KAPE.L Regulatory News (KAPE)

13 March 2018

Kape Technologies plc

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

Final results for the year ended 31 December 2017

Kape (AIM: KAPE), the consumer security software business, announces its final results for the year ended 31 December 2017.

Financial highlights

· Revenue increased by 17.4% to $66.4 million (2016: $56.5 million)

· Adjusted EBITDA1 increased by 29% to $8.3 million (2016: $6.4 million) representing an Improved EBITDA margin of 12.5% (2016: 11.3%)

· Strong growth in underlying Adjusted EBITDA from core activities excluding Web Apps and Licenses segment of 172% to $6.2 million (2016: $2.3 million)

· Increase in Media and App Distribution combined segment results2 of 47.6% to $21.7 million (2016: $14.7 million) and combined segment margins2 to 32.0% (2016: 28.3%)

· Adjusted cash generated from operations1 of $7.6 million (2016: $7.9 million) representing cash conversion from Adjusted EBITDA of 92% (2016: 123%)

· Strong balance sheet, with a cash balance at year-end of $69.5 million after $7.4 million of acquisition related payments (31 December 2016: $72.1 million)

· The board has proposed a special dividend in total of a $7.0 million of 4.93 US$ cents (3.55 pence) per share, amounting to $7.0 million

Operational highlights

· Acquisition of CyberGhost S.A ("CyberGhost"), a leading SaaS cybersecurity provider focused on the provision of Virtual Private Network ("VPN") solutions, in March 2017

- Integration of CyberGhost is now complete and the business is fully integrated with Kape's user acquisition platform

- CyberGhost has performed ahead of management expectations, contributing a net profit of $1.5 million in 2017

· Significant growth in paying users of 21% to 887,000 (2016: 734,000)

· Launched Reimage for Mac, to increase the product's addressable market

· Post year-end, in March 2018, rebranded the business to Kape Technologies plc, to reflect the Company's transformation of its operations and shift in strategic focus

· Significant progress made in transitioning the business towards a pure SaaS model with enhanced earnings visibility

- 82% growth in premium subscriptions to 260,000 (2016: 143,000) driven by shifting the focus of the business to a SaaS model

- Expect to deliver $8.0 million of recurring income from existing users in 2018

· Successful demonstration of ability to drive organic growth initiatives whilst maximising benefits from selective acquisitions continues to underpin medium-term growth expectations

Ido Erlichman, Chief Executive Officer of Kape, commented:

"With strong growth in revenue and Adjusted EBITDA, 2017 has been a successful year, in which we have achieved key milestones in becoming a leading provider of consumer cybersecurity products.

"The successful integration and subsequent strong performance of CyberGhost is evidence of our ability to acquire and integrate businesses into the Kape platform, driving growth through our existing digital marketing technology. We continue to evaluate selective acquisitions to expand our product offering and broaden our reach in the growing market of security and privacy online.

"We have made a strong start to 2018, with a solid performance across our core product stack. Following the recent rebranding of the Group, we look forward to driving Kape forward and continuing to deliver shareholder value."

1 EBITDA, Adjusted EBITDA and Adjusted cash flow from operations are non GAAP measures. Adjusted EBITDA and adjusted cash flow from operations are company specific measures which exclude certain expenses which are considered to be one off and non-recurring in nature.

2 The segment result has been calculated using revenue less costs directly attributable to that segment

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 Company 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.

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

Chairman's statement

Introduction

2017 has been a pivotal year for our business in which we fully aligned our operations to focus on cybersecurity software.

Our management team has worked tirelessly to deliver on our stated growth objectives which has now culminated in the renaming and rebranding of the business to Kape Technologies plc (previously Crossrider Plc), an important milestone in the repositioning of the business. Since October 2016, the Company has focused on both acquiring and developing cybersecurity software solutions for consumers, whilst utilising its proprietary digital distribution technology to grow its user base across the Company's product suite.

The Company's management has deployed Kape's in-depth expertise and technological capabilities within its digital marketing platform to support and grow our expanded customer base and promote our own products and services. This market leading digital pedigree has enabled the Group to accelerate the Company's successful transformation during 2017.

Products

In the last year, management has taken great strides to broaden our product stack, which includes our Reimage software and DriverAgent solutions. In March 2017, we acquired CyberGhost, a cybersecurity SaaS provider with specific focus on the provision of Virtual Private Networks ("VPN") solutions, as well as a sizeable customer base. With CyberGhost now fully integrated into the Group, I am pleased to report it has performed ahead of management's expectations on a revenue and profit levels.

