KAPE.L Regulatory News (KAPE)

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

17 March 2020

Kape Technologies plc

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

FINAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2019

Strong organic growth, game-changing acquisition and

execution of long-term growth strategy

Kape (AIM: KAPE), the digital security and privacy software business, announces its results for the year ended 31 December 2019.

Financial highlights

· Strong revenue and profit growth underpinned by significant organic growth in Kape's core business

o Revenues increased 27% to $66.1 million (2018: $52.1 million)

o Strong growth in recurring revenues to $51.5 million, an increase of 87% (2018: $27.6 million)

o Adjusted EBITDA1 up 40% to $14.6 million (2018: $10.4 million)

o Growth in adjusted EBITDA margins to 22.0% (2018: 19.9%)

o Increase of 30% in Adjusted Fully Diluted Earnings Per Share to 6.5 cents (2018: 5.0 cents), Fully Diluted Earnings Per share was 1.7 cents (2018: 1.5 cents)

o Net profit increased to $2.0m (2018: Net loss of $0.5m)

o Adjusted cash flow from operations attributable to current year of $17.9 million (2018: $15.9 million), which represents a cash conversion of 123% (2018: 153%), this excludes movement in Deferred contract costs. Adjusted cash flow from operation of $1.0 million (2018: $5.7 million)

Operational highlights

• Strong SaaS metrics driving the ongoing profitability, growth and earnings predictability of the Group

• Increase in subscribers to 2.35 million at year-end (31 December 2018: 0.83 million), with 40.2% growth (excluding Private Internet Access), with an 81% retention rate.

• Visibility on revenues from existing users increased to $98.8 million2 (31 Dec 2018: $30.0 million)

• Completed the successful integration of Intego and ZenMate

• $1.7 million in annualised cost savings identified relating to ZenMate

• Intego materially strengthened the Company's position in the North American market and expands Kape's internet security software capability

• Completed acquisition of Private Internet Access in December

• Integration is well underway, on track to realise $3.5 to 4.5 million annual savings in 2020

• Expanded the Group's user base, with 49% of revenues from North America on a pro forma basis

• Added further product innovation and R&D capabilities

• Positioned the Group to be a global leader in digital privacy

• Strong R&D and product development:

• Launched proprietary infrastructure technology

• Consumer cybersecurity centre developed and expected to launch in Q2

Outlook

· We started 2020 with strong momentum and we are on track to generate proforma revenues of between $120-$123 million and Adjusted EBITDA of between $35-$38 million

· Kape has a clear strategy in-place through which to deliver growth underpinned by the Group's product, brand and market presence as well as its robust business model

· We are on-track to put in place a long-term debt facility from commercial banks to replace the Unikmind loan

· As per Covid-19; we do not see an effect on demand for our products, and on the operational level Kape is a digital company which is well structured to operate a remote workforce while providing full service to our customers

Ido Erlichman, Chief Executive Officer of Kape, commented:

"There is no question that 2019 has been a landmark period of growth, and I think it is very important to thank all of our staff that helped deliver this excellent set of results and the progress achieved during the year. We have remained steadfast in our commitment to driving record levels of organic growth whilst successfully executing on an extremely ambitious M&A program, demonstrated by the acquisition of PIA. Kape is now ideally placed to drive significant growth across our business in the burgeoning markets in which we operate.

"We are now on the fast track to making our vision a reality by creating one of the most prominent privacy companies globally. We have positioned Kape to become a leading digital privacy company, empowering consumers to manage their own data and digital security. We also expect to enter an exciting period of product innovation as we further realise our vision of making the internet a safe and accessible place for everyone."

An audio webcast of Kape's results presentation is now available via the following link: 

http://bit.ly/KAPE_FY19

1 Adjusted EBITDA from continuing operations only. Adjusted EBITDA is a non GAAP measure and a company specific measure which excludes other operating income and expenses which are considered to be one off and non-recurring in nature.

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

Enquiries:

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 over 2 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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Chairman's statement

Introduction

Consumers' awareness of the importance of digital privacy reached new heights in 2019, given the significant number of high-profile data breaches, which saw hundreds of millions of consumer data points exposed. This included, in some instances, sensitive medical data, financial data as well as the unprecedented 600 million passwords revealed by the largest social networks. Consumers are therefore even more mindful of the inability of some of the world's largest companies to not only protect their online data, but also in their understanding of the true value of personal data to these businesses. This ongoing desire for personal information by corporates has driven consumers to control and protect their online footprint. 

