KAPE.L Regulatory News (KAPE)

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

19 March 2019

Kape Technologies plc

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

Final results for the year ended 31 December 2018

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

Financial highlights

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

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

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

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

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

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

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

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

Operational highlights

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

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

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

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

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

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

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

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

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

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

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

Ido Erlichman, Chief Executive Officer of Kape, commented:

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

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

1 Revenue from continuing operations 

2Adjusted EBITDA is a non-GAAP measure and a company specific measure which excludes other operating income and expenses which are considered to be one off and non-recurring in nature.

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

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

www.kape.com 

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Chairman's statement

Introduction

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

Market overview

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

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

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

Competitive advantage

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

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

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

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

Ongoing strategy

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

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

Don Elgie

Non-Executive Chairman

18 March 2019

Chief Executive Officer's review

Introduction

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

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

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

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

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

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

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

Operational overview

Key Performance Indicators

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

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

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

Divestment of Media division and re-brand

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

Acquisitions and integration

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

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

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

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

Organic growth

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

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

Product development

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

· investment in the next generation infrastructure;

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

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

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

Outlook

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

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

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

Ido Erlichman

Chief Executive Officer

18 March 2019

Chief Financial Officer's review

Overview

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

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

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

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

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

Segment Result

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

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

Adjusted EBITDA from continued operations

Adjusted EBITDA from continued operations for the year to 31 December 2018 was $10.4 million (2017: $8.1 million). Adjusted EBITDA is a non-GAAP company specific measure which is considered to be a key performance indicator of the Group's financial performance. It excludes share based payment charges and expenses which are considered to be one-off and non-recurring in nature and are excluded from the following analysis:

Operating profit

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

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

ProfΙt / (Loss) before tax from continuing operations

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

Profit from continuing operations

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

Discontinued operations

On 26 July 2018, the Group sold the Media division to Ecom Online Ltd. This sale is in-line with the Company's strategy to focus on the development and distribution of its own cybersecurity products. As consideration, the Group will receive a 50% share of EBITDA from the Media division for the five years following the sale. The Company recognised a loss from the sale as calculated below:

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

Cash flow

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

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

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

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

Financial position

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

Early adoption of IFRS 16

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

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

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

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

Moran Laufer

Chief Financial Officer

18 March 2019

Consolidated statement of comprehensive income

For the year ended 31 December 2018

Consolidated statement of financial position

As at 31 December 2018

Consolidated statement of changes in equity

For the year ended 31 December 2018

* amounts below 1 thousands

Consolidated statement of cash flows

For the year ended 31 December 2018

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

1 Basis of preparation

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

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

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

Going concern

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

IFRS 9 - Financial instruments

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

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

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

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

2 Revenue

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

(a) Disaggregation of revenue

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

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

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

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

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

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

3 Segmental information

Segments revenues and results

On 26 July 2018, the Group disposed the Media division which represented a separate reportable segment in the prior year and this has been accounted for as a discontinued operation, as set-out in Note 11.

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

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

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

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

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

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

Information about major customers

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

Geographical analysis of revenue

Revenue by origin

Geographical analysis of non-current assets

4 Operating loss

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 and non-recurring costs, amortisation of acquired intangible assets and impairment of intangible assets. See note 3.

5 Taxation

The parent company is domiciled, for tax purposes, in both the Isle of Man and the UK. The final tax charge shown below arises partially from the difference in tax rates applied in the difference jurisdictions in which the subsidiaries' jurisdictions.

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

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

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:

6 Intangible assets

On 16 October 2018, the Group acquired 100% of the share capital of ZenGuard GMBH trading as ZenMate ("ZenMate"), a multi-platform security software business with a focus on the provision of virtual private network ("VPN") solutions. ZenMate is a digital privacy company, headquartered in Berlin, focused on encrypting and securing internet connections and protecting individuals' privacy and digital data, as set out in note 10.

On 24 July 2018, the Group acquired 100% of the share capital of Neutral Holdings Inc trading as Intego ("Intego"), a leading Mac and IOS cybersecurity and malware protection SaaS business. Intego is focused on the provision of malware protection, firewall, anti-spam, backup, data protection and parental controls software for Mac, as set out in note 10.

On 26 July 2018, the Group sold the media division to Ecom Online Ltd. This sale is in-line with the Company's strategy to develop and distribute its own cybersecurity products. The carrying value of the Intangible assets of the Media division on the Group balance sheet as the date of the sale is $2.6 million of which the majority related to Goodwill, as set out in note 11.

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

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

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

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

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

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

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

7 Shareholder's equity