Half-year Results

RNS Number : 9633Y

Kape Technologies PLC

15 September 2020

 

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

15 September 2020

Kape Technologies plc

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

HALF YEAR RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2020

Kape Technologies plc (AIM: KAPE), the digital security and privacy software business, announces its unaudited results for the six months ended 30 June 2020.

Financial highlights

· Increasing global demand for online security and privacy solutions continues to underpin strong financial progress and user growth:

o  Revenues increased 97% to $59.0 million (H1 2019: $29.9 million), a 12% increase on a pro-forma basis

o  Strong growth in recurring revenues to $50.8 million, an increase of 140% (H1 2019: $21.2 million)

o  Organic revenue growth in the Digital Privacy segment excluding PIA was 47% in the period, $ 17.9 million (H1 2019: $12.2 million)

o  Adjusted EBITDA[1] up 185% to $16.4 million (H1 2019: $5.8 million), an increase of 21.6% on a pro-forma basis. Adjusted EBITDA margin increased to 27.8% (H1 2019: 19.2%)

o  Operating Profit up 142% to $3.4 million (H1 2019: $1.4 million)

o  Increase of 142 % in Adjusted Earnings Per Share2 to 6.3 cents (H1 2019: 2. 6 cents)

o  Strong cash generation; adjusted operating cashflow of $8.8 million (H1 2019: $0.2 million). Reported operating cash flow of $5.9 million (H1 2019: ($0.3))

o  Secured a new senior term loan and revolving credit facilities of up to $70 million in March 2020, significantly strengthening the Group's balance sheet

· Trading towards the upper range of management's expectations

Operational highlights

· Significant product launches across both the Digital Privacy and Digital Security divisions in the period include:

o  The beta CyberGhost 8 Privacy Suite and the introduction of new product verticals including End Point Security, Privacy Guard and Security Updater

o  A new Endpoint Security for Windows integrated into Microsoft Virus Initiative program and as well as a new privacy browser extension for Chrome, Firefox, and Edge

o  The encrypted WireGuard protocol across the Digital Privacy division - an 'industry first'

· Visibility over revenues from existing users increased to $ 106.6 million (31 December 2019: $98.8 million), with 86% of revenues on a subscription basis

· Maintained a consistently high level of user retention of 80% (31 December 2019: 81%)

· Integration of PIA progressing rapidly and expected to complete in the second half of 2020.

· On track to achieve a 40% reduction in PIA's monthly operating costs in Q3 2020 as part of the integration

· Enlarged group already benefiting from increased economies of scale and expected to deliver synergies towards the upper end of the previous $3.5-4.5 million guidance

Outlook

· Kape continues to be very well-placed to benefit from the growing online privacy and security markets, despite the ongoing disruption and uncertainty caused by the COVID-19 pandemic,

· Since period end the Group has experienced strong growth in PIA subscribers, driven by Kape's user-acquisition initiatives

· The board remains confident of the Group achieving revenues of between $120-123 million and Adjusted EBITDA of between $35-38 million for the full year 2020, and in the growth prospects for the Group in 2021 and beyond

Ido Erlichman, Chief Executive Officer of Kape, commented:

"The first six months of 2020 have been extremely productive for Kape both in terms of operational progress and our financial performance. With COVID-19 causing widespread uncertainty globally, the need for high quality and secure internet software solutions has been further reinforced. With this growing demand from our users we feel more inspired than ever to develop, innovate and expand our product offering, with our customers' digital privacy and security our number one priority.

"As anticipated, the acquisition of PIA has accelerated our progress and our teams have seamlessly brought our two organisations together creating a truly global leader.

"We remain focused on delivering against our strategic growth priorities in the second half and look to the future with confidence."

An audio webcast of Kape's results presentation will be available on the Company's website later today.

¹ 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.

² Adjusted EPS was calculated from the earnings per share adding back, share-based payments and non-recurring costs  

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	[phone]
N+1 Singer (Joint Broker) Harry Gooden / George Tzimas	[phone]
Vigo Communications (Financial Public Relations) Jeremy Garcia / Antonia Pollock [e-mail]	[phone]

About Kape

Kape is a leading 'privacy-first' digital security software provider to consumers. Through its range of privacy and security products, Kape focusses on protecting consumers and their personal data as they go about their daily digital lives.

To date, Kape has 2.4 million paying subscribers, supported by a team of over 350 people across eight locations worldwide. Kape has a proven track record of revenue and EBITDA growth, underpinned by a strong business model which leverages our digital marketing expertise.

Through our subscription based platform, Kape has fast established a highly scalable SaaS-based operating model, geared towards capitalising on the vast global consumer digital privacy market.

www.kape.com

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Chief Executive Officer's review

Overview

We are pleased to report that in the first half of 2020 Kape continued to successfully deliver against our strategy, achieving record revenues and user numbers, despite the unprecedented impact of COVID-19 across the global economy. In the current environment, individuals are increasingly depending on Kape to enable them to stay connected securely. This growing demand, which we believe is set to continue, underpins our focus on innovation and product development.