This strong macro landscape continues to fuel our end markets, and consequently our addressable market expands almost daily. Kape has now developed a strong suite of solutions that directly help consumers maintain their online privacy to combat the ever evolving and diverse threat to individuals' online security. 

2019 overview

We made significant progress in 2019, strategically, operationally and financially. Clearly the acquisition of Private Internet Access ("PIA") in December will be particularly important in our ongoing development, but over and above this, management delivered strong organic growth and seamlessly integrated prior acquisitions, such as Intego and ZenMate. This proved the team's expertise in integrating software solutions into the Group to deliver cost synergies and material growth. The integration of PIA has already begun, and we look forward to realising the significant benefits that this transaction will bring our business.

Growth Strategy

Our ongoing growth strategy will continue to be focused on a combination of organic growth and the execution of select acquisitions. We expect that 2020 will be focused on the integration of PIA and specifically the implementation of our business intelligence systems and proprietary infrastructure management technology as well as our user acquisition. Our more over-arching strategy will focus on the following three pillars, which we intend to leverage to generate material growth:

· Product - our internal R&D developments as well as the acquisition of PIA significantly enhanced our suite of solutions and R&D team, giving us a significant platform from which to further broaden our technology stack

· Brand and market presence - Private Internet is a well-recognised brand, which we intend to leverage globally, with the enlarged group servicing a significant user base through which to grow

· Business model - we operate a robust SaaS-based business model which continues to deliver strong levels of recurring revenue growth and earnings predictability

Corporate Governance

We constantly strive to create a company culture at Kape which adheres to the highest levels of corporate governance. One of the many initiatives we have undertaken is to ensure a constant dialogue between internal and external stakeholders. This includes holding regular meetings with key employees across the business and engaging proactively with all our board members, ensuring the highest levels of transparency across the organisation. Employees are the key to our success and as such we endeavour to sustain an inclusive environment across all our global offices, always ensuring open lines of communication.

One of our key stakeholders is our worldwide customer base, the satisfaction of which we constantly monitor and review as we believe it sets us apart from many of our peers. We now service over 2.35 million customers worldwide and this emphasis on service is evidenced in the 81% retention rate that we have achieved in the period. Therefore, customer support is at the front of management's mind and prioritised through our wholly owned customer support centres where we have expanded our 24/7 support to additional product lines, as well as constantly improving time to respond.

With regards to the sustainability of the business, given that we are a digital business our environmental footprint is low, but despite this, we constantly monitor our travel and infrastructure footprint and have strict guidelines and technologies in place to minimise our impact.

PIA bonus award

Following the transformational acquisition of PIA, the Kape Remuneration Committee has approved an exceptional bonus award of $900,000 to Ido Erlichman (CEO) and $675,000 to Moran Laufer (CFO) (the "PIA Bonus"). No other bonuses will be paid to the Executive directors for the financial year ended 31 December 2020. This exceptional award, due to be paid in 2020 based on the completion of integration milestones in the first quarter of 2020, is separate from the 2019 bonus awards which relates to performance in that year and will be set out in the Remuneration Report in the Kape Annual Report.

On a pro-forma basis this transaction is a significant contribution to revenues of over $120 million and EBITDA of over $35 million in 2020 with the prospect of increased growth in the future. Underpinning this are the addition of 1.1 million SaaS subscribers bringing the group's total subscribers to over 2.35 million. This enlarged subscriber group will now benefit from Kape's high quality digital marketing channels which will further strengthen the PIA revenues. 

The PIA bonus is subject to clawback of up to 20% of the award in relation to meeting revenue and EBITDA targets in FY2020.

The grant of the PIA Bonus is a related party transaction under Rule 13 of the AIM Rules for Companies. Myself, David Cotterell and Martin Blair, being the independent directors, consider, having consulted the Company's Nominated Adviser, Shore Capital & Corporate Limited, that the terms of the related party transaction are fair and reasonable insofar as the Company's shareholders are concerned.

Outlook

I am confident in Kape's prospects and that the combination of organic growth coupled with selected acquisitions and a clear vision and strategy in mind, provides us with an unrivalled platform through which to drive material growth. 

I would like to take this opportunity to thank the Kape team for their continued hard work and dedication to the ongoing success of our business.

As per Covid-19 we would like to note that we do not see material effect on demand for our products as a result of recent global developments; we are also prepared structurally across our different locations for supporting the business and providing full service to our customers through remote working arrangements.

