• | political, social and economic instability; | |
• | risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy, localization and content laws as well as unexpected changes in laws, regulatory requirements and enforcement due to the wide discretion given local lawmakers and regulators regarding the enactment, interpretation and implementation of local regulations; | |
• | potential damage to our brand and reputation due to compliance with local laws, including potential censorship and requirements to provide user information to local authorities; |
risks related to the legal and regulatory environment in foreign jurisdictions, including with respect to privacy, localization and content laws as well as unexpected changes in laws, regulatory requirements and enforcement due to the wide discretion given local lawmakers and regulators regarding the enactment, interpretation and implementation of local regulations;
potential damage to our brand and reputation due to compliance with local laws, including potential censorship and requirements to provide user information to local authorities;
fluctuations in currency exchange rates;
higher levels of credit risk and payment fraud;
complying with multiple tax jurisdictions;
enhanced difficulties of integrating any foreign acquisitions;
complying with a variety of foreign laws, including certain employment laws requiring national collective bargaining agreements that set minimum salaries, benefits, working conditions and termination requirements;
reduced protection for intellectual property rights in some countries;
difficulties in staffing and managing global operations and the increased travel, infrastructure and compliance costs associated with multiple international locations;
regulations that might add difficulties in repatriating cash earned outside our core markets and otherwise preventing us from freely moving cash;
import and export restrictions and changes in trade regulation;
complying with statutory equity requirements;
complying with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in other jurisdictions; and
complying with export controls and economic sanctions administered by the relevant local authorities, including in the United States and European Union, in our international business.
• | fluctuations in currency exchange rates; | |
• | higher levels of credit risk and payment fraud; | |
• | complying with multiple tax jurisdictions; | |
• | enhanced difficulties of integrating any foreign acquisitions; | |
• | complying with a variety of foreign laws, including certain employment laws requiring national collective bargaining agreements that set minimum salaries, benefits, working conditions and termination requirements; | |
• | reduced protection for intellectual property rights in some countries; | |
• | difficulties in staffing and managing global operations and the increased travel, infrastructure and compliance costs associated with multiple international locations; | |
• | regulations that might add difficulties in repatriating cash earned outside our core markets and otherwise preventing us from freely moving cash; | |
• | import and export restrictions and changes in trade regulation; | |
• | complying with statutory equity requirements; | |
• | complying with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and similar laws in other jurisdictions; and | |
• | complying with export controls and economic sanctions administered by the relevant local authorities, including in the United States and European Union, in our international business. |
If we are unable to expand internationally and manage the complexity of our global operations successfully, our business could be seriously harmed.
We may not achieve the intended tax efficiencies of our corporate structure and intercompany arrangements, which could increase our worldwide effective tax rate.
Our corporate structure and intercompany arrangements, including the manner in which we conduct our intercompany and related party transactions, are intended to provide us with worldwide tax efficiencies. The application of tax laws of various jurisdictions to our business activities is subject to interpretation and also depends on our ability to operate our business in a manner consistent with our corporate structure and intercompany arrangements. The tax authorities of jurisdictions where we operate may challenge our methodologies for intercompany and related party arrangements, including transfer pricing, or determine that the manner in which we operate does not achieve the intended tax consequences, which could increase our worldwide effective tax rate and adversely affect our financial position and results of operations.
A certain degree of judgment is required in evaluating our tax positions and determining our provision for income taxes. In the ordinary course of business, there are many transactions and calculations for which the ultimate tax determination is uncertain. For example, our effective tax rate could be adversely affected by lower than anticipated earnings in markets where we have lower statutory rates and higher than anticipated earnings in markets where we have higher statutory rates, inability to fully utilize tax assets recognized on our balance sheet, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. Any of these factors could materially and adversely affect our financial position and results of operations.
Industry data, projections and estimates contained in this annual report are inherently uncertain and subject to interpretation. Accordingly, you should not place undue reliance on such information.
Certain facts, forecasts and other statistics relating to the industries in which we compete contained in this annual report have been derived from various public data sources and third party industry reports. In deriving the market size of the aforementioned industries and regions, these industry consultants may have adopted different assumptions and estimates, such as the number of internet users. While we generally believe such reports are reliable, we have not independently verified the accuracy or completeness of such information. Such reports may not be prepared on a comparable basis or may not be consistent with other sources.
Industry data, projections and estimates are subject to inherent uncertainty as they necessarily require certain assumptions and judgments. Our industry data and market share data should be interpreted in light of the defined geographic markets and defined industries we operate in. Any discrepancy in the interpretation thereof could lead to different industry data, measurements, projections and estimates and result in errors and inaccuracies.
Our user metrics and other estimates are subject to inherent challenges in measuring our operations.
We regularly review metrics, including our MAUs, to evaluate growth trends, measure our performance and make strategic decisions. These metrics are calculated using internal company data and have not been validated by an independent third party. While these numbers are based on what we believe to be reasonable estimates for the applicable period of measurement, there are inherent challenges in measuring how our platforms are used across large populations throughout the regions that we operate in. For example, we believe that we cannot distinguish individual users who use multiple applications. Our user metrics are also affected by technology on certain mobile devices that automatically runs in the background of our applications when another phone function is used, and this activity can cause our system to miscount the user metrics associated with such applications.
Errors or inaccuracies in our metrics or data could result in incorrect business decisions and inefficiencies. For instance, if a significant understatement or overstatement of active users were to occur, we may expend resources to implement unnecessary business measures or fail to take required actions to remedy an unfavorable trend. Moreover, during the process of upgrading our platform in the past, we have lost certain historical metrics, such as the number of search queries, that we rely on to manage our operations. If partners or investors do not perceive our user, geographic or other operating metrics as accurately representing our user base, or if we discover material inaccuracies in our user, geographic or other operating metrics, our reputation may be seriously harmed.
Material weaknesses in our internal control over financial reporting have been identified, and ifIf we fail to implement and maintain effective internal control over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.
We are not required to provide a report of management on our internal control over financial reporting and our independent registered public accounting firm is not required to conduct an audit of our internal control over financial reporting due to a transition period established by rules of the Securities and Exchange Commission, or the SEC, for newly public companies. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audit of the consolidated statements of financial position of Opera Limited and its subsidiaries as of December 31, 2017 and 2016 (Successor), and the related consolidated statements of operations, total comprehensive income (loss), changes in equity, and cash flows for the year ended 31 December 2017 (Successor) and for the period from July 26, 2016 to December 31, 2016 (Successor), and for the period from January 1, 2016 to November 3, 2016 (Predecessor), and the related notes (collectively, the “consolidated financial statements”), we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting, as defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, and other control deficiencies. The two identified material weaknesses arose from our (a) lack of a sufficient number of qualified resources with IFRS, external financial reporting and internal controls expertise and (b) lack of formalized policies and procedures to ensure that significant and unusual transactions and other transactions are sufficiently analyzed and assessed against the requirements of IFRS, including the preparation and review of contemporaneous documentation.
Following the identification of the material weaknesses and control deficiencies, we have taken measures aimed at remedying these weaknesses and continue to implement our remediation plan. In 2018 we hired people with IFRS, external financial reporting and internal controls expertise who work on establishing formalized policies and procedures to ensure that transactions are sufficiently analyzed and assessed against the requirements of IFRS, and that contemporaneous documentation is prepared and reviewed. Moreover, we have engaged external consultants to assist us in improving our internal control framework, including risk assessment, design of controls and control activities. We are evaluating the longer term resource needs of our various financial functions. These remediation measures may be time consuming, costly and might place significant demands on our financial and operational resources. Although we have made enhancements to our control procedures in this area, we still have a material weakness pertaining to the lack of formalized policies, procedures and resources to design and implement relevant controls, including risk assessment, control activities and monitoring, to ensure that transactions are sufficiently analyzed and assessed against the requirements of IFRS, including preparation and review of contemporaneous documentation.
We cannot assure you that we will be able to continue to implement an effective system of internal control, or that we will not identify material weaknesses or significant deficiencies in the future. We areAs a public company in the United States, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002 or Section 404, requires that we include a report offrom management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with ourthis annual report. In connection with the preparation of this annual report, for the fiscal year ending December 31, 2019. In addition, if we cease to be an “emerging growth company” as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may concludeconcluded that our internal control over financial reporting isas of December 31, 2019 was not effective. Moreover, even if our management concludeseffective due to the presence of the following control deficiencies that constitute material weaknesses in our internal control over financial reporting isreporting:
1. | We did not design and maintain effective internal control over certain accounting transactions. Specifically, we did not perform an appropriate risk assessment, design and implement appropriate controls including the monitoring of the effectiveness of those controls to ensure that accounting transactions were sufficiently analyzed and assessed against the requirements and to analyze complex accounting matters, including the timely preparation and review of contemporaneous documentation. We have introduced appropriately qualified accounting personnel however there was insufficient time to allow them to appropriately identify and implement robust controls prior December 31, 2019. | |
| 2. | We did not perform an appropriate risk assessment in identifying specific risks with microlending businesses across several countries being operated in, and thereafter design and implement controls including monitor such controls in terms of oversight. Our process to evaluate the competence and expertise necessary to support the growth and complexity of the business, its financial reporting, and response to address shortcomings was not sufficiently implemented during 2019. As a result, we did not have a sufficient number of adequately trained personnel within the organization with assigned responsibility and accountability for the design, effective operation, and documentation of internal control over financial reporting. |
Although we are in the process of taking remedial measures to secure the resources necessary to fully implement our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with ourframework of internal controls, or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, our reporting obligations aswe cannot assure you that these material weaknesses will be cured in a public company may place a significant straintimely manner. See “Item 15. Controls and Procedures—Management’s Annual Report on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.Internal Control over Financial Reporting.”
DuringMoreover, during the course of documenting and testing our internal control procedures in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of our ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
In addition, if we cease to be an “emerging growth company” as such term is defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, our reporting obligations as a public company may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
We may be required to recognize impairment charges.
Our goodwill and intangible assets totaled US$421.6 million and US$115.4110.8 million, respectively, as of December 31, 2018. Our2019. We did not incur any impairment charges with respect to these long-lived assets were nil (US$0) in 2017, 2018 and nil (US$0) in 2018.2019. We also had US$12.226.1 million of furniture, fixtures and equipment as of December 31, 2018.2019. In accordance with applicable accounting standards, goodwill and intangible assets that are not amortized are subject to assessment for impairment by applying a fair value or value in use based test annually, and also when certain circumstances warrant. As of December 31, 2018, thewarrant, such as when our market capitalization of the Group wasfalls below the book value of its equity, indicating a potential impairment of goodwill.our equity. In addition to this indication of impairment, goodwill, intangible assets and furniture, fixtures and equipment are subject to assessment for impairment if there are other indicators of impairment, including:
losses of key customers;
unfavorable changes in technology or competition;
unfavorable changes in user base or user tastes
• | losses of key customers; | |
• | unfavorable changes in technology or competition; | |
• | unfavorable changes in user base or user tastes |
Based upon future economic and financial market conditions, the operating performance of our reporting units and other factors, including those listed above, future impairment charges could be incurred. It is possible that such impairment, if required, could be material. Any future impairment charges that we are required to record could have a material adverse impact on our results of operations.
We may need additional capital but may not be able to obtain it on favorable terms or at all.
While we believe we have sufficient capital to fund our current growth plans, we may require additional capital in order to fund future plans for the additional growth and development of our businesses and any additional investments or acquisitions we may decide to pursue. If our cash resources are insufficient to satisfy our cash requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition, results of operations, cash flows, share price performance, liquidity of international capital and lending markets and governmental regulations in the markets that we operate in. In addition, incurring indebtedness would subject us to increased debt service obligations and could result in operating and financing covenants that would restrict our operations. There can be no assurance that financing will be available in a timely manner or in amounts or on terms acceptable to us, or at all. Any failure to raise needed funds on terms favorable to us, or at all, could severely restrict our liquidity as well as have a material adverse effect on our business, financial condition and results of operations. Moreover, any issuance of equity or equity-linked securities could result in significant dilution to our existing shareholders.
We have limited business insurance coverage.
Consistent with customary industry practice in the markets that we operate in, our business insurance is limited. Any uninsured damage to our platforms, technology infrastructures or disruption of our business operations could require us to incur substantial costs and divert our resources, which could have an adverse effect on our business, financial condition and results of operations.
We are subject to risks related to litigation, including intellectual property claims and regulatory disputes.
We may be, and in some instances have been, subject to claims, lawsuits (including class actions and individual lawsuits), government investigations and other proceedings relating to intellectual property, consumer protection, privacy, labor and employment, import and export practices, competition, securities, tax, marketing and communications practices, commercial disputes and other matters. The number and significance of our legal disputes and inquiries have increased as we have grown larger, as our business has expanded in scope and geographic reach and as our services have increased in complexity.
As a consequence of a demerger in 2015, one of our subsidiaries, Opera Software AS, may have joint and several obligations towards any liabilities arising from the demerger. See “Item 4. Information of the Company—A. History and Development of the Company.” Under Norwegian law, our liability is capped to the real value of the assets transferred to Opera Software AS as part of the demerger. We do not believe that we are subject to any liabilities or obligations resulting from the demerger, however, to the extent that such demerger liabilities or obligations exist, creditors may seek to recover from us, claiming that we are liable to satisfy such obligations. While we believe the outcome of such proceedings will depend on the claim brought forth, litigation is inherently costly and uncertain and could have an adverse effect on our operations.
Moreover, as a public company we have an elevated public profile, which may result in increased litigation and public awareness of such litigation. There is substantial uncertainty regarding the scope and application of many of the laws and regulations to which we are subject, which increases the risk that we will be subject to claims alleging violations of those laws and regulations. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in investigations, claims, changes to our business practices, increased cost of operations and declines in our user growth,base, retention or engagement, any of which could seriously harm our business. In the future, we may also be accused of having, or be found to have, infringed or violated third party intellectual property rights.
Regardless of the outcome, legal proceedings can have a material and adverse impact on us due to their costs, diversion of our resources and other factors. We may decide to settle legal disputes on terms that are unfavorable to us. Furthermore, if any litigation to which we are a party is resolved adversely, we may be subject to an unfavorable judgment that we may not choose to appeal or that may not be reversed upon appeal. We may have to seek a license to continue practices found to be in violation of a third party’s rights. If we are required, or choose to enter into, royalty or licensing arrangements, such arrangements may not be available on reasonable terms, or at all, and may significantly increase our operating costs and expenses. As a result, we may also be required to develop or procure alternative non-infringing technology or discontinue the use of technology, and doing so could require significant effort and expense, or may not be feasible. In addition, the terms of any settlement or judgment in connection with any legal claims, lawsuits or proceedings may require us to cease some or all of our operations, or pay substantial amounts to the other party and could materially and adversely affect our business, financial condition and results of operations.
We are currently subject to, and in the future may from time to time face, intellectual property infringement claims, which could be time consuming and costly to defend, and may require us to pay significant damages or cease offering any of our products or key features of our products.
We cannot be certain that the products, services and intellectual property used in the ordinary course of our business do not or will not infringe valid patents, copyrights or other intellectual property rights held by third parties. We operate platforms which third party content providers may use to distribute their content, and we cannot assure you that such content providers have sufficient rights in the content they distribute via our platforms. We currently are, and may in the future be, subject to claims or legal proceedings relating to the intellectual property of others in the ordinary course of our business and may in the future be required to pay damages or to agree to restrict our activities. In particular, if we are found to have violated the intellectual property rights of others, we may be enjoined from using such intellectual property, may be ordered to pay damages and may incur licensing fees or be forced to develop alternatives. We may incur substantial expense in defending against third party infringement claims, regardless of their merit. Successful infringement claims against us may result in substantial monetary liability or may materially disrupt the conduct of our business by restricting or prohibiting our use of the intellectual property in question.
We do not have exclusive rights to certain technology, trademarks and designs that are crucial to our business.
We have applied for various patents relating to our business. While we have succeeded in obtaining some patents, some of our patent applications are still under examination by the various regulatory authorities in the markets that we operate in. Approvals of our patent applications are subject to determinations by the relevant local authorities that there are no prior rights in the applicable territory. In addition, we have also applied for initial registrations and/or changes in registrations relating to transfers of our Opera logos and other of our key trademarks to establish and protect our exclusive rights to these trademarks. While we have succeeded in registering the trademarks for most of these marks in our major markets under certain classes, the applications for initial registration, and/or changes in registrations relating to transfers, of some marks and/or of some of trademarks under other classes are still under examination by the relevant local authorities. Approvals of our initial trademark registration applications, and/or of changes in registrations relating to such transfers, are subject to determinations by the relevant local authorities that there are no prior rights in the applicable territories. We cannot assure you that these patent and trademark applications will be approved. Any rejection of these applications could adversely affect our rights to the affected technology, marks and designs. In addition, even if these applications are approved, we cannot assure you that any issued patents or registered trademarks will be sufficient in scope to provide adequate protection of our rights.
Our business may be adversely affected by third party software applications or practices that interfere with our receipt of information from, or provision of information to, our users, which may impair the user experience on our platform.
Our business may be adversely affected by third party software applications, which may be unintentional or malicious, that make changes to our users’ PCs or mobile devices and interfere with our products and services. These software applications may change the user experience on our platform by hijacking queries, altering or replacing the search results provided by our search engine partners to our users or otherwise interfering with our ability to connect with our users. Such interference can occur without disclosure to or consent from users, and users may associate any resulting negative experience with our products and services. Such software applications are often designed to be difficult to remove, block or disable. Further, software loaded on or added to mobile devices on which our search or other applications, such as Opera News, are pre-installed may be incompatible with or interfere with or prevent the operation of such applications, which might deter the owners of such devices from using our services. If we are unable to successfully prevent or limit any such applications or systems that interfere with our products and services, our ability to deliver a high-quality browsing experience and recommend relevant content to our users may be adversely affected.
Interruption or failure of our information technology and communications systems may result in reduced user traffic and harm to our reputation and business.
Interruption or failure of any of our information technology and communications systems or those of the operators of third party internet properties that we collaborate with could impede or prevent our ability to provide our services. In addition, our operations are vulnerable to natural disasters and other events. Our disaster recovery plan for our servers cannot fully ensure safety in the event of damage from fire, floods, typhoons, earthquakes, power loss, telecommunications failures, hacking and similar events. If any of the foregoing occurs, we may experience a partial or complete system shutdown. Furthermore, our servers, which are hosted at third party internet data centers, are also vulnerable to break-ins, sabotage and vandalism. Some of our systems are not fully redundant, and our disaster recovery planning does not account for all possible scenarios. The occurrence of a natural disaster or a closure of an internet data center by a third party provider without adequate notice could result in lengthy service interruptions.
Any system failure or inadequacy that causes interruptions in the availability of our services, or increases the response time of our services, could have an adverse impact on our user experience and satisfaction, our attractiveness to users and advertisers and future user traffic and advertising on our platform.
To improve performance and to prevent disruption of our services, we may have to make substantial investments to deploy additional servers or one or more copies of our internet platforms to mirror our online resources.
Our results of operations are subject to seasonal fluctuations due to a number of factors.
We are subject to seasonality and other fluctuations in our business. Revenues from our e-commerce and travel partners are typically affected by seasonality due to various holidays that may result in higher than usual e-commerce transactions and travel-related activities, and similar seasonal trends may affect revenues from our search partners. Thus,We may not yet have sufficient historical information to accurately anticipate seasonal or other fluctuations in our operating results in one or more future quarters or years may fluctuate substantially or fall below the expectations of securities analysts and investors. In such event, the trading price of our ADSs may fluctuate significantly.newer business areas.
Our corporate actions are substantially controlled by our chairman and chief executive officer, Mr. Yahui Zhou, who has the ability to control or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an opportunity to receive a premium for your ADSs and materially reduce the value of your investment.
As of the date of this annual report, Mr. Yahui Zhou, our chairman of the board and chief executive officer, beneficially owned 65.1%26.4% of the ordinary shares issued and outstanding and may be in a position to effectively control 60.16% of the voting power. As a result, Mr. Yahui Zhou hadhas the ability to control or exert significant influence over important corporate matters and investors may be prevented from affecting important corporate matters involving our company that require approval of shareholders, including:
the composition of our board of directors and, through it, any determinations with respect to our operations, business direction and policies, including the appointment and removal of officers;
any determinations with respect to mergers or other business combinations;
our disposition of substantially all of our assets; and
any change in control.
• | the composition of our board of directors and, through it, any determinations with respect to our operations, business direction and policies, including the appointment and removal of officers; | |
• | any determinations with respect to mergers or other business combinations; | |
• | our disposition of substantially all of our assets; and | |
• | any change in control. |
These actions may be taken even if they are opposed by our other shareholders, including the holders of the ADSs. Furthermore, this concentration of ownership may also discourage, delay or prevent a change in control of our company, which could have the dual effect of depriving our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and reducing the price of the ADSs. As a result of the foregoing, the value of your investment could be materially reduced.
We may be the subject of anti-competitive, harassing or other detrimental conduct that could harm our reputation and cause us to lose users and customers.
In the future, we may be the target of anti-competitive, harassing, or other detrimental conduct by third parties. Allegations, directly or indirectly against us or any of our executive officers, may be posted in internet chatrooms or on blogs or websites by anyone, whether or not related to us, on an anonymous basis. The availability of information on social media platforms and devices is virtually immediate, as is its impact. Social media platforms and devices immediately publish the content their subscribers and participants post, often without filters or checks on the accuracy of the content posted. Information posted may be inaccurate and adverse to us, and it may harm our business, prospects or financial performance. The harm may be immediate without affording us an opportunity for redress or correction. In addition, such conduct may include complaints, anonymous or otherwise, to regulatory agencies. We have been and may again in the future be subject to regulatory or internal investigations as a result of such third party conduct and may be required to expend significant time and incur substantial costs to address such third party conduct, and there is no assurance that we will be able to conclusively refute each of the allegations within a reasonable period of time, or at all. Additionally, our reputation could be harmed as a result of the public dissemination of anonymous allegations or malicious statements about our business, which in turn may cause us to lose users and customers and adversely affect the price of our ADSs.
If we fail to detect click-through fraud, we could lose the confidence of our advertisers and our revenues could decline.
Our business is exposed to the risk of click-through fraud on our partners’ advertisements. Click-through fraud occurs when a person clicks advertisements for a reason other than to view the underlying content of advertisements. If our advertising partners fail to detect significant fraudulent clicks or otherwise are unable to prevent significant fraudulent activity, the affected search advertisers may experience a reduced return on their investment in advertising on our platform and lose confidence in the integrity of our search partners’ pay-for-click service systems. If this happens, our revenues from our monetization partners may decline.
We currently report our financial results under IFRS, which differs in certain significant respects from U.S. GAAP.
We report our financial statements under IFRS. There have been and there may in the future be certain significant differences between IFRS and U.S. generally accepted accounting principles, or U.S. GAAP, including but not limited to differences related to revenue recognition, share-based compensation expense, income tax, impairment of long-lived assets and earnings per share. As a result, our financial information and reported earnings for historical or future periods could be significantly different if they were prepared in accordance with U.S. GAAP. As a result, you may not be able to meaningfully compare our financial statements under IFRS with those companies that prepare financial statements under U.S. GAAP.
We face risks related to natural disasters, health epidemics or terrorist attacks.attacks, which could significantly disrupt our operations.