In the six months ended 30 June 2020, trading was towards the upper range of management's expectations. Group revenues increased 97% in the period to $59.0 million (H1 2019: $29.9 million), as we benefitted from a full six months of contribution from Private Internet Access ("PIA"), with strong underlying organic revenue growth of 12% delivered on a proforma basis. Adjusted EBITDA increased 185% to $16.4 million (H1 2019: $5.8 million), an increase of 21.6% on a pro-forma basis. Adjusted EBITDA margin increased to 27.8% (H1 2019: 19.2%), alongside improved cash conversion.

With COVID-19 severely impacting the macroeconomic environment and driving an increased requirement for workforces to shift to home working, heightened concerns relating to digital security and privacy have resulted in Kape benefitting from favorable market tailwinds. The global shift to remote working has provided further impetus to our existing growth trajectory through increased demand for Kape's digital privacy solutions, with the size of the global VPN market alone expected to reach $70 billion in 2026¹. In addition to a continued focus on cost control, travel restrictions have curtailed the costs associated with the Group's global marketing activities and other operational expenses, resulting in an improvement in the Group's operating margin.

In March 2020, Kape secured a new senior term loan and revolving credit facilities of up to $70 million with Citi, Barclays and the Bank of Ireland, which significantly strengthened the Group's balance sheet. This provides Kape with a low-cost capital structure to fund growth and ongoing strategic investments, reinforcing management's confidence in the long-term outlook for the Group. 

As we continue to strengthen and expand the Group's privacy and security product ecosystem alongside growing our customer base, we believe Kape is in a prime position to reap the benefits of the fast-growth digital privacy and security markets.

Operational review

Key Performance Indicators

Kape performed very strongly across its KPIs during the period, which the Group reports against to track the ongoing progress of its SaaS business model, which in-turn underpins the profitability, earnings predictability and growth potential of the Group.

	30 June 2020 '000	31 Dec 2019 '000
Subscribers (thousands)	2,380	2,308
Retention rate	80%	81%
Deferred income ($'000)	36,909	35,312
	Six months ended 30 June 2020 (unaudited)	Six months ended 30 June 2019 (unaudited)
Adjusted EBITDA	16,422	5,756
Adjusted operating cash flow3:
Attributable to current year ($'000)	19,232	7,297
Investment in growth	(10,478)	(7,094)
Adjusted operating cash flow ($'000)	8,754	203

The Group's total number of subscribers increased to 2,380,000 as at 30 June 2020, from 2,308,000 at 31 December 2019. In the first quarter of 2020 we focused on PIA's integration into the Group, preparing the infrastructure for our user growth initiatives. Following a flat first quarter in terms of PIA user growth, the successful implementation of Kape's specialist user acquisition strategy and technology in March, has seen growth in PIA's subscriber base resume, with a steady growth in monthly PIA sign-ups in Q2 2020. Kape's user acquisition initiatives alone, drove c. 8,000 new PIA sign ups in August, in addition to the new users which have been generated from organic traffic. This upward trend is expected to continue throughout the second half.

The number of CyberGhost and Intego subscribers increased 20% and 22% respectively on an annualised basis during the period and we expect PIA to achieve these double digit growth rates, as all solutions continue to benefit from Kape's ongoing customer acquisition technologies.

The PC performance products saw a 2.4% annualised decrease in users during the period, as we continue to shift our customer acquisition focus to the high growth privacy and security verticals.

Overall, the Group's retention rate remained very high at 80% (31 December 2019: 81%) and deferred income was $36.9 million as at 30 June 2020 (31 December 2019: $35.3 million). The Group has continued to significantly invest in growth initiatives throughout the first half of 2020, with adjusted operating cashflow stronger than expected at $8.8 million (H1 2019: $0.2 million).

Integration and cross-promotion

The integration of PIA has progressed extremely well and more rapidly than originally anticipated, with the associated cost synergies now expected at the upper end of the $3.5-4.5 million previously guided. The enlarged group has begun to benefit from increased economies of scale, and it is anticipated that the integration will be completed in the second half of 2020.

As outlined at the Company's capital markets event in June, the key elements of the integration have comprised user acquisition and marketing, customer service, infrastructure, R&D and culture, with significant benefits realised as the integration advances.

In terms of infrastructure, we have implemented new technology protocols whilst reducing expenditure. We expect to achieve an impressive 40%² reduction in PIA's monthly operating costs in Q3 2020, mainly derived from achieving economies of scale with vendors and high-level synergies. We have enhanced our combined customer support function providing a better-quality service to our customers across the board while reducing costs. We have reduced wait times, achieving an 800% increase in chat support and adding 24/7 service, whilst achieving a 45% reduction in costs.

Culturally, the acquisition has exceeded our expectations. Kape has been able to adopt PIA's remote working culture to our existing way of working, with the combined teams working seamlessly throughout lockdown across R&D, Marketing and Finance to achieve our unified growth targets. Management also believes there is significant potential to amplify the brand and pedigree of PIA to capture a larger proportion of an expanded target market.

The combination of the Kape and PIA user bases has created a likeminded community, united by a common theme and interest in privacy and security. This provides a strong foundation and opportunity for the Group to deepen cross-promotional offerings that serve customer needs, thereby increasing user retention and average order value. During the period, we began implementing Intego's end point security solution into CyberGhost's product suite and offering PIA's VPN solution to Intego's customers.

