)
–
–
–
–
–
–
–
–
–
Net book value
At 1 January 2018
At 31 December 2018
2,451
7,105
601
2,862
670
2,582
6,854
20,623
At 31 December 2019
37,007
38,575
29,309
132,417
Capitalised
software
development
costs
$’000
Internet
domains
$’000
Cryptocurrencies
$’000
total
$’000
94
–
–
–
–
94
–
231
–
–
325
–
–
–
–
–
–
–
–
–
94
94
325
5,102
2,289
–
(768)
(30)
6,593
2,620
–
–
(57)
–
–
–
–
–
–
63,778
2,295
26,752
(11,068)
48
81,805
11
2,631
6
–
–
208,075
–
(133)
9,156
17
292,378
(3,422)
(895)
719
4
(3,594)
(1,121)
–
9
(4,706)
1,680
2,999
4,450
–
–
–
–
–
–
–
–
–
–
–
(51,428)
(2,617)
8,495
10
(45,540)
(4,784)
–
46
(50,278)
12,350
36,265
17
242,100
On 13 December 2019, the Group acquired 100% of the share capital of ltMI Holdings ("ltMI"). ltMI is the holding company
for Private Internet Access Inc ("PIA"), a leading US-based digital privacy company with a strong position in the data privacy
market. PIA was established in 2009 and is a security software business, based in Denver, Colorado, with a focus on the
provision of virtual private network ("VPN") solutions. Since its inception, PIA has grown to become a leading VPN service
provider focused on the consumer market and employing approximately 65 employees of which 35% are in an R&D capacity.
PIA has over 1 million paying subscribers globally, with 48% of them based in the US. See note 19.
On 16 October 2018, the Group acquired 100% of the share capital of ZenGuard GMBH, trading as ZenMate (“ZenMate”), a
multi-platform security software business with a focus on the provision of virtual private network ("VPN") solutions. ZenMate is
a digital privacy company, headquartered in Berlin, focused on encrypting and securing internet connections and protecting
individuals' privacy and digital data.
On 24 July 2018, the Group acquired 100% of the share capital of Neutral Holdings Inc, trading as Intego (“Intego”), a leading
Mac and IOS cybersecurity and malware protection SaaS business. Intego is focused on the provision of malware protection,
firewall, anti-spam, back-up, data protection and parental controls software for Mac.
On 26 July 2018, the Group sold the media division to Ecom Online ltd. this sale is in line with the Company's strategy to
develop and distribute its own cybersecurity products. the carrying value of the Intangible assets of the Media division on the
Group balance sheet as the date of the sale is $2.6 million, of which the majority related to Goodwill.
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.
56
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
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. Goodwill allocated to the Digital
Security CGU has a carrying amount of $11,688,000 (2018: $11,688,000) and the Digital Privacy CGU has a carrying amount of
$120,729,000 (2018: $8,935,000).
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.
For the Digital Security CGU, the recoverable value has been determined from value-in-use calculations based on cash flow
projections for the next 5 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 (2018: 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 17 per cent (2018: 25 per cent).
the discount rate used in the valuation of the Digital Security CGU was 17 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.
For the Digital Privacy CGU, the recoverable value has been determined from value-in-use calculations based on cash-flow
projections for the next 5 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 (2018: 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 15 per cent (2018: 25 per cent).
the discount rate used in the valuation of the Digital Privacy CGU was 15 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.
Following the acquisition of ltMI Holdings the company reassessed the discount rate attributable to the company’s activities,
which resulted in a reduction in the discount rates used to 17 and 15 per cent (compared to 25 per cent in 2018) for the Digital
Security and Digital Privacy CGUs, respectively. the reduction in the discount rate reflects the increasing growth and share of
revenues from higher customer retention over time product revenues and therefore an increased visibility of future user cash
flows. As at 31 December 2019, no impairment would have been recognised if a 25 per cent discount rate was used in the
impairment reviews for both the Digital Privacy and Digital Security CGUs.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
57
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
10 property, plant and equipment
Cost
At 1 January 2018
Additions
Disposals
Acquisition through business combinations
Foreign exchange differences
At 31 December 2018
Additions
Disposals
Acquisition through business combinations
Foreign exchange differences
At 31 December 2019
Accumulated depreciation:
At 1 January 2018
Charge for the period
Disposals
Foreign exchange differences
At 31 December 2018
Charge for the period
Disposals
Foreign exchange differences
At 31 December 2019
Net book value
At 1 January 2018
At 31 December 2018
At 31 December 2019
11 trade and other receivables
trade receivables and contract assets
Prepayments
Other receivables
Computer
equipment
$’000
Furniture, fixtures
and office
equipment
$’000
leasehold
improvements
$’000
1,240
99
(17)
35
(15)
1,342
192
(12)
–
(4)
1,518
(915)
(196)
12
(5)
(1,104)
(205)
11
2
(1,296)
325
238
222
245
43
(57)
47
–
278
108
(88)
46
–
344
(74)
(37)
22
(1)
(90)
(40)
33
–
(97)
171
188
247
290
37
(146)
–
5
186
101
(4)
36
–
319
(117)
(10)
126
–
(1)
(47)
–
–
(48)
173
185
271
Cars
$’000
162
–
(17)
–
4
149
117
(11)
1,457
–
1,712
(16)
(45)
15
(1)
(47)
(61)
7
–
total
$’000
1,937
179
(237)
82
(6)
1,955
518
(115)
1,539
(4)
3,893
(1,122)
(288)
175
(7)
(1,242)
(353)
51
2
(101)
(1,542)
146
102
1,611
2019
$’000
3,446
1,389
1,852
6,687
815
713
2,351
2018
$’000
3,648
1,267
1,186
6,101
Other receivables as of 31 December 2019 include a VAt receivable balance of $1,164,121 (2018: $736,000).
