Final results for the year ended 31 December 2018

RNS Number : 2232T

Kape Technologies PLC

19 March 2019

This announcement contains inside information for the purposes of Article 7 of Regulation (EU) No 596/2014

19 March 2019

Kape Technologies plc

("Kape," the "Company," or the "Group")

Final results for the year ended 31 December 2018

Kape (AIM: KAPE), the consumer security software business, is pleased to announce its final results for the year ended 31 December 2018.

Financial highlights

· Revenue¹ of $52.1 million (2017: $50.6 million). Strong progress in transitioning to a SaaS revenue model, with 53% of revenues now recurring (2017:19%).

· Adjusted EBITDA² from continuing operations up 28.3% to $10.4 million (2017: $8.1 million), slightly ahead of market expectations.

· 73% increase in underlying Adjusted EBITDA from core activities excluding Web Apps and Licences segment³.

· Increase of 31% in combined segment results³ to $25.7 million (2017: $19.6 million).

· Significant increase in Segment margins to 49.3% (2017: 35.7%) and EBITDA margins to 19.9% (2017: 16.0%).

· Strong balance sheet with $40.4 million cash (2017: $69.5 million).

· Increase of 36.8% in Adjusted Earnings Per Share to 5.2 cents (2017: 3.8 cents).

· Adjusted cash flow from operation of $5.7 million (2017: $8.1 million). Excluding movement in Deferred contract costs, Adjusted cash flow from operations attributable to the current year was $15.9 million (2017: $9.5 million) which represents a cash conversion of 153% (2017: 117%).

Operational highlights

· Executed two earnings enhancing acquisitions, now fully integrated ahead of management expectations:

o In July 2018, acquired Intego, a leading Mac and iOS cybersecurity and malware SaaS business, for a total consideration of $16.0 million.

o In October 2018, acquired ZenMate, a multi-platform security software business with a focus on the provision of virtual private network ("VPN") solutions, for a total consideration of $5.6 million (€4.8 million).

o Integration of Intego and ZenMate products to Kape's user acquisition platform. Realisation of operational synergies.

· Completed the transformation to a privacy-first cybersecurity provider, divesting non-core Media assets to Ecom Online Ltd in July 2018.

· Ongoing progress in developing the Group's SaaS revenue model:

o Visibility on revenue in future periods from existing users of approximately $30 million⁴ (2017: $8 million).

o Growth of 219% in subscriptions to 830,000 (2017: 260,000).

o Customer retention rates increased to 74% (2017: 69%).

· Launched CyberGhost 7.0 app and developed plug-ins for Chrome and Firefox browsers.

· The board remains confident in delivering year-on-year growth in 2019, in-line with market expectations.

Ido Erlichman, Chief Executive Officer of Kape, commented:

"2018 was a strong year for Kape, as evidenced by our EBITDA growth for the year. We have also made substantial progress in transitioning to a pure SaaS-based model, with $30 million⁴ in revenues expected to be generated from existing users in future periods, providing a solid platform for sustainable future growth.

"Our M&A activity has also gathered momentum, with the integration of the two businesses that we acquired in 2018 completed ahead of schedule. This, coupled with our focus on product development, will enable us to further broaden and deepen our presence in the digital privacy and security sectors."

¹ Revenue from continuing operations

²Adjusted 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.

³The Adjusted EBITDA attributable to the Web Apps and License division for 2017 was $2.2 million. This division was discontinued as of September 2017; as no such revenue was recorded in 2018.

⁴Calculated as expected revenues from first renewal of the existing user base in addition to the deferred revenue balance

Enquiries:

Kape Technologies plc Ido Erlichman, Chief Executive Officer Moran Laufer, Chief Financial Officer	via Vigo Communications
Shore Capital (Nominated Adviser & Broker) Mark Percy / Toby Gibbs / James Thomas	+44 (0)20 7408 4090
N+1 Singer (Joint Broker) Shaun Dobson / Lauren Kettle / Harry Mills (Corporate Finance) Tom Salvesen (Corporate Broking)	+44 (0) 20 7496 3000
Vigo Communications (Financial Public Relations) Jeremy Garcia / Antonia Pollock kape@vigocomms.com	+44 (0)20 7390 0237

About Kape

Kape is a cybersecurity company focused on helping consumers around the world to have better experience and protection in their digital life. Kape develops and distributes a variety of digital products in the online security space. The Group utilises its proprietary digital distribution technology to optimise its reach and create a superb user experience. Kape offers products which provide online security, privacy and an optimal online experience. Kape's vision is to provide online autonomy for a secure and accessible personal digital life, with team of over 350 people across seven locations worldwide.

www.kape.com

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Chairman's statement

Introduction

I am pleased to report 12 months of significant further development for the Group, during which Kape delivered another impressive operating profit performance. Our senior management team has worked tirelessly to both shape and grow the business - successfully completing two acquisitions, alongside product upgrades and launches. This strong performance has only been possible due to the commitment, hard work and dedication of the entire 'global' Kape family and has underpinned our transformation into a leading consumer security company.

Market overview

The shift that Kape has made into a leading privacy-first consumer security company has been central to our commitment to create long-term shareholder value, as the directors believe that the characteristics of the global cybersecurity market support our underlying growth aspirations for the business.

As the world becomes more reliant on digital communication, with individuals accessing data across multiple devices and from various locations globally, consumers have become more vulnerable to cyber-attacks - with high profile hacking often targeting individuals' private and personal data stored online. We believe that digital 'privacy', alongside 'protection' is becoming the number one individual security concern. The global cybersecurity market was worth $153 billion in 2018 and is estimated to be growing by 12-15% p.a., while the market for privacy solutions is growing at an equally fast rate of 15% p.a.

Kape's growing range of 'privacy first' solutions are now well-positioned to capitalise on this sizeable global market opportunity, as we continue to market to a receptive and highly scalable customer base.

Competitive advantage

Customer acquisition knowhow and a superior product stack continue to be key competitive advantages for our business.

Our ability to manage and implement highly targeted customer acquisition methodologies enables our team to reach millions of customers daily, effectively and has enabled management to both accelerate organic growth and enhance the customer traction of the software solutions that we have acquired.

Our product and R&D teams continue to work hard to develop and improve our solutions, ensuring quality and ease of use as well as heightened customisation and performance.

Alongside this, Kape prides itself on the strength and talent of its people. We now operate from ten locations in eight countries and are thriving as a truly global business. We are also strong advocates of diversity within our workforce and closely monitor the gender ratio of employees within the Company, with the percentage of women growing from 25% to 35% in 2018, which is an incredible achievement given less than 20% of the global cybersecurity workforce are women. We firmly believe that part of Kape's long-term success is the global and diverse nature of our workforce and we intend to continue our efforts to promote this. We have accelerated our training efforts across the Company and see personal development as an important strategic component of our future growth.

Ongoing strategy

Given the successful execution of our organic and acquisitive growth strategy in the year, management remain fully committed to maintaining our current focus. We will therefore continue to develop and grow our product base, while evaluating selective acquisition targets, which would further enhance our market presence.

The board remains confident in delivering year-on-year growth in 2019.

Don Elgie

Non-Executive Chairman

18 March 2019

Chief Executive Officer's review

Introduction

2018 was a very significant year for Kape, during which we completed our transformation into a privacy-led cybersecurity software provider, reaching over a million paying customers. We are now proud to offer our consumers an end-to-end software suite which includes: Privacy (CyberGhost and ZenMate), Malware Protection (Intego) and Performance (ReImage and Driverfix).

In the last 12 months, we delivered adjusted EBITDA growth of 28.3% to $10.4 million, increased our subscription user base by 219% to c. 830,000 users and improved our customer retention rate to 74%. We expect to generate revenues of c. $30 million in future financial years from the existing user base.

Performance in the Group's App Distribution segment - which is now Kape's sole focus - remained strong, with revenues of $52.1 million (2017: $48.2 million), and an improvement in both profitability, margin and forward visibility over revenues as a result of the Group's transition to a recurring revenue model.