As a result of cross promotion initiatives, we have seen a 15% take-up rate of Kape's premium VPN from Intego antivirus new users during the second quarter of the year. Kape now serves an aggregate user base of 2.4 million, and there is substantial opportunity to increase cross-selling throughout the Group in the coming years.

Product development

The first half of the year has been one of most significant in Kape's history in terms of product development, with a number of launches across both the Digital Privacy and Digital Security divisions. Following the acquisition of PIA, the Group's R&D function has expanded with a broader spectrum of expertise and, pleasingly, more collaboration and innovation across product teams has been evident than ever before.

Our product development efforts have been focused on two main strategic objectives: expanding our privacy and security ecosystem offering; and providing superior infrastructure to our customers.

Substantial progress has been made in the expansion of our software suite. Kape recently launched the beta version of the CyberGhost 8 Privacy Suite, a comprehensive one-stop shop for our users' privacy and security needs. Within the suite, we have incorporated our end point security solution and introduced new product verticals including End Point Security, Privacy Guard and Security Updater. In addition, we introduced Kape's end-point security solution for Windows, integrated into the Microsoft Virus Initiative programme, and launched the Company's new privacy browser extension for Chrome, Firefox and Edge.

On the infrastructure front, we deployed a new 'industry-first' encrypted WireGuard protocol across the Digital Privacy division - providing a state-of-the-art cryptography to our users. In addition, we begun to co-locate a Kape owned and controlled server network which facilitates a custom technology deployment giving our users better security, speed and overall service quality.

At Kape, we made a commitment to our users to stay ahead of the curve. To fulfil that, we have created a unique beta programme which allows us to accelerate the development cycle. Through our pilot programme we can align our product pipeline with our customers' needs by receiving constant feedback. Amongst our current initiatives are private browsing and digital identity protection solutions, which are expected to be formally launched in due course, as we continue to evolve our end-to-end technology stack.

Outlook

Whilst we continue to monitor the ongoing COVID-19 pandemic and the wider macro-economic situation closely, Kape remains well placed to continue on its exciting growth trajectory as market fundamentals remain strong and we expand our user base and broaden our software suite to capture this.

Our focus in the near-term remains on generating organic growth through a number of priorities, including completing the integration of PIA, further augmenting the Group's Digital Privacy suite, leveraging Kape's proprietary user acquisition platform to deliver strong organic growth. Management continues to evaluate select M&A opportunities as appropriate, which has always been central to Kape's growth strategy.

The board remains confident in the Group achieving revenues of between $120-123 million and Adjusted EBITDA of between $35-38 million in the full year 2020, and in the growth prospects for the Group in 2021 and beyond.

Ido Erlichman

Chief Executive Officer

14 September 2020

¹Source: Global Market Insight - April 2020

² PC performance users comprise of 15.8% of Kape's current subscriber base

 

Chief Financial Officer's review

Overview

Revenues in the first half of 2020 increased by 97% to $59.0 million (H1 2019: $29.9 million from continued activities). Segmental results increased by 149% to $31.6 million (H1 2019: $14.7 million from continued activities). The increase in revenues was driven through a combination of a full six months' contribution from Private Internet Access, as well as an increase in revenue from renewals from the existing user base at the beginning of the period, and an increase in revenue from new users as a result of an increase in marketing activities, with direct marketing expenses of $18.8 million in the period (H1 2019: $11.1 million). Adjusted EBITDA increased by 185% to $16.4 million (H1 2019: $5.8 million).

Adjusted cash flow from operations attributable to the current financial period was $19.2 million (H1 2019: $7.3 million), which represents a cash conversion of 117%. During the period, $10.5 million was reinvested in user acquisition costs that will be expensed in future periods (H1 2019: $7.1 million). When including this investment, adjusted cash flow from operations was $8.8 million (H1 2019: $0.2 million). This represents a significant improvement in cash generation compared to the comparable period, a trend we expect to continue in the second half of the year.

On 6 December 2019, Kape entered into a $40.0 million short-term debt loan from Unikmind Holdings Limited, Kape's largest shareholder, with a fixed interest rate of 5% above 6 months USD Libor. On 28 April 2020, Kape agreed with Bank of Ireland, Barclays Bank, and Citi Commercial Bank, to refinance the shareholder loan with a senior secured term and revolving credit facilities of up to $70 million. The New Debt Facilities comprise a $40 million term facility, a $10 million revolving credit facility, and a $20 million uncommitted acquisition facility. The new Debt Facilities carry an interest rate of 3 months LIBOR (as of the beginning of the relevant period) plus an opening margin of 2% per annum.

The applicable Margin is linked to the Adjusted Leverage, tested at the end of each quarter. In the instance that the Adjusted Leverage is greater than 2 or less than 1 the applicable margin will change to 2.25% or 1.85% respectively. The effective interest rate after considering debt issuance costs is 4.1%. The Company's balance sheet remains strong with a cash balance of $17.0 million on 30 June 2020 (31 December 2019: $8.2 million) and net debt of $25.6 million representing an adjusted leverage of 0.7.