Don Elgie

Non-executive Chairman

16 March 2020

Chief Executive Officer's review 

Introduction

We have entered 2020 in a very strong position. 2019 was a landmark year for Kape, in which we delivered extensive organic growth and successfully executed our mergers and acquisition strategy. During 2019, our core Digital Privacy segment revenues grew by 81.6% (excluding PIA) compared to last year, we made the game-changing acquisition of Private Internet Access and completed the successful integration of Zenmate and Intego.

Kape now has a significant base from which to capture the explosive growth in the digital privacy and security market, underpinned by our recent acquisition which has established our business as the pre-eminent digital privacy company globally. The enlarged group has a sizable global footprint and boasts an enviable portfolio of privacy-first products, positioning it at the forefront of this rapidly expanding market.

Beyond the acquisition, the Group traded strongly in the year-ended 31 December 2019, delivering Adjusted EBITDA of $14.6 million, which was slightly above management expectations and represents a 40% increase on the prior year (2018: $10.4 million). This was achieved with revenues of $66.1 million (2018: $52.1 million), representing an increase of 27% and an increase in net profit to $2.0 million (2019: ($0.5) million) as the Group continued its focus on profitable growth.

Operational review

Key Performance Indicators

Kape continues to deliver a strong return on investment and attractive unit economics supported by its subscription revenue stream and innovative customer acquisition model.

In order to ensure the ongoing profitability, growth and earnings predictability of the Group, Kape reports against the following key KPIs:

· Subscriber base demonstrates the development of our SaaS business model and future revenue potential

· Retention rate indicates levels of customer satisfaction and the high quality of our services and products

· Deferred income and Adjusted operating cash flow are an indicator of the high visibility over revenues and quality of earnings

In 2019, Kape performed strongly against its KPIs, with a combination of strong organic growth and the acquisition of PIA transforming our user base, the Group now servicing 2.35 million subscribers at year-end (31 December 2018: 830,000), an increase of 42.2% in organic growth, excluding the user base of PIA. Kape also expects to generate a much higher level of visibility over income with expected revenues of $98.8 million in future financial years anticipated to be generated from existing customers, an increase of 230% (31 December 2018: $30.0 million), driven by the increase in the Group's user base. The decrease in adjusted operating cashflow is due to our strategy to invest in expanding our user base. In addition, Kape's sustains a high retention rate across its user base of 81%, which is very strong for a consumer-focused software business.

Kape generated significant adjusted operating cash flow in 2019, up 12.3% to $17.9 million (31 December 2018: $15.9 million), supported by its subscription revenue stream, which enabled the Company to increase its investment in growth by 65.7% to $16.9 million in 2019 (31 December 2018: $10.2 million).

Another important capability which we continue to measure is our success in both integrating and growing acquisitions. Since the acquisition of CyberGhost in March 2017, we have grown our paying customer base at Cyberghost by 400% and we have organically grown our digital privacy revenue by 81.5% in the year ended 31 December 2019, demonstrating our clear ability to successfully leverage our digital marketing engine to grow a business servicing consumers and SMEs.

Furthermore, in 2019, we have been able to successfully complete the integration of both Zenmate and Intego, which we acquired in 2018, reducing the cost-base while continuing to develop our core cybersecurity capabilities. These successful transactions gave us the confidence to execute on the much larger Private Internet Access acquisition and are testament to our ability in integrating businesses to enhance revenue growth rates, optimise synergies and realise cost benefits.

Acquisition of Private Internet Access

On the 16th of December 2019, Kape acquired Private Internet Access. This deal is transformational for the Group both strategically and financially. Kape has now doubled its paying customer base whilst creating a significant foothold in the US market, with 49% of the Group's customers now based in the US. In addition, the PIA brand has positioned Kape as a top player in the North American market within the digital privacy and security space. The enlarged business is also highly cash generative and the acquisition was significantly earnings enhancing, with the enlarged group expected to generate over US$120 million in revenues and over $35 million in Adjusted EBITDA in the year ended 31 December 2020.