the fair values of trade and other receivables due within 1 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 15
of the consolidated financial statements.
12 cash and cash equivalents
Cash in bank accounts
Bank deposits
2019
$’000
7,472
739
8,211
2018
$’000
22,462
17,943
40,405
the carrying value of these assets represents a reasonable approximation to their fair value.
58
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
13 trade and other payables
trade payables
Accrued expenses
Employee liabilities
Current tax liability (*)
Other payables (*)
(*) Reclassified.
2019
$’000
5,023
4,874
2,943
583
6,209
2018
$’000
4,146
3,303
1,361
616
1,705
19,632
11,131
Other payables as of 31 December 2019 include a tax exposure balance of $5.3 million (2018: $1.4 million), the increase
comprises $3.3 million related to the acquisition of ltMI Holding and $0.6 million from uncertainties over the income tax
treatment related to cross-border services and transactions that derive from the multi-national nature of the Company.
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.
14 shareholder’s equity
Issued and paid up ordinary shares of $0.0001
2019
Number of
Shares
2018
Number of
Shares
160,144,132
148,496,073
During the year a total of 610,930 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 $255,000 (2018: $363,000).
As part of the ltMI Holdings acquisition (note 19), the company issued 42,701,548 new ordinary shares ("Consideration
Shares") to be paid in 3 phases. ltMI co-founders Andrew lee and Steve DeProspero, will each be entitled to be issued
19,247,723 Consideration Shares representing approximately 10.4% of the enlarged issued share capital of Kape, of which
5,250,363 are being issued on completion, 10,498,020 will be issued on the first anniversary of completion and 3,499,340 will
be issued on the second anniversary of completion. the balance of the Consideration Shares, being 4,206,102 in aggregate,
are being issued to 4 senior executives of PIA, of which 1,147,333 are being issued on completion, 2,294,077 will be issued on
the first anniversary of completion and 764,692 will be issued on the second anniversary of completion. the deferred shares
consideration is disclosed as shares to be issued.
During 2018, 1,800,000 shares were transferred out of treasury to an employee benefit trust as part of a jointly-owned equity
shares award to members of the executive management.
As at 31 December 2019, the Company hold in the treasury a total of 3,865,223 ordinary shares of $0.0001 par value (2018:
4,476,153). During 2019, 610,930 ordinary shares of $0.0001 par value were transferred out of treasury to satisfy the exercise of
options by the Company employees (2018: 374,095).
In June 2018, the Company paid a special dividend in the amount of $6.8 million. No additional divided was declared in 2019
and 2018.
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.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
59
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
15 Financial instruments and risk management
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 section of the Annual Report.
Principal financial instruments
the principal financial instruments used by the Group, from which financial instrument risk arises are as follows:
Non-current financial assets
Deferred consideration
Current financial assets
Deferred consideration
trade receivables and contract assets
Other receivables
Cash and cash equivalents
Non-current liabilities
lease liabilities
Deferred consideration
Contingent consideration
Current liabilities
trade payables
Other payables and accrued expenses
Shareholder loan
lease liabilities
Deferred consideration
Contingent consideration
Financial assets
the Group held the following financial assets:
Deferred consideration (see note 20)
trade receivables and contract assets
Other receivables
Cash
Financial liabilities
the Group held the following financial liabilities:
trade payables
Other payables and accrued expenses
Shareholder loan (see note 21)
lease liabilities (see note 22)
Deferred consideration (see note 24)
Measurement category
FVtPl
FVtPl
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
FVtPl
Amortised cost
Amortised cost
Amortised cost
Amortised cost
Amortised cost
FVtPl
2019
$’000
792
3,446
1,852
8,211
14,301
2019
$’000
5,023
8,675
40,221
3,118
18,536
75,573
2018
$’000
1,257
3,648
1,186
40,405
46,496
2018
$’000
4,146
4,728
–
1,919
1,039
11,832
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.
60
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
Market risk
(a) Foreign currency risk management
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, Philippines Peso and Romanian lei. 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.