In addition, and as part of the expansion into new products, the Company has launched Reimage for Mac, expanding the product's potential customer base.

We continue to experience positive customer traction across all our products, further demonstrating our ability to successfully leverage our expertise and digital marketing platform in order to drive higher margins.

Strategic priorities

Our management team remains committed to delivering sustainable growth and is therefore focused on the following key strategic priorities:

· to develop the Company's product offering organically through internal R&D and to grow our user base across the Company's growing portfolio of software products, leveraging Kape's proprietary distribution technology and expertise;

· to continue to implement our plan for new acquisitions that expand both the Company's product offering and reach, with the potential to enter additional complementary sector verticals; and

· to grow the Company's recurring revenue stream by gradually transitioning to a fully SaaS-based model, which will improve both the visibility and quality of earnings, as well as increasing the life time value of our customers.

Board appointments

In February 2017, the Company appointed Moran Laufer, Chief Financial Officer of Kape, to the board of the Company. Moran has been a key member of the Company's management, supporting its recent acquisitions as well as being part of the finance team since 2012, successfully supporting the Group's admission to AIM in 2014.

Looking forward

Kape's management has been successful in demonstrating their ability to both drive organic growth initiatives alongside maximising the benefits from strategic acquisitions.

The board is therefore confident that with its new brand positioning, strategic growth priorities and ongoing focus on consumer cybersecurity, Kape will be able to continue to maximise shareholder value.

The board remains confident in delivering year-on-year growth in 2018.

Don Elgie

Non-Executive Chairman

12 March 2018 

Chief Executive Officer's review

Introduction

When I joined Kape (formerly Crossrider Plc) in May 2016, I did so with a clear vision of where I, with the full support of the board, wanted to take this business. It was clear that despite our pedigree in digital marketing, our future laid beyond adtech.

I am therefore delighted to look back at 2017 as a year of significant strategic and operational progress. Over the past twelve months we have delivered on a number of key milestones and taken notable steps to becoming one of the leading next generation providers of consumer cybersecurity products.

We have built on our existing PC repair (Reimage) and device driver update (DriverAgent) solutions, through both the acquisition and internal development of new products during the year, which is a clear sign of our ambition.

Central to our strategy has been to shift our product focus to be B2C-driven and SaaS enabled and thereby increasing our recurring revenue base, creating a more predictable sales platform from which to grow.

We are therefore delighted to have delivered such a strong underlying EBITDA performance, up 172%, excluding the web apps and licenses segment, further demonstrating the excellent performance of our business model.

Operational update

In March 2017, we acquired CyberGhost, a leading cybersecurity SaaS provider with a focus on the provision of virtual private network ("VPN") solutions. The acquisition was successfully integrated into Kape by June 2017 and I am delighted to report, made a positive net profit contribution in the year of $1.5 million.

With CyberGhost now consolidated into the larger Kape operation, we have been successful in generating significant synergies and delivering superior customer traction post-integration with our digital user acquisition platform. This resulted in an increase in CyberGhost's user base by over 30% compared to December 2016 and the last quarter of 2017 saw record sales for the business in terms of volume and EBITDA.

We have grown Kape's product portfolio this year and it now consists of four main products; the CyberGhost VPN, a SaaS product; as well as Reimage PC, DriverAgent and Reimage for Mac, which are purchased on a one-time and yearly unlimited use basis with a technical support component. We have started to implement a SaaS model in the Reimage PC and expect to see the results of this change towards the end of 2018 when the licenses come up for renewal. In addition, we started to utilise the growth in our product offering and user base and we now offer the purchase of CyberGhost and Reimage as a package, providing our customers the best in class products in one place.

To implement the change in business model and focus on profitability, growth and earnings predictability, we have instated five key performance indicators which guide how we measure the success of our operations across the business:

· deferred income;

· adjusted operating cashflow;

· retention rate;

· paying users; and

· premium subscriptions.

Deferred income and adjusted operating cashflow are key measures as they 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 premium subscriptions represent our ability to grow our customer base and we expect these to grow over time. The retention rate is an indication of the quality of our service and products and our aim is for this to remain constant over time and improve in the medium term.

We have also been successful in growing our paying user base for Reimage and DriverAgent, by over 18%, and introducing a subscription based payment model. We also launched a Mac version of Reimage in September 2017, to complement our highly successful PC solution. We believe this new release will substantially grow our potential addressable market for this product.