Moving forward, the acquisition provides three core levers for growth and we are already ahead of schedule in leveraging these:

· User growth: we are currently implementing our customer acquisition engine to increase users as, prior to its acquisition, PIA's customer acquisition strategy was primarily organic

· Brand expansion: Private Internet Access is a well-established brand in the US and, when combined with our growth engine, has the potential to be the largest brand in this space globally

· Product development: as part of the transaction, we added new digital privacy products, which are currently being formally launched or are in the late stages of development. We expect these to provide further opportunity to grow our user base:

o LibreBrowser - a completely private browser

o Private.sh - a private and encrypted search engine based on cryptography technology

o Private Storage - a cloud-based secure private storage solution

Our integration program is now well underway and has been progressing ahead of expectations. We plan to realise between $3.5 to 4.5 million in annualised cost savings by the end of 2020. Savings will mainly be driven by the implementation of our infrastructure and capacity management technology, which has been developed in-house, into PIA's infrastructure allowing a reduction in the cost to serve our users while increasing the quality of our service across our entire customer base. In addition economies of scale allow us to improve our capacity management as well as vendor relations. Already, we have almost completed the integration of the customer service side where we are providing PIA's customers with our 24/7 customer support.

Organic growth

The Group's existing solutions performed strongly in 2019, benefiting from growing demand coupled with the ongoing implementation of our digital marketing expertise. Growth was derived mainly from our Digital Privacy segment, driven by overall growth in the market as well as management's focus on privacy solutions given the high retention rates in that division.

Overall, we have experienced 42% growth in paying subscribers from 830,000 (December 2018) to 1.18 million (December 2019) excluding PIA. We have also demonstrated a substantial growth in revenues from $52.1 million (December 2018) to $63.6 million (December 2019) excluding PIA.

Product development

We have made significant progress on the R&D front, including the launch of a landmark infrastructure revamp for our privacy solution, Gen4, an internal technology development which allows Kape to upgrade our infrastructure in a modular way, enabling technological updates to be created at a speed well above industry standards. This upgrade increases the speed of connection by an average of 35% in key geographies and our server fleet performs significantly more efficiently than before the upgrade; providing our customers with better performance and increased scalability; this upgrade also improves our security levels with server encryption, man-in-the-middle attack prevention and other protections.  Most notably, we have already started integrating this solution into the PIA infrastructure.

In addition, in 2019, the Group continued to demonstrate its ability to launch innovative solutions to combat the increasing diversity of digital threats to consumers. In June 2019, the Group launched the ZenMate Ultimate app, the most comprehensive update of ZenMate's VPN platform to-date, which has seen strong traction since launch. Furthermore, in July 2019, our macOS security analyst team was the first to discover several important malware security threats for Apple users, against which Intego's users are now fully protected.

Looking forward, we are expecting to launch our privacy and security control center in Q2 2020, which will allow our customers to have visibility over their exposure and control their security and privacy measures from one dashboard. This will deliver a complete solution of digital privacy and security features in a unified experience.

Growth strategy

We believe Kape is very well-placed to markedly increase its market share in what is a rapidly expanding space. Central to this are our core growth engines, which are to:

· Expand our global customer base

- Utilise the strong foundation of the Group's over 2.35 million paying subscribers to accelerate future growth

· Drive product innovation and R&D

- Execute on opportunities to increase the breadth of solutions we currently provide globally

· Leverage brand recognition

- Take advantage of the significant opportunity to further leverage the 'Private Internet' brand internationally, beyond North America

· Utilise our unique technology platform

- Further bolster the implementation of our user acquisition technologies

· Continue to evaluate select acquisitions

- Build upon our track-record of integrating and growing SaaS products to create a truly dominant business globally

Outlook

2019 was undoubtably a seminal year for the Group, in which we created a strong launchpad to accelerate our growth aspirations. These excellent foundations have enabled the Group to make a strong start to 2020 and we expect this to continue beyond the current financial year.

We are pleased to be able to deliver on what we have previously pledged to our partners and shareholders and have a clear roadmap to continue delivering profitable growth in future periods.

We are now fast-tracking our vision into a reality by creating one of the most prominent privacy companies globally. In one acquisition, I believe we have positioned Kape to become one of the leading digital privacy service providers in the world, empowering consumers to manage their own data and digital security.

Ido Erlichman

Chief Executive Officer

16 March 2020

3 Adjusted operating cash flow attributable to current year is calculated as Adjusted operating cash flow excluding change in deferred contract costs

Chief Financial Officer's review

Overview

Revenue from continued operations for the year to 31 December 2019 increased by 26.9% to $66.1 million (2018: $52.1 million). Adjusted EBITDA4 from continued operations increased by 40.3% to $14.6 million (2018: $10.4 million) with the increase in Adjusted EBITDA driven by the strong performance of Kape's Digital Privacy activity, with an overall increase of 98.0% in revenues and 72.3% in segment results. Organically, excluding the contribution of PIA, the Digital Privacy segment revenues and segment results increased by 81.5% to $27.6m and 48.3% to $13.4m respectively.