Our business could be adversely affected by natural disasters, such as earthquakes, floods, landslides, tsunamis, outbreaks of health epidemics such as an outbreak of avian influenza, severe acute respiratory syndrome, Zika virus, or Ebola virus or the outbreak of coronavirus (COVID-19), as well as terrorist attacks, other acts of violence or war or social instability. If any of these occurs, we may be required to temporarily or permanently close and our business operations may be suspended or terminated. For example, the outbreak of COVID-19 spread rapidly throughout China and to over 100 countries throughout the world. On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization declared the outbreak a “Public Health Emergency of International Concern (PHEIC)”, and later on March 11, 2020 a global pandemic. Our office operations in the PRC, Poland, Norway, Nigeria, Kenya, India and other countries have been disrupted to an extent by local restrictions in such locations, and the duration and effects of such restrictions are not fully apparent at present. However, our microfinance business is heavily dependent on call center staff for customer service and collections so we have meaningfully scaled back lending activities. Moreover, the COVID-19 pandemic may also result in a slow-down in advertising markets which would in turn affect our revenues from advertising and search partners. In the event that COVID-19 spreads to other countries in which we operate, additional disruption may occur. Moreover, if any of our employees contract or are suspected of having contracted COVID-19, these employees will be required to be quarantined and they could infect other of our employees potentially resulting in severe disruption to our business. Thus, our operating results in one or more future quarters or years may fluctuate substantially or fall below the expectations of securities analysts and investors. In such event, the trading price of our ADSs may fluctuate significantly. If the outbreak persists, the global economy may be severely harmed and disrupted, which could adversely affect our results of operation.
Fluctuations in foreign currency exchange rates will affect our financial results, which we report in U.S. Dollars.
We operate in multiple jurisdictions, which exposes us to the effects of fluctuations in currency exchange rates. We earn revenue denominated in U.S. Dollars, Euros, Russian Rubles, Norwegian Krone, Indonesian Rupiah, Japanese Yen, Singapore Dollars, Kenyan Shillings, Chinese Yuan, South African Rand, Indian Rupees and Nigerian Naira, among other currencies. We generally incur expenses for employee compensation and other expenses in the local currencies in the jurisdictions in which we operate. Fluctuations in the exchange rates between the various currencies that we use could result in expenses being higher and revenue being lower than would be the case if exchange rates were stable. We cannot assure you that movements in foreign currency exchange rates will not have a material adverse effect on our results of operations in future periods. We do not generally enter into hedging contracts to limit our exposure to fluctuations in the value of the currencies that our businesses use. Furthermore, the substantial majority of our revenue is denominatedearned in emerging markets currencies. Because fluctuations in the value of emerging markets currencies are not necessarily correlated, there can be no assurance that our results of operations will not be adversely affected by such volatility.
Risks Related to Our ADSs
The trading price of the ADSs is likelyhas been and may continue to be volatile, which could result in substantial losses to investors.
The trading price of the ADSs can be volatile and fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors likesuch as but not limited to concerns over the performance and fluctuationhealth of the market pricesglobal economy, geopolitical concerns, and the outbreak and spread of other technology companies that have listed their securities in the United States. A number of technology companies have listed or may be in the process of listing their securities on U.S. stock markets. The securities of some of these companies have experienced significant volatility, including price declines in connection with their initial public offerings. The trading performances of those companies’ securities after their offerings may affect the attitudes of investors toward technology companies listed in the United States in general and consequently may impact the trading performance of our ADSs, regardless of our actual operating performance.COVID-19 global pandemic.
In addition to market and industry factors, the price and trading volume for the ADSs may be highly volatile for factors specific to our own operations, including the following:
variations in our quarterly or annual revenue, earnings and cash flow;
announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors;
announcements of new products, services and expansions by us or our competitors;
changes in financial estimates by securities analysts;
detrimental adverse publicity about us, our platforms or our industries;
additions or departures of key personnel;
release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; and
potential litigation or regulatory investigations.
• | variations in our quarterly or annual revenue, earnings and cash flow; | |
• | announcements of new investments, acquisitions, strategic partnerships or joint ventures by us or our competitors; | |
• | announcements of new products, services and expansions by us or our competitors; | |
• | changes in financial estimates by securities analysts; | |
• | detrimental adverse publicity about us, our platforms or our industries; | |
• | additions or departures of key personnel; | |
• | short seller reports that make allegations against us or our affiliates, even if unfounded; | |
• | release of lock-up or other transfer restrictions on our outstanding equity securities or sales of additional equity securities; | |
• | potential litigation or regulatory investigations: and | |
• | other risk factors mentioned in this annual report. |
Any of these factors may result in large and sudden changes in the volume and price at which the ADSs will trade.
In the past, shareholders of public companiesclass action lawyers have often broughtsought to bring securities class action suits against those companies following periods of instability in the market price of their securities. If we were involvedWe have been named in Brown v. Opera Limited, et al., in the Southern District of New York following a period of instability brought on by the published report of a short seller. See the “Item 8. Financial Information — A. Consolidated Statements and Other Financial Information — Legal and Administrative Proceedings”. This or other class action suit, it couldsuits may divert a significant amount of our management’s attention and other resources from our business and operations and may require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding the ADSs, the market price for the ADSs and trading volume could decline.
The trading market for the ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade the ADSs, the market price for the ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for the ADSs to decline.
We currently do not expect to pay dividends in the foreseeable future and you must rely on price appreciation of the ADSs for return on your investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends subject to our memorandum and articles of association and certain restrictions under Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other things, our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiary, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the ADSs and you may even lose your entire investment in the ADSs.
Mr. Yahui Zhou, our chairman of the board and chief executive officer, has substantial influence over our company and his interests may not be aligned with the interests of our other shareholders.
As of the date of this annual report, Mr. Zhou beneficially owns 65.1% of the total voting power26.4% of our total issued and outstanding ordinary shares.shares and may be in a position to effectively control 60.16% of the total voting power. As a result, Mr. Zhou has substantial influence over our business, including significant corporate actions such as mergers, consolidations, sales of all or substantially all of our assets, election of directors and other significant corporate actions.
Mr. Zhou may take actions that are not aligned with the interests of our other shareholders and may render new investors unable to influence significant corporate decisions. We have in the past, and likely will continue to enter into related party transactions involving entities directly or indirectly controlled by Mr. Zhou. See “Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions” for details. Such related party transactions, while reviewed and approved by our Board's Audit Committee consisting solely of independent Directors, may indirectly benefit Mr. Zhou personally. In order to protectpersonally, by virtue of his interest in the interests of the company, our audit committee is responsible for approving all related party transactions. At the moment, however, our audit committee is chaired by Mr. Zhou. We intend to appoint an additional independent director to replace Mr. Zhou on the audit committee so that our audit committee will consist solely of independent directors within one year of the day our shares were listed on the Nasdaq Global Select Market in order to satisfy Nasdaq Global Select Market and SEC requirements.party. Furthermore, Mr. Zhou’s substantial influence over our company and such concentration of ownership may discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and may reduce the price of the ADSs. These actions may be taken even if they are opposed by our other shareholders. In addition, the significant concentration of share ownership may adversely affect the trading price of the ADSs due to investors’ perception that conflicts of interest may exist or arise. For more information regarding our principal shareholders and their affiliated entities, see “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
As a “controlled company” under the rules of the Nasdaq, we may be exempt from certain corporate governance requirements that could adversely affect our public shareholders.
Since Mr. Yahui Zhou, our chairman of the board and chief executive officer, is the beneficial owner of a majority of the voting power of our issued and outstanding share capital following the completion of the initial public offering, we are qualified as a “controlled company” under the rules of the Nasdaq. Under these rules a company of which more than 50% of the voting power is held by an individual, group or another company is a controlled company and may elect not to comply with certain corporate governance requirements, including the requirement that a majority of our directors be independent, as defined in the Nasdaq rules, and the requirement that our compensation and corporate governance and nominating committees consist entirely of independent directors. We reply on certain corporate governance exemptions as described in Item 16G (Corporate Governance) of this annual report. So long as we remain a controlled company relying on any of such exemptions and during any transition period following the time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the Nasdaq corporate governance requirements.
If a United States person is treated as owning at least 10% of our ADSs or ordinary shares, such person may be subject to adverse United States federal income tax consequences.
If a United States person is treated as owning (directly, indirectly or constructively) at least 10% of the value or voting power of our ADSs or ordinary shares, such person may be treated as a “United States shareholder” with respect to each “controlled foreign corporation,” or CFC, in our group. WhereBecause our group includes one or more United States subsidiaries, in certain circumstancesthat are corporations for United States federal income tax purposes, we could be treated as a CFC and certain of our non-United States subsidiariessubsidiary corporations could be treated as CFCs (regardless of whether or not we are or are not treated as a CFC). We believe we and certain of our non-United States subsidiaries were treated as CFCs for our taxable year ended December 31, 2018.
A United States shareholder of a CFC may be required to annually report and include in its United States taxable income its pro rata share of “Subpart F income,” “global intangible low-taxed income” and investments in United States property by CFCs, whether or not we make any distributions. An individual that is a United States shareholder with respect to a CFC generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a United States corporation. A failure to comply with these reporting obligations may subject a United States shareholder to significant monetary penalties and may prevent starting of the statute of limitations with respect to such shareholder’s United States federal income tax return for the year for which reporting was due. We do not intend to monitor whether we are or any of our non-United States subsidiaries areis treated as CFCsa CFC or whether any investor is treated as a United States shareholder with respect to us or any of our CFC subsidiaries or to furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. A United States investor should consult its own advisor regarding the potential application of these rules in its particular circumstances.
If we are a passive foreign investment company for United States federal income tax purposes for any taxable year, United States holders of ADSs or ordinary shares could be subject to adverse United States federal income tax consequences.
A non-United States corporation
We will be a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if either (i) at least 75% of itsour gross income for such year is passive income or (ii) at least 50% of the value of itsour assets (based(generally based on an average of the quarterly values of the assets) during such year is attributable to assets that produce or are held for the production of passive income. A separate determination must be made after the close of each taxable year as to whether a non-United States corporation iswe are a PFIC for that year. WeBased on the market price of our ADSs, the value of our assets and the composition of our income and assets, we do not believe that we were a PFIC for United States federal income tax purposes during thefor our taxable year ended December 31, 2018. However,2019, although there can be no assurances in this regard. Moreover, the application of the PFIC rules is subject to uncertainty in several respects.
position to any determination we make.
Changes in the composition of our income or composition of our assets, including as a result of our investment in new businesses, products, services and technologies, may cause us to be or become a PFIC. TheIn addition, the determination of whether we will be a PFIC for any taxable year may depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which may depend upon the market valueprice of theour ADSs or ordinary shares from time to time)time, which may fluctuate significantly) and also may be affected by how, and how quickly, we spend our liquid assets and the cash raisedwe generate from our operations and raise in any offering. In estimating the value of our initial public offering.goodwill and other unbooked intangibles, we have taken into account our market capitalization. Among other matters, if our market capitalization declines, we may be or become a PFIC for the current or future taxable years because our liquid assets and cash (which are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets. Further, while we believe our classification methodology and valuation approach isare reasonable, it is possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our being or becoming a PFIC for our taxable year ended December 31, 2019, the current taxable year or one or more future taxable years.
If we are a PFIC for any taxable year during which a United States person holds ADSs or ordinary shares, certain adverse United States federal income tax consequences could apply to such United States person. See “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company.”
Our memorandum and articles of association contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and the ADSs.
Our memorandum and articles of association contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADSs or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of the ADSs may fall and the voting and other rights of the holders of our ordinary shares and the ADSs may be materially and adversely affected.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our memorandum and articles of association, the Companies Law (2018(2020 Revision) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against the directors, actions by minority shareholders and the fiduciary duties owed to us by our directors under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (save for our memorandum and articles of association) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motionresolution or to solicit proxies from other shareholders in connection with a proxy contest.
Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. For example, we have elected to not have our compensation committee consist of entirely independent directors. We reply on certain corporate governance exemptions as described in Item 16G (Corporate Governance) of this annual report. However, if we choose to follow home country practice in the future, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.
As a result of all of the above, public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and the majority of our assets are located and the majority of our operations are conducted outside of the United States. In addition, a majority of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of Norway may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 for so long as we are an emerging growth company. We will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual gross revenue of at least US$1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (c) the date on which we have, during the preceding three-year period, issued more than US$1.07 billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the Exchange Act, which would occur if the market value of the ADSs that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided by the JOBS Act.
The JOBS Act also provides that an emerging growth company does not need to comply with any new or revised financial accounting standards until such date that a private company is otherwise required to comply with such new or revised accounting standards. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
As an exempted company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices for corporate governance matters that differ significantly from the Nasdaq corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the corporate governance listing standards.
As a Cayman Islands exempted company listed on the Nasdaq, we are subject to Nasdaq corporate governance listing standards which permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq corporate governance listing standards.
For instance, we are not required to: (i) have a majority of the board be independent; (ii) have a compensation committee or a nominations or corporate governance committee consisting entirely of independent directors; or (iii) have regularly scheduled executive sessions with only independent directors each year. We rely on certain corporate governance exemptions as described in Item 16G (Corporate Governance) of this annual report. To the extent we choose to follow home country practice in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the Nasdaq corporate governance listing standards applicable to U.S. domestic issuers.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.
Because we are a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC;
the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act;
the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and
• | the rules under the Exchange Act requiring the filing of quarterly reports on Form 10-Q or current reports on Form 8-K with the SEC; | |
• | the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; | |
• | the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and | |
• | the selective disclosure rules by issuers of material nonpublic information under Regulation FD. |
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to continue to publish our results on a quarterly basis through press releases, distributed pursuant to the rules and regulations of the Nasdaq. Press releases relating to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or furnish to the SEC is less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a U.S. domestic issuer.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote with respect to the ordinary shares.
As a holder of ADSs, you will only be able to exercise the voting rights with respect to the underlying ordinary shares in accordance with the provisions of the deposit agreement. Under the deposit agreement, you must vote by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will try to vote the underlying ordinary shares in accordance with these instructions. You will not be able to directly exercise your right to vote with respect to the underlying shares unless you withdraw the shares. Under our amended and restated memorandum and articles of association, the minimum notice period required for convening a general meeting is seven days. When a general meeting is convened, you may not receive sufficient advance notice to withdraw the shares underlying your ADSs to allow you to vote with respect to any specific matter. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote your shares. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. This means that you may not be able to exercise your right to vote and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our ordinary shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial for any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary were to oppose a jury trial based on this waiver, the court would have to determine whether the waiver was enforceable based on the facts and circumstances of the case in accordance with applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, or by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this would be the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have, including outcomes that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or the ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on the ordinary shares or other deposited securities underlying your ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of the ADSs.
You may experience dilution of your holdings due to inability to participate in rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
The requirements of being a public company may strain our resources and divert our management’s attention.
Upon completion of our initial public offering, we have becomeAs a public company, and we are subject to the reporting requirements of the Exchange Act, the U.S. Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-Frank Act and the listing standards of Nasdaq as applicable to a foreign private issuer, which are different in some material respects from those required for a U.S. public company. We expect that the requirements of these rules and regulations will increase our legal, accounting and financial compliance costs, make some activities more difficult, time consuming and costly, and place significant strain on our personnel, systems and resources. See “—Risks Related to Our Business and Industry—Material weaknesses in our internal control over financial reporting have been identified, and ifIndustry — If we fail to implement and maintain effective internal control over financial reporting, we may be unable to accurately report our results of operations, meet our reporting obligations or prevent fraud.” As a result of disclosure of information in this annual report and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors, shareholders or third parties. If such claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of our management and harm our business and operating results.
INFORMATION |
A. | History and Development of the Company |
We trace our history back to 1996 and the launch of the first version of our “Opera” branded browser software. We have since been a pioneer in redefining the web browsing experience, and providing personalized content discovery platforms and offering fintech and transactional services for hundreds of millions of global internet users.
Opera Limited is an exempted company with limited liability incorporated in March 2018 in the Cayman Islands. We conduct our business mainly through our operating companies, including in particular Opera SoftwareNorway AS, a private limited liability company incorporated under the laws of Norway. We acquired Opera SoftwareNorway AS and its subsidiaries on November 3, 2016, from Otello Corporation ASA for a consideration of US$575.0 million, less working capital adjustments. This acquisition included the business of providing Opera’s mobile and PC web browsers, as well as certain related products and services.
We listed our ADSs on the Nasdaq Global Select Market under the symbol “OPRA” on July 27, 2018. One ADS corresponds to two underlying shares in Opera Limited. On August 9, 2018, we completed the initial public offering of 9,600,000 ADSs, and the underwriters exercised their over-allotment option on the same date for the purchase of an additional 334,672 ADSs. We also sold 9,999,998 shares, equivalent to 4,999,999 ADSs, in a concurrent private placement. Our pre-IPO shareholders held 190,250,000 shares, equivalent to 95,125,000 ADSs. Combined, following the IPO, Opera Limited had 220,119,342 shares outstanding, corresponding to 110,059,671 ADSs. On September 24, 2019, we completed a follow-on public offering of an additional 7,500,000 ADSs, and the underwriters later exercised their over-allotment option for the purchase of an additional 1,125,000 ADSs, which was completed on October 16, 2020. As of the date of this report, net of separately announced repurchases of our own shares and the exercise of employee equity grants, a total of 238,521,354 shares are outstanding, equivalent to 119,260,677 ADSs.
Our company is a holding company that does not have substantive operations. We conduct our principal activities through our subsidiaries. Our principal executive offices are located at Gjerdrums vei 19, 0484Vitaminveien 4, 0485 Oslo, Norway. Our telephone number at this address is +47 23 69 24 00
B. | Business overview |
Overview
Opera is a leading global internet brand with a large, engaged and growing base of over 350 million average monthly active users in 2019. Building on over 20 years of innovation, starting with our browser products, we are increasingly leveraging our brand as well as our massive and engaged user base in order to expand our offerings and our business. Today, we offer users across Europe, Africa and Asia a range of products and services that include our PC and mobile browsers, our AI-powered content platform Opera News, and our app-based fintech solutions as well as our emerging products such as classifieds. We have also recently initiated a project to provide European banking/payment services.
Opera launched one of the world’s leadingfirst PC browsers in 1996 and introduced the world’s first full web browser providers andfor smartphones in 2002. Since then, Opera has remained an influential playerinnovator in the field of integrated AI-driven digital content discoverybrowser space, launching features including tabbed browsing, data savings, PC/mobile sync, and recommendation platforms. Given the growing importance of online content consumption, we believe that the future of digital content discovery is one where consumers will enjoy highly personalized experiences enabled by AI algorithmsnumerous features focused on privacy and big data. Withsecurity, including ad blocking and a longbuilt-in VPN. Today, our browser products include Opera Mini, Opera for Android, Opera Touch, Opera for Computers and proven track record of innovation in both core performance and functionality, and an established global brand, we served 326.7Opera GX, a separate PC browser tailored for gamers. These products averaged approximately 318 million average MAUs in 2018, of which 251.1 million were smartphone and PC users, compared to 216.2 million smartphone and PC users in 2017. 2019.
We believe consumers opt to useOpera News, our browsers because we provide a better-targeted solution versus their needs. Our browsers are available globally. We believe users in Africa and Asia are attracted to our mobile browsers predominantly because of their efficient design and usability, and that users across North America and Europe choose our mobile and PC browsers predominantly because of their unique features. Our mobile browsers, with a global user base of 326.7 million average MAUs in 2018, of which 192.6 million were smartphone users, compared to 168.1 million smartphone users in 2017, are among the market leaders in high growth regions such as South Asia, Southeast Asia and Africa in terms of market share, according to StatCounter. Our PC browsers, available for both Windows and macOS platforms, also had a substantial user base of 58.5 million average MAUs in 2018, compared to 48.1 million in 2017.
The browsers of today are transforming from web-browsing utilities into smarter products providing users with faster, easier and more personalized access to internet content. As technologies such as AI and big data analytics advance, consumers expect their online experiences to be increasingly customized, interactive and engaging. As a result, consumers are turning to mobile apps that deliver more personalizedAI-driven content discovery,platform enabled by big data technologies, was launched in 2017 and AI technologies. Withwas initially launched as part of our Opera browser, serving as the initial portal through whichleveraging our users access the internet,large user base and well-known brand in order to deliver a personalized and relevant content experience at scale. In early 2018, we can develop additional applications and functions on top to fulfill users’ needs and increase their time spent on our products.
We first launched Opera News, based on our AI-powered content discovery and recommendation platform, as an integrated service within our mobile browsers in January 2017. We also launched thea standalone Opera News app, in January 2018. We constantly refine and optimize our AI platform with insights from our massive user base and adopt technologies including natural language processing, computer vision and image understanding to process content, and machine learning technology, including gradient boosting decision trees and deep neural networks, in our recommendation engine to recommend personalized content to each individual user. Since the launch ofwhich now also supports short-form video functionality. Today, Opera News we have experienced tremendous user growth with 111.7 million average MAUs accessingis one of the most downloaded and used global news applications. In 2019, Opera News averaged 124 million MAUs, which included 37 million users from the Opera News app. Additionally, in 2018, an2019 Opera News launched Opera News Hub in its initial market of Nigeria. Opera News Hub enables local content creators to publish exclusive content on our platform, which has helped increase from 36.4 million average MAUs in 2017.engagement on the service by increasing page views and time spent.
In December 2018, we acquired anWe rolled out our app-based microfinance service that offersin late 2018, offering instant creditshort-term microloans to approved borrowers in Kenya under the “OKash” and other local brands. In the fourth quarter of 2018, over 280,000 microloans were disbursed by the service. By the time of this report, our microfinancebrands, initially in Kenya and subsequently expanding to India and Nigeria (collectively referred to as “OKash”). Our apps have been consistently achieving download volumes amongst the top ten most downloaded free Android apps in Kenya. This fintech business representsare intended to simplify borrowing and provide a newhigh-demand service due to convenience and profitable user-driven business opportunity thatease-of-use. As we believe will benefit fromdid with Opera News, we utilize our existing reachuser engagement across our browser and scalenews app in our established African and Asian markets,order to promote this product, enabling us to acquire users in a similar fashion as Opera News.
cost-efficient and scaled manner. Our growth strategy
The key elementsservice relies on our large repository of our growth strategy include:
Continue to grow smartphone and PC user base
We grew our smartphone and PC user base during 2018. We are focused on continuing to grow smartphone and PC users,behavior data as well as increasing their time spent onAI algorithms in order to credit-score potential borrowers, analyze the purpose of the loan as well as the repayment behavior of borrowers. Our microfinance service disbursed over 15 million short-term microloans in 2019, and millions of users are now logging into our products. We intendapp. In the future, we plan to accomplish thisexpand our microfinance offerings to additional markets and broaden our fintech product offerings.
Opera Ads is our advertising solution targeting digital agencies, advertisers and brands to connect and engage directly with Opera users through a combinationboth programmatic and traditional advertising solutions. Launched during the second quarter of product improvements, new feature or product offerings, increased marketing and distribution efforts and broadening2019, Opera Ads is an important part of our product-wise geographicmonetization strategy aimed at growing our average revenue per user. Encouraged by its early success, we decided to expand Opera Ads beyond large advertisers to include a focus areas.on small and medium sized enterprises. Specifically, we launched OLeads, a new online lead generation platform for small and medium sized enterprises in Nigeria to maximize their visibility through enabling their online presence.