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
Philippines Peso
Canadian Dollar
Japanese Yen
liabilities
Assets
2019
$’000
950
2,459
731
5
571
1,318
–
6
6,040
2018
$’000
1,135
1,744
262
3
941
316
–
6
4,407
2019
$’000
213
1,986
1,083
–
94
18
1
6
3,401
2018
$’000
696
5,612
962
–
309
357
–
5
7,941
A 10 per cent weakening of the United States Dollar against the following currencies at 31 December 2019 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 per cent 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
Philippines Peso
Canadian Dollar
Japanese Yen
Profit or loss
2019
$’000
(74)
(47)
35
–
(48)
(130)
–
–
(264)
2018
$’000
(44)
387
70
–
(63)
4
–
–
354
(b) Interest rate risk management
Interest rate risk is the risk that the value of financial instruments will fluctuate due to changes in market interest rates. the
Group is exposed to changes in market rates of interest or fair value interest rate risk, due to the shareholder short-term loan
which bears fixed interest rate plus USD libor.
At the reporting date the interest rate analysis of financial instruments was:
Fixed rate financial instruments
Financial assets
Financial liabilities (note 22)
2019
$’000
8,211
(3,118)
5,093
2018
$’000
40,405
(1,919)
38,486
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
61
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
15 Financial instruments and risk management continued
Fluctuating rate financial instruments
Financial liabilities (note 21)
2019
$’000
(40,221)
(40,221)
2018
$’000
–
–
Any increase/(decrease) by 1 per cent in USD libor interest rates will have an effect of $0.03 million on equity and profit or loss.
this analysis assumes that all other variables will remain constant.
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 principle 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.
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
2019
$’000
5,268
7,472
739
30
13,509
2018
$’000
4,184
22,462
17,943
650
45,239
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 balance sheet date.
Wherever possible and commercially practical the Group invests cash with major financial institutions that have a rating of at
least A- as defined by Standard & Poors. While the majority of money is held in line with the above policy, a small amount is
held at various institutions with no rating. the Group holds approximately 19.3% of its funds (2018: 3.5%) in financial institutions
below A- rate and 0.1% in payment methods with no rating (2018:0.3%).
At 31 December 2019
At 31 December 2018
Financial
institutions with
A- and above
rating
$’000
Financial
institutions below
A- rating and no
rating
$’000
6,623
38,860
1,588
1,545
total
$’000
8,211
40,405
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.
the Group applies the IFRS 9 simplified approach to measuring expected credit losses which uses a lifetime expected loss
allowance for all trade receivables. to measure the expected credit losses, trade receivables have been grouped based on the
days past due. the expected loss rates are based on the payment profiles of sales over a period of 90 days a month before
31 December 2019 or 1 January 2019 respectively and the corresponding historical credit losses experienced within
this period.
At 31 December 2019 the expected credit losses provision for trade receivables and contract assets is as follows:
Expected loss rate
Gross carrying amount
loss provision
62
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
Current
$’000
0%
3,346
–
Between 1 and
30 days past due
$’000
Between 31 and
60 days past due
$’000
More than
60 days past due
$’000
0%
10
–
0%
12
–
0%
78
–
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
the ageing of trade receivables is shown below:
Current
Between 1 and 30 days
Between 31 and 60 days
More than 60 days
2019
$’000
3,346
10
12
78
3,446
2018
$’000
3,536
40
32
40
3,648
the Group holds a specific loss provision of $Nil at 31 December 2019 (2018: $17,000). the expected credit loss rate is
immaterial to the Group, given the nature of the Group’s activities operating within B2C markets.
trade receivables are written-off when there is no reasonable expectation of recovery. Indicators that there is no reasonable
expectation of recovery include, amongst others, the failure of a debtor to engage in a repayment plan with the Group and
any change in the credit quality from the date the credit was initially granted up to the reporting date.
Impairment losses on trade receivables are presented as net impairment losses within operating profit. Subsequent
recoveries of amounts previously written-off are credited against the same line item.
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.
Liquidity risk management
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 maintaining sufficient cash and other highly liquid current assets.
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.