We have achieved this positive momentum by focusing on a clear strategy, centred on:

· growing our existing user base by leveraging our proprietary technology to drive customer acquisition;

· broadening and strengthening our product offering through R&D and acquisitions which offer the potential to enter new verticals; and

· building our SaaS-based business model to improve both visibility and quality of earnings.

Operational overview

Key Performance Indicators

In order to focus on profitability, growth and earnings predictability we introduced five key performance indicators, which ultimately underpin Kape's financial progress.

Deferred income and adjusted operating cash flow demonstrate the true value of each product purchase from our customers, given that they recognise the benefits across the life time of the contract. Paying users and subscriptions represent our ability to grow the customer base. The retention rate is an indication of the quality of our service and products and our aim is for this to remain constant over the short term and improve in the medium term.

	2018	2017
Paying users (thousands)	1,100	887
Subscriptions (thousands)	830	260
Retention rate	74%	69%
Deferred income ($'000)	9,514	4,014
Adjusted operating cash flow:
Attributable to current year ($'000)	15,936	9,471
Investment in growth	(10,215)	(1,330)
Adjusted operating cash flow ($'000)	5,721	8,141

Strong progress was made in the year against our core KPIs, with the increase in both paying users and subscriptions demonstrating the strength of our digital marketing expertise in driving user acquisition. Additionally, the increase in our retention rate to 74% is particularly pleasing, and now compares favourably against the wider B2C cybersecurity industry. Clearly, the most important improvement is in visibility of revenues, and we expect to deliver $30 million revenue from existing users in future periods (Dec 2017: $8 million). This is a key metric for the Group, as it reflects our customers' satisfaction, in addition to providing quality, highly visible earnings for the Company moving forward. In 2018, the Company remained highly cash generative. As stated in our growth ambitions we enhanced the investment in growth, primarily in user acquisition.

Divestment of Media division and re-brand

During 2018, we completed our transition to solely focus on the delivery of cybersecurity solutions following the divestment of Kape's Media division, announced in July 2018, to Ecom Online Ltd. As consideration, Kape will receive a 50% share of EBITDA from the Media division for the next five years following the sale. This divestment resulted in an anticipated decrease in revenues for the year and is aligned to the Company's strategy to focus on the development and growth of its owned cybersecurity assets. In March 2018, we rebranded to Kape Technologies Group plc to better reflect the ongoing activities of the business.

Acquisitions and integration

In-line with our strategy laid out at the beginning of the year, we were able to successfully execute on two earnings enhancing acquisitions in 2018, both of which form part of Kape's approach to acquire select businesses to add complementary products and additional users.

In July 2018, Kape acquired Intego, a US-headquartered SaaS business providing malware protection, firewall, anti-spam, backup, data protection and parental control software for Mac users globally, for a total consideration of $16.0 million. With a user base of 150,000 paying customers, high renewal rates and a strong brand presence, Intego brought additional benefits to the Group. We have now completed the integration of Intego and implemented Kape's user acquisition methodologies which we expect to accelerate Intego's growth in the first half of 2019. We have also integrated Intego's R&D, marketing and product teams into Kape, which further benefit from the economies of scale of the enlarged group. We also expect to release new malware protection products in the coming months.

In October 2018, Kape acquired ZenMate, a multi-platform security software business with a focus on the provision of privacy solutions, for a total consideration of $5.6 million. ZenMate is a highly complementary solution to CyberGhost, Kape's existing VPN solution. This synergistic infrastructure allows Kape to leverage the products' strengths and create an improved product for users worldwide coupled with substantial cost savings. In addition, with ZenMate's highly regarded web firewall and its Safesearch application, Kape is now able to provide a broader software suite to protect our customers' digital lives. As part of its integration, Kape implemented an extensive restructuring of ZenMate, which has been completed in less than two months, ahead of management's expectations. As a result, in this short time we have been able to bring ZenMate to profitability. ZenMate is anticipated to be EBITDA enhancing from Q1 2019.

Prior to being acquired, both businesses' marketing activities were primarily organic, presenting a clear opportunity for the implementation of Kape's digital marketing expertise to drive user acquisition and enhance profit margin. The benefits of this implementation are anticipated to begin to be realised in 2019.

Organic growth

During the year, we saw accelerated growth in CyberGhost, as we increased user acquisition through the application of our digital marketing technologies and expertise. We have seen positive results in CyberGhost's user acquisition on desktop and mobile; and expect enhanced growth and profitability to be delivered in 2019. In 2018, CyberGhost was one of the top performing VPN solutions globally - ranking in the top three in the US, France, Germany and the UK by industry reviewers.

In our Performance vertical (ReImage and Driverfix), focus has been on transitioning to a subscription-based model and implementing new product marketing initiatives ahead of the launch of two major updates for our driver and computer repair solutions. We are extremely pleased with the results of the transition to a subscription model, which we expect to improve profitability moving forward.

Product development

We accelerated our R&D efforts in the year and we now have 68 employees globally who are top-tier experts in their field. Our focus has been on:

· investment in the next generation infrastructure;

· development of new products and updates to existing solutions; and

· implementation of proprietary cross-product business intelligence and marketing tools.

Specifically, we released the most comprehensive update to our CyberGhost product to-date with the launch of the CyberGhost 7.0 app across Apple and Android devices, following an increase in mobile subscribers, as individuals look to safeguard their mobile devices. Kape also launched a Google Chrome and Mozilla Firefox plug-in based on a distributed computing platform and operating system, which enables greater freedom on the internet. We have seen significant traction across these products, demonstrating our standing at the forefront of the privacy technology sector.

Outlook

The underlying trends in digital privacy and cybersecurity continue to broaden Kape's addressable VPN market to $36 billion by 2022 with demand for privacy solutions anticipated to continue growing 15% annually, underpinning the ongoing demand for our products.

Management are confident that not only does a sizable opportunity exist to add further products to Kape's portfolio through ongoing acquisitions, but there is also substantial potential within Kape's existing product portfolio and user base to further invest in organic initiatives.

We continue to improve and expand our product offering to best serve our customers globally and will continue to evaluate select acquisition opportunities to broaden and deepen our reach.

Ido Erlichman

Chief Executive Officer

18 March 2019

Chief Financial Officer's review

Overview

Revenue from continued operations for the year to 31 December 2018 increased by 3% to $52.1 million (2017: $50.6 million). Adjusted EBITDA⁵ from continued operations increased by 28.4% to $10.4 million (2017: $8.1 million) with the increase in Adjusted EBITDA was driven by the strong performance of Kape's core App Distribution activity, with an increase of 8% in revenues, 49.3% in segment results and 73.3% in underlying adjusted EBITDA. In July 2018, Kape divested its Media division to a third Party, Ecom online Ltd, and is now considered a discontinued operation.

Kape remains a highly cash generative business, with cash generated from continued operations after adjusting for one-off non-recurring items in 2018 of $5.7 million (2017: $8.1 million). This represents adjusted cash conversion of 55% (2017: 101%). Cash flow from operations includes $10.2 of million investment in user acquisitions growth that will be expensed in future periods as it attributable to future revenue from subscriptions and is recognised over the expected life time of the users in accordance with IFRS 15 (2017: $1.3 million). When excluding this investment adjusted cash conversion from operations was $15.9 million, which represents cash conversion of 151%. The Group's balance sheet remains strong with cash of $40.4 million at 31 December 2018 (31 December 2017: $69.5 million) and no debt after cash outflow for investing and financing activities of $32.0 million, that comprise mainly of the acquisitions of Intego and ZenMate and a special dividend payment.

On 24 July 2018, the Group acquired 100% of the share capital of Neutral Holdings Inc, trading as Intego, for a total consideration of $16.0 million. Intego is a leading Mac and IOS cybersecurity and malware protection SaaS business. Intego is focused on the provision of malware protection, firewall, anti-spam, backup, data protection and parental controls software for Mac. In the year to 31 December 2017, Intego generated profit before tax of $1.3 million.

On 16 October 2018, the Group acquired 100% of the share capital of ZenGuard GMBH trading as ZenMate, a multi-platform security software business with a focus on the provision of virtual private network solutions. The total consideration for the acquisition was $5.6 million (€4.8 million) in cash, funded from Kape's internal cash resources, which was satisfied on closing of the acquisition. As part of the acquisition, Kape initiated restructuring plan which was intended to downsize ZenMate's staff and reduce operational costs.