Increase monetizationIn August 2019 we launched a classifieds product, OList, a free online marketplace and e-commerce platform in Nigeria, designed for individuals and corporate businesses to advertise, market, purchase or sell goods and services. OList is also focused on becoming heavily involved in several high value categories including real estate/rentals and used cars, where there is an opportunity for Opera to create transparent and robust marketplaces and to participate in, or facilitate, transactions.
Increasing monetization on a per-product, per-user basis is a key component to our revenue aspirations. WeAs we have done with Opera News, OKash, Opera Ads, OList and OLeads, we intend to improve our ad technology capabilities, increase monetization opportunities on newer products such as Opera News, and continue to optimize monetization of both mobileleverage our brand as well as our large and PC browsers. Additionally, some of our established markets are less developed in terms of digital advertising, and we expect to benefit as these markets continue to mature.
Leverage the Opera brand andengaged user base to drive opportunities in adjacent markets
We intend to leverage Opera’s established global brand and position as a leading browser provider and influential playerlaunch additional consumer facing products in the field of integrated AI-driven digital content discoveryfuture. In addition to our efforts around creating a robust classifieds marketplace and recommendation platforms, with 326.7 million average MAUstaking deeper measures in 2018. We believe this creates opportunities in adjacent markets. For example,certain high-value verticals, we have used this strong positionannounced our intention to expand intolaunch fintech withproducts that will be offered to our microfinance service.
Investlarge user base in select businesses supported by favorable underlying trends where Opera can make a difference
We have invested in select emerging market ventures ranging from social media focused on music and entertainment, African mobile money and payment services, and African licensed sports betting. We observe traffic patterns and verticals that are on a positive trajectory, and have decided to invest where we further see potential for mutually beneficial operational synergies. We believe such investments allow us to participate in, and support the emergence of, growth cases, in a way not always accessible for a direct financial investor given our brand and market position.Europe.
Our products for usersProducts and Users
Our products for users include (i) the web browsers Opera Mini, Opera for Android, Opera Touch, and Opera for Computers and Opera GX, (ii) the standalone personalized news aggregation app Opera News and our emerging markets fintech apps, which includes microfinance app Okash, also operating underand other local brands.capabilities, and (iii) the intelligent online marketing platforms Opera Ads, OList and OLeads. Our cloud-based technologies enabled over 314.9 million average MAUs in 2018enable hundreds of millions of users to discover and interact with the content and services that matter most to them. The application of leading AI-powered technologies and advanced data analytics and the recommendation engine built into our browsers and news app, and other products and services, give our users a better, faster and more personalized online experience and enable advertisers to target relevant users in a more precise way.
Our Mobile Browsers: Opera Mini, Opera for Android and Opera Touch
We currently have three mobile browser products: Opera Mini, Opera for Android and Opera Touch. Our mobile browser products are fast, and optimized for mobile browsing. All mobile browsers come with native ad blockers, which provide users with the option to further increase browser speed by blocking ads that are often slow and intrusive.
First launched in 2006, Opera Mini is a mobile browser that provides a faster browser experience on practically any smartphone or feature phone. Through the application of advanced data compression and saving technologies, Opera Mini has enabled hundreds of millions of users around the world to access the internet through their mobile devices, providing a reliable browsing experience regardless of their network conditions. Opera Mini is a cloud-based browser that is fast to install and takes up very little space on a user’s mobile phone. When browsing with Opera Mini, the data traffic goescan go through Opera servers, which compress web pages, including text and images, towards only 10% of their original size, reducing the amount of data that needs to be sent over mobile networks that are often congested. Moreover, the reduced data traffic consumption provides users with a significantly lower data cost compared to the default browser found on their phones.
Launched in 2013, Opera for Android is our flagship Android smartphone browser. It comes with a full browser engine, based on the Chromium project, and a user-friendly interface designed to give users a fast browsing experience on high-end smartphones. Opera for Android is a powerful and feature-rich browser, and is optimized for mobile phones with larger screens and tablets. In December 2018, Opera for Android became the first browser to feature an integrated Crypto Wallet, making it easy to use Ethereum based cryptocurrencies and blockchain powered web applications. The browser also enables users to block annoying cookie dialogs, and in March 2019, the browser became the first major mobile browser to ship with an integrated VPN solution.
We launched our brand newnewest mobile browser, Opera Touch, in the second quarter of 2018 for Android and in the fourth quarter of 2018 for iOS.
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Opera Touch is designed for mobile phone users to use the browser with one hand while they are on the move. It is also designed to let users to share content from Opera Touch to their other devices in a faster and easier fashion than with other mobile browsers. We believe Opera Touch is a great companion app for our PC browser. The Opera Touch browser has won both the Red Dot Award in Communication Design 2018 and the iF DESIGN AWARD 2019 for its unique design and usability. Opera Touch is today the only browser we offer for iOS that offers a rich feature set including a native ad-blocker, a Crypto Wallet and the Flow feature that enables users to continue browsing across their devices.
Our mobile browser users
Our mobile browser user base reached 256.4251.9 million average MAUs in 2018,2019, of which 180.8189.9 million were smartphone users and 75.662 million were feature phone users. Our smartphone user base continues to grow throughout the world. The growth rate of our mobile browser user base has historically been strongest in regions where users had the greatest need for fast browsers on limited mobile networks, and often paid a relatively higher cost for data relative to their income. As a result, our mobile browsers have been very popular in Africa and South Asia and Southeast Asia. Further, we have seen organic mobile browser growth in Europe relating to the increase in users of Opera for Computers in the region.
Our PC browser: Opera for Computers and Opera GX
Opera for Computers is one of the most innovative and differentiated PC browsers on the market, catering to the high-end user segment that requires performance and features beyond those offered by the default system browsers on both Windows and macOS. Opera for Computers uses an Opera-tuned version of the Chromium browsing engine carefully optimized for performance metrics such as speed and laptop battery consumption. In addition, we provide users with unique features that are not found in other major web browsers.
Key features
Opera for Computers has unique featuresbrowsers, including a free, built-in VPN service that enhances user privacy and security, especially for laptops on public networks, subject to compliance with relevant local regulatory requirements. The browser also includes a battery-saving mode that can increase battery life by up to 50%, and a native ad block feature that increases page loading speeds by up to five times. Our PC browser makes it easier to shop online with built-in currency and foreign unit conversion, and makes communication easier by embedding social network services such as Facebook Messenger, WhatsApp, Telegram and VKontakte in the browser’s sidebar.
In the first quarter of 2019, we launched a redesigned PC browser codenamed R3, becoming the first PC browser with Web 3 support, powering a year-to-year PC browser MAU growth of 14% in a mature market.
Opera GX, which launched in the second quarter of 2019, is a PC web browser tailored for gamers. Opera GX allows PC gamers to customize and tune their browsers to improve their gaming experience. In September 2019, Opera GX won the Red Dot Award in the Interface and User Experience Design category. The product has grown rapidly with strong engagement, including reaching 1 million downloads approximately three months after launch.
Our PC browser users
We have a large and active global PC user base with 58.566.4 million average MAUs in 2018,2019, reaching 60.967.6 million average MAUs in the fourth quarter of 2018.2019, up 11% year-over-year. Our PC browser user base has historically been prominent in regions that value our innovations in browser technology. As a result, our strongest PC region has been Europe, representing approximately 67%the majority of our user base. In addition, we have experienced significant growth in other geographies such as Asia and the Americas in 2018, leading our overall PC user base to grow in 2018 versus 2017.2019.
Our AI-powered newsnews and content recommendations service:content recommendations service: Opera News
Leveraging our massive user base and innovation capability, we launched the Opera News service in January 2017. Opera News is our AI-powered personalized news discovery and aggregation service. The service is both featured prominently as part of our browsers, and also made available as a standalone app.app and website. By providing AI-powered news and content recommendations, we have increased both user activity and the amount of time users spend in our online ecosystem. This has supported an attractive revenue growth trajectory that is predictable, recurring and fully scalable.scalable as well as an ability to promote other Opera products.
Key Opera News Features
We use our proprietary AI technologies to curate and intelligently recommend news, articles, videos and other online content that may be of interest to our users. Users can conveniently access this content through real-time intelligent ranking, top news and push notificationsnotification features. Moreover, Opera News utilizes natural language processing and other technologies to quickly process linguistic differences and nuances to assess and recommend online content across different languages and cultures. In December 2018, Opera News was available in over 30 languages across nearly 60 countries. When using an Opera product powered by our AI recommendation engine, people can efficiently discover save and share online content that appeals to them.
Our latest initiative forIn addition, we have been constantly innovating Opera News was the launch ofwith new features and functions for our users. In December 2018, we launched Instaclips, in December 2018. Instaclips is a streaming video feature within the platform that is designed to captivate and engage our users with easy-to-consume, interest-based, short-form video clips. Following the launch, over 50% of dailyIn September 2019, we launched Opera News App usersHub in Nigeria, a platform which enables content creators to publish and monetize through Opera News. Opera News Hub has further improved engagement metrics, with accessincreases in article clicks, reading time, and app time spend. We plan to the feature optedexpand Opera News Hub to engage with Instaclips, consuming over 13 minutes of video clips per day, on average, paired with strong sharing metrics.four additional African countries beyond Nigeria in 2020.
Our Opera News usersusers
Growing the size of our Opera News user base and increasing engagement is one of our strategic priorities. Since its launch in January 2017, its user base reached 111.7124 million average MAUs in 20182019 across those users that accessed Opera News from within Opera browsers and those that accessed it from the dedicated Opera News app. Leveraging our established monetization channels, the platform generated immediate revenues and serves as an additional access portal to partners and publishers.
We launched the standalone Opera News app on the Google Play Store and other Android app stores for certain African markets in January 2018. Within four weeks of its launch, the Opera News app generated over one million downloads and was the most downloaded app on the Google Play Store in Nigeria, Tanzania, Kenya and Ghana. From an initial focus on Nigeria, Kenya and South Africa, to the Ivory Coast to better serve French speaking African countries, as well as Egypt for North Africa, we have also expanded our presence in India and Indonesia successfully following the same model. As a result, in the second quarter of 2019, Opera News app was identified by Sensor Tower, as the top downloaded global news app. The Opera News app user base has experienced rapid growth since its launch, averaging 11.736.9 million MAUs in 20182019. We expect to attract additional users by expanding Opera News Hub and reaching 19.7 million average MAUs increating additional access points including a light version of the fourth quarter of 2018.app for lower-end smartphones.
Our emerging market fintech mapps:icrofinance apps: OKash, and other local brands
Our app-based microfinance service offersemerging market fintech apps offer instant microcreditmicroloans to approved borrowers under “OKash” and other local brands. The apps are designed for young consumers with an income and are intended to simplify borrowing for "last mile" financial inclusion. Our microfinance service is unique as it uses artificial intelligence technologies to analyze the purpose of the loanloans as well as the repayment behavior of borrowers. The serviceWe work to create an accessible credit product with similar use cases as a credit card would have in developed markets that result in high levels of repeat usage. We take our social responsibility seriously, and offer only limited loan amounts to first-time borrowers. Further, to date, we have effectively capped interest charges for all users that are not able to repay on time, such that our claims have never exceed twice the original amounts due. We have also, features an advanced security systemto date, elected not to bring legal collections proceedings against any borrower that includes facial recognition.did not pay us back.
OurIn 2019, we have made tremendous progress scaling our microfinance service, which we acquired on December 19, 2018, disbursed over 280,000 short term microloansbusiness since launching in Kenya duringin December 2018. Besides scaling in Kenya, we expanded our footprint, most notably to India. In 2019, we disbursed about 15 million short duration microloans globally. Further, AI technologies and a growing base of recurring users enabled us to decrease non-performing loans as the year progressed. In the fourth quarter of 2018. By the time2019, non-performing loans had been reduced to approximately 5.5% of this report, our microfinance apps have been consistently achieving download volumes amongst the top ten most downloaded free Android apps in Kenya.total loan value, supported by about 80% of loans being granted to returning users. Our microfinance business representshas proven to be a new and profitable user-driven business opportunity that we believe will benefithas benefited from Opera’sour existing reach and scale as well as from strong user reviews in Google Play. Further, we expect to expand to additional countries and launch additional fintech products to leverage the large base of users that are engaging with our fintech apps. We also expect further improvements in the credit scoring AI technologies and business processes including collections, which could enable us to serve a similar fashion asbroader set of customers and expand our offering.
Our intelligent online marketing platforms: Opera News.Ads, OList and OLeads
In May 2019, we launched Opera Ads, a new platform to facilitate both traditional and programmatic access to Opera’s advertising inventory. Based on user intent and contextual relevance, Opera Ads offers an intelligent advertising solution to digital agencies, advertisers and brands to connect and engage directly with the Opera audiences. Opera Ads is available in both traditional and programmatic buying models and is a strong alternative to advertisers in key regions where we have significant scale and reach, e.g. sub-Saharan Africa.
Encouraged by its early success, we expanded Opera Ads beyond large advertisers to include a focus on small and medium sized enterprises. In September 2019, we launched OLeads, a new online lead generation platform for small and medium sized enterprises in Nigeria to maximize their visibility and online presence. OLeads offers user-friendly tools which enable users to come online easily for their marketing campaign. Once registered with OLeads, users can choose between a wide variety of website templates which they can personalize according to their own business needs. By simply dragging and dropping text, images and call-to-action modules, users can have their business landing page up and running in minutes. OLeads also allows users to manage the data generated from their websites. In addition, OLeads integrates seamlessly into the contextual advertising platform, Opera Ads, with direct access to Opera’s huge user base in Nigeria.
In August 2019 we launched a classifieds product, OList, an online marketplace in Nigeria and an e-commerce platform, designed for individuals and corporate businesses to advertise, market, purchase or sell goods and services. OList offers a wide variety of products and services and has been focusing on becoming heavily involved in several high value categories, including real estate, rentals and used cars, where there is an opportunity for us to create transparent and robust marketplaces and to participate in and/or facilitate transactions. These categories represent large revenue opportunities and the potential to solve inefficiencies or challenges for users and suppliers in these markets. Since its launch to the end of 2019, OList attracted more than 2 million listings in its websites, with more than 4 million monthly visiting users.
Our partnerspartners
Monetization partnerspartners
Our monetization partners are companies that benefit from our online marketing and advertising services, including search engines, e-commerce and travel agencies and digital advertising platforms. Through placement of shortcuts, or Speed Dials, and advertisements in our browsers and apps, we have the ability to direct traffic to the websites of both global and local partners that provide services to our users. These companies pay us either for referring traffic to them or for displaying their advertisements.
Search Providers
We partner with internet search providers like Google and Yandex and have worked closely with them for over 15 years. These partnerships make available best-in-class search technology to our users and enhance the visibility of our brand. We share the revenue generated by our search partners when our users conduct searches initiated within the URL bar, default search page or search boxes embedded in our PC and mobile browsers.
We have had a search distribution agreement with Google since 2001. We entered into our current search distribution agreement with Google in 2012 with a two-year term. The agreement has since been amended and restated several times, with the term of the most current version extending to December 2020. Google may also extend the term by an additional 12-month period by providing 30 days written notice to us. We have had a search partner agreement with Yandex since 2007. We entered into our current partner agreement with Yandex in 2012 with a five-year initial term. The initial term washas subsequently been extended twice and now extends until April 2020.2023. Following the initial term, the partner agreement automatically renews for additional two-year periods unless written notice is given by either party at least 30 days prior to the automatic renewal. Our agreements with Google and Yandex are subject to customary events of default, including failure to make payments, material breach, liquidation, as well as other termination trigger events as provided therein.
E-commerce and online travel agenciesonline travel agencies
We work closely with globally reputablelarge, global e-commerce and online travel agencies, such as Booking.com, Amazon, AliExpress and eBay, as well as strong local brands like Flipkart, Tokopedia, Lazada and others. The value of these partnerships continues to rise through increased user engagement with such popular services within our browsers, as well as deeper integration of services and our AI technology, which allows for more accurate suggestions, price comparisons, personalized landing pages and one-click purchases.
We earn revenue from transactions initiated by our directed users via links provided on our Speed Dial homepage and other advertisements, typically in the form of a defined share of the revenue generated by these service providers.
Digital advertising platformsadvertising platforms
We have established relationships with leading digital advertising platforms such as Google AdSense, AdMob by Google, Audience Network by Facebook and Baidu.
We allow these digital advertising platforms to display their advertisement inventories on our browsers and recognize revenue based on the amounts we are entitled to receive from such advertising partners. We also sell select premium advertising placements, such as banners, interstitials, videos, sponsored articles and notifications to global and local advertisers.
Retail salessales
Our underlying browser business puts us in the position of being the gateway to the web. The ongoing consumer shift from offline retail to online shopping means this is an attractive position for us. We have established relationships with certain mobile operators and other vendors of mobile handsets, prepaid airtime and data in an effort to begin to explore ways in which we can capitalize on our position and build our brand through direct retail sales. We began retail sales of prepaid airtime and data, and eventually mobile handsets, to local consumers and wholesalers in the second half of 2018. Our focus has been maintaining our retail business at current volumes, in order to start building scale as we explore a wider retail opportunity.support adjacent potential opportunities.
Content Partners
We have formed strong relationships with high profile media companies, while also focusing on regional and local content providers in key markets in Sub-Saharan Africa, India and Indonesia. Some of our newest content provider partners include media houses such as France Media Monde, IOL, Indian Express, Cricbuzz, and IDN Times. These relationships enable us to obtain comprehensive news and other content that we can make available to users on our platform, provide more publicity for our content provider partners and generate revenues through the placement of advertising within our news service. Further, we are increasingly focused on the creation of exclusive local content through Opera News Hub. We also analyze users’ behavior to improve the relevance of the news stories and advertisements that we show to each user based on their preferences.
Distribution Partners
We have long-term relationships with device manufacturers and chipset vendors worldwide, including many of the largest smartphone brands, such as Samsung, Huawei, Xiaomi, OPPO and Tecno.Vivo. This ensures cost-efficient and reliable distribution benefitting both these distribution partners and us. We cooperate with global OEMs at favorable rates based upon activation of pre-installations.
Technology
Technology is key to our success as it enables us to innovate, improve our users' experience and operate our business more efficiently. Our technology team is composed of highly skilled engineers, computer scientists and technicians whose expertise spans a wide range of areas. As of December 31, 2018,2019, we employed a team of approximately 302550 engineering and data analytics personnel, mainly located in Poland, China and Sweden, engaged in building our technology platform and developing new Opera products and services. Likewise, in January 2020 we acquired a company in Estonia with banking-as-a-service technology and a skilled Estonian fintech team to support our existing Swedish and Polish team in our European financial services initiative.
Artificial Intelligence
Through AI technologies, we have transformed our browsers and other products and services into an AI-powered content discovery and recommendation platform that provides our users with personalized news, videos and other online content. We leverage data from our existing user base and technologies, such as natural language processing, computer visioning and image recognition, deep learning and collaborative filtering, to develop our AI-powered content discovery and recommendation platform that we integrate into a variety of our products and services. Our AI platform evaluates billions of potentially correlated data points between each item of online content and each individual user to provide personalized content recommendations of high interest to our users. We have also integrated AI technologies into our microfinance offerings to improve credit scoring capabilities.
Our key AI technologies implement the following powerful features:
• | Natural Language Processing. We use natural language processing, or NLP, and deep learning models to analyze, sort, extract, classify, process and better understand news content. Using NLP, we can quickly incorporate new languages into our AI-powered content discovery and recommendation platform. Our deep learning models, which include word embedding, advanced recurrent neural networks (e.g., long short-term memory and gated recurrent units), convolutional neural networks and attention-based deep neural networks, help us to extract keywords and tag topics and concepts. For example, with advanced NLP technology, Opera News can make intelligent recommendations among local news in Swahili to users in Africa who chose Swahili as their preferred language. |
• | Computer Vision for Images and Videos. We analyze the images and videos that are associated with online text to better understand the content and optimize our recommendation engines. Deep learning is at the core of our image and video understanding technologies. Our deep learning convolutional neural network-based models analyze images and videos frame-by-frame and classify them into content categories that our recommendation engine refers to when recommending content to users. |
• | Personalized Click Prediction Model. We developed a large-scale and personalized recommendation and click prediction ranking model that is based on real-time user interactions. Tens of billions of feature sets employ a Gradient Boost Decision Tree, or GBDT, model for raw feature transformation and large-scale Logistic Regression combined with Factorization Machine with attention mechanism and another Deep Neural Network model to output the click prediction of a user to a certain news article to decide the ranking of news article recommendations for such user. |
• | Neural Collaborative Filtering and Networks. Our neural collaborative filtering technology uses deep learning based word-to-vector and embedding models that examine and assess more variables and allows for more intelligent filtered results than traditional user-based and item-based collaborative filtering technologies. Moreover, we developed multi-dimensional vector-based interest representations of user profiles that are more data rich than simple tag-based representations and combine them with deep layers of neural networks to create more accurate and personalized recommendations for our users. |
Big Data Capabilities
We are able to quickly develop and scale our presence across different geographies, languages and cultures because of our big data capabilities. We have multiple data centers distributed across three continents that support massive petabyte-level distributed data storage and allow us to process in real-time hundreds of terabytes of data related to our users every day. We use data mining and analytics technologies to find patterns in the large amounts of data we collect, which helps us to understand our users and provide them with better content recommendations.
Cloud Compression Technologies
Our compression technologies, Turbo and OBML, are advanced compression technologies that are built into our apps to optimize data traffic and connection times for our users. These technologies allow our browsers to load web pages faster by downloading less data. Today, Turbo is our standard compression mode for high-end smartphones and computers, while OBML, adapted exclusively for Opera Mini, provides an extreme compression mode, which compresses web content by up to 90%, providing a good web browsing experience even on the most limited mobile data networks.
Network Infrastructure
We have built a reliable and secure network infrastructure that will fully support our operations. Our physical network infrastructure utilizes our private data centers that are linked with high-speed networking. We have developed our architecture to work effectively in a flexible cloud environment that has a high degree of elasticity. Our automatic provisioning tools have enabled us to increase our storage and computing capacity in a short period of time in response to increasing demand for our services. Our proprietary network application protocols ensure fast and reliable mobile communications under different network conditions in the various markets where we operate. The aim is to provide a consistent user experience across different devices, operating systems, carriers and network environments.
As of December 31, 2018,2019, we owned approximately 6,6007,000 servers in seven internet data centers located in Oslo, Amsterdam, St. Petersburg, Seattle, AshburnThe Netherlands (two locations), Russia, the United States (two locations), Singapore and Singapore,Nigeria, with an additional location opened in Kenya in January 2020. As of December 31, 2019, our data centers had a total connectivity bandwidth of 890 Gbps1.012 Tbps (max throughput), an increase of 32.8%13.7% versus December 31,2017.31, 2018. We have also established aexpanded our large-scale AI computing service cluster, including GPU processors, to provide computing power for our AI technologies.
Crypto Wallet
In 2018, we introduced a Crypto Wallet inside our browsers, enabling access to a new generation of blockchain-based Web 3 applications. This allows users to interact with these applications, send or receive various kinds of crypto-currencies to sites and users, as well as identify themselves to sites and hold unique digital items from blockchain-based games. Opera supports theseveral blockchains including Ethereum, blockchainBitcoin and its native currency, ETH,Tron, as well as hundredsa large number of Ethereum-based crypto-currencies such as the DAI or USDC stablecoins.crypto-currencies.