Segment Result

		Revenue				Segment result
		H1 2020		H1 2019		H1 2020		H1 2019
		$'000		$'000		$'000		$'000
Digital Privacy		42,237		12,228		24,560		6,521
Digital Security		16,749		17,705		7,041		8,178
Revenue		58,986		29,933		31,601		14,699

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 for the Group's privacy products. Direct sales and marketing costs are user acquisition costs.

Digital Privacy
			H1 2020		H1 2019
			$'000		$'000
Revenue			42,237		12,228
Cost of sales			(7,526)		(2,338)
Direct sales and marketing costs			(10,151)		(3,369)
Segment result			24,560		6,521
Segment margin (%)			58.1		53.3

During the period, the Digital Privacy segment has seen continued growth with a 245% increase in revenue to $42.2 million (H1 2019: $12.2 million) and a 277% increase in the segment result to $24.6 million (H1 2019: $6.5 million). Following the completion of its acquisition in December 2019, Private Internet Access contributed $24.3 million of revenue in the period (H1 2019: Nil). Organic revenue growth excluding Private Internet Access was 47% in the period and was driven by a 181% increase in revenue from existing customers and a 7% increase in revenue from new sign-ups. Following the increase in recurring revenue from existing customers, Segment Margin has increased to 58.1% (H1 2019: 53.3%).

Digital Security
			H1 2020		H1 2019
			$'000		$'000
Revenue			16,749		17,705
Cost of sales			(1,087)		(1,825)
Direct sales and marketing costs			(8,621)		(7,702)
Segment result			7,041		8,178
Segment margin (%)			42.0		46.2

During the period, revenue from the Digital Security segment slightly decreased, by 5% to $16.7 million (H1 2019: $17.7 million). This decrease was driven by reduced investment in direct marketing of the PC performance products following a management decision to shift budgets to Intego's Endpoint security products and Digital Privacy solutions where on average users generate a higher lifetime value. An increase of 6% in revenue from Intego's endpoint security products has partially mitigated the decrease in the segment.

Adjusted EBITDA from continued operations

Adjusted EBITDA for the six months to 30 June 2020 was $16.4 million (H1 2019: $5.8 million). Adjusted EBITDA is a non-GAAP company specific measure which is considered to be a key performance indicator for the Group. 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:

			H1 2020		H1 2019
			$'000		$'000
Revenue			58,986		29,933
Cost of sales			(8,613)		(4,163)
Direct sales and marketing costs			(18,772)		(11,071)
Segment result			31,601		14,699
Indirect sales and marketing costs			(4,644)		(3,687)
Research and development costs			(2,963)		(1,384)
Management, general and administrative cost			(7,572)		(3,872)
Adjusted EBITDA			16,422		5,756
EBITDA margin %			27.8		19.2

The increase in adjusted operating expenses is mainly due to a $4.6 million contribution from Private Internet Access in the period. In addition, there is a $0.6 million increase in payroll and staff costs driven by higher headcount mainly in the Research and development department.

Operating profit

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

			H1 2020		H1 2019
			$'000		$'000
Adjusted EBITDA			16,422		5,756
Employee share-based payment charge			(542)		(989)
Exceptional and non-recurring costs			(2,683)		(519)
Depreciation and amortisation			(9,790)		(2,840)
Operating profit			3,407		1,408

Exceptional and non-recurring costs in H1 2020 comprised non-recurring staff costs of $2.5 million (H1 2019: $0.4 million) related to employee bonuses for the acquisition and the integration of Private Internet Access, and $0.2 million (H1 2019: $0.1 million) for professional services related to acquisitions. The increase in depreciation and amortisation derives from $6.3 million amortisation charges of acquired intangible assets that were added through the acquisitions of Private Internet Access in December 2019.

Profit before tax

Profit before tax was $1.4 million (H1 2019: $1.3 million). Finance costs of $2.0 million comprised mainly of $1.2 million of interest on debt facilities, $0.5 million non-cash interest on deferred consideration related to the Private Internet Access acquisition, and foreign exchange differences of $0.3 million.

Profit after tax

Profit after tax was $0.2 million (H1 2019: $0.9 million). The tax charge derives mainly from group subsidiaries' residual profits. Since the amortisation of acquired intangibles and share-based payment charges are not tax-deductible in the main jurisdictions in which the Company operates, management believes it is appropriate to examine the effective tax rate out of Adjusted EBITDA rather than Profit Before Tax. The effective tax rate out of Adjusted EBITDA remained broadly stable at 7.1% (H1: 2019 6.4%).

Cash flow

			H1 2020		H1 2019
			$'000		$'000
Cash flow/(outflow) from operations			5,890		(350)
Exceptional and non-recurring cash outflow			2,864		553
Adjusted cash flow from operations			8,754		203
% of Adjusted EBITDA			53%		4%
Excluding increase of deferred contract costs			10,478		7,094
Adjusted Cash flow from operations attributable to the current year			19,232		7,297
% of Adjusted EBITDA			117%		127%

Cash flow from operations was $5.9 million (H1 2019: $0.3 million cash outflow). Adjusted cash flow from operations after adding back one-off payments was $8.8 million (H1 2019: $0.2 million). The significant increase in operating cash flow is due to an increase in collections from existing users' renewals. Adjusted operating cash flow attributable to the current financial period increased to $19.2 million (H1 2019: $7.3 million), which represents a cash conversion of 117%. This excludes investment in user acquisition that will drive future revenue and therefore will be recognised in future periods.