⁵Adjusted EBITDA is a company specific measure which is calculated as operating loss before depreciation, amortisation, exceptional and non-recurring costs, employee share-based payment charges and 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.

Segment Result

	Revenue		Segment result
	2018	2017	2018	2017
	$'000	$'000	$'000	$'000
App Distribution	52,060	48,226	25,690	17,207
Web Apps and License	-	2,376	-	2,376
Revenue	52,060	50,602	25,690	19,583

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 VPN products. Direct sales and marketing costs are user acquisition costs.

App Distribution
	2018	2017
	$'000	$'000
Revenue	52,060	48,226
Cost of sales	(5,605)	(4,572)
Direct sales and marketing costs	(20,765)	(26,447)
Segment result	25,690	17,207
Segment margin (%)	49.3	35.7

During the period, the App Distribution segment has seen continued growth with an 8.0% increase in revenue to $52.1 million (2017: $48.2 million) and a 49.3% increase in segment result to $25.7 million (2017: $17.2 million). The segment margin has significantly improved to 49.3% (2017: 35.7%). Following their acquisition, Intego contributed $2.6 million and ZenMate contributed $0.4 million to the segment result. Excluding acquisitions, the segment results has increased by 30.2% to $22.4 million in 2018.

Adjusted EBITDA from continued operations

Adjusted EBITDA from continued operations for the year to 31 December 2018 was $10.4 million (2017: $8.1 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:


	2018	2017
	$'000	$'000
Revenue	52,060	50,602
Cost of sales	(5,605)	(4,572)
Direct sales and marketing costs	(20,765)	(26,447)
Segment result	25,690	19,583

Indirect sales and marketing costs	(6,398)	(3,657)
Research and development costs	(1,389)	(535)
Management, general and administrative cost	(7,529)	(7,306)
Adjusted EBITDA	10,374	8,085

Operating profit

A reconciliation of Adjusted EBITDA to operating loss is provided as follows:


	2018	2017
	$'000	$'000
Adjusted EBITDA	10,374	8,085
Employee share-based payment charge	(1,490)	(303)
Charge for repurchase of employee options	-	(3,176)
Exceptional and non-recurring costs	(1,441)	(796)
Depreciation and amortisation	(3,800)	(2,376)
Operating profit	3,643	1,434

Exceptional and non-recurring costs in 2018 comprised non-recurring staff costs of $0.5 million (2017: $0.3 million), mainly due to payments made to employees option holders in parallel to the special dividend paid in June, $0.8 million for professional services for acquisitions (2017: $0.3 million) and $0.1 million related to an onerous lease contract (H1 2017: Nil).

ProfΙt / (Loss) before tax from continuing operations

Profit before tax from continuing operations was $3.3 million (2017: $1.3 million)

Profit from continuing operations

Profit from continuing operations was $2.2 million (2017: $0.2 million). The tax charge derives mainly from group subsidiaries' residual profits. The Group recognises a deferred tax asset of $0.2 million (2017: Nil) in respect of tax losses accumulated in previous years.

Discontinued operations

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 focus on the development and distribution of its own cybersecurity products. As consideration, the Group will receive a 50% share of EBITDA from the Media division for the five years following the sale. The Company recognised a loss from the sale as calculated below:

		2018
		$'000
Consideration received or receivable:
Fair value of contingent consideration		1,257
Total consideration		1,257
Carry amount of net assets sold		(4,498)
Non-controlling interest		989
Loss on sale		(2,252)

The financial performance and cash flow information presented are for the period ended 26 July 2018 and the year ended 31 December 2017.

	2018	2017
	$'000	$'000

Revenue	4,185	15,781
Share of results of equity accounted associates	-	(40)
Expenses	(4,501)	(19,895)
Loss before income tax	(316)	(4,154)
Income tax income/ (expenses)	(166)	636
Loss after income tax of discontinued operation	(482)	(3,518)
Loss on sale of the Media division	(2,252)	-
Loss from discontinued operation	(2,734)	(3,518)

Net cash outflow from operating activities	(336)	(603)
Net cash outflow from investing activities	(341)	(175)
Net cash flow from financing activities	-	-
Net decrease in cash generated by the Media division	(677)	(778)

Cash flow

	2018	2017
	$'000	$'000
Cash flow from operations	3,695	6,533
Exceptional and non-recurring payments	1,441	1,005
Net cash flow from discontinued operating activities	336	603
Net cash paid due to restructuring plan	249	-
Adjusted cash flow from operations	5,721	8,141
% of Adjusted EBITDA	55%	101%

Cash flow from operations was $3.7 million (2017: $6.5 million). Adjusted cash flows from operations, after adding back payments that are one off in nature was $5.7 million (2017: $8.1 million). This represents a cash conversion of 55% of Adjusted EBITDA (2017: 101%). Cash flow from operations includes $10.2 million investment in user acquisitions growth that will be expensed in future periods as it attributable to future revenue from subscriptions and therefore is recognised over the expected life time of the users in accordance with IFRS 15 (2017: $1.3 million). When excluding this investment adjusted cash conversion from operations is $15.9 million (2017: $9.5 million) which represents cash conversion of 151% (2017: 115%).

Tax paid net of refunds in the period was $0.5 million (2017: $0.1 million).

Cash spent in the period on capital expenditure of $2.5 million (2017: $2 million) mainly comprises of capitalised development costs and purchase of fixed assets. Net cash paid for acquisitions in the period totalled $20.8 million (2017: $5.3 million), out of which the Company paid $15.5 million in relation to the acquisition of Neural Holdings Inc and $5.3 million related to the acquisition of ZenGuard GMBH. Net cash outflow for sold operations in the period amounted to $0.3 million in relation to the disposal of the Media division to a third party in July 2018. As a result, net cash outflow from investing activities was $23.6 million (2017: $7.4 million).

In June 2018, the Company paid a special dividend in the amount of $6.8 million representing 3.55 pence per share. In November 2017, the Company repurchased 3.8 million share options from CyberGhost's founder for a total consideration of $3.8 million, out of which $1.9 million was paid in 2017 and the rest in eight equal quarterly instalments. During 2018 $0.9 million in payments were made for the repurchase. During 2018 the company paid $1.1 million of lease related payments that were recorded as part of the financing activities following the adoption of IFRS 16. Employee option exercises resulted in cash receipts of $0.4 million during 2018. As a result, net cash outflow from financing activities was $8.4 million (2017: 1.5 million).

Financial position

At 31 December 2018, the Company had cash of $40.4 million (31 December 2017: $69.5 million), net assets of $73.0 million (31 December 2017: $79.4 million) and was debt free. At 31 December 2018, trade receivables and contract assets were $3.6 million (31 December 2017: $8.5 million) which represented 13 days outstanding, (31 December 2017: 42 days). The decrease in Trade receivables is mainly due to the sale of the media division.

Early adoption of IFRS 16

From 1 January, 2018, the Company adopted IFRS 16, which specifies how to recognise, measure, present and disclose leases. The Company has not restated comparatives for the 2017 reporting period.

On initial application, the Group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases.

If the Company had chosen not to early adopt IFRS 16, the company net profits from continuing operations would have been $2.3 million.