2019
trade and other payables
Shareholder’s loan
Payables to related parties
lease liabilities
Deferred consideration
2018
trade and other payables
Payables to related parties
lease liabilities
Deferred consideration
Carrying
amounts
$’000
13,640
40,221
58
3,118
18,536
75,573
Carrying
amounts
$’000
8,664
210
1,919
1,039
Contractual
cash flows
$’000
13,640
40,221
58
3,330
20,532
77,781
Contractual
cash flows
$’000
8,664
210
2,026
1,243
11,832
12,143
3 months or less
$’000
3-12 months
$’000
13,640
–
58
431
–
14,129
–
40,221
–
957
5,020
46,198
1-5 years
$’000
–
–
–
1,942
15,220
17,162
3 months or less
$’000
3-12 months
$’000
1-5 years
$’000
8,664
210
366
226
9,466
–
–
782
717
–
–
878
300
1,499
1,178
More than
5 years
$’000
–
–
–
–
292
292
More than
5 years
$’000
–
–
–
–
–
Capital risk
the Group seeks to maintain a capital structure which enables it to continue as a going concern and which supports its
business strategy. the Group’s capital is provided by equity and the Group manages its capital structure through cash flow
from operations and a shareholder loan which was taken to support PIA’s acquisition.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
63
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
16 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 2019, the following options were outstanding (2018: 12,158,805):
Group
Group 1
Group 2
Group 3
Group 4
Group 5
Group 6
Group 7
Group 8
Group 9
Group 10
Group 11
Group 12
Group 13
Group 14
Total
Grant date
29 May 2014
21 April 2015
5 January 2016
31 May 2016
26 October 2016
3 April 2017
15 June 2017
26 April 2018
26 April 2018
13 July 2018
24 August 2018
21 May 2019
20 November 2019
3 December 2019
Number of shares
under option
Subscription price
per share
1,166,540
245,063
231,563
2,000,000
2,232,270
586,833
660,587
67,500
373,375
1,810,000
1,800,000
367,500
827,000
650,000
13,018,231
$0.538
$1.305
$0.710
$0.352
$0.467
$0.0001
$0.845
$0.0001
$1.280
$1.437
$0.000
$1.090
$1.040
$1.230
Vesting conditions
Groups 1-5, 7-10 and 12-14 – 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.
Group 11 – 33.33% on a yearly basis during the 3 year period following the grant date subject to certain performance conditions
the total number of shares exercisable as of 31 December 2019 was 6,977,213 (2018: 5,864,311).
the weighted average fair value of options granted in the year using the Cox, Ross and Rubinstein’s Binomial Model (the
“Binomial Model”) was $1.03. the inputs into the Binomial model are as follows:
2019
$’000
2018
$’000
Early exercise factor
Fair value of Group’s stock
Expected Volatility
Risk free interest rate
Dividend yield
Forfeiture rate
100%
$1.12-$1.91
45%
100%
$1.51-$1.61
60%
0.47%-1.08% 0.72%-1.50%
–
0%-28%
–
0%-28%
We used the empirical observations for early exercise factor of public companies as an appropriate benchmark for the
expected early exercise factor.
Expected volatility was determined based on the historical volatility of comparable companies.
Forfeiture rate is assumed to be 0% for senior management and 28% 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
2019
$’000
1,680
2018
$’000
1,490
64
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
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
At the end of the year
2019
2018
Weighted average
exercise price
Number
of options
Weighted average
exercise price
$0.59
$1.14
$1.00
$0.43
$0.66
12,158,805
1,844,500
(374,144)
(610,930)
13,018,231
$0.55
$0.81
$0.96
$1.02
$0.59
Number
of options
8,490,329
4,162,500
(119,929)
(374,095)
12,158,805
the options outstanding at 31 December 2019 had a weighted average remaining contractual life of 7.3 years (2018: 7.9 years).
On 24 August 2018, the Company awarded 1,800,000 in respect of its ordinary shares of $0.0001 each have been granted
under the Company’s 2014 Global Equity Plan to members of its executive management. the Awards vest equally over the
3 year period from grant, subject to the achievement of certain performance metrics relating to the 3 financial years of the
Company commencing 1 January 2018. the Awards have been granted as Jointly Owned Equity Awards (“JOE Awards”). Under
the terms of the Awards, the Executives will benefit from the growth in value of their respective Award from the date of grant
along with the right to acquire the trustee’s interest by way of a nil cost option in the event that the Awards vest.
17 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 earnings per share:
From continuing operations
from discontinued operations
total basic earnings per share
Diluted earnings per share:
From continuing operations
from discontinued operations
total diluted earnings per share
Adjusted basic
Adjusted diluted
2019
cents
2018
Cents
1.7
(0.3)
1.4
1.7
(0.4)
1.3
6.8
6.5
1.5
(1.8)
(0.3)
1.5
(1.8)
(0.3)
5.2
5.0
Adjusted earnings per share is a non-GAAP measure and therefore the approach may differ between companies. Adjusted
earnings have been calculated as follows:
Profit (loss) for the year
Post tax adjustments:
Employee share-based payment charge
Exceptional or non-recurring costs
Amortisation on acquired intangible assets
loss from discontinued operations
Other operating income
Finance cost on deferred consideration for options repurchase
Adjusted profit for the year
2019
$’000
2,020
1,767
2,136
3,112
465
92
138
9,730
2018
$’000
(506)
1,578
1,403
1,905
2,723
–
247
7,350
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
65
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
17 earnings per share continued
Denominator – basic:
Weighted average number of equity shares for the purpose of earnings per share
Adjustments for calculation of diluted earnings per share:
Impact of potentially dilutive shares related to employee options
Impact of potentially dilutive shares related to deferred shares consideration for business
combinations
Denominator – diluted
Weighted average number of equity shares for the purpose of diluted earnings per share
Number
Number
143,217,060
142,008,376
6,257,713
5,947,197
951,231
–
150,426,004
147,955,573
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 7,208,944 (2018: 5,947,197) being the effect of all potentially dilutive Ordinary shares derived from the
number of share options granted to employees and deferred share consideration relating to the acquisition of ltMI Holding
(“PIA”) that are held in escrow against future claims.