Net tax payments in the period were $0.3 million (H1 2019: $0.8 million). The decrease is due to refunds from tax authorities of payments that were paid in previous periods.

Cash spent in the period on capital expenditure of $1.4 million (H1 2019: $1.4 million), comprises capitalised development costs and fixed asset purchases.

Cash flow from financing activities of $4.8 million (H1 2019: $1.4 million outflow) included $0.7 million (H1 2019: $0.6 million) for leases, full repayment of $40 million principal, and $1.2 million interest related to the shareholder loan, which was funded by a long term bank debt of $40.8 million, net of issuance costs. In addition, $5.9 million (H1 2019: $0.1 million) related to the exercise of employee share options in the period. Out of the $5.9 million, $4.3 million are payable to employees .

Financial position

At 30 June 2020, the Group had cash of $17.0 million (31 December 2019: $8.2 million), net assets of $157.3 million (31 December 2019: $155.0 million), and net debt of $25.6 (31 December 2019: $32 million).

Moran Laufer

Chief Financial Officer

14 September 2020

 

Consolidated statement of comprehensive income

For the six months ended 30 June 2020

			Six months ended 30 June 2020 (unaudited)		Six months ended 30 June 2019 (unaudited)
	Note		$'000		$'000
Revenue	3		58,986		29,933
Cost of sales			(8,613)		(4,163)
Gross profit			50,373		25,770
Selling and marketing costs			(23,457)		(14,827)
Research and development costs			(3,054)		(1,547)
Management, general and administrative costs			(10,665)		(5,148)
Depreciation and amortisation			(9,790)		(2,840)
Total operating costs	5		(46,966)		(24,362)
Operating profit	5		3,407		1,408
Adjusted EBITDA	5		16,422		5,756
Employee share-based payment charge			(542)		(989)
Exceptional and non-recurring costs	5		(2,683)		(519)
Depreciation and amortisation			(9,790)		(2,840)
Operating profit	5		3,407		1,408
Finance income			-		317
Finance costs			(2,031)		(420)
Profit before taxation			1,376		1,305
Tax charge			(1,167)		(369)
Profit for the period			209		936
Other comprehensive income:
Items that may be reclassified to profit and loss:
Foreign exchange differences on translation of foreign operations			8		6
Total comprehensive profit for the period			217		942
Earnings per share attributable to the ordinary equity holders of the company:
Basic earnings per share (cents)	7		0.13		0.7
Diluted earnings per share (cents)	7		0.11		0.6

*Adjusted EBITDA is a non GAAP measure and a company specific measure which is earnings before interest, tax, depreciation, amortisation, share based payment charges and exceptional and non-recurring costs.
 

Consolidated statement of financial position

As at 30 June 2020

			30 June 2020 (unaudited)		31 December 2019 (audited)
	Note		$'000		$'000
Non-current assets
Intangible assets			234,578		242,100
Property, plant and equipment			2,289		2,351
Right-of-use assets			2,485		2,985
Deferred consideration			446		446
Deferred contract costs			20,857		16,542
Deferred tax asset			2,125		2,180
			262,780		266,604
Current assets
Software license inventory			80		96
Deferred contract costs			18,961		12,798
Deferred consideration			346		346
Trade and other receivables			7,692		6,687
Cash and cash equivalents			17,012		8,211
			44,091		28,138
Total assets			306,871		294,742
Equity
Share capital	6		16		16
Additional paid in capital			154,573		153,002
Shares to be issued			56,499		56,499
Foreign exchange differences on translation of foreign operations			786		778
Retained earnings			(54,540)		(55,291)
Equity attributable to equity holders of the parent			157,334		155,004
Non-current liabilities
Contract liabilities			5,501		6,013
Loans and Borrowings	8		33,065		-
Deferred tax liabilities			23,189		22,102
Long term lease liabilities			1,347		1,753
Deferred consideration			14,922		14,578
			78,024		44,446
Current liabilities
Trade and other payables	10		26,502		19,632
Loans and Borrowings	8		7,371		-
Shareholder loan	8,9		-		40,221
Contract liabilities			31,408		29,299
Short term lease liabilities			1,337		1,365
Deferred consideration			4,895		4,775
			71,513		95,292
Total equity and liabilities			306,871		294,742