Our Investments
Our business includes investments in certain associates and joint ventures:
Opay Digital Service Limited, or Opay,OPay, an associate in which we haveoriginally held 19.9% interest in December 2018 and now currently hold a 19.9%13.1% equity interest, launched its mobile money services in 2018. OpayOPay focused its efforts in Nigeria, a market characterized by a massive, un-banked population with low mobile money penetration. Opay launchedOPay has an agent-centric operation in July as a means to reach the underserved population. By year-end, OpayIn November 2019, OPay had recruited 3,000140,000 agents and December’swith average daily transaction volume was in excess of US$1 million, with peak days exceeding US$1.510 million, placing Opay among top-tier mobile money providers in Nigeria less than one year after launch.
In 2018, Opay OPay has also launched a separate microfinance product in Kenya, branded OKash. The service is app-basedadditional services such as ridesharing to increase engagement and offers instant credit to approved borrowers. Initially, the service was primarily marketed to Opera browser users. In the fourth quarterusage of 2018, OKash generated US$1.7 million of revenue from 280,000 microloans, and held active licenses to provide similar microfinance products in four other countries. In late December 2018, we paid US$9.5 million to acquire this microfinance business from Opay. The transaction resulted in Opay recognizing a gain, of which our proportionate share of US$1.9 million was included in the share of Opay's net loss recognized by us.its platform.
Powerbets Holdings Limited, or Powerbets, a joint venture in which Opera has a 50.1% equity interest, provides a platform for sports betting, virtual sports betting, and gaming services throughout Africa. Having one of the largest gaming footprints in Africa, Powerbets is licensedoperates in nineeights African markets and operational in seven.markets.
nHorizon Innovation (Beijing) Software Ltd., or nHorizon, a joint venture in which Opera has a 29.1% equity interest, operates an Opera browser in China. nHorizon’s monetization partners include Baidu, Sogou and others. nHorizon consists of nHorizon Innovation (Beijing) Software Limited and nHorizon Infinite (Beijing) Software Limited. The joint venture was co-founded by Otello Corporation ASA and Telling Telecom in August 2011. The GroupWe acquired the investment in nHorizon as a result of the acquisition of Opera SoftwareNorway AS in 2016.
StarMaker Inc, or StarMaker, an associate in which we invested US$30 million on November 5, 2018, in exchange for preferred shares in the company, resulting in a 19.4% equity interest, is a technology-driven social media company focused on music and entertainment. StarMaker enables users to record and share their own music videos, collaborate with other musicians, connect with other users and follow their idols on the social platform. StarMaker continued its revenue growth during 2019, with revenues totaling approximately US$21 million. In 2020, the company plans to expand into new markets (South-East Asia), to reach more users. The growing user base, coupled with improvements such as enhanced live streaming features in its products, is expected to increase revenues for 2020. During the second half of 2018,2019, StarMaker expanded into short-form music and video clips of a more viral nature, and revenues increased its revenue by 53% compared with the first half of 2018, reaching an annualized revenue run-rate in excess of US$17 million in December.140%, compared to 2018. The preferred shares have dividend and liquidation preference. As part of the investment, weOpera also obtained an option to increase our ownership to 51% in the second half of the year 2020.
User Privacy and Safety
The vitality and integrity of our user base is the cornerstone of our business. We dedicate significant resources to the goal of strengthening our user base through developing and implementing programs designed to protect user privacy, promote a safe environment, and ensure the security of user data. We also implement unique features in our products to protect users’ online digital presence, such as a free, no-log VPN service, native ad blocking and anti-tracking options.
Our privacy statements seek to describe our data use practices and how privacy works on our platforms in a user-friendly manner. We provide users with adequate notice as to what data is being collected and undertake to manage and use the data collected in accordance with applicable laws. We serve our European users from our business establishment in Norway and consequently all our processing of the personal data of such users is conducted in accordance with the General Data Protection Regulation, or GDPR. We serve our users outside of Europe primarily from our business establishment in Singapore. Regardless, we consider the protection of the personal privacy of each of our users to be of paramount importance.
We continuously strive to prevent unauthorized use, loss or leak of user data. In addition, we use a variety of technologies to protect the data with which we are entrusted and have a team of privacy professionals dedicated to the ongoing review and monitoring of data security practices. For example, we store all user data in an encrypted format and strictly limit the number of personnel who can access servers that store user data. For our external interfaces, we also utilize demilitarized zones and firewalls to protect against potential attacks or unauthorized access.
Product Marketing and Distribution
Our main source of marketing for our products and services is “word-of-mouth” from our large user base. The trust and reliance that our users place in us is a key growth driver of our business, since prospective users that hear positive feedback from their friends and colleagues about our products and services are more likely to try them. In 2018,2019, organic installs represented approximately 64%63% of our new smartphone users. In parallel, we invest in advertising campaigns and paid online promotions to reach prospective users. We also cooperate with industry partners to promote our products. See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” In 2018,2019, approximately 6%8% of new smartphone users originated from our paid online promotions. We normally set an annual budget for the overall spending on paid online promotions. In addition, we work closely with key device manufacturers and chipset vendors worldwide to pre-install Opera products and co-market our products and services. In 2018,2019, approximately 30%29% of new smartphone users came from such partners. We have long-standing relationships covering most of the largest smartphone brands, including Samsung, Huawei, OPPO and Tecno.
Our products are available through our official website, www.opera.com, as well as the Google Play Store and Apple App Store.
Competition
We face intense competition with regards to all of the products and services we offer. In the browser space, we generally compete with other global browser developers, including Google (Chrome browser), Apple (Safari browser) and Microsoft (Internet Explorer and Edge browsers) that distribute their browsers via proprietary operating systems and devices, and with other regional internet companies that have strong positions in particular countries. In the content space, we face competition from other internet companies promoting their own content products and services globally, including Google, Apple and Facebook, and traditional media such as global or regional newspapers and magazines. Unlike some other large competitors, we primarily focus on key growth markets outside North America, which enables us to integrate unique content to local Opera News users via our evolving AI-powered content discovery and recommendation platform. In addition, we compete with all major internet companies for user attention and advertising spend.
In microfinance we face significant competition from large, venture backed global microfinance providers such as Tala and Branch, incumbent banks and local players. We believe our advantages include scale, a large user base to promote our products, strong AI technology for credit scoring and a substantial in-market presence and operational expertise in key geographies.
Intellectual Property
We regard our patents, copyrights, service marks, trademarks, trade secrets and other intellectual properties as critical to our success. We rely on patents, trademarks, and copyrights, trade secret protection, and non-competition, confidentiality, and license agreements with our employees, customers, partners and others to protect our intellectual property rights. Despite our precautions, it may be possible for third parties to obtain and use our intellectual properties without authorization. Furthermore, the validity, enforceability and scope of protection of intellectual property rights in internet-related industries are uncertain and still evolving.
As of December 31, 2018,2019, we had 217179 active registrations of the OPERA, Opera with Red O (both old and new versions) and OPERA SOFTWARE trademarks in 8892 countries/regions and 2818 applications in 1410 additional countries/regions. We also had 203167 active registrations of the “O” logo in 7473 countries/regions and 3325 applications in 12seven countries. Our main classes are 9, 35, 38 and 42. Opera also has a patent portfolio that includes 22 patents issued in the United States as well as certain international patent registrations. In addition, as of December 31, 2018,2019, we had over 800900 registered domain names related to our business.
Norwegian Regulations
Regulations on Foreign Investments
There are currently no general restrictions on foreign investments in Norway, but national restrictions exist on ownership of natural resources and on some specific activities (fishing, maritime transport and media). The Norwegian government also applies a “qualified ownership” test for significant ownership positions within the financial sector.
Regulations on Dividend Distributions
The Norwegian Private Limited Companies Act, or the PLCA, chapter 8 includes certain constraints on the distribution of dividends from Norwegian subsidiaries.
Section 8-1 of the PLCA provides that a Norwegian company may distribute dividends up to its distributable equity, to the extent that its net assets following the distribution covers the (i) share capital, (ii) reserve for valuation variances and (iii) reserve for unrealized gains. The total nominal value of treasury shares which the Norwegian company has acquired for ownership or as security prior to the balance sheet date, as well as credit and security to related parties shall be deducted from the distributable equity.
Dividends are declared by a shareholders’ resolution based on a recommendation from the board of directors. The calculation of the distributable equity is made on the basis of the balance sheet included in the latest approved annual accounts, provided, however, that the registered share capital as of the date of the resolution to distribute dividends shall be applied. Following the approval of the annual accounts for the last financial year, the shareholders may also authorize the board of directors to declare dividends on the basis of its annual accounts. Dividends may also be resolved by a shareholders’ resolution based on an interim balance sheet which has been prepared and audited in accordance with the provisions applying to the annual accounts and with a balance sheet date not further into the past than six months before the date of the resolution.
Dividends can only be distributed to the extent that the Norwegian company’s equity and liquidity following the distribution is considered sound. Dividends may be paid in cash or in some instances in kind.
The PLCA does not provide for any time limit after which entitlement to dividends lapses. Subject to various exceptions, Norwegian law provides a limitation period of three years from the date on which an obligation is due. There are no dividend restrictions or specific procedures for non-Norwegian shareholders to claim dividends, however withholding tax may apply.
Regulations on Foreign Exchange
There are currently no foreign exchange control restrictions in Norway that would potentially restrict the payment of dividends to a shareholder outside Norway. There is no maximum transferable amount either to or from Norway, although transferring banks are required to submit reports on foreign currency exchange transactions into and out of Norway into a central data register maintained by the Norwegian customs and excise authorities. The Norwegian police, tax authorities, customs and excise authorities, the National Insurance Administration and the Norwegian FSA have electronic access to the data in this register.
Regulations on Information Technology and Intellectual Property Rights
Norway adheres to key international agreements for the protection of intellectual property rights, hereunder the Paris Union Convention for the Protection of Industrial Property, Berne Copyright Convention, Universal Copyright Convention of 1952, Rome Convention and the TRIPS agreement.
The main acts governing intellectual property rights in Norway are the Patents Act of December 15, 1967, Designs Act of March 14, 2003, Trademarks Act of March 26, 2010, Copyrights Act of May 12, 1961June 15, 2018 and Marketing Act of January 9, 2009. The latter also protects trade secrets.
Trademarks, designs and patents shall be registered upon application to the Norwegian Industrial Property Office, or the NIPO, in order to be valid in Norway. Patent applications which have been granted at the European Patent Office can be validated in Norway upon application to the NIPO.
Regulations on Data Protection and Information Security
The principal data protection legislation in Norway is the Personal Data Act of April 14, 2000June 15, 2018 no. 31.38. The purpose of the act is to protect natural persons from violation of their right to privacy through the processing of personal data. Effective June 15, 2018, theThe new Personal Data Act was amended to incorporate 016/implements 2016/679/EU - General Data Protection Regulation, on the protection of natural persons with regard to the processing of personal data and on the free movement of such data (or “GDPR”) in its entirety. GDPR nowThe Personal Data Act applies directly to all processing of personal data conducted in Norway, regardless of whether the processing takes place within the EEA. The Act also applies to processing of personal data of data subjects who are in Norway by an entity not established in the EEA, where the processing is linked to the offering of goods or by Norwegian entities.services to such data subject in Norway or the monitoring of their behavior as far at their behavior takes place in Norway.
Regulations on Anti-money Laundering and the Prevention of Terrorism Financing
The Norwegian Anti-Money Laundering Act of June 1, 2018 and the Anti-Money Laundering Regulation of September 14, 2018, both entered into force on October 15, 2018., The purpose of this legislation is to prevent and detect money laundering and terrorist financing. The legislation is based on the EU Fourth Money Laundering Directive (Directive EU 2015/849) and FATF Recommendations. The legislation applies to reporting entities, such as banks, investment firms, insurance companies, etc. Reporting entities are obliged to apply a risk based approach when determining measures against money laundering and terrorist financing, including the performance of required customer due diligence measures. If a reporting entity detects circumstances which may indicate that funds are associated with money laundering or terrorist financing, further examinations shall be conducted. If the reporting entity after such examinations suspects that funds are the proceeds of a criminal activity, or are related to terrorist financing, it is required to report its suspicions to the Norwegian national financial intelligence unit. The Company is not a reporting entity according to this legislation.
C. | Organizational Structure |
The chart below summarizes our corporate structure and identifies our principal subsidiaries and their places of incorporation as of the date of this annual report:
Notes: (2) 0.01% held by Kunhoo Software Ltd.
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D. | Property, Plants and Equipment |
Our corporate headquarters is located in Oslo, Norway. Our principal technical development facilities are located in Wroclaw, Poland, Beijing, China and both Linköping and Gothenburg, Sweden. We also have smaller offices in Nigeria, India, Ireland, Estonia, Mexico, and Kenya.Kenya among other countries.
Our servers are hosted in leased data centers, primarily in the Netherlands, the United States, Nigeria and Singapore, with an additional small data centerscenter in Russia and Norway.Russia. The data centers in our network are owned and maintained for us by major domestic and international data center providers. We generally enter into leasing and hosting service agreements with renewal terms that range from one to three years.
UNRESOLVED STAFF COMMENTS |
None.
OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” and elsewhere in this annual report.
For discussion of 2017 items and year-over-year comparisons between 2018 and 2017 that are not included in this annual report on Form 20-F, refer to “Item 5. – Operating and Financial Review and Prospects” found in our Form 20-F for the year ended December 31, 2018, that was filed with the Securities and Exchange Commission on April 17, 2019.
A. | Operating Results |
Major Factors Affecting Our Results of Operations
Our business and operating results are affected by general factors affecting the global online content consumption, e-commerce and e-commercefintech industries, which include:
overall global economic growth;
mobile and PC internet usage and penetration rate by geography;
growth of online content consumption, and its popularity as an advertising medium;
growth of online commerce and related advertising; and
governmental policies and initiatives affecting online content consumption and e-commerce.
• | overall global economic growth; | |
• | mobile and PC internet usage and penetration rate by geography; | |
• | growth of online content consumption, and its popularity as an advertising medium; | |
• | growth of online commerce and related advertising; | |
• | growth of mobile money solutions and traditional banking alternatives; and | |
• | governmental policies and initiatives affecting online content consumption, and e-commerce, and fintech. |
While our business is influenced by these general factors, we believe our results of operations are more directly affected by company specific factors, including the following major factors:
Our Ability to Maintain and Expand Our User Base, and Maintain and Enhance User Engagement
Our user base is important for our revenue generation, both because its sheer size makes us an attractive partner for search and advertising partners, and in terms of directly impacting our user-generated revenues. The following table presents certain of our user metrics for the periods indicated:
Three months ended (1) | Three months ended(1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
March 31, 2016 | June 30, 2016 | Sept 30, 2016 | Dec 31, 2016 | March 31, 2017 | June 30, 2017 | Sept 30, 2017 | Dec 31, 2017 | March 31, 2018 (1) | June 30, 2018 | Sept 30, 2018 | Dec 31, 2018 | Mar 31, 2018 | Jun 30, 2018 | Sept 30, 2018 | Dec 31, 2018 | Mar 31, 2019 | Jun 30, 2019 | Sept 30, 2019 | Dec 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Smartphone browser average MAUs | 141.3 | 138.1 | 146.1 | 164.1 | 160.0 | 160.6 | 171.5 | 180.4 | 182.0 | 174.3 | 178.6 | 188.5 | 182.0 | 174.3 | 178.6 | 188.5 | 190.0 | 190.2 | 190.9 | 188.5 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Smartphone total average MAUs | 141.3 | 138.1 | 146.1 | 164.1 | 160.0 | 160.6 | 171.5 | 180.4 | 184.3 | 182.2 | 196.0 | 208.0 | 184.3 | 182.2 | 196.0 | 208.0 | 221.4 | 226.7 | 232.0 | 227.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
PC browser average MAUs | 51.7 | 45.3 | 40.5 | 42.2 | 42.6 | 45.6 | 49.4 | 54.8 | 57.4 | 57.1 | 58.4 | 60.9 | 57.4 | 57.1 | 58.4 | 60.9 | 65.1 | 65.0 | 67.8 | 67.6 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Opera News average MAUs (2) | — | — | — | — | 9.1 | (3) | 24.8 | 39.3 | 72.4 | 90.2 | 101.0 | 121.4 | 134.1 | 90.2 | 101.0 | 121.4 | 134.1 | 149.7 | 162.9 | 169.0 | 162.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) | Average across the three months included in each period, with each month calculated as of its final day using a 30-day look back window. |
(2) | Includes Opera News users within our browsers as well as the dedicated Opera News app. |
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Our total browser average MAUs in the three months ended December 31, 20182019 was 319.4316.2 million including 258.5248.6 million mobile browser users and 60.967.6 million PC browser users. Our mobile browser users included 188.5 million smartphone users and 70.060.1 million feature phone users.
Our total smartphone average MAUs in the three months ended December 31, 20182019 was 208.0227.4 million. This figure is comprised of the 188.5 million smartphone browser users, and the 19.538.9 million users of the dedicated Opera News app. Most of our Opera News users during 2018 accessed the service from within our browsers as this service was launched a year prior to Opera News became available as a dedicated app.
Our smartphone browser user base followed a positive growth trend across 2016, 2017, 2018 and 2018,2019, adding 47.228.5 million MAUs over that period with seasonally highest growth in the third and fourth quarters.period. As we oriented our marketing and distribution efforts around the new dedicated Opera News app during 2018,2019, our overall smartphone user base grew faster than the browser subset, adding a total of 27.667.4 million in 20182019 alone.
Our PC user base declined during the second and third quarters of 2016 as we focused the product and marketing on lower volume yet higher value segments, thereafter increasing by 20.4 million MAUs from the three months ended September 30, 2016 to the end of 2018.
Our ability to continue to effectively maintain and expand our user base will affect the growth of our business and our revenues going forward. We generate revenues from our business partners, including search providers and advertisers, who are drawn to our platform in part because of the size of our user base, its attractive demographics, and our level of user engagement. Our ability to maintain and expand our user base, as well as maintain and enhance user engagement, depends on, among other things, the effectiveness of our marketing and distribution spend, our ability to continuously offer comprehensive and effective products and services, recommend personalized content through technological innovation and provide a superior content discovery experience.
Our Ability to Monetize
We have long and deep relationships with our monetization partners. Changes in the revenue sharing or fee arrangements with our key monetization partners may materially affect our revenues, although we have not seen material impacts to our revenues over the 2016-20182017 to 2019 period from such pricing related factors. However, for example, a change in the revenue sharing percentage paid by certain of our major partners such as Google or Yandex, or a change in their payment policies or other contractual arrangements, could impact our revenues, either positively or negatively. Likewise, with respect to certain major advertising partners, changes in the fee rate we receive per click or per sale may affect our revenues.
Further, our revenue generation is affected by our ability to promote and improve our users’ experience with our partners’ services, and our ability to open advertising inventory.
In 2018,2019, we had approximately 350more than 400 monetization partners. We intend to maintain and deepen our relationships with current partners and attract more partners to increase and diversify our revenue sources. Our ability to further increase the number of partners primarily depends on whether we can provide integrated marketing services and help them more precisely reach their targeted users through our AI-powered content discovery platform.
Our Brand Recognition and Market Leadership
We believe that the strong brand recognition of “Opera” is a key element of our success. Our ability to maintain our massive user base and brand recognition as a leading independent browser and content discovery platform is key to our ability to maintain and enhance relationships with our users, monetization partners, content partners and distribution partners. In addition, the reputation and attractiveness of our platform among internet users also serves as a highly efficient marketing channel for our new products and services.
Our Ability to Manage Our Operating Expenses
Our long-term results of operations further depend on our ability to manage our operating expenses. Our operating expenses consist primarily of staff cost, marketing and distribution expenses, loss related to changes in fair value of loans to customers, cost of revenue, server hosting expenses and rent. We expect the absolute amount of staff cost, server hosting expenses and rent to increase as we grow our business and as we make necessary adjustments to operate as a public company. We anticipate further investing in our growth by incurring increased marketing and distribution expensesstaff costs from new business initiatives as well as increased loss related to changes in fair value of loans to customers (primarily driven by realized and expected cash shortfalls, i.e., credit losses) and cost of revenue driven mainly by retailmicrolending revenues, the new revenue category which beganscaled rapidly through 2019, and is expected to scalesee continued growth. In 2019, our operating expenses totaled US$314.2 million, representing a 147% increase compared to 2018 due to costs from our microlending business and increased investment in second halfmarketing. As a percentage of revenue, operating expenses represented 94% in 2019, compared to 74% in 2018. However, over time, we expect our costs and operating expenses to decrease as a percentage of revenue as we improve our operating efficiency and as a result of economies of scale. As an example, our operating expenses totaled US$127.0 million in 2018, representingKey examples would be personnel and hosting cost which decreased as a 2.3% increase compared to 2017. As a percentpercentage of revenue operating expenses represented 73.7% in 2019 versus 2018 compareddue to 96.3% in 2017.our larger scale.
Our Ability to Strengthen Our Technological Capabilities, Especially AI and Big Data
The internet business in general is undergoing constant technological evolution. In particular, AI and big data have been transforming, and will continue to transform, the internet industry, especially the content consumption market. We are dedicated to continually enhancing and applying our capabilities to new forms of content discovery and recommendation technologies and other applications. To maintain and enhance our innovation capabilities, we have increased our investments in product development and expect to continue to do so.
Critical Accounting PoliciesOur Ability to Engage and Retain Borrowers and Collect Repayments From Them
Business Combinations, Goodwill
Business combinations, except those occurring under common control, are accounted for usingIn 2019, 38.3% of our revenue was derived from our fintech business, which we generate by charging our borrowers origination fees and interest. Origination fees remain fixed regardless of any early repayments, while interest fees accrue only if and after a loan is not repaid by its due date. The amount of revenue we generate from these fees is dependent on the acquisition method. Acquired businesses are included in the consolidated financial statements from the date the Group obtains control. The costnumber of an acquisition is measured as the consideration transferred, which is measured at acquisition date fair value. Acquisition-related costs are expensed as incurred.
The Group initially measures goodwill at cost, being the excess of the aggregate of the consideration transferredloans we disburse and the amount recognized for non-controlling interestspercentage of loans that are timely repaid. Our ability to retain and any previous interest held, over the net identifiable assets acquiredengage our existing borrowers and liabilities assumed.
After initial recognition, goodwillcontinue to expand our borrower base is measured at cost less any accumulated impairment losses. Goodwill is from the acquisition date allocatedessential to the Group’s Cash Generating Units, or CGUs, that are expected to benefit fromgrowth of our fintech business. We bear the transaction. The goodwill recognized by the Group is allocated to the Consumer Business CGU.
The acquisitioncredit risk of a microfinance business primarily operating under the brand OKash, as discussed in Note 28loans disbursed to our consolidated financial statements included elsewhere in this annual report, occurred under common control. Business combinations under common control are accounted for using predecessor accounting. Under this method, assetsborrowers, which we attempt to measure and liabilities of the acquired entity are stated at predecessor carrying values; they were not measured at acquisition date fair values. No new goodwill is recognized. Any difference between the consideration given and the aggregate carrying value of the assets and liabilities of the acquired entity at the date of the transaction is included in equity in retained earnings. The acquired entity’s results, assets and liabilities are incorporated prospectively from the date on which the business combination between entities under common control occurred.
Impairment of Goodwill and Intangibles with Indefinite Lives
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Based on our business and reporting set-up with one operating segment (Consumer Business), we have identified one single cash-generating unit.
Goodwill is tested for impairment annually as of 31 December and when circumstances indicate that the carrying value may be impaired.
In assessing value in use, the estimated future cash flows are discounted to their present valuemitigate using a pre-tax discount rate that reflects current market assessmentsvariety of the time valuemethods, including total outstanding loan balance, delinquency rates by aging, credit scorecards and by way of money and the risks specificcollection models. If we are unable to the asset.
The Group bases its impairment calculation on detailed budgets and forecast calculations. These budgets and forecast calculations covercollect repayments of our loans in a period of one year. Because the length of the projection period for the cash flow forecast where a CGU has goodwill or intangible assets with indefinite lives is into perpetuity,timely manner, we identify a “steady state” set of assumptions for the cash flows based an approach where we estimate cash flows for the following four years and then using the estimated cash flows in the final year of estimation as the basis for the terminal value. A long-term growth rate is calculated and applied to project future cash flows after projected period. See Note 9 tomay incur credit losses which would adversely affect our consolidated financial statements included elsewhere in this annual report for more information.
For assets, excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized.fintech business operations.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with IFRS as issued by the IASB. Preparing these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity, revenue, expenses, and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates.
The critical accounting estimates, assumptions, and judgments that we believe to have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services (the transaction price).
We have the following primary sources of revenue: search, advertising, retail, and technology licensing and other revenue.
i. Search revenueSearch
Search revenue is generated when a user conducts a qualified search using an Operaa search partner such(such as Google or Yandex,Yandex) through the built-in combined address and search bar provided in Opera’sour PC and mobile browsers, or when otherwise redirected to the search partner via browser functionality. We recognize searchSearch revenue is recognized in the period the qualified search occurs based upon the contractually agreed revenue share amount.
ii. Advertising revenueAdvertising
Advertising comprisesincludes revenues from all other user-generated activities apartexcluding search revenues. Advertising revenues include revenues from search, such as industry-standard ad units, predefined partner bookmarks or (“Speed Dials,Dials”) and subscriptions of various promoted services that are provided by us. Revenue is recognized when our advertising services are delivered based on the specific terms of the underlying contract, which are commonly based on revenue sharing, clicks, or subscription revenues collected by third parties on behalf of the Group.us.
The majority of advertising revenue is reported based on the amounts the Group iswe are entitled to receive from advertising partners. In limited instances where the Group haswe have developed or procured a service which it promoteswe promote to the users, the Group considers itselfwe consider ourselves the principal party to a transaction and not an agent of another entity. In such cases, the Groupwe will recognize revenue on a gross basis. In the Group’sour determination as to whether it iswe are the principal, it considers itswe consider our (i) responsibility to provide the service to the end-user, (ii) ability to determine pricing, (iii) exposure to risk. The associated costs for these transactions are included in the Statement of Operations within cost of revenue.
iii. | Origination fees and interest |
Retail
We provide instant app-based microloans to customers in exchange for an origination fee that remains fixed regardless of any early repayment. The origination fee is compensation for the credit risk and time value of money. Additional fees in the form of interest accrues only if and after a loan is not repaid by its due date.
While loans to customers are classified as financial assets measured at fair value through profit or loss, we disaggregate changes in fair value into interest income and credit losses in the Statement of Operation. Interest income, classified as revenue, is recognized when the interest is accrued based on the effective interest rate – the rate that at inception exactly discounts the estimated contractual future cash receipts through the expected life of the loans to the disbursed amount.
iv. | Airtime and handsets revenue |
The Retail is a new revenue stream with activity starting from the third quarter of 2018. Itsegment includes sale of handsets, prepaid airtime and data to consumers and wholesalers in certain African countries and Indonesia. Retail revenues also includes consideration from sale of handsets to wholesalers in Indonesia.wholesalers. Revenue is recognized when the contracted good or service is transferred to the customer, after which the Group doeswe do not have any remaining obligations, except for a potential obligation to provide refunds customers in some arrangements if certain criteria are met. This right of refund creates variability in the transaction price. The amount of revenue recognized includes variable consideration to which we expect to be entitled. In 2018,2019, customers’ right of refund did not materially impact the amount of revenue recognized. The Group updates itsWe update our estimates of refund liabilities (and the corresponding change in the transaction price) at the end of each reporting period.
The Group has We have concluded that it iswe are a principal for all itsour existing arrangements with customers classified as retail, based on the factors discussed above for Advertising revenue. Although other parties are involved in the supply of the contracted good or service to the customer, Opera controlswe control the contracted good or service before it is transferred.
v. Technology licensing and other revenueTechnology Licensing and Other Revenue
Technology licensing and other revenuesrevenue include other revenues that are not generated by our user base, such as revenues from providing professional services, from device manufacturers and mobile communications operators, and delivery of professional services. Licensing agreements may includecommunication operators. We generate such revenue from licensing of our proprietary compression technology and providing related professional services, maintenance, supporting and hosting services to third parties, as well as providing professional services, and enabling customized browser configurations to mobile operators.
Maintenance, support and hosting revenues are generally recognized ratably over the term that these services are provided.
Revenue from distinct professional services are recognized over the development period in line with the degree of completion.
Financial assets
Our financial assets include loan to customers, trade receivables, preferred shares, holdings of publicly traded securities and other loans.
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income, or fair value through profit or loss. We did not have financial assets measured at fair value through other comprehensive income.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and our business model for managing them. Trade receivables that do not resultcontain a significant financing component are initially measured at the transaction price determined in accordance with the accounting policies for revenue recognition (see below). All other financial assets are initially measured at their fair value plus, in the transfercase of a promised goodfinancial asset not at fair value through profit or service,loss, transaction costs. Transaction costs of financial assets measured at fair value through profit or loss are expensed when incurred.
In order for a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income it needs to give rise to cash flows that are solely payments of principal and interest ("SPPI") on the principal amount outstanding. This assessment is performed at an instrument level. Our business model for managing financial assets refers to how we manage our financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets are measured at amortized cost if the financial assets satisfy the SPPI criteria and are held within a business model whose objective is to collect the contractual cash flows. If the financial asset is held within a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that are SPPI, the assets are measured at fair value through other comprehensive income. Financial assets with cash flows that are not identified asSPPI are classified and measured at fair value through profit or loss, irrespective of business model.
The microloans are held within a business model whose objective is to hold the assets and collect the contractual cash flows over the life of the instruments. There is no pattern of selling the loans, and the performance of the business is not measured at fair value for internal purposes. However, we have established a contractual obligation based on our business practices and external communication to limit the total amount of interest in the form of late fees to the customer. The costsamount of set-up activitiesthe principal and origination fee. This means that for overdue loans that are repaid after having reached such limit, the contractual cash flows are not payments of principal and interest on the principal amount outstanding. This is due to the interest amounts not being consideration for the time value of money. Consequently, the microloans are measured at fair value through profit or loss. In the Statement of Financial Position, the microloans are presented as Loans to customers.
Subsequent measurement at amortized cost
Our financial assets at amortized cost includes trade receivables, loans to associates and joint ventures and other loans. These assets are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.
Subsequent measurement at fair value through profit or loss
Our financial assets subsequently measured at fair value through profit or loss include loans to customers, preferred shares in OPay and StarMaker and holdings of publicly traded securities. These assets are carried in the Statement of Financial Position at fair value with changes in fair value recognized in the Statement of Operations.
While loans to customers are measured at fair value through profit or loss, changes in fair value are disaggregated in the Statement of Operations into interest income (presented as revenue) and credit loss (other changes in fair value). The net of interest income and credit loss expense represents the change in fair value. Fair value is estimated by discounting projected future cash flows to their present value using the credit-adjusted effective interest rate, determined as at the date loans were granted. This method is deemed appropriate for estimating fair value due to the short duration of the loans and the amounts of origination fees and interest reflecting market rates at the point in time when the loans were granted. The credit-adjusted effective interest rate reflects the risk of defaulted payment. The total cash flows (both principal, origination fees and interest) expected to be collected are regularly reviewed. The impact of changes in expected cash flows is adjusted in the carrying amount of Loans to customers and is, together with the difference between the realized and expected cash flow of the period, recognized in the Statement of Operations as Revenue or Other changes in fair value of loans to customers. The underlying estimates for future cash flows, which form the basis for revenue recognition, depends on variables such as the ability to contact the debtor and reach an asset, providedagreement, timing of cash flows, general economic environment, and statutory regulations. Events or changes in assumptions and management’s judgment will affect the criteria defined in IFRS 15 are met.
The fair values of preferred shares in OPay and StarMaker as of December 31, 2019 were measured using methods and techniques that reflect the economic rights and benefits of the preferred shares. These rights and benefits include redemption rights and liquidation preferences. A combination of the following three valuation methods was used to estimate the fair value of the preferred shares: Probability weighted expected return model (“PWERM”); Option pricing model (“OPM”); and Current value method (“CV”). These models build on estimates, such as discount for contracts with multiple elementslack of marketability and the fair value of equity in OPay and StarMaker. Moreover, the PWERM model is based on estimates for future scenarios and outcomes, including sale transactions, initial public offering, dissolution, and redemption. More details on the Group’s estimatemodels and input are provided in Note 16 to our consolidated financial statements included elsewhere in this annual report.
Revenue from operators is included in the “Technology licensing and other revenue” category even if there are variable components that scales with the number of users. This is related to the fact that such operator agreements typically contain licensing fees based on usage, as well as hosting and support services.
Share-based Payments
On April 7, 2017, we adopted a restricted share unit plan, orOur employees receive remuneration in the RSU Plan, for our qualified employees, directors and officers. On January 19, 2019, we adopted an amended and restated share incentive plan, or the Plan. See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan” for detailsform of the newly adopted Plan. Our share incentive plans are considered share-based payment program under IFRS 2.transactions, whereby employees render services in consideration for equity instruments.
Estimating fair value for a share-based payment transactionawards requires determinationan assessment of the mostan appropriate valuation model, which depends on the terms and conditions of the grant. The valuation modelestimate also requires determinationan assessment of the most appropriate inputs to the valuation model including grant date fair value of the underlying equity, the expected life of the grant, volatility and dividend yieldyield. Assumptions and making assumptions about them.models used for current grants are disclosed in Note 6 to our consolidated financial statements included elsewhere in this annual report.
When applicable, employer social security costs are accrued over the vesting period of each award, based on the award’s intrinsic value of the underlying equity interest as of the reporting date.
Both periodic equity costs and social security cost accruals are adjusted for estimated forfeitures.
We are not required to cash settle any equity awards in any scenario. As a result, we consider all equity awards to be equity settled in the context of the consolidated our financials.
The number of equity awards are presented on a basis where each unit represents one American Depository Share, or ADS, in Opera Limited. In parallel with our IPO, all RSU Plan grants were adjusted by factor of 0.4 to reflect the transfer of the program to Opera Limited, an entity with 200 million outstanding shares at the time of the transfer. The factor of 0.4 represented the ratio of 200 million outstanding shares of Opera Limited to the 500 million shares assumed in the RSU plan, and ensured that each RSU award maintained the same value after the transfer of the program to Opera Limited. Further, as one ADS in Opera Limited represents two underlying shares in Opera Limited, reported RSU grants have been further adjusted by a factor of 0.5, such that the reported RSUs correspond to the ultimate number of ADSs that would be awarded to employees.
As of December 31, 2018, 4,244,132 million RSUs, corresponding to 8,488,264 underlying shares in Opera Limited were outstanding, and included both service-based and performance conditions to vest. The default vesting schedule for the majority of the 2017 grants were 20%, 20%, 30%, 30% on January 1, 2018, 2019, 2020 and 2021, respectively, and one year later for the majority of the grants made in 2018. We recognize share-based remuneration using the accelerated attribution method, net of estimated forfeitures. The grant date fair value of RSUs is based on the fair value of the underlying stock on the date of grant.
The following table summarizes our equity award activity under the RSU Plan as of December 31, 2018:
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Fair Value of Our Restricted Share Units/Options
We estimate the fair value of equity grants by pairing the fair value of the underlying equity interest on the date of the grant with market conditions using the Monte Carlo simulation model. The models require the input of highly subjective assumptions including the estimated expected share price volatility and the share price upon which our employees are likely to exercise the equity grants. We historically have been a private company and lacked information on our share price volatility. Therefore, we estimated our expected share price volatility based on the historical volatility of a group of similar companies that are publicly-traded for purposes of equity grant valuations. When selecting these public companies on which we have based our expected share price volatility, we selected companies with characteristics similar to us, including the invested capital’s value, business model, risk profiles, position within the industry, and with historical share price information sufficient to meet the contractual life of our equity grants. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own share price becomes available. The risk-free interest rates for the periods within the contractual life of the equity grants are based on the U.S. Treasury yield curve in effect during the period the equity grants were made.
The assumptions we adopted to estimate the fair value of awarded RSUs were as follows:
Year ended December 31, 2017 | Year ended December 31, 2018 | |||||||
Current share price valuation (US$) | 5.70 | 7.75 | ||||||
Expected volatility | 37.44 | % | 35.29 | % | ||||
Risk free interest rate (%) | 1.61 | % | 2.43 | % | ||||
Dividend yield (%) | 0 | % | 0 | % | ||||
Duration of initial simulation period (years to longstop date) | 4.55 | 4.73 | ||||||
Duration of second simulation period with postponed exercise (years) | 3.00 | 3.00 | ||||||
Fair value at the measurement date (US$) | 4.50 | 7.12 | ||||||
Although the fair value of awards is determined based upon a grant date fair value, social security costs is accrued on the awards based upon the period-end intrinsic value which required management judgment prior to our IPO, and is based on the closing ADS price of each period post our IPO. We recognize the intrinsic value of the social security costs related to the awards less estimated forfeitures as an expense over the vesting period in the same manner as a cash settled award. The social security cost element could be volatile if the intrinsic value fluctuates.
These assumptions represented our best estimates, but the estimates involve inherent uncertainties and the application of our judgment.
See Note 25 to our consolidated financial statements included elsewhere in this annual report for a detailed discussion.statements.
Capitalized Development Costs and Customer Relationships
Certain costs of developing new features, together with significant and pervasive improvements of core functionality, are capitalized as development costs and amortized on a straight-line, three-year basis. Other engineering work related to research activities or ongoing product maintenance, such as “bug fixes,” updates needed to comply with changes in laws and regulations, or updates needed to keep pace with the latest web trends are expensed as ordinary compensation costs in the period they are incurred. Initial capitalization of expenditure is based on management’s judgment that the project meets all of the six criteria discussed in Note 2 to our consolidated financial statements included elsewhere in this annual report. Assessing if and when all of these criteria are met is based on judgment, which takes into account past experiences and expectations about the technical ability to complete the asset as intended
Acquired intangible assets related to customer relationships are recognized at cost less accumulated amortization and impairment losses, and are amortized over up to 15 years. We evaluate customer relationships for impairment when circumstances warrant.
Business Combinations and Goodwill
Business combinations, except those occurring under common control, are accounted for using the acquisition method. Acquired businesses are included in the consolidated financial statements from the date we obtain control. The cost of an acquisition is measured as the consideration transferred, which is measured at acquisition date fair value. Acquisition-related costs are expensed as incurred.
We initially measure goodwill at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held, over the net identifiable assets acquired and liabilities assumed.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is from the acquisition date allocated to our Cash Generating Units, or CGUs, that are expected to benefit from the transaction. The goodwill recognized by us is allocated to the Consumer Business CGU.
The acquisition of a microfinance business primarily operating under the brand OKash, as discussed in Note 26 to our consolidated financial statements included elsewhere in this annual report, occurred under common control because we concluded that both Opera Limited and the acquired business was controlled by our Chairman and CEO. The determination that Opera Limited was controlled by our Chairman and CEO was based on significant judgment. The Chairman and CEO’s ownership interest and voting rights were established by his control of Keeneyes Future Holding Inc and Kunlun Tech Limited, a subsidiary of Beijing Kunlun Tech Co. Ltd. Although the Chairman and CEO did not hold a majority of the shares and voting rights in the latter, we concluded that he had de facto control over that entity based on his practical ability to direct the relevant activities unilaterally. This was based on him being the largest holder of voting rights in Beijing Kunlun Tech Co. Ltd, effectively controlling 33.77% of the voting rights directly. The history of voting in general meetings for Beijing Kunlun Tech Co. Ltd demonstrated that our Chairman and CEO controlled significantly more than 50% of the shares registered to vote. The remaining shares in Beijing Kunlun Tech Co. Ltd were widely dispersed among a large number of other shareholders.
Business combinations under common control are accounted for using predecessor accounting. Under this method, assets and liabilities of the acquired entity are stated at predecessor carrying values; they were not measured at acquisition date fair values. No new goodwill is recognized. Any difference between the consideration given and the aggregate carrying value of the assets and liabilities of the acquired entity at the date of the transaction is included in equity in retained earnings. The acquired entity’s results, assets and liabilities are incorporated prospectively from the date on which the business combination between entities under common control occurred. See Note 26 to our consolidated financial statements included elsewhere in this annual report for a detailed discussion.
Impairment of Goodwill and Intangibles with Indefinite Lives
We assess, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, we estimate the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. Goodwill and our brand of Opera (the trademark) were initially recognized in November 2016 through the acquisition of Opera Norway AS (formerly Opera Software AS) with subsidiaries, consisting of one segment – “the Consumer business”. Due to growth and expansion into new businesses in 2019, including microlending, management organized us into four operating segments effective from 2019: Browser and News, Fintech, Retail and Other. The goodwill and the trademark that previously was allocated to the Consumer business CGU was reallocated to the Browser and News CGU.
Goodwill is tested for impairment annually as of December 31, and when circumstances indicate that the carrying value may be impaired.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU.
We base our impairment calculation on detailed budgets and forecast calculations. These budgets and forecast calculations cover a period of one year. Because the length of the projection period for the cash flow forecast where a CGU has goodwill or intangible assets with indefinite lives is into perpetuity, we identify a “steady state” set of assumptions for the cash flows based an approach where we estimate cash flows for the following four years and then using the estimated cash flows in the final year of estimation as the basis for the terminal value. A long-term growth rate is calculated and applied to project future cash flows after the projected period. See Note 10 to our consolidated financial statements included elsewhere in this annual report for more information.
For assets, excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, we estimate the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized.
Income Taxes
Income tax consists of the sum of (i) current year income taxes payable plus (ii) the change in deferred taxes and liabilities, except if income taxes relate to items recognized in other comprehensive income, in which case it is recognized in other comprehensive income (loss). Income taxes include all domestic and foreign taxes, which are based on taxable profits, including withholding taxes. Current year income taxes payable is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the year end, and any adjustment to tax payable in respect of previous years.
We recognize income taxes in the income statement except to the extent that it relates to items recognized directly in equity or in comprehensive income. We include deductions for uncertain tax positions when it is probable that the tax position will be sustained in a tax review. We record provisions relating to uncertain or disputed tax positions at the amount expected to be paid. The provision is reversed if the disputed tax position is settled in favor of us and can no longer be appealed.
Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the reporting date. We only recognize a deferred tax asset to the extent that it is probable that future taxable profits will allow the deferred tax asset to be realized. Recognized assets are reversed when realization is no longer probable.
See Note 2425 to our consolidated financial statements included elsewhere in this annual report for a detailed discussion.
Unaudited Pro Forma Consolidated Financial InformationRecent Accounting Pronouncements
The unaudited pro forma consolidated statement of operations for the year ended December 31, 2016, is based on the historical auditedSee Note 3 to our consolidated financial statements included elsewhere in this report for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of the Group and the audited consolidated financial statementsdates of the acquired Consumer Business, held by Opera Software AS with subsidiaries when acquired (suchstatement of financial information presented as “Predecessor”). All financial statements, including the Predecessor statements, were preparedposition included in accordance with IFRS using the accounting policies described in our audited consolidated financial statements. Opera Limited's predecessor (Kunhoo Software LLC) was formed on July 26, 2016, and had no operations prior to the acquisition of the Opera Software AS, although it did incur significant transaction costs prior to the acquisition date. See “Item 4. Information on the Company—A. History and Development of the Company.” These pro forma consolidated financial statements give effect to the acquisition of Opera Software AS by the Group as if the acquisition had occurred as of January 1, 2016. The actual acquisition date was November 3, 2016, and included cash consideration of US$575.0 million less working capital adjustments of US$17.3 million that were settled in cash in December 2016 and January 2018. No financing obligations were incurred as a result of the transaction.
Basis of Preparation
The unaudited pro forma financial information was prepared in accordance with Article 11 of Regulation S-X. Accordingly, the historical consolidated financial statements have been adjusted in the pro forma financial statements to give effect to pro forma events that are (i) directly attributable to the acquisition of Opera Software AS, (ii) expected to have a continuing impact on the Group and (iii) factually supportable.
In preparing the unaudited pro forma consolidated financial information, we have utilized the values of identifiable tangible and intangible net assets acquired, including goodwill resulted from the purchase price allocation used to record the purchase of Opera Software AS, and related depreciation and amortization periods and income tax effects when applicable.this report.
The unaudited pro forma financial consolidated statement of operations does not necessarily reflect what our consolidated results of operations would have been had the acquisition occurred on January 1, 2016. It may also not be useful in predicting future results of operations for the combined Group. The unaudited pro forma statement of operations does not reflect the realization of any expected cost savings as a result of initiatives following the completion of the acquisition. The unaudited pro forma consolidated financial information should be read in conjunction with “Item 3. Key Information—D. Risk Factors”, “Item 5. Operating and Financial Review and Prospects” and the audited consolidated financial statements and the related notes included elsewhere in this annual report.
Assumptions underlying the pro forma adjustments are described in the accompanying notes, which should be read in conjunction with the unaudited pro forma consolidated statement of operations.
Unaudited Pro Forma Consolidated Statement of Operations
Predecessor for the period from January 1, 2016 to November 3, 2016 | Successor Group from inception on July 26, 2016 to December 31, 2016 | Pro forma adjustments | Note | Unaudited pro forma consolidated Group for the year ended December 31, 2016 | ||||||||||||||||
(US$ in thousands) | ||||||||||||||||||||
Revenue and other income: | ||||||||||||||||||||
Revenue | 88,518 | 18,767 | — | 107,285 | ||||||||||||||||
Other income | — | — | — | — | ||||||||||||||||
Operating expenses: | ||||||||||||||||||||
Cost of revenue | (638 | ) | (469 | ) | — | (1,107 | ) | |||||||||||||
Personnel expenses including share-based remuneration | (35,493 | ) | (5,972 | ) | — | (41,465 | ) | |||||||||||||
Depreciation and amortization | (9,586 | ) | (3,082 | ) | (4,044 | ) | (1) | (16,712 | ) | |||||||||||
Other expenses | (42,486 | ) | (19,032 | ) | 6,100 | (2) | (55,418 | ) | ||||||||||||
Restructuring costs | (3,911 | ) | — | — | (3,911 | ) | ||||||||||||||
Total operating expenses | (92,113 | ) | (28,555 | ) | 2,056 | (118,613 | ) | |||||||||||||
Operating profit (loss) | (3,595 | ) | (9,788 | ) | 2,056 | (11,328 | ) | |||||||||||||
Income (loss) from associates and joint ventures: | ||||||||||||||||||||
Share of net income (loss) of associates and joint ventures | (2,664 | ) | (237 | ) | — | (2,901 | ) | |||||||||||||
Net finance income (expense): | ||||||||||||||||||||
Finance income | — | 37 | — | 37 | ||||||||||||||||
Finance expense | (1,378 | ) | (24 | ) | — | (1,402 | ) | |||||||||||||
Net foreign exchange gain (loss) | (1,212 | ) | 212 | — | (1,000 | ) | ||||||||||||||
Net finance income (expense) | (2,590 | ) | 225 | — | (2,365 | ) | ||||||||||||||
Net income (loss) before income taxes | (8,849 | ) | (9,800 | ) | 2,056 | (16,594 | ) | |||||||||||||
Income tax (expense) benefit | 743 | 2,096 | 1,011 | (3) | 3,850 | |||||||||||||||
Net income (loss) | (8,106 | ) | (7,704 | ) | 3,067 | (12,744 | ) | |||||||||||||
Notes to the Unaudited Pro Forma Consolidated Statement of Operations
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The tables below show further details for certain captions included within the unaudited pro forma consolidated statement of operations. This information is derived from the sum of amounts included in the Predecessor for the period from January 1 to November 3, 2016 and the Successor for the period from July 26 to December 31, 2016 in Notes 4, 5 and 6 of the consolidated financial statements and the pro forma adjustments described above.
Predecessor for the period from January 1, 2016 to acquisition on November 3, 2016 | Successor Group from inception on July 26, 2016 to December 31, 2016 | Pro forma adjustments | Unaudited pro forma consolidated Group for the year ended December 31, 2016 | |||||||||||||
(US$ in thousands) | ||||||||||||||||
Pro forma revenue by revenue type: | ||||||||||||||||
Search | 44,347 | 10,215 | — | 54,561 | ||||||||||||
Advertising | 27,960 | 5,219 | — | 33,180 | ||||||||||||
Technology licensing/other | 16,211 | 3,333 | — | 19,544 | ||||||||||||
Total Revenue | 88,518 | 18,767 | — | 107,285 | ||||||||||||
Pro forma revenue by customer location: | ||||||||||||||||
Ireland | 32,730 | 9,310 | — | 42,041 | ||||||||||||
Russia | 13,883 | 2,868 | — | 16,751 | ||||||||||||
Other | 41,904 | 6,589 | — | 48,494 | ||||||||||||
Total Revenue | 88,518 | 18,767 | — | 107,285 | ||||||||||||
Pro forma personnel expenses including share-based remuneration: | ||||||||||||||||
Personnel expenses excluding share-based remuneration | 34,579 | 5,972 | — | 40,551 | ||||||||||||
Share-based remuneration, including related social security costs | 914 | — | — | 914 | ||||||||||||
Total personnel expenses including share-based remuneration | 35,493 | 5,972 | — | 41,465 | ||||||||||||
Pro forma other expenses: | — | |||||||||||||||
Marketing and distribution | 22,550 | 7,980 | — | 30,530 | ||||||||||||
Hosting | 7,894 | 2,215 | — | 10,109 | ||||||||||||
Audit, legal and other advisory services | 1,577 | 6,359 | (6,100 | ) | 1,836 | |||||||||||
Software license fees | 1,068 | 253 | — | 1,320 | ||||||||||||
Rent and other office expenses | 3,407 | 545 | — | 3,952 | ||||||||||||
Travel | 1,880 | 983 | — | 2,862 | ||||||||||||
Other | 4,110 | 698 | — | 4,808 | ||||||||||||
Total other expenses | 42,486 | 19,032 | (6,100 | ) | 55,418 | |||||||||||
Description of Certain Statement of Operations Items
Revenue
We currently generate revenue primarilyOur revenues are derived from search, advertising, retail,four business lines, namely (i) Browser and technology licensingNews, (ii) Fintech, (iii) Retail and other revenues.(iv) Other. The table below sets forth the revenue, both in absolute amount and as a percentage of total revenue for each business line for the periods indicated.
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||||||
Predecessor for the period from January 1, 2016 to November 3, 2016 | % of total revenue | Successor Group from inception on July 26, 2016 to December 31, 2016 | % of total revenue | Unaudited pro forma consolidated Group for the year ended December 31, 2016 | % of total revenue | Successor Group for the year ended December 31, 2017 | % of total revenue | Successor Group for the year ended December 31, 2018 (1) | % of total revenue | |||||||||||||||||||||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||||||||||
Search | 44,347 | 50.1 | 10,215 | 54.4 | 54,561 | 50.9 | 68,192 | 52.9 | 80,204 | 46.6 | ||||||||||||||||||||||||||||||
Advertising | 27,960 | 31.6 | 5,219 | 27.8 | 33,180 | 30.9 | 41,047 | 31.8 | 59,895 | 34.8 | ||||||||||||||||||||||||||||||
Retail | - | - | - | - | - | - | - | - | 9,287 | 5.4 | ||||||||||||||||||||||||||||||
Technology licensing/other | 16,211 | 18.3 | 3,333 | 17.8 | 19,544 | 18.2 | 19,653 | 15.2 | 22,890 | 13.3 | ||||||||||||||||||||||||||||||
Total Revenue | 88,518 | 100.0 | 18,767 | 100.0 | 107,285 | 100.0 | 128,893 | 100.0 | 172,276 | 100.0 | ||||||||||||||||||||||||||||||
For the year ended December 31, | ||||||||||||||||
2018 | % | 2019 | % | |||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||
Revenue: | ||||||||||||||||
Browser and News | 138,444 | 80.4 | 154,968 | 46.3 | ||||||||||||
Fintech | 1,655 | 1.0 | 128,373 | 38.3 | ||||||||||||
Retail | 9,287 | 5.4 | 29,802 | 8.9 | ||||||||||||
Other | 22,890 | 13.3 | 21,712 | 6.5 | ||||||||||||
Total revenue | 172,276 | 100.0 | 334,855 | 100.0 | ||||||||||||
Browser and News revenue primarily consists of our search and advertising revenue.
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Search revenue accounted for 54.4%, or 50.9% on a pro forma consolidated basis,46.6% and 25.7% of our total revenue in 2016,2018 and 52.9% and 46.6% of our total revenue in 2017 and 2018,2019, respectively. Through revenue sharing arrangements with our search partners including Google and Yandex, we generate search revenue when our users conduct searches initiated within the URL bar, default search page or search boxes embedded in our PC and mobile browsers, or otherwise redirected to our search partners via our browser functionality.
Advertising revenue accounted for 27.8%, or 30.9% on a pro forma consolidated basis,33.8% and 20.6% of our total revenue in 2016,2018 and 31.8% and 34.8% of our total revenue in 2017 and 2018,2019, respectively. We generate advertising revenue by referring traffic from our platform to e-commerce partners, online travel agencies and other partners, and by selling advertisements. The fee arrangements generally include revenue sharing, cost per click or subscription revenues collected by third parties on our behalf.
Fintech revenue is primarily generated from origination fees and interest fees of our microlending business, accounting for 1.0% and 38.3% of our total revenue in 2018 and 2019, respectively. We started to generate origination fees and interest in late 2018 when we initiated our microlending business in Africa. We provide instant app-based microloans to our clients with a relatively short duration, up to 365 days, in exchange for a fixed origination fee regardless of any early repayment. The average duration for microloans provided in 2019 was 15 days. Additional fees in the form of interest, limited to the sum of the principal and origination fee, accrues only if and after a loan extended to our clients is not repaid by its due date.
Retail revenue accounted for 5.4% and 8.9% of total revenue in 2018.2018 and 2019, respectively. We started to generate retail revenue from the second half of 2018, when we began scaling sales, both retail and wholesale, of prepaid data, airtime, and mobile handsets.
Technology licensing and other revenue accounted for 17.8%, or 18.2% on a pro forma consolidated basis,13.3% and 6.5% of our total revenue in 2016,2018 and 15.2% and 13.3% of our total revenue in 2017 and 2018,2019, respectively. We generate licensing and other revenue mainly from providing professional services, licensing of our proprietary compression technology and providing related maintenance, supporting and hosting services to third parties, as well as providing professional services, and enabling customized browser configurations to mobile operators.
Geographically, our revenue in 2018 2017 and 20162019 was generated primarily from customers and monetization partners domiciled in India, Ireland, Kenya and Russia, with no other country exceeding 10% of our total revenue. The table below sets forth the revenue by customers and monetization partners’ domiciled country, both in absolute amount and as a percentage of total revenue for the periods indicated. The breakdown of revenue by country reflects the country of domicile for our direct source of revenues from our monetization partners, which is not necessarily an indication of where user activities occur because the end users are located globally.
For the year ended December 31, | ||||||||||||||||
2018 | % | 2019 | % | |||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||
India | 1,549 | 0.9 | 98,504 | 29.4 | ||||||||||||
Ireland | 76,791 | 44.6 | 81,637 | 24.4 | ||||||||||||
Kenya | 3,426 | 2.0 | 35,086 | 10.5 | ||||||||||||
Russia | 17,356 | 10.1 | 17,265 | 5.2 | ||||||||||||
Other | 73,154 | 42.5 | 102,363 | 30.6 | ||||||||||||
Total revenue | 172,276 | 100.0 | 334,855 | 100.0 | ||||||||||||
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||||||
Predecessor for the period from January 1, 2016 to November 3, 2016 | % of total revenue | Successor Group from inception on July 26, 2016 to December 31, 2016 | % of total revenue | Unaudited pro forma consolidated Group for the year ended December 31, 2016 | % of total revenue | Successor Group for the year ended December 31, 2017 | % of total revenue | Successor Group for the year ended December 31, 2018 (1) | % of total revenue | |||||||||||||||||||||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||
Ireland | 32,730 | 37.0 | 9,310 | 49.6 | 42,041 | 39.2 | 63,152 | 49.0 | 76,791 | 44.6 | ||||||||||||||||||||||||||||||
Russia | 13,883 | 15.7 | 2,868 | 15.3 | 16,751 | 15.6 | 18,251 | 14.2 | 17,356 | 10.1 | ||||||||||||||||||||||||||||||
Other | 41,904 | 47.3 | 6,589 | 35.1 | 48,494 | 45.2 | 47,490 | 36.8 | 78,129 | 45.3 | ||||||||||||||||||||||||||||||
Total revenue | 88,518 | 100.0 | 18,767 | 100.0 | 107,285 | 100.0 | 128,893 | 100.0 | 172,276 | 100.0 | ||||||||||||||||||||||||||||||
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Other Income
In 2017, we entered into a set of agreements with a customer that included a sale of intellectual property, perpetual licensing of other technology, and certain time-restricted hosting services. The licensed technology was in part procured for licensing from a third party. The sale of intellectual property, net of associated costs amounted to US$5.5 million and was recognized as other income. Proceeds allocated to the licensing of our own intellectual property as well as hosting services is recognized as technology licensing and other revenue.
Operating Expenses
We categorize our operating expenses into (i) cost of revenue, (ii) personnel expenses including share-based remuneration, (iii) marketing and distribution expenses, (iv) credit loss expenses, (v) other changes in fair value of loans to customers, (vi) depreciation and amortization (iv)and (vii) other expenses and (v) restructuring costs.expenses. The table below sets forth our operating expenses, both in absolute amount and as a percentage of total revenue, for the periods indicated.
2016 | 2017 | 2018 (4) | For the year ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Predecessor for the period from January 1, 2016 to November 3, 2016 | % of total revenue | Successor Group from inception on July 26, 2016 to December 31, 2016 | % of total revenue | Unaudited pro forma consolidated Group for the year ended December 31, 2016 | % of total revenue (3) | Successor Group for the year ended December 31, 2017 | % of total revenue | Successor Group for the year ended December 31, 2018 | % of total revenue | 2018 | % | 2019(1) | % | |||||||||||||||||||||||||||||||||||||||||||
(US$ in thousands, except for percentages) | (US$ in thousands, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cost of revenue | 638 | 0.7 | 469 | 2.5 | 1,107 | 1.0 | 1,303 | 1.0 | 13,316 | 7.7 | 20,009 | 11.6 | 73,991 | 22.1 | ||||||||||||||||||||||||||||||||||||||||||
Personnel expenses including share-based remuneration | 35,493 | 40.1 | 5,972 | 31.8 | 41,465 | 38.6 | 44,315 | 34.4 | 40,968 | 23.8 | 34,683 | 20.1 | 61,029 | 18.2 | ||||||||||||||||||||||||||||||||||||||||||
Marketing and distribution expenses | 31,381 | 18.2 | 73,150 | 21.8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Credit loss expense | (678 | ) | (0.4 | ) | 577 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Other changes in fair value of loans to customers | 528 | 0.3 | 54,302 | 16.2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 9,586 | 10.8 | 3,082 | 16.4 | 16,712 | (1) | 15.6 | 16,604 | 12.9 | 12,694 | 7.4 | 12,694 | 7.4 | 18,933 | 5.7 | |||||||||||||||||||||||||||||||||||||||||
Other expenses | 42,486 | 48.0 | 19,032 | 101.4 | 55,418 | (2) | 51.7 | 58,652 | 45.5 | 59,997 | 34.8 | 28,359 | 16.5 | 32,210 | 9.6 | |||||||||||||||||||||||||||||||||||||||||
Restructuring costs | 3,911 | 4.4 | — | — | 3,911 | 3.6 | 3,240 | 2.5 | - | - | ||||||||||||||||||||||||||||||||||||||||||||||
Total operating expenses | 92,113 | 104.1 | 28,555 | 152.2 | 118,613 | 110.6 | 124,114 | 96.3 | 126,975 | 73.7 | 126,975 | 73.7 | 314,192 | 93.8 | ||||||||||||||||||||||||||||||||||||||||||
(1) |
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| Effective January 1, |
Cost of Revenue
Our cost of revenue (formerly “Payoutsis primarily comprised of (i) revenue shares to content creators on Opera platforms and payments to publishers and monetization partners”) primarily comprises inventory cost incurred forpartners (including the purchase of data, airtime and handsets, as well as publisher costs and costs of any platform or collection service used to facilitate subscription services where we are the principal in the transaction) related to our browser and news business line; (ii) transaction and communication platform expenses, as well as third party credit scoring, data and risk control costs related to our microlending business; (iii) inventory cost incurred for the purchase of data, airtime and handsets related to our retail business; and (iv) personnel expenses incurred in connection with the transaction, which typically consist of fees based upon“technology licensing and other” revenue segment. We expect such individual components within this cost category to stay relatively stable as a percentage of relevant revenues, such as publishers providing content in which we deliver mobile advertisements or operators facilitating payments of Opera branded services. We expect our cost ofmicrolending, retail and other revenue tostreams, and increase in absolute amounts and relative to revenues in the foreseeable future due to the anticipated growth of our business, including the full-year effect of our retail business and increasing exposure to content monetization.advertising revenue.
Personnel Expenses including Share-based Remuneration
Our personnel expenses including share-based remuneration primarily consist of salaries and bonuses with applicable social security costs, external temporary hire cost and other personnel related expenses, as well as share-based remuneration, including related social security costs. Personnel expenses are net of capitalized development expenses, which amounted to US$0.3 million in 2016, or US$1.9 million on a pro forma consolidated basis, including US$1.6 million capitalized in the period from January 1, 2016 to November 3, 2016, US$3.5 million in 2017 and US$4.5 million in 2018.expenses. Capitalized development expenses in 2018 related2019 mainly relates to the development of Opera News. We expect our personnel expenses to increase in absolute amounts in the foreseeable future due to the anticipated growth of business and expansion of our global operations, as well as periodic salary adjustments. For details of our share incentive plan, see “—“ — Critical Accounting Policies—Policies — Share-based payment.” The table below sets forth the breakdown of our personnel expenses, both in absolute amount and as a percentage of total revenue for the periods indicated.
2016 | 2017 | 2018 | For the year ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Predecessor for the period from January 1, 2016 to November 3, 2016 | % of total revenue | Successor Group from inception on July 26, 2016 to December 31, 2016 | % of total revenue | Unaudited pro forma consolidated Group for the year ended December 31, 2016 (1) | % of total revenue (1) | Successor Group for the year ended December 31, 2017 | % of total revenue | Successor Group for the year ended December 31, 2018 | % of total revenue | 2018 | % | 2019 | % | |||||||||||||||||||||||||||||||||||||||||||
(US$ in thousands, except for percentages) | (US$ in thousands, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Personnel expenses excluding share-based remuneration | 34,579 | 39.1 | 5,972 | 31.8 | 40,551 | 37.8 | 34,819 | 27.0 | 36,121 | 21.0 | 29,836 | 17.3 | 55,101 | 16.5 | ||||||||||||||||||||||||||||||||||||||||||
Share-based remuneration, including related social security costs | 914 | 1.0 | — | — | 914 | 0.9 | 9,496 | 7.4 | 4,846 | 2.8 | 4,846 | 2.8 | 5,928 | 1.8 | ||||||||||||||||||||||||||||||||||||||||||
Total | 35,493 | 40.1 | 5,972 | 31.8 | 41,465 | 38.6 | 44,315 | 34.4 | 23.8 | 34,683 | 20.1 | 61,029 | 18.2 | |||||||||||||||||||||||||||||||||||||||||||
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Credit Loss Expenses
Our credit loss expense is mainly related to provisions for expected credit losses on trade receivables and consist of specific provisions where risk of credit loss have been determined by management as well as general provisions determined based on the aging of the trade receivables. Changes in credit loss expense is affected by our ability to collect our trade receivables, the credit risk of the markets we operate in as well as general market conditions affecting our trade partners.
Other changes in fair value of loans to customers
While loans to customers are accounted for at fair value through profit or loss, changes in fair value are disaggregated into interest revenue and other changes in fair value of loans to customers. Other changes in fair value are primarily driven by realized and expected cash shortfalls, i.e. credit losses. Changes in fair value of loans to customers are estimated on a per-loan, per-day basis, informed by the observed probability of collecting a loan at different stages of maturity, adjusting for factors such as first-time versus returning borrower, country, loan duration and loan amount, and managerial assessments of other factors influencing probability of repayment. Changes in fair value of loans to customers as a percentage of loan disbursements, or percentage of associated revenue, is affected by our ability to appropriately identify borrowers most likely to repay their loans, the quality of our collection operations, the amount of relevant market and user data obtainable, how much history we have in a given market, as well as general market conditions affecting our borrowers.
Marketing and Distribution Expenses
Marketing and distribution expenses primarily consist of performance based campaigns associated with our browser and news business and microlending business. We expect our marketing and distribution expenses to decrease as a percent of total revenue over the years to come, though there may be short-term fluctuations including in the near future due to the COVID-19 situation.
Depreciation and amortization
Depreciation cost largely relates to purchased equipment and servers as well as leasehold improvements. Amortization cost largely relates to intangible assets such as technology and customer relationships as well as capitalized development. Depreciation and amortization is driven by the amounts of assets we purchase and/or capitalize and the expected lifetime of those assets.
Other Expenses
Our other expenses primarily consist of marketing and distribution expenses, which includes payments to distribution partners; hosting expenses; professional advisory service fees; software license fees, rent and other office expenses and travel expenses. We expect our other expenses to increase in absolute amounts in the foreseeable future due to the anticipated growth of our business as well as accounting, insurance, investor relations and other public company costs. The table below sets forth the breakdown of our other expenses, both in absolute amount and as a percentage of total revenue for the periods indicated.
2016 | 2017 | 2018 | For the year ended December 31, | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Predecessor for the period from January 1, 2016 to November 3, 2016 | % of total revenue | Successor Group from inception on July 26, 2016 to December 31, 2016 | % of total revenue | Unaudited pro forma consolidated Group for the year ended December 31, 2016 | % of total revenue(2) | Successor Group for the year ended December 31, 2017 | % of total revenue | Successor Group for the year ended December 31, 2018 (3) | % of total revenue | 2018 | % | 2019(1) | % | |||||||||||||||||||||||||||||||||||||||||||
(US$ in thousands, except for percentages) | (US$ in thousands, except for percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Marketing and distribution | 22,550 | 25.5 | 7,980 | 42.5 | 30,530 | 28.5 | 30,971 | 24.0 | 31,581 | 18.3 | ||||||||||||||||||||||||||||||||||||||||||||||
Hosting | 7,894 | 8.9 | 2,215 | 11.8 | 10,109 | 9.4 | 12,105 | 9.4 | 10,146 | 5.9 | 10,146 | 5.9 | 6,941 | 2.1 | ||||||||||||||||||||||||||||||||||||||||||
Audit, legal and other advisory services | 1,577 | 1.8 | 6,359 | 33.9 | 1,836 | (1) | 1.7 | 3,529 | 2.7 | 8,324 | 4.8 | 8,306 | 4.8 | 8,533 | 2.5 | |||||||||||||||||||||||||||||||||||||||||
Software license fees | 1,068 | 1.2 | 253 | 1.3 | 1,320 | 1.2 | 1,346 | 1.0 | 1,799 | 0.1 | 1,799 | 1.0 | 2,566 | 0.8 | ||||||||||||||||||||||||||||||||||||||||||
Rent and other office expenses | 3,407 | 3.8 | 545 | 2.9 | 3,952 | 3.7 | 4,304 | 3.3 | 4,573 | 2.7 | 4,573 | 2.7 | 5,379 | 1.6 | ||||||||||||||||||||||||||||||||||||||||||
Travel | 1,880 | 2.1 | 983 | 5.2 | 2,862 | 2.7 | 1,775 | 1.4 | 2,058 | 1.2 | 2,057 | 1.2 | 3,990 | 1.2 | ||||||||||||||||||||||||||||||||||||||||||
Other | 4,110 | 4.6 | 698 | 3.7 | 4,808 | 4.5 | 4,622 | 3.6 | 1,517 | 0.9 | 1,477 | 0.9 | 4,801 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||
Total other expenses | 42,486 | 48.0 | 19,032 | 101.4 | 55,418 | 51.7 | 58,652 | 45.5 | 59,997 | 34.8 | 28,359 | 16.5 | 32,210 | 9.6 | ||||||||||||||||||||||||||||||||||||||||||
(1) |
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| Effective January 1, |
Restructuring CostsContribution Margin by Segment
Our restructuring costs mainly consistoperating segments are based on our main categories of severance paymentsproducts and services, namely Browser and News, Fintech, Retail and Other. The following table presents contribution for these segments, which represents revenue from the segment, less the sum of (i) cost of revenue, (ii) marketing and distribution expense and (iii) credit loss expense attributed to former employeesthat segment, as well as each item expressed as a percentage of the segment revenue during the periods indicated.
For the year ended December 31, | ||||||||||||||||
2018 | 2019 | |||||||||||||||
US$ | % | US$ | % | |||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||
Browser and News | ||||||||||||||||
Revenue | 138,444 | 100.0 | 154,968 | 100.0 | ||||||||||||
Cost of revenue | 3,637 | 2.6 | 2,642 | 1.7 | ||||||||||||
Marketing and distribution expenses | 31,336 | 22.6 | 64,685 | 41.7 | ||||||||||||
Credit loss expense | (678 | ) | (0.5 | ) | 577 | 0.4 | ||||||||||
Contribution | 104,149 | 75.2 | 87,064 | 56.2 | ||||||||||||
Browser and reductionsNews contributed US$87.1 million in 2019, corresponding to 56.2% of office space, with certain associated legal fees. Our restructuring (includingsegment revenue and comparing to US$104.1 million or 75.2% of segment revenue in 2018. While the restructuring withinsegment revenue increased by US$16.5 million, this was offset by the Predecessor period) represents a streamliningeffect of our business carried out overstrategic investments in additional marketing and distribution (increasing by US$33.4 million).
For the year ended December 31, | ||||||||||||||||
2018 | 2019 | |||||||||||||||
US$ | % | US$ | % | |||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||
Fintech | ||||||||||||||||
Revenue | 1,655 | 100.0 | 128,373 | 100.0 | ||||||||||||
Cost of revenue | 428 | 25.9 | 29,759 | 23.2 | ||||||||||||
Marketing and distribution expenses | 45 | 2.7 | 8,464 | 6.6 | ||||||||||||
Credit loss expense (1) | 528 | 31.9 | 54,302 | 42.3 | ||||||||||||
Contribution | 654 | 39.5 | 35,848 | 27.9 | ||||||||||||
(1) Credit loss expense is consistent with Other changes in fair value of loans to customers in the Statement of Operations.
Fintech contributed US$35.8 million in 2019, or 27.9% of segment revenue and comparing to US$0.7 million or 39.5% of segment revenue in 2018. The segment revenue increased by US$126.7 million, while credit loss expense, cost of revenue and marketing and distribution expenses increased with a limited time-period.total of US$91.5 million. This significant growth was primarily driven by the launch and subsequent scaling of our microlending offerings in Kenya in the fourth quarter of 2018 and India in the second quarter of 2019.
For the year ended December 31, | ||||||||||||||||
2018 | 2019 | |||||||||||||||
US$ | % | US$ | % | |||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||
Retail | ||||||||||||||||
Revenue | 9,287 | 100.0 | 29,802 | 100.0 | ||||||||||||
Cost of revenue | 9,096 | 97.9 | 29,836 | 100.1 | ||||||||||||
Marketing and distribution expenses | - | - | - | - | ||||||||||||
Credit loss expense | - | - | - | - | ||||||||||||
Contribution | 191 | 2.1 | (34 | ) | (0.1 | ) | ||||||||||
Retail contributed a loss of US$34 thousands in 2019, and comparing to US$0.2 million or 2.1% of segment revenue in 2018. The segment revenue increased by US$20.5 million, while cost of revenue increased with a total of US$20.7 million. The increase was primarily due to the full year effect of this revenue category which was introduced in the third quarter of 2018, as well as continued scaling of our handset and airtime resale activity in Asia and launch of operations in Africa.
For the year ended December 31, | ||||||||||||||||
2018 | 2019 | |||||||||||||||
US$ | % | US$ | % | |||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||
Other | ||||||||||||||||
Revenue | 22,890 | 100.0 | 21,712 | 100.0 | ||||||||||||
Cost of revenue | 6,848 | 29.9 | 11,754 | 54.1 | ||||||||||||
Marketing and distribution expenses | - | - | - | - | ||||||||||||
Credit loss expense | - | - | - | - | ||||||||||||
Contribution | 16,042 | 70.1 | 9,958 | 45.9 | ||||||||||||
The Other segment, which mainly includes licensing of our proprietary technology and professional services, contributed US$10.0 million in 2019, or 45.9% of segment revenue, comparing to US$16.0 million or 70.1% of segment revenue in 2018. The decrease was attributable to a general decline in our licensing and operator revenues in line with our strategic decision to center our focus on more scalable sources of revenue, partially offset by the growth in professional services.
Taxation
Norway
As most of our activities are consolidated in Norway, the starting point of reconciliation of effective tax rate is the applicable tax rate in Norway, which was 25.0%, 24.0%23.0% and 23.0%22.0% in 2016, 20172018 and 2018,2019, respectively.
Ireland
Opera Software Ireland Limited, our subsidiary incorporated and tax resident in Ireland, is subject to Irish corporation tax on any worldwide profits or chargeable capital gains (subject to any available reliefs). The standard rate of corporation tax on Irish trading profits is 12.5%. To benefit from this rate, companies must derive income from a trade that is actively carried on in Ireland. A rate of 25% applies to non-trading (for example, rental income and royalty income) and foreign-source income. An Irish resident company will, subject to any exemptions that are available, pay tax on any gains it realizes on the disposal of its capital assets at an effective rate of 33%.
Cayman Islands
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty.
There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after execution brought within the jurisdiction of, the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Hong Kong
Kunhoo Software Limited, our subsidiaryOur subsidiaries incorporated in Hong Kong, isare subject to 16.5% Hong Kong profit tax on itstheir taxable income generated from operations in Hong Kong. Under Hong Kong tax laws, we are exempted from the Hong Kong income tax on our foreign-derived income. In addition, payments of dividends from our Hong Kong subsidiarysubsidiaries to us are not subject to any Hong Kong withholding tax.
Results of Operations
The following table sets forth a summary of our consolidated statements of operations for both the Group and the Predecessor, as well as pro forma consolidated results giving effect to the acquisition of Opera Software AS by the Group as if the acquisition had occurred as of January 1, 2016, for the periods indicated, in absolute amounts and as percentages of total revenue during the period. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||||||||
Predecessor for the period from January 1, 2016 to November 3, 2016 | % of total revenue | Successor Group from inception on July 26, 2016 to December 31, 2016 | % of total revenue | Unaudited pro forma consolidated Group for the year ended December 31, 2016 | % of total revenue | Successor Group for the year ended December 31, 2017 | % of total revenue | Successor Group for the year ended December 31, 2018 (4) | % of total revenue | |||||||||||||||||||||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||
Revenue and other income: | ||||||||||||||||||||||||||||||||||||||||
Revenue | 88,518 | 100.0 | 18,767 | 100.0 | 107,285 | 100.0 | 128,893 | 100.0 | 172,276 | 100.0 | ||||||||||||||||||||||||||||||
Other income | — | — | — | — | — | — | 5,460 | N/A | — | — | ||||||||||||||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||||||||||||||||||
Cost of revenue | (638 | ) | (0.7 | ) | (469 | ) | (2.5 | ) | (1,107 | ) | (1.0 | ) | (1,303 | ) | (1.0 | ) | (13,316 | ) | (7.7 | ) | ||||||||||||||||||||
Personnel expenses including share-based remuneration | (35,493 | ) | (40.1 | ) | (5,972 | ) | (31.8 | ) | (41,465 | ) | (38.6 | ) | (44,315 | ) | (34.4 | ) | (40,968 | ) | (23.8 | ) | ||||||||||||||||||||
Depreciation and amortization | (9,586 | ) | (10.8 | ) | (3,082 | ) | (16.4 | ) | (16,712 | )(1) | (15.6 | ) | (16,604 | ) | (12.9 | ) | (12,694 | ) | (7.4 | ) | ||||||||||||||||||||
Other expenses | (42,486 | ) | (48.0 | ) | (19,032 | ) | (101.4 | ) | (55,418 | )(2) | (51.7 | ) | (58,652 | ) | (45.5 | ) | (59,997 | ) | (34.8 | ) | ||||||||||||||||||||
Restructuring costs | (3,911 | ) | (4.4 | ) | — | — | (3,911 | ) | (3.6 | ) | (3,240 | ) | (2.5 | ) | — | — | ||||||||||||||||||||||||
Total operating expenses | (92,113 | ) | (104.1 | ) | (28,555 | ) | (152.2 | ) | (118,613 | ) | (110.6 | ) | (124,114 | ) | (96.3 | ) | (126,975 | ) | (73.7 | ) | ||||||||||||||||||||
Operating profit (loss) | (3,595 | ) | (4.1 | ) | (9,788 | ) | (52.2 | ) | (11,328 | ) | (10.6 | ) | 10,239 | 7.9 | 45,301 | 26.3 | ||||||||||||||||||||||||
Income (loss) from associate and joint ventures: | ||||||||||||||||||||||||||||||||||||||||
Share of net income (loss) of associates and joint ventures | (2,664 | ) | (3.0 | ) | (237 | ) | (1.3 | ) | (2,901 | ) | (2.7 | ) | (1,670 | ) | (1.3 | ) | (3,248 | ) | (1.9 | ) | ||||||||||||||||||||
Net finance income (expense): | ||||||||||||||||||||||||||||||||||||||||
Finance income | — | — | 37 | 0.2 | 37 | — | * | 1,054 | 0.8 | 1,637 | 1.0 | |||||||||||||||||||||||||||||
Finance expense | (1,378 | ) | (1.6 | ) | (24 | ) | (0.1 | ) | (1,402 | ) | (1.3 | ) | (238 | ) | (0.2 | ) | (1,695 | ) | (1.0 | ) | ||||||||||||||||||||
Net foreign exchange gain (loss) | (1,212 | ) | (1.4 | ) | 212 | 1.1 | (1,000 | ) | (0.9 | ) | (1,881 | ) | (1.5 | ) | (354 | ) | (0.2 | ) | ||||||||||||||||||||||
Net finance income (expense) | (2,590 | ) | (2.9 | ) | 225 | 1.2 | (2,365 | ) | (2.2 | ) | (1.065 | ) | (0.8 | ) | (412 | ) | (0.2 | ) | ||||||||||||||||||||||
Net income (loss) before income taxes | (8,849 | ) | (10.0 | ) | (9,800 | ) | (52.2 | ) | (16,594 | ) | (15.5 | ) | 7,504 | 5.8 | 41,641 | 24.2 | ||||||||||||||||||||||||
Income tax (expense) benefit | 743 | 0.8 | 2,096 | 11.2 | 3,850 | (3) | 3.6 | (1,440 | ) | (1.1 | ) | (6,481 | ) | (3.8 | ) | |||||||||||||||||||||||||
Net income (loss) | (8,106 | ) | (9.2 | ) | (7,704 | ) | (41.1 | ) | (12,744 | ) | (11.9 | ) | 6,064 | 4.7 | 35,160 | 20.4 | ||||||||||||||||||||||||
For the year ended December 31, | ||||||||||||||||
2018 | % | 2019(1) | % | |||||||||||||
(US$ in thousands, except for percentages) | ||||||||||||||||
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Revenue | 172,276 | 100.0 | 334,855 | 100.0 | ||||||||||||
Operating expenses: | ||||||||||||||||
Cost of revenue | (20,009 | ) | (11.6 | ) | (73,991 | ) | (22.1 | ) | ||||||||
Personnel expenses including share-based remuneration | (34,683 | ) | (20.1 | ) | (61,029 | ) | (18.2 | ) | ||||||||
Marketing and distribution expense | (31,381 | ) | (18.3 | ) | (73,150 | ) | (21.9 | ) | ||||||||
Credit loss expense | 678 | 0.4 | (577 | ) | (0.2 | ) | ||||||||||
| Other changes in fair value of loans to customers | (528) | (0.3 | ) | (54,302 | ) | (16.2 | ) | |||||||||
Depreciation and amortization | (12,694 | ) | (7.4 | ) | (18,933 | ) | (5.7 | ) | ||||||||
Other expenses | (28,359 | ) | (16.5 | ) | (32,210 | ) | (9.6 | ) | ||||||||
Restructuring costs | - | - | - | - | ||||||||||||
Total operating expenses | (126,975 | ) | (73.7 | ) | 314,192 | (93.8 | ) | |||||||||
Operating profit | 45,301 | 26.3 | 20,662 | 6.2 | ||||||||||||
Share of net income (loss) of associates and joint ventures | (3,248 | ) | (1.9 | ) | (3,818) | (1.1) | ||||||||||
| Change in fair value of preferred shares in associates | - | - | 37,900 | 11.3 | ||||||||||||
Net finance income (expense): | ||||||||||||||||
Finance income | 1,637 | 1.0 | 10,530 | 3.1 | ||||||||||||
Finance expense | (1,695 | ) | (1.0 | ) | (1,505 | ) | (0.4 | ) | ||||||||
Net foreign exchange gain (loss) | (354 | ) | (0.2 | ) | (269 | ) | (0.1 | ) | ||||||||
Net finance income (expense) | (412 | ) | (0.2 | ) | 8,756 | 2.6 | ||||||||||
Net income before income taxes | 41,641 | 24.2 | 63,500 | 19 | ||||||||||||
Income tax expense | (6,481 | ) | (3.8 | ) | (5,602 | ) | (1.7 | ) | ||||||||
Net income | 35,160 | 20.4 | 57,899 | 17.3 | ||||||||||||
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| Effective January 1, |
Year Ended December 31, 20182019 Compared to Year Ended December 31, 20172018
Revenue and Other Income
We had revenue of US$334.8 million in 2019, compared to US$172.3 million in 2018, compared to US$128.9 million in 2017, marking an increase of 33.7%94.4%. This increase was driven primarily by (i) the increase in revenue from origination fees and interest in mircrolending business, (ii) search and advertising revenue, as well asdue to continuing growth of our existing PC and mobile smartphone user bases and improved monetization of our new and existing partners, and (iii) retail revenue that we started to generate in the second half of 2018.2018 and which scaled during 2019.
• | Search Revenue. Our search revenue increased to US$86.2 million in 2019 from US$80.2 million in 2018, |
• | Advertising Revenue. Our advertising revenue increased to US$68.8 million in 2019 from US$59.9 million in 2018, |
•
Fintech Revenue. Our fintech revenue increased to US$128.4 million in 2019 from US$1.7 million in 2018. This significant growth was primarily driven by the launch and subsequent scaling of our microlending offerings in Kenya in the fourth quarter of 2018 and India in the second quarter of 2019. | ||
• | Retail Revenue. |
• | Technology Licensing and Other Revenue. Our technology licensing and other revenue |
Operating Expensesexpenses
We had total operating expenses of US$314.2 million in 2019, compared to US$127.0 million in 2018, compared to US$124.1 million in 2017.2018. Our total operating expenses as a percentage of total revenue decreasedincreased to 93.8% in 2019 from 73.7% in 2018 from 96.3% in 2017.2018.
Cost of Revenuerevenue
Our cost of revenue increased significantlyto US$74.0 million in 2019 from US$1.3 million in 2017 to US$13.320.0 million in 2018, primarily due to the increasedincreases in (i) cost incurred in microlending business, from US$0.4 million in 2018 to US$29.8 million in 2019, which is in line with our growing scale of business operation in 2019, (ii) retail business cost from US$9.1 million in 2018 to US$29.8 million in 2019, resulting from increase sale of prepaid airtime and handsets, and (iii) cost in relation to technology licensing and other business from US$6.8 million in 2018 to US$11.8 million in 2019, primarily attributable to cost of professional services provided to OPay, and is partially offset by a slight decrease in costs related to our new retail business. Within thesearch and advertising from US$3.6 million in 2018 total,to US$9.22.6 million related to the retail business, and US$4.1 million related to advertising revenue recognized at gross basis or subject to revenue sharing. We expect our cost of revenue to increase in absolute amounts and relative to revenues in the foreseeable future due to the anticipated growth of our business, including the full-year effect of our retail business and increasing exposure to content monetization.2019.
Personnel Expensesexpenses including Share-Based Remunerationshare-based remuneration
Our personnel expenses including share-based remuneration decreasedincreased to US$41.061.0 million in 2019 from US$34.7 million in 2018, representing an increase of 76.0%. The increase was driven mainly by the growth in our fintech business as well as by other new initiatives including OList, Opera Ads and Opera News. Cash-based compensation expenses increased by 84.7% from US$44.329.8 million in 2017, representing a decrease2018 to US$55.1 million in 2019, which is primarily attributable to an increase in the number of 7.5%. Cash-based compensationfull time employees from 464 as of December 31, 2018 to 819 as of December 31, 2019, as well as an increase in the number of our outsourced staff in call centers and similar in-market roles from almost zero as of December 31, 2018 to close to 6,000 as of December 31, 2019. Share-based remuneration expense increased by 3.7%22.3% from US$34.84.8 million in 20172018 to US$36.15.9 million in 2018. Share-based remuneration expense decreased by 49.0% from2019.
Marketing and distribution expenses
Our marketing and distribution expenses increased to US$9.573.2 million in 20172019 from US$31.4 million in 2018, representing a 133.1% increase. This was primarily due to our strategic decision to invest more resources in accelerating our growth in Opera News, which was scaling rapidly in Africa and expanding to additional geographies, as well as targeted marketing of browser offerings during 2019.
Credit loss expense
Ourcredit loss expense was US$4.80.6 million in 2019. Compared to a gain of US$0.7 million related to reversal of bad debt provisions in prior periods within the browser and news segment in 2018.
Other changes in fair value of loans to customers
In our Fintech segment, Other changes in fair value of loans to customers is consistent with Credit loss expense in the Browser and News segment. In 2019 our changes in fair value of loans to customers amounted to US$54.3 million compared to US$0.5 million in 2018. The reductionincrease was mainly driven by the scaled microlending operations in share-based remuneration was related to reductions in accrued social security cost,India and the fact that share-based remuneration expense was elevated in 2017 because it was the first yearKenya.
Depreciation and Amortizationamortization
We had depreciation and amortization of US$18.9 million in 2019 compared to US$12.7 million in 2018, compared to US$16.6 million in 2017, representing a decreasean increase of 23.5%49.2%. The declineincrease is mainly explained by certain equipment being fully depreciated. Depreciation and amortization largely related to equipment, as well as intangible assets including technology and customer relationships.the result of the adoption of IFRS 16 on January 1, 2019.
Other Expensesexpenses
Our other expenses increased to US$60.032.2 million in 20182019 from US$58.728.4 million in 2017,2018, representing an increase of 2.2%14.2%. Within the category, audit, legal and other advisory services increased from US$8.3 million in 2018 to US$8.5 million in 2019. Our travel expenses also increased from US$2.1 million in 2018 to US$4.0 million in 2019, rent and other office expenses grew from US$4.6 million in 2018 to US$5.4 million in 2019 and lastly software license fees increased from US$1.8 million in 2018 to US$2.6 million in 2019, all due to the scale of operations. This increase was partly offset by a base ofdecrease in hosting expenses from US$3.510.2 million in 2018 to US$6.9 million in 2019, primarily as a privately held company in 2017 to US$8.3 million following our IPO and associated preparations. Marketing and distribution expenses increased slightly, up 2.0% to US$31.6 million. The increases were partially offset by reductions in other expenses inresult of the category, including a 16.2% reductionadoption of hosting cost from US$12.1 million to US$10.1 million.IFRS 16 on January 1, 2019.
Operating Profit (loss)profit
As a result of the foregoing, we recorded an operating profit of US$45.320.6 million in 2018,2019, representing an operating margin of 26.3%. We recorded6.2%, compared to an operating profit of US$10.245.3 million in 2017, representing2018 and an operating margin of 7.9%26.3%.
LossShare of net loss from Associatesassociates and Joint Venturesjoint ventures
Our share of loss from associates and joint ventures was US$3.8 million in 2019 compared to a share of net loss of US$3.2 million in 2018, and US$1.7 million in 2017. Our loss in 2018 was related to our investments in two joint ventures, nHorizon Innovation (Beijing) Software Ltd. and Powerbets Holding Limited, and an associate, Opay Digital Services Limited.2018. See Note 2927 to our consolidated financial statements included elsewhere in this annual report for more details on the financial performance of each investee.
Change in fair value of preferred shares in associates
Our gain in fair value of preferred shares in 2019 was related to increased valuations of our preferred shares in OPay and StarMaker, by US$33.9 million and US$4.0 million, respectively. See Note 16 to our consolidated financial statements included elsewhere in this annual report for more details on the valuation of the preferred shares.
Net Finance Income (Expense)finance income (expense)
We recorded a total net finance income of US$8.8 million in 2019, compared to net finance expense of US$0.4 million in 2018, compared to net finance expense of US$1.1 million in 2017.2018. The 20182019 result consisted of finance income of US$1.6 million primarily driven byincluded interest income from the IPO proceeds, offset by finance expense of US$1.7 million primarilyas well as gains related to a decrease in the fair value of financial instruments, and foreign exchange loss of US$0.4 million.our marketable securities.
Income Tax Expensestax expense
We recorded an income tax expense of US$6.55.6 million in 2018.2019. The effective tax rate, expressed as the percentage of income tax expenses to net income before income taxes, was 15.6%8.8%, compared to an income tax expense of US$1.46.5 million in 2017,2018, representing an effective tax rate of 19.2%15.6%. The increaseddecrease in the tax expense in 20182019 was mainly driven mainly by higher taxable profits, partially offset bynon-taxable gains related to our associates and joint ventures, changes in deferred tax assets and liabilities and reductions in applicable tax rates. See Note 2425 to our consolidated financial statements included elsewhere in this annual report for more detail.
Net Income (Loss) for the Yearincome
As a result of the foregoing, we recorded net income of US$57.9 million for 2019, compared to US$35.2 million in 2018, compared to US$6.1 million for 2017.
2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenue and Other Income
We had revenue of US$128.9 million in 2017, compared to US$18.8 million in 2016, or US$107.3 million on a pro forma consolidated basis, marking an increase of 20.1% on a pro forma consolidated basis. This increase was driven by both search and advertising revenue.
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In 2017, we recorded other income of US$5.5 million. This included proceeds related to divestment of intellectual property.
Operating Expenses
We had total operating expenses of US$124.1 million in 2017, compared to US$28.6 million in 2016, or US$118.6 million on a pro forma consolidated basis. Our total operating expenses as a percentage of total revenue decreased to 96.3% in 2017 from 110.6% of total revenues of US$107.3 million in 2016 on a pro forma consolidated basis.
Cost of Revenue
Our cost of revenue amounted to US$0.5 million, or US$1.1 million on a pro forma consolidated basis, in 2016 and US$1.3 million in 2017.
Personnel Expenses including Share-Based Remuneration
Our personnel expenses including share-based remuneration increased to US$44.3 million in 2017 from US$6.0 million in 2016, or US$41.5 million in 2016 on a pro forma consolidated basis, representing an increase of 6.9% on a pro forma consolidated basis. However, within this category, share-based remuneration increased from US$0.9 million on a pro forma consolidated basis in 2016 to US$9.5 million in 2017, whereas personnel expenses excluding share-based remuneration decreased from US$40.6 million on a pro forma consolidated basis in 2016 to US$34.8 million in 2017, representing a decrease of 14.1% on a pro forma consolidated basis, as a result of the restructuring carried out in late 2016 and early 2017 offsetting our investment in hiring additional product development personnel.
Depreciation and Amortization
We had depreciation and amortization of US$16.6 million in 2017, compared to US$3.1 million in 2016, or US$16.7 million on a pro forma consolidated basis, representing a decrease of 0.6% on pro forma consolidated basis. Depreciation and amortization largely related to equipment, as well as intangible assets including technology and customer relationships.
Other Expenses
Our other expenses increased to US$58.7 million in 2017 from US$19.0 million in 2016, or increased by 5.8% from US$55.4 million in 2016 on a pro forma consolidated basis. Marketing and distribution represented over half of other expenses, and was relatively unchanged on a pro forma consolidated basis. The pro forma increase was largely driven by an increase in hosting expenses as we expanded our business and opened new data centers in 2017, as well as an increase in audit, legal and other advisory services as we carried out our first full year of operations. Partially offsetting the above mentioned increases, we were able to reduce travel costs of US$2.9 million and other miscellaneous costs of US$4.8 million, both on a pro forma consolidated basis in 2016, by US$1.3 million in the aggregate, to US$1.8 million and US$4.6 million in 2017, respectively.
Operating Profit (loss)
As a result of the foregoing, we recorded an operating profit of US$10.2 million in 2017, representing an operating margin of 7.9%. We recorded an operating loss of US$9.8 million in 2016, or a loss of US$11.3 million on a pro forma consolidated basis.