The recognised right-of-use assets and lease liabilities are specified below:

Right-of-Use Assets	Real estate leases	Vehicles	Total
	$'000	$'000	$'000

At 1 January 2018	1,331	77	1,408
Additions	1,265	-	1,265
Additions through business combination	305	-	305
Amortisation	(1,181)	(28)	(1,209)
At 31 December 2018	1,720	49	1,769

Lease liabilities	Real estate leases	Vehicles	Total
	$'000	$'000	$'000

At 1 January 2018	1,331	77	1,408
Additions	1,265	-	1,265
Additions through business combination	305	-	305
Interest expense	82	11	93
Lease payments	(1,058)	(29)	(1,087)
Foreign exchange movements	(62)	(3)	(65)
At 31 December 2018	1,863	56	1,919

Moran Laufer

Chief Financial Officer

18 March 2019

Consolidated statement of comprehensive income

For the year ended 31 December 2018

		2018	2017
	Note	$'000	$'000

Revenue	2,3	52,060	50,602
Cost of sales		(5,605)	(4,572)
Gross profit		46,455	46,030

Selling and marketing costs	2c	(27,564)	(30,143)
Research and development costs		(1,653)	(856)
Management, general and administrative costs		(9,795)	(11,221)
Depreciation and amortisation	6,13	(3,800)	(2,376)
Total operating costs		(42,812)	(44,596)

Operating profit	4	3,643	1,434

Adjusted EBITDA	4	10,374	8,085

Employee share-based payment charge	8	(1,490)	(303)
Charge for repurchase of employee options	8	-	(3,176)
Exceptional and non-recurring costs	4	(1,441)	(796)
Depreciation and amortisation	6,13	(3,800)	(2,376)
Operating profit		3,643	1,434

Finance income		587	277
Finance costs		(938)	(452)
Profit before taxation		3,292	1,259
Tax charge	5	(1,064)	(1,102)
Profit from continuing operations		2,228	157

Loss from discontinued operations (attributable to equity holders of the company)	11	(2,734)	(3,518)
Loss for the year		(506)	(3,361)
Other comprehensive income:
Items that may be reclassified to profit and loss:
Foreign exchange differences on translation of foreign operations		7	858
Total comprehensive loss for the year		(499)	(2,503)
Total profit/ (loss) for the year attributable to:
Owners of the parent		(518)	(3,561)
Non-controlling interests		12	200
Total comprehensive income/ (loss) attributable to:
Owners of the parent		(511)	(2,703)
Non-controlling interests		12	200

Total profit/ (loss) for the year attributable to Owners of the parent:
Continuing operations		2,228	157
Discontinuing operations		(2,746)	(3,718)
		(518)	(3,561)
Earnings per share from continuing operations attributable to the ordinary equity holders of the company:
Basic earnings per share (cents)	9	1.5	0.1
Diluted earnings per share (cents)	9	1.5	0.1

Earnings per share attributable to the ordinary equity holders of the company:
Basic earnings per share (cents)	9	(0.3)	(2.4)
Diluted earnings per share (cents)	9	(0.3)	(2.4)

Consolidated statement of financial position

As at 31 December 2018

		2018	2017
	Note	$'000	$'000

Non-current assets
Intangible assets	6	36,265	12,350
Property, plant and equipment		713	815
Right-of-use assets	13	1,769	-
Non-current investments		-	50
Contingent consideration	11	934	-
Deferred contract costs	2c	7,196	406
Deferred tax asset	5	728	97
		47,605	13,718
Current assets
Software license inventory		52	65
Deferred contract costs	2c	5,216	1,386
Contingent consideration	11	323	-
Trade and other receivables		6,101	11,071
Cash and cash equivalents		40,405	69,502
		52,097	82,024
Total assets		99,702	95,742

Equity
Share capital		15	15
Additional paid in capital		131,091	130,728
Foreign exchange differences on translation of foreign operations		859	852
Retained earnings		(58,991)	(53,200)
Equity attributable to equity holders of the parent		72,974	78,395
Non-controlling interests		-	977
Total equity		72,974	79,372

Non-current liabilities
Contract liabilities	2b	2,165	892
Deferred tax liabilities	5	3,125	349
Long term lease liabilities	13	1,693	-
Deferred consideration	14	143	993
		7,126	2,234

Current liabilities
Trade and other payables		11,131	10,094
Contract liabilities	2b	7,349	3,120
Short term lease liabilities	13	226	-
Deferred consideration	14	896	922
		19,602	14,136
Total equity and liabilities		99,702	95,742

Consolidated statement of changes in equity

For the year ended 31 December 2018

	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
	$'000	$'000	$'000	$'000	$'000	$'000	$'000

At 1 January 2017	14	130,292	(6)	(49,747)	80,553	-	80,553

Loss for the year	-	-		(3,561)	(3,561)	200	(3,361)
Other comprehensive income:
Foreign exchange differences on translation of foreign operations	-	-	858	-	858	-	858
Total comprehensive loss for the year	-	-	858	(3,561)	(2,703)	200	(2,503)
Non-controlling interest from acquisition of subsidiary	-	-	-	-	-	777	777
Transactions with owners:
Share based payments	-	-	-	3,516	3,516	-	3,516
Exercise of employee options (note 7)	1	436	-	-	437	-	437
Purchase of own share options (note 7)	-	-	-	(3,408)	(3,408)	-	(3,408)
At 31 December 2017	15	130,728	852	(53,200)	78,395	977	79,372
At 1 January 2018	15	130,728	852	(53,200)	78,395	977	79,372

Loss for the year	-	-		(518)	(518)	12	(506)
Other comprehensive income:
Foreign exchange differences on translation of foreign operations	-	-	7	-	7	-	7
Total comprehensive loss for the year	-	-	7	(518)	(511)	12	(499)
Non-controlling interest from disposal of subsidiary	-	-	-	-	-	(989)	(989)
Transactions with owners:
Share based payments	-	-	-	1,490	1,490	-	1,490
Exercise of employee options (note 7)	*	363	-	-	363	-	363
Dividend paid to company's shareholders	-	-	-	(6,763)	(6,763)	-	(6,763)
At 31 December 2018	15	131,091	859	(58,991)	72,974	-	72,974

* amounts below 1 thousands

Consolidated statement of cash flows

For the year ended 31 December 2018

		2018	2017
	Note	$'000	$'000
Cash flow from operating activities
Loss for the year after taxation		(506)	(3,361)
Adjustments for:
Amortisation of intangible assets	6	2,617	6,046
Loss from Selling the media activity	11	2,252	-
Depreciation of Right-to-use assets	13	1,209	-
Depreciation of property, plant and equipment		288	399
Loss on sale of property, plant and equipment		58	101
Tax charge	5	1,230	467
Interest income		(587)	(277)
Interest expenses, fair value movements on deferred consideration		252	411
Share based payment charge	8	1,490	3,516
Share of results of associates		-	40
Movement in deferred and contingent consideration		(20)	(90)
Re-measurement gain on equity interest in associate		-	(52)
Expense from repurchase of employee share options		-	208
Interest received		587	277
Unrealised foreign exchange differences		(168)	240
Operating cash flow before movement in working capital		8,702	7,925
Decrease in trade and other receivables		3,142	967
Decrease/ (Increase) in software licenses inventory		13	(65)
Increase /(Decrease) in trade and other payables		82	(2,113)
Decrease in other current liabilities		-	(209)
Increase in deferred contract costs		(10,215)	(1,330)
Increase in contract liabilities		1,971	1,358
Cash flow from operations		3,695	6,533
Tax paid net of refunds		(502)	(109)
Cash generated from operations		3,193	6,424

Cash flow from investing activities
Purchases of property, plant and equipment		(179)	(540)
Sale of property, plant and equipment		10	39
Net cash paid on business combination	10	(20,823)	(5,337)
Net cash paid on business sold	11	(341)	-
Intangible assets acquired	6	(6)	(115)
Capitalisation of development costs	6	(2,289)	(1,432)
Net cash used in investing activities		(23,628)	(7,385)

Cash flow from financing activities
Repurchase of employee share options	7,8	(929)	(1,914)
Dividend paid		(6,763)	-
Payment of leases		(1,087)	-
Exercise of options by employees	7	363	437
Net cash generated from financing activities		(8,416)	(1,477)
Net (decrease)/increase in cash and cash equivalents		(28,851)	(2,438)

Revaluation of cash due to changes in foreign exchange rates		(246)	(124)
Cash and cash equivalents at beginning of year		69,502	72,064
Cash and cash equivalents at end of year		40,405	69,502

Notes forming part of the financial information for the year ended 31 December 2018

1 Basis of preparation

The financial information set out in this document does not constitute the Group's financial statements for the year ended 31 December 2018 or 31 December 2017. The annual report and financial statements for the year ended 31 December 2018 were approved by the Board of Directors on 18 March 2018, along with this preliminary announcement. The financial statements for the year ended 31 December 2018 have been reported on by the Independent Auditor. The Independent Auditor's report on the financial statements for the year ended 2018 was unqualified and did not draw attention to any matters by way of emphasis.