Adjusted cash flow from operations attributable to the current financial period was $17.9 million (2018: $15.9 million), which represents cash conversion of 123%. In addition, during the period $16.9 million was reinvested in user acquisition costs that will be expensed in future periods (2018: $10.2 million). When including this investment, adjusted cash flow from operations decreased to $1.0 million (2018: $5.7 million). At 31 December 2019 the Group's cash balance was $8.2 million (31 December 2018: $40.4 million) and the net debt was $32.0 million after a cash investment of $64.3 million for the acquisition of PIA.

On 16 December 2019, the Group acquired 100% of the share capital of LTMI holding, trading as Private Internet Access, for a total consideration of $130.1 million5 and enterprise value of $162.3 million6. PIA was established in 2009 and is a security software business, based in Denver, Colorado, with a focus on the provision of virtual private network ("VPN") solutions. Since its inception, PIA has grown to become a leading VPN service provider focused on the consumer market and employing approximately 65 employees of which 35% are in an R&D capacity. PIA has over 1 million paying subscribers globally, with 49% of them based in the N. America. 

The divestment of the Media division in July 2018, resulted in changes to its management reporting system and we now operate with two reportable segments:

· Digital Privacy - comprising the Group's Virtual Private Network products which comprise Cyberghost, Private Internet Access and Zenmate;

· Digital Security - comprising the Group's end point security and PC performance products

Segment Result

The segment result has been calculated using revenue less costs directly attributable to that segment. Cost of sales comprises payment processing fees and infrastructure costs of the group's privacy products. Direct sales and marketing costs are user acquisition costs.

During the period, the Digital Privacy segment has seen continued growth with an 98% increase in revenue to $30.1 million (2018: $15.2 million) and a 72.3% increase in segment result to $15.5 million (2018: $9.0 million). The segment margin has decreased to 51.6% (2018: 59.3%) mainly because the revenue growth is driven by user acquisition activities. Following the acquisition of PIA in December 2019, PIA contributed $2.5 million to revenues and $2.0 million to segment results. Excluding the acquisition of PIA, the segment results increased by 48.3% to $13.4 million in 2019.

During the period, the Digital Security segment margins have improved to 49.7% (2018: 45.2%) resulting in an increase of 7.2% in segment results to $17.9 million (2018: $16.7 million) despite a 2.4% decrease in revenues to $35.9 million (2018: $36.9 million). The increase in margins is driven from the higher proportion of recurring revenue of Intego's end point security products.

Adjusted EBITDA from continued operations

Adjusted EBITDA from continued operations for the year to 31 December 2019 was $14.6 million (2018: $10.4 million). Adjusted EBITDA is a non-GAAP company specific measure which is considered to be a key performance indicator of the Group's financial performance. It excludes share based payment charges and expenses which are considered to be one-off and non-recurring in nature and are excluded from the following analysis:

Operating profit

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

Exceptional and non-recurring costs in 2019 comprised restructuring costs of $0.4 million due to restructuring of Zenmate and Intego that were acquired in 2018 and $1.9 million for professional services and other acquisition related cost that derive from the acquisition of PIA (2018: $0.8 million).

ProfΙt before tax from continuing operations

Profit before tax from continuing operations was $2.8 million (2018: $3.3 million).

Profit after tax from continuing operations

Profit from continuing operations was $2.5 million (2018: $2.2 million). The tax charge derives mainly from group subsidiaries' residual profits. The Group recognises a deferred tax asset of $1.6 million (2018: $0.2 million) in respect of tax losses accumulated in previous years. The increase is due to recognition of tax asset in Germany following the merger of two subsidiaries ZenGuard GMBH and Mobile Concepts GMBH.

Cash flow

Cash flow from operations was $1.4 million (2018: $3.7 million). Adjusted cash flows from operations, after adding back payments that are one-off in nature was $1.0 million (2018: $5.7 million). This represents a cash conversion of 7% of Adjusted EBITDA (2018: 55%). The decrease in operating cash flow is due to an increase in user acquisition investment attributable to future periods to $16.9 million (2018: $10.2 million). Excluding the investment, adjusted operating cash flow attributable to the current financial period increased to $17.9 million (2018: $15.9 million), which represents a cash conversion of 123%.