18 subsidiaries
Name
Country of incorporation
Principal activities
CyberGhost SRl (**)
Romania
Neutral Holding Inc
Intego SA (**)
Intego Inc (**)
United States
of America
France
United States
of America
ZenGuard GMBH (*) (**)
Germany
Reimage limited
Isle of Man
Reimage limited (**)
R.S.F Remote Software Fixing
limited (**)
Cyprus
Israel
KltM5 Holding (***)
Private Internet Access Inc (**)
United States
of America
United States
of America
Kape technologies (Cyprus) limited
(formerly Crossrider technologies
limited)
Cyprus
Crossrider Sports limited (**)
United Kingdom
66
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
A leading cybersecurity SaaS provider, with a
focus on the provision of virtual private network
("VPN") solutions
Holding company of Intego inc, a leading
cybersecurity SaaS provider, with a focus on
the provision of malware protection to MAC
operating systems.
Development and technical support services.
A leading cybersecurity SaaS provider, with a
focus on the provision of malware protection to
MAC operating systems
A leading cybersecurity SaaS provider, with a
focus on the provision of virtual private network
("VPN") solutions and Provision of software
development services to its parent company
Development and sale of the "Reimage"
software tool.
Consulting, market research and software
development services
Provision of development, technical support and
marketing support services to its parent
company
Holding company of Private Internet Access Inc,
a leading cybersecurity SaaS provider, with a
focus on the provision of virtual private network
("VPN") solutions
A leading cybersecurity SaaS provider, with a
focus on the provision of virtual private network
("VPN") solutions
Provision of professional services to the Group
entities
Provision of consulting services to the Group
entities
Holding %
100
100
100
100
100
100
100
100
100
100
100
100
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
Name
Country of incorporation
Principal activities
Holding %
Definiti Media ltd (**)
Israel
Crosspath trading limited
British Virgin Islands
Providing user-acquisition services for the
Group’s activities
Provision of professional services to the Group’s
entities
Kape technologies Employee
Benefit trust
Plus Ultra link llC (**)
Jersey
Employee benefit trust
United States
of America
Development of a speeds-up internet
connections software
Ember Infrastructure Services, llC (**) United States of
Provision of Infrastructure Services
BestAd Hitech Media limited (**)
Crossrider Advanced technologies
limited (**)
Crossrider (Israel) limited (**)
Blueroad trading limited (**)
Frontbase trading limited (**)
Crossrider ROM SRl(**)
America
Israel
Israel
Israel
Cyprus
Cyprus
Romania
(*) Merged with MobileConcept GMBH.
(**) Indirect shareholding.
(***) Merged with ltMI Holding as part of the acquisition.
Inactive
Inactive
Inactive
Inactive
Inactive
Inactive
the Group was 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.
100
100
100
80
100
100
100
100
100
100
100
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
67
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
19. Business combinations
(a) Acquisition of LTMI Holdings
On 13 December 2019, the Group acquired 100% of the share capital of ltMI Holdings (“PIA”). ltMI is the holding company
for Private Internet Access Inc (“PIA”), a leading US-based digital privacy company with a strong position in the data
privacy services.
the Acquisition will deliver substantial operational benefits to Kape, transforming the Group’s user-base with the addition of
over 1 million customers, 48% of which are based in the US. the acquisition includes an additional suite of software-based
privacy solutions available across mobile, tablet and desktop and which includes Plus Ultra, a software that speeds up
internet connections, and libreBrowser, a completely private browser.
Details of the provisional fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill,
are as follows:
Brand and domain name
technology
Customer relations
Deferred tax liability
Cash and cash equivalents
trade and other receivables
Property, plant and equipment, net
Intangible assets, net
Right-of-use assets
Deferred Contracts costs
Deferred tax assets
Contract liabilities
trade and other payables
long-term debt
lease liabilities
Fair value of consideration
Cash
Shares
Deferred cash consideration
Deferred shares consideration
Deferred assets consideration
Goodwill
Net cash outflow on acquisition of business
Cash consideration
Cash paid to ltMI Holding's phantom shareholder
Cash paid to repay long-term debt
Cash and cash equivalents acquired
Acquiree’s carrying amount
before combination
$’000
–
478
–
(942)
676
976
1,539
237
386
3,491
6,438
(23,723)
(11,935)
(32,161)
(314)
(54,854)
Provisional
fair value
$’000
36,257
31,991
27,796
(25,804)
676
976
1,539
237
386
–
6,659
(23,723)
(11,935)
(32,161)
(314)
12,580
27,076
21,657
18,325
56,499
817
111,794
2019
$’000
27,076
5,763
32,161
(676)
64,324
PIA is being acquired for a total consideration of $130.1 million (including the $5.7 million to PIA phantom shareholder) and an
enterprise value of $162.3 (including $32.2 million for repayment of PIA’s existing debt), to be satisfied by combination of
$85.0 million cash and issuance of 42,701,548 new Kape ordinary shares to be paid in 3 phases:
• A payment upon closing of $65.0 million in cash of which $27.1 million to PIA founders, $5.7 million to PIA phantom
shareholder and $32.2 million for repayment of PIA’s existing debt, and 11,648,059 consideration shares.