Given our focus on further strengthening our SaaS business model, 2018 will be the first year we are able to generate significant revenues from our existing customer base. Therefore, during 2018, we expect to deliver $8.0 million of recurring income from existing users4, which greatly improves both the visibility and quality of our earnings.

3On a proforma basis If Cyberghost was part of the group on 31 December 2016

4Based on deferred revenue balance and current retention rate for existing subscriptions.

Cybersecurity market

Management identified the consumer cybersecurity space as presenting a significant opportunity for Kape, as a sizeable growth market with few nimble B2C focused-players that can easily adapt to the ever-changing digital landscape. As the internet has become increasingly central to people's lives and concurrently hacking has also evolved significantly, the sharing of data online is posing an increasing threat to individuals' online security.

In 2004, the global cybersecurity market was worth $3.5 billion and in 2017 it was worth over $120 billion, representing growth of over 35 times in 13 years, with key growth drivers including5:

· a growing number of internet users to c. 3.17 billion globally;

· increased network and WiFi connectivity across the world;

· commercial entities increasingly collecting personal data;

· cybercrime targeting individuals, not just enterprise-level hacks;

· heightened regulatory uncertainty around privacy and online security; and

· the emergence of the Internet of Things.

The proliferation of internet users has led to a sizeable B2C cybersecurity marketplace, with the addressable market for personal digital safety in 2018 estimated to be $10 billion. Kape is well-placed to capitalise on the increasing awareness of individuals to protect both their privacy and security online, as the Company has end-to end control over the user journey by leveraging its digital marketing technology and expertise.

The Company's renewed focus on the consumer cybersecurity market is increasingly coming to fruition, as evidenced by the strong performance of Kape's core divisions and existing software solutions in 2017. This, coupled with the acquisition and successful integration and performance of CyberGhost, is a real testament to our ability to deliver in the cybersecurity space.

5Based on deferred revenue balance and current retention rate for existing subscriptions.

Re-branding

Given the extensive re-engineering of the business we took the decision to rename and rebrand the Company to Kape Technologies plc. Kape will be the future umbrella for all our products and services as we focus on delivering upon the following strategic priorities:

· strengthening and developing both our consumer and corporate brand globally;

· better leveraging product cross-selling opportunities within the cybersecurity arena;

· growing our product offering through both organic growth and acquisitions;

· developing and increasing our marketing reach under a unified banner; and

· further strengthening our SaaS business, thereby increasing our recurring revenue base.

Kape's core principles are to be proactive, accessible and bold. We believe there is a real need for innovative solutions for customers and a requirement for online privacy and security as individuals manoeuvre through today's ever-changing online environment. It is this shift in buying and browsing behaviour that is ultimately driving demand for our products.

Current trading and outlook

Over the past 12 months we have delivered on our stated growth strategy. The Group has made significant headway in developing our product suite, which has been greatly enhanced by the addition of CyberGhost. The launch of Reimage for Mac is a great example of our internal development capability and our unique 'in-house' digital user acquisition expertise has enabled Kape to expand our user base globally.

We are motivated by the opportunities that exist within our growing portfolio of products and continue to constantly evaluate selective acquisition opportunities which could potentially broaden our software portfolio and accelerate our expansion into the global consumer cybersecurity market.

In 2018, we are focussing on two core growth initiatives:

· to continue to grow organically against our key KPIs, including users and revenues from our existing product portfolio; and

· to deliver on a growth enhancing acquisitions which incorporate the following criteria:

- a sizeable and growing user base;

- an established recurring revenue model; and

- the ability to deliver strong synergies with both Kape's digital distribution capabilities and expertise.

We have made a strong start to 2018, with record monthly sales, compared to equivalent period, achieved across our products as we continue to reap the benefits of our renewed focus on the Cybersecurity market.

The board therefore remains confident in delivering year-on-year growth in 2018, in-line with market expectations.

Special Dividend

Following our robust performance this year and significant adjusted cashflow from operations of $7.6 million the board has declared a special dividend of 4.93 US$ cents per share, amounting to a total of $7.0 million. This is the first special dividend the Company has issued; it follows the successful transition of the business, will contribute to maintaining balance sheet efficiency and reflects our confidence in the business. The dividend shall be paid in sterling and therefore it will be subject to a conversion exchange rate from US dollars based on a GBP/USD rate of 1.3887, being the rate at 4.30 pm on 12 March 2018, as a result shareholders will receive 3.55 pence per share. The special dividend will become payable on 13 June 2018 to those shareholders on the Company's register as at the record date of 25 May 2018. The ex-dividend date is 24 May 2018.

Ido Erlichman

Chief Executive Officer

12 March 2018

Chief Financial Officer's review

Overview

Revenue for the year to 31 December 2017 increased by 17.4% to $66.4 million (2016: $56.5 million) and Adjusted EBITDA by 28.9% to $8.3 million (2016: $6.4 million). The increase was driven by strong financial performance of the core App Distribution and Media segments which, excluding the Web Apps and License segment, shows a significant increase of 23.0% in revenue and 46.9% in combined segment results. The increase in core activities was off-set by the winding down of the Web Apps and License business that was completed in September 2017.

Kape remains a highly cash generative business, with cash generated from operations after adjusting for one-off non-recurring items of $7.6 million (2016: $7.9 million). This represents adjusted cash conversion of 92% (2016: 123%). The Group balance sheet remains strong with cash of $69.5 million at 31 December 2017 (31 December 2016: $72.1 million) and no debt.

In March 2017, Kape completed the acquisition of CyberGhost S.A for a maximum consideration of €9.1 million ($9.6 million) out of which €3.1 million ($3.3 million) was in cash at closing, €3.0 million ($3.2 million) in nominal value share options, which are subject to the continued employment of the founder over the vesting period, and a deferred earn-out consideration capped at €3.0 million ($3.2 million) million. €1.75 million ($1.9 million) was paid at closing as a prepayment of the deferred earn out consideration. The fair value of the contingent consideration at acquisition was €1.4 million ($1.5 million). On 20 November 2017, the Company repurchased 3,810,667 options out of the 4,400,000 option granted to the founder for total cash consideration of €3.2 million ($3.8 million) following his reposition from managing director to Chairman and Corporate Development Manager of CyberGhost. Out of the total consideration, €1.6 million ($1.9 million) was paid upon execution of the repurchase agreement, while the remaining amount is to be paid in eight equal instalments.

In April 2017, Kape increased its holding in Clearvelvet Trading Ltd ("Clearvelvet"), a programmatic video advertising company, from 16.67% to 50.01%, for an initial consideration of $1.7 million out of which $0.8 million was in cash and $0.9 million conversion of a loan balance. The cash balance of Clearvelvet at acquisition was $1.4 million. In addition, the sellers would have been entitled to receive up to a total of $1.4 million in earn-out consideration, to be satisfied in cash subject to their continued employment by Clearvelvet. The earn-out consideration was contingent on achieving EBITDA of $1.7 million in 2017 (pro-rated from 60% of target) and $2.2 million for 2018 (pro-rated from 67% of target). The 2017 EBIDTA goal was not achieved, as a result no earn out has been charged for 2017 and no accrual made for 2018 earn out. The earn-out consideration is accounted for remuneration in the post-acquisition income statement rather than as part of the acquisition cost.

Segment Result

The segment result has been calculated using revenue less costs directly attributable to that segment. Cost of sales comprises commissions paid to publishers and payment processing fees. Direct sales and marketing costs comprise traffic acquisition costs.

During the period, App Distribution margins significantly improved, reaching 35.7% compared to 29.5% in 2016. The improved return on marketing investment resulted in a $10.0 million increase in revenues and $5.8 million increase in the segment result, which represents a 52.7% uplift. The increase is attributable to organic growth due to improvement in user acquisition processes and traffic quality which resulted in better conversion rates, and a decrease in average user acquisition cost as well as the addition of the DriverAgent and CyberGhost software products to the Company's portfolio in October 2016 and March 2017 respectively.

In the Media division, revenues increased by 14.5% and segment results increased by 28.3% to $4.5 million. The increase was driven by the contribution of the Clearvelvet programmatic video advertising activity that was consolidated, starting in April 2017 and compensating for a decrease in revenue from the mobile content and mobile apps marketing verticals.

In accordance with the board's decision to cease investment in the Web Apps and License segment, which Kape reported in 2016, revenue in the period came solely from a software licence and services agreement between Kape and Playtech Software pursuant to the terms of which Kape has granted to Playtech Software a license to use certain software modules for Playtech Software's licensees' branded casino software. The agreement expired on 18 September 2017. Following the expiration of the license and services agreement, no further revenue is expected to be generated from this segment and as such it is expected this will be the last time we report this segment.

Adjusted EBITDA

Adjusted EBITDA for the year to 31 December 2017 was $8.3 million (2016: $6.4 million). Adjusted EBITDA is a non-GAAP company specific measure which is considered to be a key performance indicator for 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 loss

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

Exceptional and non-recurring costs for the full year 2017 comprised $0.3 million of acquisition bonuses to employees, other non-recurring staff costs of $0.1 million, professional services related to business combination of $0.3 million and a $0.2 million expense from the repurchase of the founder of CyberGhost's share options on 20 November 2017. The charge for repurchase of employee options of $3.2 million is following the acceleration of the repurchased share options.

Loss before tax

Loss before tax has decreased to $2.9 million compared to $10.0 million in 2016.

Loss after tax

Loss after tax was $3.4 million (2016: $10.7 million). The tax charge derives mainly from group subsidiaries' residual profits. The Group continues to recognise a deferred tax asset of $0.1m (2016: $0.2m) in respect of tax losses accumulated in previous years.

Cash flow

Cash flow from operations was strong at $6.5 million (2016: $5.9 million). Adjusted cash flows from operations after adding back payments that are one off in nature and deferred payment for past acquisition that was treated as a remuneration expense in previous years, was $7.6 million (2016: $7.9 million). This represents a cash conversion of 92% of Adjusted EBITDA (2016: 123%).

Tax paid net of refunds in the period was $0.1 million (2016: $0.9 million).

Cash spent in the period on capital expenditure of $2 million (2016: $0.8 million) mainly comprises of capitalised development costs and purchase of fixed assets. Net cash paid for acquisitions in the period totalled $5.3 million (2016: $1.4 million), out of which the Company paid $5.7 million in relation to the CyberGhost acquisition and $0.4 million net inflow related to the acquisition of an additional 33.3% in Clearvelvet and the consolidation of its cash balance in April 2017. As a result, net cash outflow from investing activities was $7.4 million (2016: $3.1 million). In addition, $0.2 million paid in the period for past acquisitions is included in the operational cash flow as it is treated as remuneration as required by IFRS (2016: $1.1 million)

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 the year and the rest will be paid in eight equal quarterly instalments.

Financial position

At 31 December 2017, the Company had cash of $69.5 million (31 December 2016: $72.1 million), net assets of $79.4 million (31 December 2016: $80.5 million) and is debt free. At 31 December 2017, trade receivables were $8.5 million (31 December 2016: $5.6 million) which represented 42 days outstanding, (31 December 2016: 44 days).

Early adoption of IFRS 15

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customer ("IFRS 15"), a new standard related to revenue recognition. Under the standard, revenue is recognised when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The Company has adopted IFRS 15 using the cumulative effect method applied to those contracts which were not completed as of 1 January 2017.

Revenue recognition relating to most of our products and services remains substantially unchanged and, in consequence, the impact of the new standard on our opening balances (as at 1 January 2017) was immaterial.

On an ongoing basis, the most significant impact of the standard relates to our accounting for user acquisition costs associated with subscription sales of CyberGhost and auto renewal sales of Reimage which commenced in 2017. These costs, which relate to sales and marketing, are considered incremental in obtaining the contract, and therefore capitalised and amortised over the expected customer relationship period under the new standard. The adoption of the new standard had no impact to cash from or used in operating, financing or investing on our consolidated cash flow statements.

The impact of the adoption on our consolidated income statement and balance sheet for the period ended 31 December 2017 was as follows:

Income statement

Balance sheet

Dividends

Following our strong cash flow from operations and cash balance as of 31 December 2017, The Board has recommended a special dividend of 4.93 US$ cents per share (2016: nil) being a total payout of $7 million.

Moran Laufer

Chief Financial Officer

12 March 2018

Consolidated statement of comprehensive income

For the year ended 31 December 2017

Consolidated statement of financial position

As at 31 December 2017

The financial statements were approved by the Board and authorised for issue on 12 March 2018.

Consolidated statement of changes in equity

For the year ended 31 December 2017

Consolidated statement of cash flows

For the year ended 31 December 2017

1. Basis of preparation

The financial information set out in this document does not constitute the Group's statutory financial statements for the year ended 31 December 2017 or 31 December 2016. The annual report and financial statements for the year ended 31 December 2017 were approved by the Board of Directors on 12 March 2018 along with this preliminary announcement. The financial statements for the year ended 31 December 2017 have been reported on by the Independent Auditor. The Independent Auditor's report on the financial statements for 2017 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 adopted by the EU. 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 2016.

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.

Adoption of new and revised standards

New standards and amendments to existing standards that have been published and are mandatory for the first time for the financial year beginning 1 January 2017 have been adopted but had no significant impact on the Group.

In May 2014, the IASB issued IFRS 15 Revenue from Contract with Customer ("IFRS 15"), a new standard related to revenue recognition. Under the standard, revenue is recognised when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Company has early adopted IFRS 15 for the financial year beginning 1 January 2017, as set out below.

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 Media CGU.

On January 1, 2017, the Company adopted IFRS 15 using the cumulative effect method applied to those contracts which were not completed as of January 1, 2017. The impact of new standard on our opening balances was immaterial.

On an ongoing basis, the most significant impact of the standard relates to our accounting for marketing costs of the Reimage and CyberGhost products which commence as of FY 2017. These costs are considered incremental in obtaining the contract, and therefore capitalised and amortised over the expected customer relationship period under the new standard.

Revenue recognition related to most of our products and services remain substantially unchanged.

(a) Disaggregation of revenue

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

In accordance with the new revenue standard requirements, the disclosure of the impact of adoption on our consolidated income statement and balance sheet for the period ended December 31, 2017 was as follows:

Income statement

Balance sheet

The marketing costs to obtain a contract include fees paid to marketing partners on behalf of subscription sales of Cyberghost or Reimage to customers referred by the partners.

(b) Contract liabilities

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

(*) The balance is relating to CyberGhost, which was purchased on March 2017.

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 77.8% of the transaction price allocated to the unsatisfied contracts (which represent to contract liabilities) as of 31 December 2017 will be recognised as revenue during the next annual reporting period ($3,120,000), 12.5% and 4.6% ($500,000 and $185,000) and will be primarily recognised in the 2019 and 2020 financial years, respectively. The remaining 5.2% ($207,000) 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.

3. Segmental information

Segments revenues and results

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

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

· Media - comprising the Group's ad network activities and associated technology platforms; and

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

Exceptional and non-recurring costs in 2017 comprised $0.3 million of acquisition bonuses to employees, other non-recurring staff costs of $0.1 million, 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.

Exceptional and non-recurring costs in 2016 comprised non-recurring staff restructuring costs of $0.6 million and a $0.3 million one-time onerous contract written-off in the period. The decrease in the employee share-based payment charge is due to reversal of charges from previous periods for employees that left the Company during the year.

The impairment of intangible assets charge of $4,683,000 relates to the Media segment. After allocating this charge to the Media segment, the segment result is $1,203,000 loss.

(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 impairment of intangible assets 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 2017 and 2016 there were no customers contributing more than 10% of total revenue of the Group.

Geographical analysis of revenue

Revenue by origin

Reimage Limited was re-domiciled from British Virgin Islands to Isle of Man on 8 September 2016.

Geographical analysis of non-current assets

4. Operating loss

Adjusted EBITDA

Adjusted EBITDA is calculated as follows:

Operating loss 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.

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 $97,000 (2016: $166,000) 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) is set out below:

Details of the deferred tax liability recognised (arising from timing differences on intangible valuations on business combinations) is set out below:

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

6. Shareholder's equity

During the year a total of 801,175 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 $437,000 (2016: $nil).

During the year a total of 3,810,667 of share option of $0.0001 par value were repurchased by the Company for a total cash consideration of $3,800,000 (2016: $nil).

During 2016 a total of 1,250,000 of ordinary shares of $0.0001 par value were purchased by the Company for a total cash consideration of $994,952 and are held in treasury at the reporting date.

As at 31 December 2017, the Company hold in the treasury total of 6,650,248 of ordinary shares of $0.0001 per value (2016: 7,451,423). During 2017, 801,175 of ordinary shares of $0.0001 par value were transferred out of treasury to satisfy the exercise of options by the company employees (2016: nil).

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.

7. 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 2017, the following options were outstanding (2016: 10,259,383):

Vesting conditions

Groups 1-5 and 7 - 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.

The total number of shares exercisable as of 31 December 2017 was 2,973,348 (2016: 3,840,679).

The weighted average fair value of options granted in the year using the Cox, Ross and Rubinstein's Binomial Model (the "Binomial Model") was $0.50. The inputs into the Binomial model are as follows:

Expected volatility was determined based on the historical volatility of comparable companies.

Forfeiture rate is assumed to be 7%-14% for senior management and 43% 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:

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