Tax paid net of refunds in the period was $1.4 million (2018: $0.5 million). The increase was mainly due to prepayments in France and the United States by Group subsidiaries related to Intego.

Cash spent in the period on capital expenditure of $67.5 million (2018: $23.6 million) mainly comprises $64.4 million for the acquisition of PIA, $2.6 (2018: $2.3 million) million capitalised development costs and $0.5 million (2018: $0.2 million) purchase of fixed assets.

Financial position

At 31 December 2019, the Company had cash of $8.2 million (31 December 2018: $40.4 million), net assets of $155.0 million (31 December 2018: $73.0 million) and net debt of $32 million (2018: Nil). At 31 December 2019, trade receivables and contract assets were $3.4 million (31 December 2018: $3.6 million).

Moran Laufer

Chief Financial Officer

16 March 2020

4 Adjusted EBITDA is a company specific measure which is calculated as operating profit before depreciation, amortisation (including right to use asset amortisation), exceptional and non-recurring costs, employee share-based payment charges and charge of repurchase of employee options which are considered to be one off and non-recurring in nature as set out in note 4. The Directors believe that this provides a better understanding of the underlying trading performance of the business.

5Total consideration per Note 10 plus cash paid to PIA's phantom shareholder, the value of the share consideration was calculated based on the share price at the day of closing, 16 December 2019

6Total consideration in (4) above plus cash paid to repay long-term debt

Consolidated statement of comprehensive income

For the year ended 31 December 2019

Consolidated statement of financial position

As at 31 December 2019

Consolidated statement of changes in equity

For the year ended 31 December 2019

* amounts below 1 thousands

Consolidated statement of cash flows

For the year ended 31 December 2019

Notes forming part of the financial information for the year ended 31 December 2019

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 2019 or 31 December 2018. The annual report and financial statements for the year ended 31 December 2019 were approved by the Board of Directors on 16 March 2020, along with this preliminary announcement. The financial statements for the year ended 31 December 2019 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 2018, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2019. New standard impacting the Group that have be adopted in the annual financial statements for the year ended 31 December 2019 is IFRIC 23 Uncertainty over Income Tax Positions. Details of the impact of this standard is 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. The bridge loan term granted by Unikmind for the acquisition of LTMI holding was due to expire on 12 June 2020, but post year end was extended to expire on 31 March 2021. The directors of Kape consider, having consulted with the Company's nominated adviser, that the grant of the option to extend the term of the Term Loan to 31 March 2021 is fair and reasonable insofar as the Company's shareholders are concerned. The company is currently working on refinancing the bridge loan granted by Unikmind with long term bank debt. They therefore continue to adopt the going concern basis of accounting in preparing the financial statements. 

Adoption of new and revised standards

New standard impacting the Group that will be adopted in the annual financial statements for the year ended 31 December 2019, and which have given rise to changes in the Group's accounting policies is:

· IFRIC 23 - Uncertainty over Income Tax Positions (IFRIC 23);

IFRIC 23 - Uncertainty over Income Tax Positions

IFRIC 23 provides guidance on the accounting for current and deferred tax liabilities and assets incircumstances in which there is uncertainty over income tax treatments. The Interpretation requires:

· The Group to determine whether uncertain tax treatments should be considered separately, or together as a group, based on which approach provides better predictions of the resolution;

· The Group to determine if it is probable that the tax authorities will accept the uncertain tax treatment; and

· If it is not probable that the uncertain tax treatment will be accepted, measure the tax uncertainty based on the most likely amount or expected value, depending on whichever method better predicts the resolution of the uncertainty. This measurement is required to be based on the assumption that each of the tax authorities will examine amounts they have a right to examine and have full knowledge of all related information when making those examinations.

The Group elected to apply IFRIC 23 retrospectively with the cumulative effect recorded in retained earnings as at the date of initial application, 1 January 2019. The Group has maintained provisions for potential historic tax liabilities, As at 31 December 2019 the amount of these provisions is $ 5.3 million (2018:$1.4 million). The increase in tax liabilities comprise $3.3 million related to the acquisition of LTMI holding and $0.6 million from uncertainties over the income tax treatment related to cross border services and transactions that derive from the multi-national nature of the Company.