Consolidated statement of cash flows

For the six months ended 30 June 2020

		Six months ended 30 June 2020 (unaudited)		Six months ended 30 June 2019 (unaudited)
		$'000		$'000
Cash flow from operating activities
Profit for the period after taxation		209		936
Adjustments for:
Amortisation of intangible assets		8,780		2,049
Profit on sale of intangible assets		(27)		-
Amortisation of Right-to-use assets		680		628
Depreciation of property, plant and equipment		330		163
(Profit)/Loss on sale of property, plant and equipment		(7)		37
Tax charge		1,167		369
Interest Income		-		(317)
Interest expenses		1,752		37
Share based payment charge		542		989
Interest received		-		169
Unrealised foreign exchange differences		(16)		39
Operating cash flow before movement in working capital		13,410		5,099
(Increase)/Decrease in trade and other receivables		(1,265)		321
Decrease/(Increase) in software licences inventory		16		(60)
Increase/(Decrease) in trade and other payables		2,610		(33)
Increase in deferred contract costs		(10,478)		(7,094)
Increase in contract liabilities		1,597		1,417
Cash flow/(outflow) from operations		5,890		(350)
Tax paid net of refunds		(294)		(839)
Cash generated from/(used in) operations		5,596		(1,189)
Cash flow from investing activities
Purchases of property, plant and equipment		(193)		(302)
Sale of property, plant and equipment		7		6
Sales of intangible assets		130		-
Intangible assets acquired		(148)		(1)
Capitalisation of development costs		(1,205)		(1,084)
Net cash used in investing activities		(1,409)		(1,381)
Cash flow from financing activities
Repurchase of share-based consideration		-		(880)
Payment of leases		(693)		(591)
Proceeds from loan		40,000		-
Proceeds from RCF		1,654		-
Debt issuance costs		(873)		-
Repayment of interest on Shareholder loan		(1,155)		-
Repayment of Shareholder loan		(40,000)		-
Exercise of options by employees		5,904		74
Net cash generated from/(used in) financing activities		4,837		(1,397)
Net increase/(decrease) in cash and cash equivalents		9,024		(3,967)
Revaluation of cash due to changes in foreign exchange rates		(223)		(5)
Cash and cash equivalents at beginning of year		8,211		40,405
Cash and cash equivalents at end of year		17,012		36,433

Notes

 

1.  General information

The financial information set out in this document is for Kape Technologies plc (the "Company") and its subsidiary undertakings (together the "Group") in respect of the six months ended 30 June 2020.

Kape is a leading 'privacy-first' digital security software provider to consumers. Through its range of privacy and security products, Kape focusses on protecting consumers and their personal data as they go about their daily digital lives. To date, Kape has 2.4 million paying subscribers, supported by a team of over 350 people across eight locations worldwide. Through its subscription based platform, Kape has established a highly scalable SaaS-based operating model, geared towards capitalising on the vast global consumer digital privacy market.

The Board of Directors approved this interim financial information on 14 September 2020.

2.  Basis of preparation

This interim consolidated financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted for use in the EU. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 31 December 2019 Annual Report. The financial information for the half years ended 30 June 2020 and 30 June 2019 does not constitute statutory accounts.

The annual financial statements of Kape Technologies Plc ('the group') are prepared in accordance with IFRS as adopted by the European Union. The comparative financial information for the year ended 31 December 2019 included within this report does not constitute the full statutory Annual Report for that period. The statutory Annual Report and Financial Statements for 2019 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 31 December 2019 was unqualified and did not draw attention to any matters by way of emphasis.

The Group has applied the same accounting policies and methods of computation in its interim consolidated financial statements as in its 2019 annual financial statements, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2020, and are adopted in the 2020 financial statements.

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.

After making enquiries, the directors have concluded that the Group has adequate resources to continue operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the half-yearly consolidated unaudited financial statements.

3.  Disaggregation of revenue

		Six months ended 30 June 2020		Six months ended 30 June 2019
		(unaudited)		(unaudited)
		$'000		$'000
Sale of Digital Security, endpoint protection, and PC performance products		16,749		17,705
Sale of Digital Privacy software solutions		42,237		12,228
		58,986		29,933

The following table presents our revenues disaggregated by the timing of revenue recognition in accordance with our reporting segments:

	Six months ended 30 June 2020 (unaudited) (USD, in thousands)			Six months ended 30 June 2019 (unaudited) (USD, in thousands)
	Digital Security	Digital Privacy	Total	Digital Security	Digital Privacy	Total
Revenue recognised over a period	2,158	35,884	38,042	2,196	7,862	10,058
Revenue recognised at a point in time	14,591	6,353	20,944	15,509	4,366	19,875
Total	16,749	42,237	58,986	17,705	12,228	29,933

 

4.  Segmental information

Segment revenues and results

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

·  Digital Security - comprising software and SaaS products offering security, endpoint protection and PC performance.

·    Digital Privacy - comprising virtual private network ("VPN") solutions and other privacy SaaS products.

Six months ended 30 June 2020		Digital Security			Digital Privacy		Total
		$'000			$'000		$'000
Revenue		16,749			42,237		58,986
Cost of sales		(1,087)			(7,526)		(8,613)
Direct sales and marketing costs		(8,621)			(10,151)		(18,772)
Segment result		7,041			24,560		31,601
Central operating costs							(15,179)
Adjusted EBITDA (note 5)							16,422
Depreciation and amortisation							(9,790)
Employee share-based payment charge							(542)
Exceptional or non-recurring costs							(2,683)
Operating profit							3,407
Finance income							-
Finance costs							(2,031)
Profit before tax							1,376
Taxation							(1,167)
Profit from the period							209