• A payment on the first anniversary of completion of $5.0 million in cash (“deferred cash consideration”), 23,290,117
consideration shares and Company owned cars (“deferred assets consideration”).
• A payment on the second anniversary of completion of $15.0 million in cash (“deferred cash consideration”), 7,763,372
consideration shares and Company owned cars (“deferred assets consideration”).
68
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
Andrew lee and Steve DeProspero will each be entitled to be issued 19,247,723 Consideration Shares (subject to the escrow
and set-off arrangements described below) representing approximately 10.4% of the enlarged issued share capital of Kape, of
which 5,250,363 will be issued on completion, 10,498,020 will be issued on the first anniversary of completion and 3,499,340
will be issued on the second anniversary of completion. the balance of the Consideration Shares, being 4,206,102 in
aggregate, are being issued to 4 senior executives of PIA, of which 1,147,333 are being issued on completion, 2,294,077 will be
issued on the first anniversary of completion and 764,692 will be issued on the second anniversary of completion.
the Founders’ Consideration Shares will be subject to a graduated lock-in, whereby the Consideration Shares to be issued on
completion will be subject to a 12 month lock-in and the Consideration Shares issuable on the first anniversary of completion
will be subject to a lock-in which is released as to 25% of such Consideration Shares each quarter thereafter. Following the
expiry of their respective lock-in periods, the Consideration Shares to be issued to the Founders on completion and on the
first anniversary of completion will be subject to a 12-month orderly market period. the Consideration Shares issuable to the
Founders on the second anniversary of completion will not be subject to a lock-in period but will be subject to a 12-month
orderly market period from the time of their issue.
All of the lock-in arrangements will be subject to customary exclusions. In addition, if Unikmind or any of its concert parties
disposes of the beneficial interest in any Kape ordinary shares during the lock-in period to a person other than another
concert party of Unikmind, the same proportion of the Founders’ then locked-in Consideration Shares (ignoring any shares
held in escrow) will be released from the lock-in but will remain subject to the orderly market arrangements for 12 months
after such release.
the initial cash consideration and repayment of PIA’s existing debt to be funded through Kape’s internal cash resources a
$25.0 million and a $40.0 million short-term debt facility from Unikmind Holdings limited (“Unikmind”), Kape’s largest
shareholder, as well as provide an additional debt facility of $20.0 million, which the Company does not expect to draw, to
satisfy the deferred cash consideration, on similar terms. Further details of the term loan, which is a related party
transaction, are set out on note 21.
Since the acquisition date, PIA has contributed $2.5 million to Group’s revenues, profit of $0.2 million to Group profit. In
addition, since the acquisition date PIA contributed $2.0 million to segment results of the Privacy segment (as set out in note
4). If the acquisition had occurred on 1 January 2019, Group revenue would have been $113.2 million, Group loss for the period
would have been $9.5 million and the Digital Privacy result would have been $52.1 million.
Acquisition costs of $1.8 million arose as a result of the transaction. these have been recognised as part of administrative
expenses in the statement of comprehensive income.
20 discontinued operation
(a) Description
On 26 July 2018, the Group sold the Media division to Ecom Online ltd. As for the sale date, the Media division included
Clearvelvet trading limited (“Clearvelvet”) and Intangible assets of the Media CGU. As consideration, the Group will receive a
50% share of EBItDA from the Media division for the next 5 years following the sale. the Company estimate the recoverable
value based on cash-flow projections for the next periods agreed upon with the acquiree. the fair value of the deferred
consideration as at 31 December 2019 was $0.8 million (2018: $1.3 million). Decrease to the fair value is presented as
discontinued operation.
the deferred consideration fair value has been determined based on cash-flow projections for the deferred period left using
the most recent expectations received from the acquiree. the rate used to discount these forecast cash flows is 25 per cent
(2018: 25 per cent).
the discount rate used in the valuation was 25 per cent. If the discount rate was increased by 1 percentage point the effect
would have been $0.01 million. there is no reasonably possible change in assumption that would give rise to an impairment.
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
69
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
20 discontinued operatione continued
(b) Financial performance
the financial performance and cash flow information presented are for the years ended 31 December 2019 and 2018.
2019
$’000
–
–
–
–
–
(465)
–
(465)
–
–
–
–
2018
$’000
4,185
(4,501)
(316)
(166)
(482)
–
(2,252)
(2,734)
(336)
(341)
–
(677)
2018
$’000
323
934
1,257
(2,524)
(49)
(50)
(4)
(2,517)
(12)
(341)
999
(4,498)
989
(2,252)
Revenue
Expenses
loss before income tax
Income tax expenses
loss after income tax of discontinued operation
Fair value movements on deferred consideration
loss on sale of the Media division
loss from discontinued operation
Net cash outflow from operating activities
Net cash outflow from investing activities
Net cash flow from financing activities
Net decrease in cash generated by the Media division
(c) Details of the sale of the subsidiary
Consideration received or receivable:
Short term fair value of contingent consideration
long term fair value of contingent consideration
total consideration
Carry amount of net assets sold
Goodwill
Capitalised Software Development Costs
Investment
Property, plant and equipment
trade and other receivables
Deferred tax asset
Cash and cash equivalents
trade and other payables
Non-controlling interest
loss on sale
70
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
21 Related party transactions
the Group is controlled by Unikmind Holdings limited incorporated in British Virgin Islands, which owns 67.03% of the
Company’s shares as at 31 December 2019. the controlling party, Unikmind Holdings ltd, has re-domiciled from the British
Virgin Islands to the Isle of Man. Mr. teddy Sagi is the sole ultimate beneficiary of Unikmind Holdings ltd.
(a) Related party transactions
the following transactions were carried out with related parties:
Revenue from common controlled companies
technical support services to end customers and administration services provided by
common controlled companies
Office expenses to common controlled companies
Payment processing services provided by common controlled company
Development services provided by common controlled company
Amortisation of right-of-use assets with common controlled companies (note 22)
Interest expenses from lease liabilities to common controlled companies
Interest expenses from shareholder short-term loan and debt facility
loss debt from related parties
2019
$’000
–
(254)
(163)
(189)
(29)
(941)
(65)
(221)
–
(1,862)
2018
$’000
85
(2,227)
–
(376)
–
(744)
(71)
–
(323)
(3,656)
On 6 December 2019, Kape entered into a $40.0 million short-term debt facility from Unikmind Holdings limited (“Unikmind”),
Kape’s largest shareholder, and was also provided with an additional debt facility of $20.0 million, which the Company does
not expect to draw, to satisfy the deferred cash consideration, on similar terms. term loan has a fixed interest rate of 5%
above 6 months USD libor. Each tranche of the term loan is repayable on the earlier of a third-party refinancing of the term
loan and 6 months after its utilisation, unless such tranche’s maturity is extended until 31 March 2021. the term loan can be
repaid early in whole or part by the Borrower free of any penalty. the term loan will also include a commitment fee on
undrawn amounts only from the moment they become available in accordance to the payment schedule and certain other
customary obligations on the Borrower in relation to the lender’s costs and expenses and in relation to taxes. term debt
facilities have a fixed interest of 1.5% upon availability, $5.0 million on the first anniversary and $15.0 million on the
second anniversary.
Borrowings under the term loan will be guaranteed by Kape and secured by a share charge granted by Kape in respect of its
shares in the Borrower.
Kape intends to re-finance the term loan with third party facilities as soon as practicable.
(b) Receivables owed by related parties (Note 15)
Name
Parent company
Companies related by virtue of common control
Companies related by virtue of common control
Nature of transaction
Unpaid share capital
Other
trade
(c) Payables to related parties (Note 15)
Name
Companies related by virtue of common control
Unikmind Holdings limited
Nature of transaction
Other
Shareholder loan
2019
$’000
10
20
–
30
2019
$’000
58
40,221
40,279
2018
$’000
10
–
650
660
2018
$’000
210
–
210
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
71
notes to tHe consolidAted FinAnciAl stAtements CONtINUED
FOR THE YEAR ENDED 31 DECEMBER 2019
21 Related party transactions continued
(d) Right-of-use assets and lease liabilities to related parties (Note 22)
2019
$’000
2,058
(2,387)
2018
$’000
1,422
(1,543)
2019
$’000
2,847
138
2,985
Real estate
leases
$’000
Vehicles
$’000
1,331
1,265
305
(1,181)
1,720
2,026
308
(63)
(1,144)
2,847
77
–
–
(28)
49
44
78
–
(33)
138
Real estate
leases
$’000
Vehicles
$’000
1,331
1,265
305
82
(1,058)
(62)
1,863
2,026
314
(66)
76
(1,207)
50
3,056
77
–
–
11
(29)
(3)
56
44
–
–
1
(39)
–
62
2018
$’000
1,720
49
1,769
total
$’000
1,408
1,265
305
(1,209)
1,769
2,070
386
(63)
(1,177)
2,985
total
$’000
1,408
1,265
305
93
(1,087)
(65)
1,919
2,070
314
(66)
77
(1,246)
50
3,118
Right-of-use assets
lease liabilities
22 leases
the recognised right-of-use assets relate to the following types of assets:
Right-of-use assets:
Real estate leases
Vehicles
Right-of-Use Assets
At 1 January 2018
Additions
Additions through business combinations
Amortisation
At 31 December 2018
Additions
Additions through business combinations
Effect of modification to lease terms
Amortisation
At 31 December 2019
Lease liabilities
At 1 January 2018
Additions
Additions through business combinations
Interest expense
lease payments
Foreign exchange movements
At 31 December 2018
Additions
Additions through business combinations
Effect of modification to lease terms
Interest expense
lease payments
Foreign exchange movements
At 31 December 2019
72
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
stRAteGic
RepoRt
coRpoRAte
GoVeRnAnce
FinAnciAl
stAtements
2019
lease liabilities
Carrying
amount
$’000
3,118
Contractual
cash flow
$’000
3,330
3 months
or less
$’000
431
3-12 months
$’000
957
1-5 years
$’000
1,942
More than
5 years
$’000
–
the Company leases various offices and vehicles. lease terms are negotiated on an individual basis and contain a wide range
of different terms and conditions. the lease agreements do not impose any covenants.