2 Revenue

Revenues from software and SAAS products offering security, malware protection and PC performance are generated from the Digital Security CGU, while revenues from provision of Digital privacy software solutions are generated from the Digital Privacy CGU. The revenues generated from the Media CGU in the period ended December 31,2018 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:

 (b) Contract liabilities

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

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.

Management expects that 83.0% of the transaction price allocated to the unsatisfied contracts (which represent to contract liabilities) as of 31 December 2019 will be recognised as revenue during the next annual reporting period ($29,299,000), 13.6% and 2.9% ($4,812,000 and $1,032,000) will be recognised in 2021 and 2022 financial years, respectively. The remaining 0.5% ($169,000) will be primarily recognised on the following financial years.

(c) Assets recognised from costs to obtain and fulfil a contract

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

3 Segmental information

Segments revenues and results

The divestment of the Media division in July 2018 (Note 11), resulted in changes to its management reporting system and now operates two reportable segments:

· Digital Security - comprising software and SAAS products offering security, malware protection and PC performance.

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

The Media division which represented a separate reportable segment in the prior year and this has been accounted for as a discontinued operation, as set-out in Note 11.

Exceptional or non-recurring costs in 2019 comprised restructuring costs of $0.4 million mainly due to restructuring of ZenMate and Intego that were acquired during 2018, $1.9 million (2018: $0.8 million) for professional services and other business combinations related costs which derive from LTMI Holding acquisition.

Exceptional or non-recurring costs in 2018 comprised non-recurring staff costs of $0.5 million mainly due to payments made to option holders in parallel to the special dividend paid in June, $0.8 million for professional services for acquisitions and rebranding expenses and $0.1 of onerous cost related to lease contract.

 (1) Adjusted EBITDA is a company specific measure which is calculated as operating loss before depreciation (including right to use assets amortisation), amortisation, exceptional or non-recurring costs, employee share-based payment charges and 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 2019 and 2018 there were no customers contributing more than 10% of total revenue of the Group.

Geographical analysis of revenue

Revenue by origin of the recording entity

Geographical analysis of non-current assets

4 Operating profit

Adjusted EBITDA

Adjusted EBITDA is calculated as follows:

Operating profit has been arrived at after charging:

Operating costs

Operating costs are further analysed as follows:

Adjusted operating costs exclude share based payment charges, exceptional or non-recurring costs, other operating expenses and amortisation of acquired 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 recognised a deferred tax asset of $1,598,000 (2018: $159,000) in respect of tax losses accumulated in previous years.

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

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

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

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

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

The Group maintained provisions for potential historic tax liabilities presented on Other payables. In 2019 the Group increased its provision of corporate tax liabilities by $0.6 million to $2.0 million (2018: $1.4 million). The increase in tax liabilities driven by the multi-national nature of the Company which give rise to uncertainty over the income tax treatment related to cross border services and transactions. In addition, Other payables as of 31 December 2019 include tax exposure balance of $3.3 million (2018: $Nil) following the due diligence performed with LTMI Holding acquisition.

6 Intangible assets

On 13 December 2019, the Group acquired 100% of the share capital of LTMI Holdings ("LTMI"). LTMI is the holding company for Private Internet Access Inc ("PIA"), a leading US-based digital privacy company with strong position in the data privacy services. PIA was established in 2009 and is a security software business, based in Denver, Colorado, with a focus on the provision of virtual private network ("VPN") solutions. Since its inception, PIA has grown to become a leading VPN service provider focused on the consumer market and employing approximately 65 employees amongst them 35% are in an R&D capacity. PIA has over 1 million paying subscribers globally, with 48% of them based in the US. See Note 10.

On 16 October 2018, the Group acquired 100% of the share capital of ZenGuard GMBH trading as ZenMate ("ZenMate"), a multi-platform security software business with a focus on the provision of virtual private network ("VPN") solutions. ZenMate is a digital privacy company, headquartered in Berlin, focused on encrypting and securing internet connections and protecting individuals' privacy and digital data.

On 24 July 2018, the Group acquired 100% of the share capital of Neutral Holdings Inc trading as Intego ("Intego"), a leading Mac and IOS cybersecurity and malware protection SaaS business. Intego is focused on the provision of malware protection, firewall, anti-spam, backup, data protection and parental controls software for Mac.

On 26 July 2018, the Group sold the media division to Ecom Online Ltd. This sale is in-line with the Company's strategy to develop and distribute its own cybersecurity products. The carrying value of the Intangible assets of the Media division on the Group balance sheet as the date of the sale is $2.6 million of which the majority related to Goodwill.