Six months ended 30 June 2019
		Digital Security			Digital Privacy		Total
		$'000			$'000		$'000
Revenue		17,705			12,228		29,933
Cost of sales		(1,825)			(2,338)		(4,163)
Direct sales and marketing costs		(7,702)			(3,369)		(11,071)
Segment result		8,178			6,521		14,699
Central operating costs							(8,943)
Adjusted EBITDA (note 5)							5,756
Depreciation and amortisation							(2,840)
Employee share-based payment charge							(989)
Exceptional or non-recurring costs							(519)
Operating profit							1,408
Finance income							317
Finance costs							(420)
Profit before tax							1,305
Taxation							(369)
Profit from the period							936

5.  Operating Profit

 

Adjusted EBITDA

Adjusted EBITDA is calculated as follows:

			Six months ended 30 June 2020		Six months ended 30 June 2019
			$'000		$'000
Operating profit			3,407		1,408
Depreciation and amortisation			9,790		2,840
Employee share-based payment charge			542		989
Exceptional and non-recurring costs:
Non-recurring staff and restructuring costs			2,465		401
Exceptional professional services costs			218		118
Adjusted EBITDA			16,422		5,756

Operating costs

Operating costs are further analysed as follows:

	Six months ended 30 June 2020 Adjusted $'000	Six months ended 30 June 2020 Total $'000		Six months ended 30 June 2019 Adjusted $'000	Six months ended 30 June 2019 Total $'000
Direct sales and marketing costs	18,772	18,772		11,071	11,071
Indirect sales and marketing costs	4,644	4,685		3,687	3,756
Selling and marketing costs	23,416	23,457		14,758	14,827
Research and development costs	2,963	3,054		1,384	1,547
Management, general and administrative cost	7,572	10,665		3,872	5,148
Depreciation and amortisation	2,155	9,790		1,281	2,840
Total operating costs	36,106	46,966		21,295	24,362

Adjusted operating costs exclude share-based payment charges and employer costs related to employee exercises, exceptional bonuses for the acquisition and integration of PIA, professional services related to business combinations, and amortisation of acquired intangible assets.

6.  Shareholder's equity

Ordinary share capital as at 30 June 2020 amounted to $16,014 (30 June 2019: $14,850; 31 December 2019: $16,014).

The number of shares in issue as at 30 June 2020 was 160,144,132 (30 June 2019: 148,496,073; 31 December 2019: 160,144,132).

As of 30 June 2020, the Company held in treasury a total of 436,884 ordinary shares of $0.0001 (30 June 2019: 4,390,442; 31 December 2019: 3,865,223). During the six months ended 30 June 2020, 3,428,339 ordinary shares of $0.0001 were transferred out of treasury to satisfy the exercise of options by the Company employees (30 June 2019: 85,111).

The Kape Technologic plc Employee Benefit Trust holds 1,200,000 Ordinary Shares (30 June 2019: 1,800,000; 31 December 2019: 1,800,000), the voting rights to which have been waived.

7.  Earnings per share

Basic profit per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

			Six months ended 30 June 2020		Six months ended 30 June 2019
			cents		cents
Basic earnings per share			0.13		0.7
Diluted earnings per share			0.11		0.6
Adjusted basic			6.3		2.6
Adjusted diluted			5.3		2.5

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

			Six months ended 30 June 2020		Six months ended 30 June 2019
			$'000		$'000
Profit/(Loss) for the period			209		936
Post tax adjustments:
Employee share-based payment charge			542		1,010
Exceptional and non-recurring costs			2,213		416
Amortisation on acquired intangible assets			6,785		1,244
Finance cost on deferred consideration and leases			550		-
Adjusted profit for the year			10,299		3,606

			Number		Number
Denominator - basic:
Weighted average number of equity shares for the purpose of earnings per share			163,228,289		142,285,061
Adjustments for calculation of diluted earnings per share:
Impact of potentially dilutive shares related to employee options			7,658,686		3,227,811
Impact of potentially dilutive shares related to deferred shares consideration for business			23,146,630		-
Impact of potentially dilutive shares related to deferred shares consideration for business			194,033,605		145,512,872

The diluted denominator has not been used where this has anti-dilutive effect.

The difference between weighted average number of Ordinary shares used for basic earnings per share and the diluted earnings per share is 30,805,316 (H1 2019: 3,227,811) 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 to be held in escrow against future claims.

8.  Loans and Borrowings

			Bank Loan		Shareholder loan
			$'000		$'000
At 31 December 2019			-		40,221
Term Facility			40,000		-
Revolving credit facility			1,654		-
Debt issuance costs			(1,486)		-
Interest expenses			268		934
Interest paid			-		(1,155)
Repayment of loan			-		(40,000)
At 30 June 2020			40,436		-

Shareholder loan

On 6 December 2019, Kape entered into a $40.0 million short-term debt loan from Unikmind Holdings Limited ("Unikmind"), Kape's largest shareholder, and was also provided with an additional debt facility of $20.0 million, $5 million of it would have been available on December 2020 and $15 million on December 2021 ("Term Loan"). The Term Loan had a fixed interest rate of 5% above 6 months USD Libor. Each tranche of the Term Loan was 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 also includes a commitment fee on undrawn amounts only from the moment they become available in accordance with 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.

On 4 May 2020, Kape repaid the Term Loan and accumulated interest following closing of a new bank debt facility.

Bank loan

(a)  General

On 28 April 2020, Kape agreed with Bank of Ireland, Barclays Bank, and Citi Commercial Bank (the "Banks"), to provide a senior secured term and revolving credit facilities of up to $70 million (the "New Debt Facilities"), the facility is a club of banks with Bank of Ireland acting as the agent bank replacing a short-term debt facility.

The New Debt Facilities comprise a $40 million term facility (the "Term Facility"), a $10 million revolving credit facility (the "RCF"), and a $20 million uncommitted acquisition facility (the "Uncommitted Acquisition Facility"). The New Debt Facilities have a three-year term with an option to extend by up to an additional two years, 50% of the Term Facility will be repaid on a quarterly basis across 36 months starting from 30 September 2020.

Term Facility

The net proceeds of the Term Facility after deducting commissions and other direct costs of the Term Facility totalled $38.514 million. Commissions and other direct costs of the Term Facility have been offset against the principal balance and are amortised throughout the loan.

The Term Facility carries an interest rate of 3 months LIBOR (as of the beginning of the relevant period) plus an opening margin of 2% per annum.

The applicable Margin is linked to the Adjusted Leverage, tested at the end of each quarter for the preceding 12 months (first test will be a six-month test, second will be nine months and then 12 months at each quarterly test date thereafter). In case the Adjusted Leverage will be greater than 2 or less than 1 the applicable margin will change to 2.25% or 1.85% respectively. The effective interest rate after considering debt issuance cost is 4.1%.

RCF

A $10 million revolving credit facility, that carries a commitment fee for the unused facility of 35% of the applicable margin and interest rate as of the Term Facility. As of the reporting date the credit facility drawn amount is $1.65 million.

Uncommitted Acquisition Facility

Up to $20 million to be used for Acquisitions, including the funding of deferred consideration due under the acquisition agreement of Private Internet Access. The interest rate will be 3 months LIBOR plus a margin of no more than 1% above the original Margin applicable to the Term Loan or Revolving Credit Facility.

(b)  Security

The New Debt Facilities is secured by first ranking security over all assets (including material Intellectual Property) of Kape Technologies Plc ("Parent") and her material subsidiaries ("Obligors") and over the shares in all Obligors (other than the Parent).

(c)  Loan Covenants

The Group is required to comply with the following financial covenants:

·The ratio of EBITDA to Net Finance Charges ("Interest Cover") shall not be less than 4.0x in respect of any Relevant Period.

·The ratio of Total Net Debt on the last day of the relevant period to Adjusted EBITDA in respect of that Relevant period ("Adjusted Leverage"), shall not exceed 2.5x for the first 4 relevant periods and 2.0x thereafter.

As of 30 June 2020, the Group has met the financial covenants as follows:

· Interest Cover: 27

· Adjusted Leverage: 0.71

30 June 2020	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
Bank Loan	40,436	44,005	2,291	6,239	35,475	-

9.  Related party transactions

The Group is controlled by Unikmind Holdings Limited, registered in Isle of Man, which owns 67.65% of the Company's shares. Mr. Teddy Sagi is the sole ultimate beneficiary of Unikmind Holdings Limited.

On 4 May 2020, the Company fully repaid the shareholder loan and accumulated interest following the closing of a bank debt facility, see Note 8.

During the period the following transactions were carried out with related parties:

	Six months ended 30 June 2020		Six months ended 30 June 2019
	$'000		$'000
Technical support services to end customers and administration services provided by common controlled companies	(120)		(128)
Office expenses to common controlled companies	(89)		(37)
Development services provided by common controlled company	-		(30)
Payment processing services provided by common controlled company	-		(170)
Amortisation of right-of-use assets with common controlled companies related to office leases	(496)		(414)
Interest expenses from lease liabilities to common controlled companies related to office leases	(64)		(35)
Interest expenses from shareholder short-term loan and debt facility (Note 8)	(934)		-
	(1,703)		(814)

10.  Government Grants

On 30 April 2020, Private Internet Access Inc received $0.7 million from the US Treasury as part of the Paycheck Protection Program ("PPP"). Following the Covid-19 crisis, US Treasury declared the PPP to provide relief to small businesses during the Coronavirus pandemic as part of the $2 trillion Coronavirus Aid. Each business can borrow up to 2.5 of monthly payrolls, rent, and utilities expenses. The loan will bear interest of 0.5% and potentially can be fully forgiven if the proceeds were used to fund qualified payroll and non-payroll (rent and utilities) expenses in the 24 weeks subsequent to disbursement while keeping a level factor of the expenses.

As of 30 June 2020, the Group believes the PPP amount will be fully forgiven and accounted as a Government grant. The PPP is included in Trade and other payables as deferred income and recognised in profit and loss over the period necessary to match them with the costs that they are intended to compensate.

11.  Cautionary statement

This document contains certain forward-looking statements relating to Kape Technologies plc ('the Group'). The Group considers any statements that are not historical facts as "forward-looking statements". They relate to events and trends that are subject to risk and uncertainty that may cause actual results and the financial performance of the Group to differ materially from those contained in any forward-looking statement. These statements are made by the directors in good faith based on information available to them and such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying any such forward-looking information.

 

END

 

 

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