The financial information set out in these preliminary results has been prepared using International Financial Reporting Standards (IFRSs) as issued by the International Accounting Standards Board. The accounting policies adopted in these preliminary results have been consistently applied to all the years presented and are consistent with the policies used in the preparation of the financial statements for the year ended 31 December 2017, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2018. New standards impacting the Group that have be adopted in the annual financial statements for the year ended 31 December 2018 are IFRS 9 Financial Instruments and IFRS 16 Accounting for leases. Details of the impact of these two standards are given below. Other new standards, amendments and interpretations to existing standards, which have been adopted by the Group have not been listed, since they have no material impact on the financial statements.

The Group's revenue and operating costs are predominantly denominated in US Dollars and accordingly the Group's financial statements have been presented in US Dollars.

Going concern

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. They therefore continue to adopt the going concern basis of accounting in preparing the financial statements.

IFRS 9 - Financial instruments

IFRS 9 has replaced IAS 39 Financial Instruments: Recognition and Measurement, and has had no significant effect on the Group.

The impairment provision on financial assets measured at amortised cost (such as trade and other receivables) has been calculated in accordance with IFRS 9's expected credit loss model, which differs from the incurred loss model previously required by IAS 39. The Group has chosen not to restate comparatives on adoption of IFRS 9. The change to an expected credit loss model as required under IFRS 9 has had an immaterial impact on the group.

As allowed by the transitional rules in IFRS 9, prior year financial statements have not been restated and, in any event, no material changes in the numbers recognised were required. The adoption of IFRS 9 has though resulted in presentational changes as described above.

On the date of initial application, 1 January 2018, the financial instruments of the group were as follows:

	Measurement Category		Carrying amount
	Original (IAS 39)	New (IFRS 9)	Original	New	Difference
	$'000	$'000	$'000	$'000	$'000

Current financial assets

Trade receivables and accrued income	Amortised cost	Amortised cost	8,536	8,536	-
Other receivables	Amortised cost	Amortised cost	1,872	1,872	-
Cash and cash equivalents	Amortised cost	Amortised cost	69,502	69,502	-

Non-current liabilities
Deferred consideration	FVTPL	FVTPL	993	993	-

Current liabilities
Trade payables	Amortised cost	Amortised cost	2,469	2,469	-
Other payables and accrued expenses	Amortised cost	Amortised cost	5,939	5,939	-
Deferred consideration	FVTPL	FVTPL	922	922	-

2 Revenue

	2018	2017
	$'000	$'000

Sale of software license and services	52,060	48,226
Revenue from advertising	-	2,376
	52,060	50,602

Revenues from sale of software tool and provision of virtual private network ("VPN") solutions are generated from the App distribution CGU, while revenues from advertising is generated mainly from the Web Apps and licenses CGU. The revenues generated from the Media CGU 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:

	2018 (USD, in thousands)		2017 (USD, in thousands)
	App distribution	Total	App distribution	Web apps and license	Total
Revenue recognised over a period	11,788	11,788	6,454	2,376	8,830
Revenue recognised at a point in time	40,272	40,272	41,772	-	41,772
Total	52,060	52,060	48,226	2,376	50,602

(b) Contract liabilities

The company has recognised the following revenue-related contract liabilities:

December 31, 2018

(USD, in thousands)

December 31, 2017

(USD, in thousands)

Contract liabilities

9,514

4,012

Total

9,514

4,012

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:	December 31, 2018 (USD, in thousands)	December 31, 2017 (USD, in thousands)

Business combination	(3,415)	(2,324)

Revenue recognised that was included in the contract liability balance from Business combination	(1,863)	2,181

Revenue recognised that was included in the contract liability balance at the beginning of the period	(3,189)	-

Increases due to cash received, excluding amounts recognised as revenue during the period	3,082	(3,537)

Revaluation of contract liabilities in foreign currency	(117)	(332)

Management expects that 77.2% of the transaction price allocated to the unsatisfied contracts (which represent to contract liabilities) as of 31 December 2018 will be recognised as revenue during the next annual reporting period ($7,349,000), 15.1% and 4.5% ($1,432,000 and $433,000) and will be primarily recognised in the 2020 and 2021 financial years, respectively. The remaining 3.2% ($300,000) will be primarily recognised on the following financial years.

The Company recognises an asset in relation to marketing costs to obtain a contract. The asset is recognised as the Company expects to recover the cost over the expected relationship period with the customer which includes the initial contract period and expected renewals. The expected relationship period with the customer is estimated based on historical contract renewals data. The asset is amortised on a straight line basis over the expected relationship period with the customer.

In addition, the company recognised an asset for fulfilment costs that are considered directly attributable in fulfilling a contract. The fulfilment costs comprised of processing fees paid to third party processing service providers. This asset is amortised on a systematic basis over the initial contract period.

Significant changes in relation to assets recognized from costs to obtain and fulfil a contract

	December 31, 2018 (USD, in thousands)	December 31, 2017 (USD, in thousands)

Short term Asset recognised from marketing cost to obtain a contract	4,624	1,071

Long term Asset recognised from marketing cost to obtain a contract	7,066	315

short term Asset recognised from fulfilment cost to fulfil a contract	592	315

Long term Asset recognised from fulfilment cost to fulfil a contract	130	91

Amortization recognised during the period - marketing costs	(2,155)	(294)

Amortization recognised during the period - fulfilment cost	(1,319)	(804)

3 Segmental information

Segments revenues and results

On 26 July 2018, the Group disposed 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 11.

Based on the management reporting system, the group operates two reportable segments:

· App distribution - comprising the Group's own software and SAAS products and distribution platform;

· Web Apps and License - comprising revenue generated from monetising web apps and licencing the associated technology; and

Year ended 31 December 2018	App distribution 2018	Web apps and license 2018	Total 2018
	$'000	$'000	$'000

Revenue	52,060	-	52,060
Cost of sales	(5,605)	-	(5,605)
Direct sales and marketing costs	(20,765)	-	(20,765)
Segment result	25,690	-	25,690
Central operating costs			(15,316)
Adjusted EBITDA⁽¹⁾			10,374
Depreciation and amortisation			(3,800)
Employee share-based payment charge			(1,490)
Exceptional and non-recurring costs			(1,441)
Operating loss			3,643
Finance income			587
Finance costs			(938)
Profit before tax			3,292
Taxation			(1,064)
Profit from continuing operations			2,228
Loss from discontinued operations (attributable to equity holders of the company)			(2,734)
Loss for the year			(506)

Exceptional and non-recurring costs in 2018 comprised non-recurring staff costs of $0.5 million (2017: $0.3 million) mainly due to payments made to option holders in parallel to the special dividend paid in June, $0.8 million (2017: $0.3 million) for professional services for acquisitions and rebranding expenses and $0.1 of onerous cost related to lease contract (H1 2017: Nil). The decrease in Employee share-based payment charge is due to the repurchase of the share-based option consideration from the founder of CyberGhost, which completed on 20 November 2017.

Year ended 31 December 2017	App distribution 2017	Web apps and license 2017	Total 2017
	$'000	$'000	$'000

Revenue	48,226	2,376	50,602
Cost of sales	(4,572)	-	(4,572)
Direct sales and marketing costs	(26,447)	-	(26,447)
Segment result	17,207	2,376	19,583
Central operating costs			(11,498)
Adjusted EBITDA(1)			8,085
Depreciation and amortisation			(2,376)
Employee share-based payment charge			(303)
Charge for repurchase of employee options			(3,176)
Exceptional and non-recurring costs			(796)
Operating profit			1,434
Finance income			277
Finance costs			(452)
Profit before tax			1,259
Taxation			(1,102)
Profit from continuing operations			157
Loss from discontinued operation (attributable to equity holders of the company)			(3,518)
Loss from the year				(3,361)

Exceptional and non-recurring costs in 2017 comprised $0.3 million of acquisition bonuses to employees, professional services related to business combination of $0.3 million and a $0.2 million expense from repurchase of CyberGhost's founder's share options on 20 November 2017.