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

The Group tests goodwill annually for impairment, or more frequently if there are indications that goodwill might be impaired. The recoverable amounts of the CGUs are determined from value in use calculations. Goodwill allocated to the Digital Security CGU has a carrying amount of $11,688,000 (2018: $11,688,000) and the Digital Privacy CGU has a carrying amount of $120,729,000 (2018: $8,935,000) 

The key assumptions for the value in use calculations are those regarding the discount rates, growth rates and expected changes to selling prices and direct costs during the period.

For the Digital Security CGU, the recoverable value has been determined from value in use calculations based on cash flow projections for the next 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 (2018: 1 per cent). This rate does not exceed the average long-term growth rate for the relevant markets. The rate used to discount these forecast cash flows is 17 per cent (2018: 25 per cent).

The discount rate used in the valuation of the Digital Security CGU was 17 per cent. If the discount rate was increased by 1 percentage point the effect would have been nil. There is no reasonably possible change in assumption that would give rise to an impairment.

For the Digital Privacy CGU, the recoverable value has been determined from value in use calculations based on cash flow projections for the next 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 (2018: 1 per cent). This rate does not exceed the average long-term growth rate for the relevant markets. The rate used to discount these forecast cash flows is 15 per cent (2018: 25 per cent).

The discount rate used in the valuation of the Digital Privacy CGU was 15 per cent. If the discount rate was increased by 1 percentage point the effect would have been nil. There is no reasonably possible change in assumption that would give rise to an impairment.

Following the acquisition of LTMI holdings the company reassessed the discount rate attributable to the company activities, which resulted in a reduction in the discount rate used to 17 and 15 per cent (compared to 25 per cent in 2018) for the Digital Security and Digital Privacy CGUs, respectively. The reduction in the discount rate reflects the increasing growth and share of revenues from higher customer retention over time product revenues and therefore an increased visibility of future user cash flows. As at 31 December 2019, no impairment would have been recognised if a 25 percent discount rate was used in the impairment reviews for both the Digital Privacy and Digital Security CGUs. 

7 Shareholder's equity

During the year a total of 610,930 new ordinary shares of $0.0001 par value from treasury were sold for cash in relation to share option schemes resulting in cash consideration of $255,000 (2018: $363,000).

As part of the LTMI Holdings acquisition (Note 10), the company issued 42,701,548 new ordinary shares ("Consideration Shares") to be paid in three phases. LTMI co-founders Andrew Lee and Steve DeProspero will each be entitled to be issued 19,247,723 Consideration Shares representing approximately 10.4% of the enlarged issued share capital of Kape, of which 5,250,363 are being issued on completion, 10,498,020 will be issued on the first anniversary of completion and 3,499,340 will be issued on the second anniversary of completion. The balance of the Consideration Shares, being 4,206,102 in aggregate, are being issued to four senior executives of PIA, of which 1,147,333 are being issued on completion, 2,294,077 will be issued on the first anniversary of completion and 764,692 will be issued on the second anniversary of completion. The deferred shares consideration is disclosed as shares to be issued.

During 2018, 1,800,000 shares were transferred out of treasury to an employee benefit trust as part of a jointly owned equity shares award to members of the executive management.

As at 31 December 2019, the Company hold in the treasury total of 3,865,223, of ordinary shares of $0.0001 par value (2018: 4,476,153). During 2019, 610,930 of ordinary shares of $0.0001 par value were transferred out of treasury to satisfy the exercise of options by the company employees (2018: 374,095).

In June 2018, the Company paid a special dividend in the amount of $6.8 million. No additional divided was declared in 2019 and 2018.

The following describes the nature and purpose of each reserve within owner's equity:

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 2019, the following options were outstanding (2018: 12,158,805):

Vesting conditions

Groups 1-5, 7-10 and 12-14 - 25% at the end of the first year following the grant date. 6.25% on a quarterly basis during 12 quarters period thereafter.

Group 6 - 50% at the end of the second year following the grant date and the remainder at the end of the third year following the grant.

Group 11 - 33.33% on a yearly basis during 3 years period following the grant date subject to certain performance conditions 

The total number of shares exercisable as of 31 December 2019 was 6,977,213 (2018: 5,864,311).

The weighted average fair value of options granted in the year using the Cox, Ross and Rubinstein's Binomial Model (the "Binomial Model") was $1.03. The inputs into the Binomial model are as follows:

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: