Company Announcements

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

17 September 2019

Kape Technologies plc

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

HALF YEAR RESULTS FOR SIX MONTHS ENDED 30 JUNE 2019

Kape Technologies plc (AIM: KAPE), a global cybersecurity and malware protection SaaS business, announces its unaudited results for the six months ended 30 June 2019.

Financial highlights

·     Another strong period marked by international expansion and organic growth driving a rise in profitability:

o  Revenues¹ increased 24.2% to $29.9 million (H1 2018: $24.1 million)

o  Strong growth in recurring revenues to $21.2 million, an increase of 301.5% (H1 2018: $5.3 million)

o  Adjusted EBITDA² up 21.3% to $5.8 million (H1 2018: $4.7 million)

o  Robust balance sheet with cash of $36.4 million as at 30 June 2019 and no debt

o  Increase of 14.9% in Adjusted Earnings Per Share³ to 2.5 cents (H1 2018: 2.2 cents)

o  Deferred income increased to $10.9 million (December 2018: $9.5 million)

·     On track to meet full-year expectations

Operational highlights

·     Strong progress in transitioning to a SaaS revenue model:

o  Significant improvement in customer retention ratio to 82% (December 2018: 74%)

o  Over one million subscribers, up 24% on prior year, supported by continued investment in direct sales and marketing

o  Expect to deliver $38 million in revenues from existing customers in future financial years, up 27% (December 2018: $30 million)

·     Strategic acquisitions enhancing global capabilities:

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

o  ZenMate is highly complementary to CyberGhost, Kape's existing VPN solution, and has strengthened the Company's presence in the German market

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

·     Both acquisitions are performing in line with expectations

Outlook

·     Significant long-term growth opportunities across target markets

·     Clear delivery plans for organic growth

·     Successful integration of acquisitions has accelerated implementation of the Group's strategy

·     The board remains confident in delivering year on year growth for the current financial year, in line with market expectations

Ido Erlichman, Chief Executive Officer of Kape, commented:

"We are pleased to report another period of earnings growth. This performance, coupled with the continued expansion of both our user base and SaaS-based model, provides Kape with a strong foundation from which to drive forward. Our results demonstrate the power of our business model as we head into the second half of the year having generated strong momentum.

"We have significant ambitions for Kape and having now reached over one million subscribers and increased our retention rate to 82% - one of the highest in the consumer SaaS space, we firmly believe much more is possible.

"In the near-term, we plan to further drive sustainable growth and profitability through ongoing investment in R&D, ensuring we remain at the forefront of the digital privacy arena and address consumers' ever-increasing concerns. The progress that Kape has demonstrated in the first six months of 2019 has been key in underpinning its ongoing investment proposition."

An audio webcast of Kape's results presentation is now available via the following link: http://bit.ly/KAPEH119webcast

¹Revenues from continuing operations only

² 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.

³ Adjusted EPS was calculated from the earnings per share from continuing operations adding back interest, depreciation, share-based payments and non-recurring costs 

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 1 million paying subscribers, supported by a team of over 300 people across eight locations worldwide. Kape has a proven track record of revenue and EBITDA growth, underpinned by a strong business model which leverages our digital marketing expertise.

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

www.kape.com

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Chief Executive Officer's review

Overview

In the first half of 2019, we have seen strong demand for our core software products, demonstrated by the 24.2% increase in the Group's revenue to $29.9 million (H1 2018: $24.1 million from continued operations), as well as a 21.3% increase in Adjusted EBITDA to $5.8 million (H1 2018: $4.7 million from continued operations).

With the growing need for consumers globally to control and protect their information online, Kape continues to capitalise on the increasing demand for privacy-first online security products. The scope and quality of our software suite, our ability to drive individuals to our products and our capability to retain users, has resulted in Kape securing a growing proportion of what is a relatively nascent market.

The Group's performance continues to benefit from our digital marketing expertise and technologies, which sets us apart from many of our peers. Notably, the performance of both Intego and ZenMate has improved in the first half, following completion of their integration, which we expect to continue as we further accelerate our digital marketing efforts for these solutions. Additionally, CyberGhost and ZenMate are experiencing increased brand awareness, which is driving organic user acquisition, providing a complementary growth engine.

Our growth is testament to our ability to identify, acquire and then integrate acquisition targets in order to generate heightened performance from these businesses, with $1.7 million in annualised cost savings also achieved in relation to ZenMate since its acquisition.

Key Performance Indicators

In the first six months of the year, Kape has achieved significant growth against its KPIs, which we set out last year in order to focus the Group on profitability, growth and earnings predictability.

The stand-out achievement for the Group in this period has been the significant improvement in our user retention rate to 82%, which is a key focus for Kape for 2019, as it underpins the quality of our earnings and the Group's ability to generate revenues for future periods. We believe the improvement in retention is largely as a result of our constant focus on R&D and product development, ensuring our solutions are the best available, and we are proud that our customers are choosing to consistently renew our products year after year. Our retention rate is now one of the highest amongst consumer-focused SaaS providers.

The first six months of 2019 also saw a 23.7% increase in our subscription user base, which, alongside our improving retention rate, means the Group is very well-placed to achieve sustained growth in the years to come. This has already been evidenced by the Group generating over $10.9 million in deferred income in the period as we continue to enhance Kape's ongoing revenue visibility.

Product development

We continue to invest in R&D, with 44% of our workforce (excluding staff in our customer support centre in the Philippines) allocated to R&D and the Group's malware detection capabilities, to ensure that our solutions are consistently at the forefront of the digital privacy space. This enables us to fully capitalise on the significant and growing market opportunity that exists.

As consumers' digital lives continue to expand, and their online privacy needs as a result, it is critical that our products' capabilities broaden simultaneously.

Development of our existing product stack has been key in the first half of 2019. Most notable is the significant progress we have made with ZenMate, which the Group acquired in October 2018. This included the launch of the ZenMate Ultimate app, the most comprehensive update of ZenMate's VPN platform to-date, which adopts a new infrastructure with central developments including augmented location features, server security improvements, a mobile connection checker and faster speeds. In addition, Kape launched ZenMate Pulse, a comprehensive web firewall extension which protects against pop-up ads, trackers, phishing schemes, malware and malvertising. Not only does ZenMate Pulse protect against these threats, it also enables the user to understand specifically what the types of threats are.

In addition, Kape's macOS security analyst team discovered number of important malware security threats for Apple users: OSX/CrescentCore malware, which installs malicious Safari extension software, and OSX/Linker, that seeks to capitalise on existing macOS Gatekeeper security flaws. Kape's users are now fully protected against both.

Outlook

We look forward to continuing to execute on the board's strategy of leveraging Kape's key growth drivers:

·     High-growth target market: capturing a larger piece of the consumer digital privacy segment;

·     R&D capabilities: leveraging these and continuing to invest to ensure Kape's products remain at the forefront of the market;

·     Proprietary digital distribution and online marketing expertise: helping maximise our product sales; and

·     Strong business model: giving us the ability to generate high-quality recurring revenues by growing our user base and bettering our user retention.

We remain focused on driving organic growth initiatives across the business, as well as evaluating select earnings enhancing acquisitions which either add product capabilities or extend our market reach.

The board remains very confident in delivering growth in the full year 2019 and in the years to come, in-line with market expectations.

Ido Erlichman

Chief Executive Officer

16 September 2019

Chief Financial Officer's review

Overview

Total reported revenues from continued operations in the first half of 2019 increased by 24.2% to $29.9 million (H1 2018: $24.1 million from continued activities). Segmental results increased by 28.2% to $14.7 million (H1 2018: $11.5 million from continued activities) driven by an increase in direct marketing expenses of $11.1 million (H1 2018: $9.8 million) and strong performance from the Group's user acquisition campaigns. Adjusted EBITDA increased by 21.3% to $5.8 million (H1 2018: $4.7 million).

Adjusted cash flow from operations attributable to the current financial period was $7.3 million (H1 2018: $6.4 million), which represents cash conversion of 127%. In addition, during the period $7.1 million was reinvested in user acquisition costs that will be expensed in future periods (H1 2018: $3.4 million). When including this investment, adjusted cash flow from operations decreased to $0.2 million (H1 2018: $2.9 million). The Group's balance sheet remains strong with a cash balance of $36.4 million at 30 June 2019 (31 December 2018: $40.4 million) and no debt.

Segmental result

The segmental 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 related to user acquisition expenditure.

On 26 July 2018, the Group disposed of its Media division, which represented a separate reportable segment in the prior year and is presented as a discontinued operation. As a result, the Group's management reporting system includes one reportable segment during the period ended 30 June 2019, which comprised the Group's own software and SaaS products and distribution platform - App distribution.

Adjusted EBITDA from continued operations

Adjusted EBITDA for the six months to 30 June 2019 was $5.8 million (H1 2018: $4.7 million). Adjusted EBITDA is a non-GAAP company specific measure which is considered to be a key performance indicator for the Group. It excludes share-based payment charges and expenses, which are considered to be one-off and non-recurring in nature and are excluded from the following analysis:

Operating profit

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

Exceptional and non-recurring costs in H1 2019 comprised non-recurring staff costs of $0.4 million (H1 2018: $0.5 million) related to the restructuring of Intego and Zenmate, and $0.1 million (H1 2018: $0.1 million) for professional services for acquisitions and restructuring expenses. The increase in employee share-based payment charge is due to a share award grant made in August 2018. The increase in depreciation and amortisation derives from amortisation charges of acquired intangible assets that were added through the acquisitions of Intego and Zenmate in July and October 2018 respectively.

Profit before tax

Profit before tax was $1.3 million (H1 2018: $1.8 million). Finance costs of $0.4 million comprise mainly of foreign exchange differences derived from the Company's subsidiaries. The finance costs are offset by $0.3 million interest income generated from short-term deposits and deferred consideration assets.

Profit after tax

Profit after tax was $0.9 million (H1 2018: $1.5 million). The tax charge derives mainly from Group subsidiaries' residual profits.

Cash flow

Cash outflow from operations was $0.3 million (H1 2018: $2.3 million cash inflow). Adjusted cash flow from operations after adding back one-off payments was $0.2 million (H1 2018: $2.9 million). The decrease in operating cash flow is due to an increase in user acquisition investment attributable to future periods to $7.1 million (H1 2018: $3.4 million). Excluding the investment, adjusted operating cash flow attributable to the current financial period increased to $7.3 million (H1 2018: $6.4 million), which represents a cash conversion of 127%.

Net tax payments in the period were $0.8 million (H1 2018: $0.3 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 $1.4 million (H1 2018: $0.9 million), comprises capitalised development costs and fixed asset purchases.

Cash outflows from financing activities of $1.4 million (H1 2018: $7.7 million) included a final instalment of $0.9 million (H1 2018: $0.5 million) for the repurchase of CyberGhost's founder's share-options, and payments of leases of $0.6 million (H1 2018: $0.6 million). Cash inflows from financing activities included $0.1 million (H1 2018: $0.1 million) of proceeds from the exercise of employee share options.

As a result, net cash outflow from investing and financing activities was $2.8 million (H1 2018: $8.6 million).

Financial position

At 30 June 2019, the Group had cash of $36.4 million (31 December 2018: $40.4 million), net assets of $74.9 million (31 December 2018: $72.9 million) and is debt free. At 30 June 2019, trade receivables and contract assets were $3.2 million (31 December 2018: $3.6 million) which represented 21 days outstanding (31 December 2018: 13 days).

Moran Laufer

Chief Financial Officer

16 September 2019

Consolidated statement of comprehensive income

For the six months ended 30 June 2019

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

Consolidated statement of financial position

As at 30 June 2019

Consolidated statement of cash flows

For the six months ended 30 June 2019

Notes

1.   General information

The financial information set out in this document is for Kape Technologies plc (the "Company") and its subsidiary undertakings (together the "Group") in respect of the six months ended 30 June 2019.

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 one million paying subscribers, supported by a team of over 300 people across eight locations worldwide. Kape has a proven track record of revenue and EBITDA growth, underpinned by a strong business model which leverages its digital marketing expertise. Through its 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.

The Board of Directors approved this interim financial information on 16 September 2019.

2.   Basis of preparation

This interim consolidated financial information has been prepared in accordance with International Financial Reporting Standards, International Accounting Standards and interpretations (collectively IFRS) issued by the International Accounting Standards Board (IASB) as adopted for use in the EU. They do not include all disclosures that would otherwise be required in a complete set of financial statements and should be read in conjunction with the 31 December 2018 Annual Report. The financial information for the half years ended 30 June 2019 and 30 June 2018 does not constitute statutory accounts.

The annual financial statements of Kape Technologies Plc ('the group') are prepared in accordance with IFRS as adopted by the European Union. The comparative financial information for the year ended 31 December 2018 included within this report does not constitute the full statutory Annual Report for that period. The statutory Annual Report and Financial Statements for 2018 have been filed with the Registrar of Companies. The Independent Auditors' Report on the Annual Report and Financial Statements for the year ended 31 December 2018 was unqualified and did not draw attention to any matters by way of emphasis.

The Group has applied the same accounting policies and methods of computation in its interim consolidated financial statements as in its 2018 annual financial statements including the early adoption of IFRS16, except for those that relate to new standards and interpretations effective for the first time for periods beginning on (or after) 1 January 2019, and are adopted in the 2019 financial statements.

IFRIC 23 'Uncertainty over Income Tax Positions' is effective for annual periods beginning on or after 1 January 2019. IFRIC 23 clarifies how to recognise and measure current and deferred income tax assets and liabilities when there is uncertainty over income tax treatments. When there is uncertainty over income tax treatments. IFRIC 23 does not have a significant impact on the amounts recognised in the Group's consolidated financial statements.

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

3.   Revenue disaggregation of revenue

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

4.   Segmental information

Segment revenues and results

On 26 July 2018, the Group disposed of its Media division, which represented a separate reportable segment in the prior year, and is presented as a discontinued operation. As a result, the Group management reporting system includes one reportable segment during the period ended June 30, 2019 which comprised the Group's own software and SaaS products and distribution platform.

5.   Operating Profit

Adjusted EBITDA

Adjusted EBITDA is calculated as follows:

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 other operational losses from the disposal of fixed assets.

6.   Shareholder's equity

Ordinary share capital as at 30 June 2019 amounted to $14,850 (30 June 2018: $14,850; 31 December 2018: $14,850).

The number of shares in issue as at 30 June 2019 was 148,496,073 (30 June 2018: 148,496,073; 31 December 2018: 148,496,073).

As at 30 June 2019, the Company held in treasury a total of 4,390,442 ordinary shares of $0.0001 (30 June 2018: 6,561,685; 31 December 2018: 4,476,153). During the six months ended 30 June 2019, 85,111 ordinary shares of $0.0001 were transferred out of treasury to satisfy the exercise of options by the Company employees (30 June 2018: 88,563).

7.   Earnings per share

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

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

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

The difference between weighted average number of Ordinary shares used for basic earnings per share and the diluted earnings per share is 3,227,811 (H1 2018: 346,979) being the effect of all potentially dilutive Ordinary shares derived from the number of share options granted to employees.

8.   Related party transactions

The Group is controlled by Unikmind Holdings Limited, registered in Isle of Man, which owns 72.73% of the Company's shares. Mr. Teddy Sagi is the sole ultimate beneficiary of Unikmind Holdings Limited.

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

9.   Discontinued operation

On 26 July 2018, the Group sold the Media division to Ecom Online Ltd. As at the sale date, the Media division included Clearvelvet Trading Limited ("Clearvelvet") and Intangible assets of the Media CGU. This sale is in-line with the Company's strategy to develop and distribute its own cybersecurity products.

10.   Cautionary statement

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