⁽¹⁾ Adjusted EBITDA is a company specific measure which is calculated as operating loss before depreciation, amortisation, exceptional and non-recurring costs, employee share-based payment charges and charge for repurchase of employees 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.

Information about major customers

In 2018 and 2017 there were no customers contributing more than 10% of total revenue of the Group.

Geographical analysis of revenue

Revenue by origin

	2018	2017
	$'000	$'000

Europe	49,302	48,225
British Virgin Islands	-	4
Asia	-	2,373
US	2,758	-
	52,060	50,602

Geographical analysis of non-current assets

	2018	2017
	$'000	$'000

Europe	23,972	10,364
British Virgin Islands	-	1,954
Asia	90	847
US	12,916	-
Total intangible assets and property, plant and equipment	36,978	13,165

4 Operating loss

Adjusted EBITDA

Adjusted EBITDA is calculated as follows:

	2018	2017
	$'000	$'000

Operating profit	3,643	1,434
Depreciation and amortisation	3,800	2,376
Employee share-based payment charge	1,490	3,479
Exceptional and non-recurring costs:
Non-recurring staff and restructuring costs	1,441	796
Adjusted EBITDA	10,374	8,085
Excluding Web Apps and License Segment	-	(2,062)
Adjusted EBITDA excluding Web Apps and License segment	10,374	6,023

Operating profit has been arrived at after charging:

	2018	2017
	$'000	$'000
Exceptional and non-recurring operating costs
Non-recurring staff costs	543	295
Professional services related to business combination	813	293
Expenses from repurchase of employee share options	-	208
Costs related to onerous rent agreement	85	-
	1,441	796

Auditor's remuneration:
Audit	220	158
Taxation services	7	8
Amortisation of intangible assets	2,305	1,982
Depreciation	286	394
Amortisation of Right-to-use assets	1,209	-
Employee share-based payment charge (note 8)	1,490	3,479

Operating costs

Operating costs are further analysed as follows:

	2018 Adjusted $'000	2018 Total $'000	2017 Adjusted $'000	2017 Total $'000

Direct sales and marketing costs	20,765	20,765	26,447	26,447
Indirect sales and marketing costs	6,398	6,799	3,657	3,696
Selling and marketing costs	27,163	27,564	30,104	30,143
Research and development costs	1,389	1,653	535	856
Management, general and administrative cost	7,529	9,795	7,306	11,221
Depreciation and amortisation	2,079	3,800	963	2,376
Total operating costs	38,160	42,812	38,908	44,596

Adjusted operating costs exclude share-based payment charges, exceptional and non-recurring costs, amortisation of acquired intangible assets and impairment of intangible assets. See note 3.

5 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 difference jurisdictions in which the subsidiaries' jurisdictions.

The Group continues to recognise a deferred tax asset of $159,000 (2017: $97,000) in respect of tax losses accumulated in previous years.

The total tax charge can be reconciled to the overall tax charge as follows:

	2018	2017
	$'000	$'000

Profit from continuing operations before income tax expense	3,292	1,259
Loss from discontinuing operation before income tax expense	(2,568)	(4,153)
	724	(2,894)

Tax at the applicable tax rate of 19% (2017: 19%)	137	(550)
Tax effect of
Differences in overseas rates	83	(421)
Expenses not deductible for tax purposes	835	1,253
Deferred tax not recognised on losses carried forward	81	122
Tax expense for previous years	94	63
Tax charge for the year	1,230	467

Income tax expenses/ (credit) is attributable to:
Profit from continuing operations	1,064	1,102
Loss from discontinued operation	166	(635)
	1,230	467

The tax expense from continuing operations Analysed as:
Deferred taxation in respect of the current year	173	41
Current tax charge	891	1,061
Tax charge for the year	1,064	1,102

The group has maximum corporation tax losses carried forward at each period end as set out below:

	2018	2017
	$'000	$'000

Corporate tax losses carried forward	38,974	33,235

Details of the deferred tax asset recognised arising in respect of losses and timing differences is set out below:

	2018	2017
	$'000	$'000

At the beginning of the year	97	166
Additions through business combinations	770	10
Disposal of the media division	(12)	-
Derecognised in the year from continuing operations	(115)	(100)
Foreign exchange revaluation	(12)	21
At the end of the year	728	97

Details of the deferred tax liability recognised arising from timing differences is set out below:

	2018	2017
	$'000	$'000

At the beginning of the year	349	691
Arising from business combinations	2,718	366
Foreign exchange differences	-	42
Movement in the year due to temporary differences from continuing operations	58	(59)
Movement in the year due to temporary differences from discontinuing operation	-	(691)
At the end of the year	3,125	349

In addition, the Group has an unrecognised deferred tax asset in respect of the following:

	2018	2017
	$'000	$'000

Tax losses carried forward	38,218	33,026
Unrecognised deferred tax assets due to tax losses carried forward	6,603	4,011

6 Intangible assets

	Intellectual Property	Trademarks		Customer Lists	Goodwill	Internet Domains	Capitalised Software Development Costs		Total
	$'000	$'000		$'000	$'000	$'000	$'000		$'000
Cost
At 1 January 2017	36,424	9,462		2,383	685	69	3,450		52,473
Additions	-	90		-	-	25	1,432		1,547
Acquisition through business combination	1,706	546		743	5,690	-	204		8,889
Foreign exchange differences	212	70		92	479	-	16		869
At 31 December 2017	38,342	10,168	3,218		6,854	94	5,102		63,778
Additions	-	6	-		-	-	2,289		2,295
Acquisition through business combination	5,751	2,491	2,342		16,168	-	-		26,752
Disposals	(3,663)	(2,035)	(2,078)		(2,524)	-	(768)		(11,068)
Foreign exchange differences	(81)	10	24		125	-	(30)		48
At 31 December 2018	40,349	10,640	3,506		20,623	94	6,593	81,805

Accumulated amortisation
At 1 January 2017	(33,559)	(7,968)	(1,415)	-	-	(2,418)	(45,360)
Charge for the year	(2,320)	(1,595)	(1,128)	-	-	(1,003)	(6,046)
Foreign exchange differences	(12)	(4)	(5)	-	-	(1)	(22)
At 31 December 2017	(35,891)	(9,567)	(2,548)	-	-	(3,422)	(51,428)
Charge for the period	(1,031)	(241)	(450)	-	-	(895)	(2,617)
Disposals	3,663	2,035	2,078	-	-	719	8,495
Foreign exchange differences	15	(5)	(4)	-	-	4	10
At 31 December 2018	(33,244)	(7,778)	(924)	-	-	(3,594)	(45,540)

Net book value
At 1 January 2017	2,865	1,494	968	685	69	1,032	7,113
At 31 December 2017	2,451	601	670	6,854	94	1,680	12,350
At 31 December 2018	7,105	2,862	2,582	20,623	94	2,999	36,265

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, as set out in note 10.

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, backup, data protection and parental controls software for Mac, as set out in note 10.

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, as set out in note 11.

On 14 March 2017, the Group acquired 100% of the share capital of CyberGhost S.A ("CyberGhost"), a leading cyber security SaaS provider, with a focus on the provision of virtual private network ("VPN") solutions. Prior to the acquisition date, CyberGhost acquired Mobile Concepts GmbH, a software development company based in Germany, for an amount of €1.5 million.

On 1 April 2017, the Company increased its holding in Clearvelvet Trading Limited ("Clearvelvet") to 50.01% of the share capital by acquiring an additional 33.34% of its issued share capital. In September 2015, the Group acquired 16.67% of the share capital of Clearvelvet for a total consideration of $850,000, of which $350,000 paid in 2016 with the completion of certain milestones.

Goodwill acquired in a business combination is allocated at acquisition to the cash generating units (CGUs), or group of units that are expected to benefit from that business combination.

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. Goodwill allocated to the App Distribution CGU has a carry amount of $20,623,000 (2017: $4,330,000).

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 App Distribution CGU, the recoverable value has been determined from value in use calculations based on cash flow projections for the next five years from the most recent budgets approved by management and extrapolated cash flows beyond this period using an estimated growth rate of 1 per cent (2017: 1 per cent). This rate does not exceed the average long-term growth rate for the relevant markets. The rate used to discount these forecast cash flows is 25 per cent (2017: 25 per cent).

The discount rate used in the valuation of the App Distribution CGU was 25 per cent. If the discount rate was increased by 1 percentage point the effect would have been nil. There is no reasonably possible change in assumption that would give rise to an impairment.

7 Shareholder's equity

	2018	2017
	Number of Shares	Number of Shares

Issued and paid up ordinary shares of $0.0001	148,496,073	148,496,073

During the year a total of 374,095 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 $363,000 (2017: $437,000).

During the year 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.

During 2017 a total of 3,810,667 of share option of $0.0001 par value were repurchased by the Company for a total cash consideration of $3,800,000.

As at 31 December 2018, the Company hold in the treasury total of 4,476,153 of ordinary shares of $0.0001 per value (2017: 6,650,248). During 2018, 374,095 of ordinary shares of $0.0001 par value were transferred out of treasury to satisfy the exercise of options by the company employees (2017: 801,175).

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.

8 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 2018, the following options were outstanding (2017: 8,490,329):

Group	Grant date	Number of shares under option	Subscription price per share
Group 1	29 May 2014	1,258,132	$0.538
Group 2	21 April 2015	338,781	$1.305
Group 3	5 January 2016	291,500	$0.710
Group 4	31 May 2016	2,000,000	$0.352
Group 5	26 October 2016	2,232,272	$0.467
Group 6	3 April 2017	884,333	$0.0001
Group 7	15 June 2017	991,287	$0.845
Group 8	26 April 2018	67,500	$0.0001
Group 9	26 April 2018	485,000	$1.280
Group 10	13 July 2018	1,810,000	$1.437
Group 11	24 August 2018	1,800,000	$0.000
Total		12,158,805

Vesting conditions

Groups 1-5 and 7-10 - 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 3 years period following the grant date subject to certain performance conditions

The total number of shares exercisable as of 31 December 2018 was 5,864,311 (2017: 2,973,348).

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:

	2018	2017
	$'000	$'000

Early exercise factor	100%	150%
Fair value of Group's stock	$1.51-$1.61	$0.78
Expected Volatility	60%	70%
Risk free interest rate	0.72%-1.50%	0.16%-1.11%
Dividend yield	-	-
Forfeiture rate	0%-28%	43%

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:

	2018	2017
	$'000	$'000

Share-based payment charge	1,490	303
Charge for repurchase of employee options	-	3,176

Movements in the number of share options outstanding and their related weighted average exercise prices are as follows:

	2018		2017
	Weighted average exercise price	Number of options	Weighted average exercise price	Number of options

At the beginning of the year	$0.55	8,490,329	$0.66	10,259,383
Granted	$0.81	4,162,500	$0.17	5,843,424
Lapsed	$0.96	(119,929)	$0.81	(3,000,633)
Exercised	$1.02	(374,095)	$0.55	(801,178)
Repurchased by the company	-	-	$0.0001	(3,810,667)
At the end of the year	$0.59	12,158,805	$0.55	8,490,329

The options outstanding at 31 December 2018 had a weighted average remaining contractual life of 7.9 years (2017: 8.2 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 three-year period from grant, subject to the achievement of certain performance metrics relating to the three 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.

9 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.

	2018	2017
	cents	cents

Basic earnings per share:
From continuing operations	1.5	0.1
from discontinued operations	(1.8)	(2.5)
Total basic earnings per share	(0.3)	(2.4)

Diluted earnings per share:
From continuing operations	1.5	0.1
from discontinued operations	(1.8)	(2.5)
Total diluted earnings per share	(0.3)	(2.4)

Adjusted basic	5.2	3.8
Adjusted diluted	5.0	3.7

Adjusted earnings per share is a non-GAAP measure and therefore the approach may differ between companies. Adjusted earnings have been calculated as follows:

	2018	2017
	$'000	$'000

Loss for the year	(506)	(3,361)

Post tax adjustments:
Employee share-based payment charge	1,578	3,535
Exceptional and non-recurring costs	1,403	793
Amortisation on acquired intangible assets	1,905	4,439
Loss from discontinued operations	2,723	-
Finance cost on deferred consideration for options repurchase	247	-
Adjusted profit for the year	7,350	5,406

	Number	Number
Denominator - basic:
Weighted average number of equity shares for the purpose of earnings per share	142,008,376	141,547,496

Denominator - diluted
Weighted average number of equity shares for the purpose of diluted earnings per share	147,955,573	145,260,658

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 5,947,198 (2017: 3,713,162) being the effect of all potentially dilutive Ordinary shares derived from the number of share options granted to employees.

10. Business combinations

(a) Acquisition of Neutral Holdings Inc

The Acquisition is directly in-line with Kape's core strategy to accelerate its growth in the cybersecurity market through select acquisitions, and brings significant strategic benefits to the Company.

Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill, are as follows:

	Acquiree's carrying amount before combination	Fair value
	$'000	$'000

B2C Brand	-	625
Customer relations	-	2,155
Corporate Trademark	-	1,334
Technology	-	3,687
Deferred tax liability	(61)	(1,857)
Cash and cash equivalents	510	510
Trade and other receivables	229	229
Property, plant and equipment	67	67
Deferred Contracts costs	291	291
Deferred tax assets	684	684
Contract liabilities	(2,499)	(2,499)
Trade and other payables	(931)	(931)
	(1,710)	4,295
Fair value of consideration
Cash		15,979
Goodwill		11,684

Net cash outflow on acquisition of business

		2017
		$'000

Cash consideration		15,979
Cash and cash equivalents acquired		(510)
		15,469

Intego is being acquired for a total consideration of $16.0 million cash, from internal cash resources, to be satisfied on closing of the Acquisition.

Since the acquisition date, Intego has contributed $2.9 million to group revenues, profit of $1.1 million to group loss. In addition, since the acquisition date Intego contributed $2.6 million to segment results of the app distribution segment (as set out in note 3). If the acquisition had occurred on 1 January 2018, group revenue would have been $55.5 million, group loss for the period would have been $0.9 million and the app distribution segmental result would have been $28.2 million.

Acquisition costs of $0.6 million arose as a result of the transaction. These have been recognised as part of administrative expenses in the statement of comprehensive income.

(b) Acquisition of ZenGuard GMBH

The Acquisition is highly complementary to CyberGhost, Kape's existing VPN solution.

Details of the fair value of identifiable assets and liabilities acquired, purchase consideration and goodwill, are as follows:

	Acquiree's carrying amount before combination	Fair value
	$'000	$'000
Customer relations	-	187
Brand	-	532
Technology	-	2,064
Deferred tax liability	(29)	(861)
Property, plant and equipment	15	15
Deferred Contracts costs	96	96
Trade and other receivables	139	139
Cash and cash equivalents	200	200
Deferred tax asset	-	86
Contract liabilities	(916)	(916)
Trade and other payables	(472)	(472)
	(967)	1,070
Fair value of consideration
Cash		5,554
Goodwill		4,484

ZenMate is being acquired from several venture capital funds and private investors, including the founders of the business, for a total consideration of $5.6 million (€4.8 million) in cash, funded from Kape's internal cash resources, to be satisfied on closing of the Acquisition.

As part of the acquisition, Kape indicated a restructuring plan which was planned and designed by ZenMate former management. The restructuring plan was intended to downsize ZenMate's staff and reduce operational costs. The restructuring plan cost was circa $0.3 million and was completed in January 2019.

Net cash outflow on acquisition of business

		2018
		$'000
Cash consideration		5,554
Cash and cash equivalents acquired		(200)
		5,354

Since the acquisition date, ZenMate has contributed $0.55 million to group revenues, profit of $0.1 million to group loss and $0.4 million to segment results (as set out on note 3). If the acquisition had occurred on 1 January 2018, group revenue would have been $54.2 million, group loss for the period would have been $1.7 million and the app distribution segmental result would have been $26.7 million.