Extension and termination options are included in a number of property and equipment leases across the Group. these terms
are used to maximize operational flexibility in terms of managing contracts.
23 contingent liabilities
the Group had no contingent liabilities as at 31 December 2019.
24 deferred and contingent consideration
(a) 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 for 31 December 2019, the consideration included $0.2 million of
consideration (2018: $0.17 million) which is contingent on future results.
(b) 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 the Cyberghost’s
former founder for a total cash consideration of $3.8 million (€3.2 million). $1.9 million (€1.625 million) was paid upon execution
of the purchase agreement, while the remaining amount is to be paid in 8 equal instalments amounting to $235,000 (€197,000)
per quarter over the course of 2 years and recognised as deferred consideration. On 28 March 2019, the company accepted
Cyberghost’s former founder request for immediate remittance of the remaining consideration in exchange for reduction on
the amount of said consideration, equal to 7 per cent. As at 31 December 2019, the deferred consideration is fully paid with Nil
balance (2018: $0.9 million).
(c) sale of the media division
On 26 July 2018, the Group sold the media division to Ecom Online ltd. this sale is in line with the Company’s strategy to
develop and distribute its own cybersecurity products. As consideration, the Group will receive a 50% share of EBItDA from
the Media division for the next 5 years following the sale, which will be reinvested in the Group’s core Digital Security and
Digital Privacy segments. As at 31 December 2019, the consideration included $0.8 million (2018: $1.3 million) of deferred
consideration receivable.
(d) Acquisition of private internet Access inc
On 13 December 2019, the Group acquired 100% of the share capital of ltMI Holdings (“PIA”). ltMI is the holding company for
Private Internet Access Inc (“PIA”), a leading US-based digital privacy company with a strong position in the data privacy
market. PIA is being acquired for a total consideration of $130.1 million (including the $5.7 million to PIA phantom shareholder)
and an enterprise value of $162.3 (including $32.2 million for repayment of PIA’s existing debt), to be satisfied by the
combination of $85.0 million cash and issuance of 42,701,548 new Kape ordinary shares to be paid in 3 phases:
• A payment upon closing of $65.0 million in cash of which $27.1 million to PIA founders, $5.7 million to PIA phantom
shareholder and $32.2 million for repayment of PIA’s existing debt, and 11,648,059 Consideration shares.
• A payment on the first anniversary of completion of $5.0 million in cash (“Deferred cash consideration”), 23,290,117
Consideration shares and Company owned cars (“Deferred assets consideration”).
• A payment on the second anniversary of completion of $15.0 million in cash (“Deferred cash consideration”), 7,763,372
Consideration shares and Company owned cars (“Deferred assets consideration”).
As for 31 December 2019, the deferred consideration balance included $19.14 million of deferred cash consideration, of which
$4.75 million will be paid on 2020.
25 subsequent events
there were no material events after the reporting period, which have a bearing on the understanding of the consolidated
financial statements.
Shareholder information, including financial results, news and information on products and services, can be found
at https://investors.kape.com
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
73
notes
74
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
75
sHAReHoldeR inFoRmAtion And AdVisoRs
independent Auditor
BDO llP
55 Baker Street
london W1U 7EU
nominated Adviser and Broker
Shore Capital
Cassini House
57 St James’s St
london SW1A 1lD
investor Relations
Vigo Communications
Sackville House
40 Piccadilly
london W1J 0DR
Registered office
Sovereign House
4 Christian Road
Douglas
Isle of Man IM1 2SD
corporate legal Advisers
Bryan Cave leighton Paisner llP
Adelaide House
london Bridge
london EC4R 9HA
Joint Broker
Nplus1 Singer Advisory llP
1 Bartholomew lane
london EC2N 2AX
Registrars
Computershare Investor Services (Jersey) limited
Queensway House
Hilgrove Street
St Helier
Jersey JE1 1ES
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.
76
KAPE TECHNOLOGIES PLC
ANNUAl REPORt AND ACCOUNtS 2019
KAPE TECHNOLOGIES PLC
LABS Hawley Wharf
1 Water Lane
Hawley Wharf
London NW1 8NZ
Tel: +44 (0) 203 432 4977
Email: ir@kape.com
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