Acquisition costs of $0.1 million arose as a result of the transaction. These have been recognised as part of administrative expenses in the statement of comprehensive income.

11 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. This sale is in-line with the Company's strategy to develop and distribute its own cybersecurity products.

(b) Financial performance

The financial performance and cash flow information presented are for the period ended 26 July 2018 (2018 column) and the year ended 31 December 2017.

	2018	2017
	$'000	$'000

Revenue	4,185	15,781
Share of results of equity accounted associates	-	(40)
Expenses	(4,501)	(19,895)
Loss before income tax	(316)	(4,154)
Income tax income/ (expenses)	(166)	636
Loss after income tax of discontinued operation	(482)	(3,518)
Loss on sale of the Media division	(2,252)	-
Loss from discontinued operation	(2,734)	(3,518)

Net cash outflow from operating activities	(336)	(603)
Net cash outflow from investing activities	(341)	(175)
Net cash flow from financing activities	-	-
Net decrease in cash generated by the Media division	(677)	(778)

		2018
		$'000
Consideration received or receivable:
Short term fair value of contingent consideration		323
Long term fair value of contingent consideration		934
Total consideration		1,257
Carry amount of net assets sold
Goodwill		(2,524)
Capitalised Software Development Costs		(49)
Investment		(50)
Property, plant and equipment		(4)
Trade and other receivables		(2,517)
Deferred tax asset		(12)
Cash and cash equivalents		(341)
Trade and other payables		999
		(4,498)
Non-controlling interest		989
Loss on sale		(2,252)

As consideration, the Group will receive a 50% share of EBITDA from the Media division for the next five years following the sale, which will be reinvested in the Group's core App Distribution segment, where all Media division employees were be transferred to.

In order to calculate contingent consideration, the recoverable value has been determined from value in use calculations based on cash flow projections for the next five years agreed upon with the acquiree.

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 $0.03 million. There is no reasonably possible change in assumption that would give rise to an impairment.

12 Related party transactions

The Group is controlled by Unikmind Holdings Limited incorporated in British Virgin Islands, which owns 72.77% of the Company's shares. The controlling party is the Unikmid holding Ltd, established under the laws of British Virgin Islands. Mr. Teddy Sagi is the sole ultimate beneficiary of Unikmind Holding Ltd.

(a) Related party transactions

The following transactions were carried out with related parties:

	2018	2017
	$'000	$'000

Revenue from common controlled company	85	2,587
Technical support services to end customers provided by common controlled company	(2,227)	(2,704)
Payment processing services provided by common controlled company	(376)	(208)
Office rent expenses to common controlled companies	-	(230)
Amortisation of Right-to-use assets with common controlled companies (Note 13)	(744)	-
Interest expenses from Lease liabilities to common controlled companies	(71)	-
Loss debt from related parties (Note 13)	(323)	-
	(3,656)	(555)

(b) Receivables owed by related parties

		2018	2017
Name	Nature of transaction	$'000	$'000

Parent company	Unpaid share capital	10	10
Companies related by virtue of common control	Trade	650	881
		660	891

		2018	2017
Name	Nature of transaction	$'000	$'000

Companies related by virtue of common control	Other	210	90
		210	90

(d) Right-to-use assets and Lease liabilities to related parties (Note 13)

	2018	2017
	$'000	$'000

Right-to-use assets	1,422	-
Lease liabilities	(1,543)	-

13 Operating leases

Effective January 1, 2018, the Company early adopted IFRS 16, which specifies how to recognize, measure, present and disclose leases. The Company has not restated comparatives for the 2017 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognised in the opening balance sheet on 1 January 2018.

On initial application, the group recognised lease liabilities in relation to leases which had previously been classified as 'operating leases' under the principles of IAS 17 Leases. These liabilities were measured at the present value of the remaining lease payments, discounted using the lessee's incremental borrowing rate as of 1 January 2018. The weighted average lessee's incremental borrowing rate applied to the lease liabilities on 1 January 2018 was 4.49%. The Company has elected to record right-of-use assets based on the corresponding lease liability.

In applying IFRS 16 for the first time, the group has used the following practical expedients permitted by the standard:

· The use of a single discount rate to a portfolio of leases with reasonably similar characteristics

· Reliance on previous assessments on whether leases are onerous

· The exclusion of initial direct costs for the measurement of the right-of-use asset at the date of initial application; and

· The use of hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

The group has also elected not to reassess whether a contract is, or contains a lease at the date of initial application. Instead, for contracts entered into before the transition date the group relied on its assessment made applying IAS 17 and IFRIC 4 Determining whether an Arrangement contains a Lease.

The Company's operating lease liability at December 31, 2017, as previously disclosed in the Company's consolidated financial statements (2017: $578,000) differs from the lease liability recognised on initial application of IFRS 16 at January 1, 2018 $1,408,550. The differences attributed mainly to, management assumptions for periods of the leases contract, and the Company decision to apply the practical expedient to account for each lease component and any non-lease components as a single lease component.

The recognised right-of-use assets relate to the following types of assets:

			2018
Rights-of-use assets:			$'000

Real estate leases			1,720
Vehicles			49
			1,769

Right-of-Use Assets

	Real estate leases	Vehicles	Total
	$'000	$'000	$'000

At 1 January 2018	1,331	77	1,408
Additions	1,265	-	1,265
Additions through business combination	305	-	305
Amortisation	(1,181)	(28)	(1,209)
At 31 December 2018	1,720	49	1,769

The Group had sub-leased one of the Right-of-use asset on 2018, for total consideration of $0.1 million.

Lease liabilities

	Real estate leases	Vehicles	Total
	$'000	$'000	$'000

At 1 January 2018	1,331	77	1,408
Additions	1,265	-	1,265
Additions through business combination	305	-	305
Interest expense	82	11	93
Lease payments	(1,058)	(29)	(1,087)
Foreign exchange movements	(62)	(3)	(65)
At 31 December 2018	1,863	56	1,919

2018	Carrying amount	Contractual cash flow	3 months or less	Between 3-12 months	Between 1-5 years	More than 5 years
	$'000	$'000	$'000	$'000	$'000	$'000

Lease liabilities	1,919	2,026	366	782	878	-

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

14 Deferred consideration

(a) Acquisition of AjillionMax

The consideration for the acquisition of certain assets of AjilionMAX Limited in May 2014 included $654,000 deferred consideration. Of this $104,000 was repaid during the year ending 31 December 2014, $156,000 was repaid during the year ending 31 December 2015, $189,000 was repaid during the year ending 31 December 2016 and the remainder was repaid during the year ending 31 December 2017.

In addition, $435,000, included as part of the acquisition arrangements, has been recognised directly in the income statement during the year ending 31 December 2015, out of which $209,000 was paid in May 2017.

(b) 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 2018, the consideration included $0.17 million of deferred consideration (2017: $0.17 million) which is contingent on future results.

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 total cash consideration of $3.8 million (€3.2 million). Out of which $1.9 million (€1.625 million) paid upon execution of the purchase agreement, while the remaining amount to be paid in eight equal instalments amounting of $235 thousand (€197 thousand) per quarter over the course of two years and recognised as deferred consideration. As for 31 December 2018, the consideration included $0.9 million of deferred consideration (2017: $1.75 million) which will be fully paid in 2019.

(d) 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 five years following the sale, which will be reinvested in the Group's core App Distribution segment, where all Media division employees were be transferred to. As at 31 December 2018, the consideration included $1.3 million of contingent consideration receivable.

15 Subsequent events

There were no material events after the reporting period, which have a bearing on the understanding of the consolidated

16 Cautionary Statement

Kape has made forward-looking statements in this press release, including statements about the market for and benefits of its products and services; financial results; product development plans; the potential benefits of business relationships with third parties and business strategies. These statements about future events are subject to risks and uncertainties that could cause Kape's actual results to differ materially from those that might be inferred from the forward-looking statements. Kape can make no assurance that any forward-looking statements will prove correct.

This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.

END

FR DGGDXCSBBGCI

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