Loss from Associates and Joint Ventures
Our loss from associates and joint ventures was US$0.2 million in 2016, or US$2.9 million on a pro forma consolidated basis, and US$1.7 million in 2017. Our loss in 2016 was related to the net loss from our investment in one joint venture, nHorizon Innovation (Beijing) Software Ltd. Our loss from associates and joint ventures in 2017 was related to the net loss from our investments in two joint ventures, nHorizon Innovation (Beijing) Software Ltd. and Powerbets Holding Limited, and an associate, Opay Digital Services Limited.
Net Finance Income (Expense)
We recorded total net finance income of US$0.2 million in 2016, caused by net foreign exchange gain of the same amount. We recorded a net finance expense of US$2.4 million in 2016 on a pro forma consolidated basis, or 2.2% of our revenue of US$107.3 million on a pro forma consolidated basis, caused by finance expense of US$1.4 million and net foreign exchange loss of US$1.0 million. We recorded net finance expense of US$1.1 million in 2017, or 0.8% of our revenue, driven by net foreign exchange loss of US$1.9 million and finance expense of US$0.2 million, which were partially offset by net finance income of US$1.1 million predominantly from a change in the estimated fair value of a variable liability to Otello Corporation ASA.
Income Tax Benefit (Expenses)
We recorded an income tax benefit of US$2.1 million in 2016. We recorded an income tax benefit of US$3.9 million in 2016 on a pro forma consolidated basis, primarily because the Group as a whole did not generate profit in 2016 and based upon our expectation that future taxable income will be sufficient to enable us to utilize the corresponding deferred tax asset. The tax benefit in 2016 was also impacted by a change in the Norwegian statutory tax rate from 25% to 24% in December 2016 which reduced net deferred tax liabilities as of December 31, 2016. We recorded income tax expense of US$1.4 million in 2017, and the effective tax rate in 2017, as the percentage of income tax expenses to net income before income taxes, was 19.2% due to non-taxable currency effects, other gains and the impact of the reduction in the Norwegian statutory tax rate from 24% to 23% in December 2017, which reduced net deferred tax liabilities as of December 31, 2017, offset by the non-recognition of certain deferred tax assets.
Net Income (Loss) for the Year
As a result of the foregoing, we incurred a net loss of US$7.7 million in 2016, or a net loss of US$12.7 million in 2016 on a pro forma consolidated basis, and recorded a net income of US$6.1 million for 2017.
Non-IFRS Financial Measures
To supplement our consolidated financial statements, which are prepared and presented in accordance with IFRS, we use adjusted EBITDA and adjusted net income (loss), both non-IFRS financial measures, as described below, to understand and evaluate our core operating performance. These non-IFRS financial measures, which may differ from similarly titled measures used by other companies, are presented to enhance investors’ overall understanding of our financial performance and should not be considered a substitute for, or superior to, the financial information prepared and presented in accordance with IFRS.
We define adjusted EBITDA as net income (loss) excluding income tax expense (benefit), total net financial loss (income), share of net loss (income) of associates and joint ventures, change in fair value of preferred shares in associates, restructuring costs (though no such cost in below presented periods), depreciation and amortization, share-based remuneration and expensed costs related to our recent initial public offering, less other income. We define adjusted net income (loss) as net income (loss) excluding share-based remuneration, amortization cost related to acquired intangible assets, and expensed costs related to our recent initial public offering, adjusted for the associated tax benefit related to such items. We believe that adjusted EBITDA and adjusted net income (loss) provide useful information to investors and others in understanding and evaluating our operating results. These non-IFRS financial measures adjust for the impact of items that we do not consider indicative of the operational performance of our business. While we believe that these non-IFRS financial measures are useful in evaluating our business, this information should be considered as supplemental in nature and is not meant as a substitute for the related financial information prepared and presented in accordance with IFRS.
The following table presents reconciliations of adjusted EBITDA and adjusted net income (loss) to net income (loss), the most directly comparable IFRS financial measures, for the periods indicated.
2016 | 2017 | 2018 | For the year ended December 31, | |||||||||||||||||||||||||
Predecessor for the period from January 1, 2016 to November 3, 2016 | Successor Group from inception on July 26, 2016 to December 31, 2016 | Unaudited pro forma consolidated Group for the year ended December 31, 2016 (1) | Successor Group for the year ended December 31, 2017 | Successor Group for the year ended December 31, 2018 (5) | 2018 | 2019 (2) | ||||||||||||||||||||||
(US$ in thousands) | (US$ in thousands) | |||||||||||||||||||||||||||
Reconciliation of net income (loss) to adjusted EBITDA: | ||||||||||||||||||||||||||||
Net income (loss) | (8,106 | ) | (7,704 | ) | (12,744 | ) | 6,064 | 35,160 | ||||||||||||||||||||
Add: Income tax expense (benefit) | (743 | ) | (2,096 | ) | (3,850 | ) | 1,440 | 6,481 | ||||||||||||||||||||
Net income | 35,160 | 57,899 | ||||||||||||||||||||||||||
Add: Income tax expense | 6,481 | 5,602 | ||||||||||||||||||||||||||
Add: Total net financial loss (income) | 2,590 | (225 | ) | 2,365 | 1,065 | 412 | 412 | (8,756 | ) | |||||||||||||||||||
Add: Share of net loss (income) of associates and joint ventures | 2,664 | 237 | 2,901 | 1,670 | 3,248 | 3,248 | 3,818 | |||||||||||||||||||||
Add: Restructuring costs (2) | 3,911 | — | 3,911 | 3,240 | - | |||||||||||||||||||||||
| Add: Change in fair value of preferred shares in associates | - | (37,900 | ) | |||||||||||||||||||||||||
Add: Depreciation and amortization | 9,586 | 3,082 | 16,712 | 16,604 | 12,694 | 12,694 | 18,933 | |||||||||||||||||||||
Add: Share-based remuneration | 914 | — | 914 | 9,496 | 4,846 | 4,846 | 5,928 | |||||||||||||||||||||
Add: Expensed IPO related costs | 2,952 | 2,952 | - | |||||||||||||||||||||||||
Less: Other income (3) | — | — | — | (5,460 | ) | --- | ||||||||||||||||||||||
Adjusted EBITDA | 10,816 | (6,706 | ) | 10,210 | 34,119 | 65,794 | 65,794 | 45,523 | ||||||||||||||||||||
Reconciliation of net income (loss) to adjusted net income | ||||||||||||||||||||||||||||
Net income (loss) | (8,106 | ) | (7,704 | ) | (12,744 | ) | 6,064 | 35,160 | ||||||||||||||||||||
Reconciliation of net income to adjusted net income | ||||||||||||||||||||||||||||
Net income | 35,160 | 57,899 | ||||||||||||||||||||||||||
Add: Share-based remuneration | 914 | — | 914 | 9,496 | 4,846 | 4,846 | 5,928 | |||||||||||||||||||||
Add: Opera acquisition amortization | — | 853 | 5,120 | 5,120 | 5,120 | 5,120 | 5,120 | |||||||||||||||||||||
Add: Expensed IPO related costs | — | — | — | — | 2,952 | 2,952 | - | |||||||||||||||||||||
Income tax adjustment (4) | (37 | ) | (1,413 | ) | (2,516 | ) | (2,884 | ) | (1,943 | ) | ||||||||||||||||||
Adjusted net income (loss) | (7,229 | ) | (8,264 | ) | (9,226 | ) | 17,796 | 46,136 | ||||||||||||||||||||
Income tax adjustment (1) | (1,943 | ) | (1,311 | ) | ||||||||||||||||||||||||
Adjusted net income | 46,136 | 67,635 | ||||||||||||||||||||||||||
(1) |
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| Reversal of the income tax benefit related to the social security cost component of share-based remuneration, deferred taxes on the amortization of acquired intangible assets and expensed IPO related costs. |
| Effective January 1, |
B. | Liquidity and Capital Resources |
Cash Flows and Working Capital
In addition to net proceeds of US$167.8 million we received from our initial public offering in the third quarter of 2018 and US$82.6 million from our follow-on offering in the third quarter of 2019, our principal source of liquidity has been cash generated from our operating activities. As of December 31, 2016, 2017,2018 and 2018,2019, we had US$34.2 million, US$33.2177.9 million and US$177.9139.5 million, respectively, in cash and cash equivalents. Cash and cash equivalents consist of cash on hand, checking and demand deposits, cash equivalents and restricted cash. cash other than cash used as collateral for our subsidiaries’ local bank debts. Our microlending business is capital intensive by nature. As we have scaled this business in 2019, we have used a larger portion of our balance of cash and cash equivalents to finance this business, either directly or via local credit institutions. See Note 19 to our consolidated financial statements included elsewhere in this annual report for more information on our Capital Management.
Our cash and cash equivalents are primarily denominated in U.S. Dollars, with limited amounts held in Euro, Norwegian Krone and other local currencies of the markets where we operate. We intend to finance our future working capital requirements and capital expenditures primarily from cash generated from operating activities as well as existing cash and cash equivalents. We believe that our current available cash and cash equivalents will be sufficient to meet our working capital requirements and capital expenditures in the ordinary course of business for the next 12 months.
The following table sets forth a summary of our cash flows for the periods indicated.
For the year ended December 31, | ||||||||||||||||||||
Successor Group from Inception on July 26, 2016 to December 31, 2016 | Successor Group for the year ended December 31, 2017 | Successor Group for the year ended December 31, 2018 | 2018 | 2019 | ||||||||||||||||
(US$ in thousands) | (US$ in thousands) | |||||||||||||||||||
Summary Consolidated Cash Flow Data: | ||||||||||||||||||||
Net cash provided by operating activities | 1,697 | 11,653 | 33,828 | |||||||||||||||||
Net cash provided by (used in) operating activities | 33,828 | (44,464 | ) | |||||||||||||||||
Net cash provided by (used in) investing activities | 25,538 | (3,305 | ) | (47,250 | ) | (47,250 | ) | (106,987 | ) | |||||||||||
Net cash provided by (used in) financing activities | 6,946 | (10,031 | ) | 158,946 | ||||||||||||||||
Net cash provided by financing activities | 158,946 | 113,200 | ||||||||||||||||||
Net increase (decrease) in cash and cash equivalents | 34,181 | (1,683 | ) | 145,524 | 145,524 | (38,248 | ) | |||||||||||||
Cash and cash equivalents at beginning of the period | — | 34,181 | 33,207 | 33,207 | 177,873 | |||||||||||||||
Effects of exchange rate change on cash and cash equivalents | — | 709 | (857 | ) | (857 | ) | (137 | ) | ||||||||||||
Cash and cash equivalents at end of the period | 34,181 | 33,207 | 177,873 | 177,873 | 139,487 | |||||||||||||||
Operating Activities
Net cash provided byused in operating activities was US$33.844.5 million in 2018.2019. This amount primarily represents net income before income taxes of US$41.663.5 million, adjusted for depreciation and amortization of US$12.718.9 million, equity cost of share-based remuneration of US$6.45.1 million, and share of losses from associates and joint ventures of US$3.23.8 million, and change in fair value of preferred shares in associates of US$37.9 million. Income taxes paid during the year of US$4.39.9 million is mainly related to operations in India, Norway and Ireland. DuringOperating cash flow was substantially affected by the year thereincrease in our net loan book due to the scaling of our microlending operations, reducing cash by US$90.0 million. Following the growth of our business, operating cash flow was reduced by an increase in trade and other receivables of US$9.614.2 million, driven mainlyincreased pre-payments of US$11.4 million (of which US$6.3 million related to marketing, distribution and promotion services), and retail inventory of US$7.8 million, however, combined these were more than offset by increased turnover, and a decreaseour increase in trade and other payables of US$5.6 million. The cash flow from operating activities is also offset by an increase in prepayments of US$12.2 million, of which US$11.1 million is related to marketing, distribution and promotion services. Additional information about this transaction is provided in Notes 29 and 30 to our consolidated financial statements included elsewhere in this annual report.
Net cash provided by operating activities was US$11.7 million in 2017. This amount primarily represents net income before income taxes of US$7.5 million, adjustments for depreciation and amortization of US$16.6 million and equity cost of share-based remuneration of US$7.0 million, partially offset by a decrease in trade and other payables of US$8.5 million (of which US$4.7 million relates to payment of transaction costs associated with the acquisition of the Predecessor) and net gain from disposals of equipment and intangible assets of US$5.5 million, relating to a sale of intellectual property.
Net cash provided by operating activities for the Successor was US$1.7 million from our inception on July 26, 2016 to December 31, 2016. This amount primarily represents an increase in accounts and other payables of US$11.9 million and an adjustment for depreciation and amortization of US$3.1 million, partially offset by our loss before tax of US$9.8 million and an increase in accounts and other receivables of US$3.939.2 million.
Investing Activities
Net cash used in investing activities was US$47.3107.0 million in 2018,2019, which was primarily attributable to an increase of deposit of collateral for our Indian subsidiary's loan facility of US$52.9 million, and net purchases of marketable securities totaling US$35.3 million. Furthermore, we purchased equipment for US$8.9 million, and had development expenditures totaling US$4.2 million. In addition, we made investments in, and provided loans provided to associates and joint ventures, and associated companies of US$32.96.6 million. This mainly related to the purchase of preferred shares of StarMaker Inc. for a consideration of US$30.0 million in November 2018. NetThe cash used in investing activities also includes the acquisition of a microfinance business for a consideration of US$9.5 million in December 2018, less cash acquired in the transaction of US$1.6 million.
Net cash used in investing activities was US$3.3 million in 2017, which was primarily attributable to investments and loans to joint ventures and associates of US$6.9 million, purchase of equipment of US$3.5 million and capitalized development costs of US$3.5 million,outflows were partially offset by proceeds from salesrepayment of equipment and intangibles of US$5.7 million, and the release of US$5.4 million held in escrow to secure loans to nHorizon Innovation (Beijing) Software Ltd., aassociates and joint ventureventures of ours.
Net cash provided by investing activities for the Successor was US$25.5 million from our inception on July 26, 2016 to December 31, 2016, which was primarily attributable to cash acquired from the acquisition of the Predecessor of US$31.7 million, less investments in nHorizon Innovation (Beijing) Software Ltd. of US$5.50.7 million.
Financing Activities
Net cash provided by financing activities was US$158.9113.2 million in 2018,2019, which was attributable to net proceeds of US$170.882.6 million from our initial public offering,issues of equity instruments, less transaction costs of US$3.01.4 million. Proceeds from loans and borrowing contributed with US$43.2 million, acquisitionpredominantly relating to our Indian subsidiary partially funding its growth in loan book by obtaining local bank debt which we guarantee through international escrow (as described in the above paragraph). These items were partially offset by share repurchases of treasury shares of US$4.85.8 million, and repayment of loans and financial leases, including interest, of US$4.05.4 million.
NetCompared to our fourth quarter earnings release filed on Form 6-K on February 25, 2020, we have reclassified certain items, within the full-year cash used inflow components. As a consequence, operating cash flow was reduced by US$3.1 million, investing cash flow was increased by US$1.8 million and financing activitiescash flow was increased by US$10.0 million in 2017, which was attributable to payment1.3 million. The net effect of finance lease liabilities of US$5.7 million related to certain financial leases to host our servers and repayments of loans and borrowings of US$4.4 million related to the server financing loan from Dell Bank International d.a.c.
Net cash provided by financing activities was US$6.9 million from our inception on July 26, 2016 to December 31, 2016, which was primarily attributable to proceeds from loans and borrowings of US$5.5 million related to a short-term loan from Otello Corporation ASA and proceeds from investors of US$1.6 million.
The cash used in the purchase of Opera Software ASthese reclassifications is not presented in the Group’s consolidated statements of cash flows as it was funded directly by our members and assigned to the Group.zero.
Capital Expenditures
We made capital expenditures for the Successor of US$0.6 million from our inception from July 26, 2016 to December 31, 2016, US$7.0 million for the year ended December 31, 2017 and US$7.3 million and US$13.0 million in 2018.2018 and 2019, respectively. In these periods, our capital expenditures were used for purchase of equipment and capitalized development cost.
C. | Research and Development, Patents and Licenses, etc. |
See “Item 4. Information on the Company—B. Business Overview—Technology.” and “Item 4. Information on the Company—B. Business Overview—Intellectual Property.”
D. | Trend Information |
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the period from January 1, 20182019 to December 31, 20182019 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that would cause reported financial information not necessarily to be indicative of future operating results or financial conditions.
E. | Off-balance Sheet Arrangements |
As of December 31, 2018,2019, we did not have any off-balance sheet arrangements that had or were reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that isare material to investors.
F. | Tabular Disclosure of Contractual Obligations |
The following table sets forth our contractual obligations as of December 31, 2018.2019.
Payment Due by Period | ||||||||||||||||
Total | Less Than 1 Year | 1-5 Years | More than 5 Years | |||||||||||||
(US$ in thousands) | ||||||||||||||||
Debt obligations | 4,532 | 2,294 | 2,238 | — | ||||||||||||
Operating lease obligations | 7,790 | 3,249 | 4,541 | — | ||||||||||||
Finance lease liabilities (1) | 229 | 196 | 33 | — | ||||||||||||
Total contractual commitments | 12,551 | 5,739 | 6,812 | — | ||||||||||||
Payment Due by Period | ||||||||||||||||
Total | Less Than 1 Year | 1-5 Years | More than 5 Years | |||||||||||||
(US$ in thousands) | ||||||||||||||||
Trade and other payables | 57,125 | 57,125 | - | - | ||||||||||||
Lease liabilities (1) | 13,858 | 4,930 | 8,928 | - | ||||||||||||
Interest-bearing loans including interest | 45,143 | 43,303 | 1,840 | - | ||||||||||||
Other liabilities | 15,279 | 15,142 | 137 | - | ||||||||||||
Total contractual commitments | 131,405 | 120,500 | 10,905 | - | ||||||||||||
(1) | Represents mainly leases of office properties and server equipment for hosting |
In January 2017, weA guarantee has been made a guaranteeby us in favor of Dell Bank International d.a.c. ("Dell") as a security for any and all our present and future finance lease liabilities of our subsidiaries as(as the lessee of serverslessee) to Dell Financial Services owing from time to time.Dell. This guarantee is (i) limited to a principal amount of approximately US$11.6 million,11,382 thousand, with the addition of any interests, costs and/or expenses accruing on the liabilities and/or as a result of the lessee’swe non-fulfilment of the liabilities; (ii)liabilities. The guarantee is independent and separate from our obligations as the obligations of the lessee;lessee and (iii)is valid for ten10 years from January 17, 2017.
In 2019, we obtained a credit facility from a financial institution. Loans under the credit facility, denominated in Indian Rupee, were used to partially fund the microlending business in India. As of December 31, 2019, the total amount of loans under the credit facility was US$42.2 million. See Notes 17 and 18 to our consolidated financial statements included elsewhere in this annual report for additional details.
In 2019, we entered into an agreement with Putu Novi Financing Corporation, a related party, under which we provided a revolving credit facility limited to US$10 million and would be entitled to interest and gross profit sharing of the borrower’s operations. The credit facility was provided for a period of 18 months starting on December 18, 2019. As of December 31, 2019, no loans were provided under the credit facility. See Note 28 to our consolidated financial statements included elsewhere in this annual report for additional details.
In 2018, we provided a revolving credit facility of US$6 million to Powerbets, a related party. As of December 31, 2019, a total of US$3.0 million was drawn under the credit facility. See Note 28 to our consolidated financial statements included elsewhere in this annual report for more information.
Other than those shown above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of December 31, 2018.2019.
G. | Safe Harbor |
See “Forward-Looking Statements” at the beginning of this annual report.
DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
A. | Directors and Senior Management |
The following table provides information regarding our directors and executive officers as of the date of this annual report.
Directors and Executive Officers | Age | Position/Title | |||
Yahui Zhou |
| Chairman of the Board and Chief Executive Officer | |||
Hongyi Zhou |
| Director | |||
| 40 |
| Director | ||
Lori Wheeler Næss |
| Independent Director | |||
Trond Riiber Knudsen |
| Independent Director | |||
James Liu | 49 | Independent Director | |||
Lin Song | 39 | Chief Operating Officer | |||
Frode Jacobsen |
| Chief Financial Officer | |||
|
|
|
Yahui Zhou has served as our chairman and chief executive officer since July 2016. Mr. Zhou has also served as the chairman of Beijing Kunlun, a global internet company listed on the Shenzhen Stock Exchange, since March 2011, and an executive director and general manager of Beijing Kunlun from March 2008 to March 2011. He served as general manager of Beijing JiNaiTe Internet Technology Co., Ltd. from March 2007 to March 2008. From November 2005 to March 2007, Mr. Zhou was an executive officer in charge of new business development at RenRen Inc., a NYSE-listed company. From September 2000 to January 2004, Mr. Zhou was general manager of Beijing Huoshen Technology Co., Ltd. Mr. Zhou received his bachelor’s degree in mechanical engineering and his master’s degree in optical engineering from Tsinghua University in 1999 and 2006, respectively.
Hongyi Zhou has been a member of our board of directors since November 2016. Mr. Zhou has twenty years of managerial and operational experience in China’s internet industry. Mr. Zhou co-founded Qihoo 360 Technology Co. Ltd. and has been serving as chairman of the board of Qihoo 360 Technology Co. Ltd. and its de facto successor 360 Security Technology Inc. (SH: 601360). Prior to founding Qihoo 360 Technology Co., Ltd., Mr. Zhou was a partner at IDG Ventures Capital since September 2005, a global network of venture capital funds, where he assisted small- to medium-sized software companies source funds to support their growth. Mr. Zhou was the chief executive officer of Yahoo! China from January 2004 to August 2005. In 1998, Mr. Zhou founded www.3721.com, a company in the internet search and online marketing businesses in China, and served as its chairman and chief executive officer until www.3721.com was acquired by Yahoo! China in January 2004. Mr. Zhou also serves as a director of a number of privately owned companies based in China. Mr. Zhou received his bachelor’s degree in computer software in 1992 and his master’s degree in system engineering in 1995 from Xi’an Jiaotong University.
Han FangTian Jin has been a member of our board of directors since March 2018. He has beenDecember 2019. Mr. Jin held positions of the vice presidentgeneral manager and secretary of Kunlun Tech Limited, which operates as an internet investment corporation, since 2013. Mr. Fang also served as vice presidentthe board of Beijing Kunlun Tech Co., Ltd,Ltd. (CH: 300418), a global internet company listed on the Shenzhen Stock Exchange, from 2015 to 2018, and has been serving as a director since November 2018. Prior to that, Mr. Jin had six years of experience in the banking industry. He held the positions of vice president of the customer development department of Nanjing Bank Beijing branch from 2010 to 2011 and vice president of the bank’s Beichuan sub-branch from 2011 to 2018. He worked from 2003 to 20072015, and he also served as a senior research and development engineerkey account manager of Oak Pacific Interactive Corporation, which provides internet services and operates social networks. He alsoAgricultural Bank of China Beijing branch from 2009 to 2010. Before that, Mr. Jin worked as a senior research and development engineer for both AsiaInfo, Inc.at Heyi Ceramics (Shanghai) Co., Ltd., a softwarehigh-end ceramics manufacturing company, where he served as the managing director and IT services company, and Turbo Linux Inc., a linux based solutions provider,supervisor from 20022000 to 2003 and from 1998 to 2000, respectively. He was employed by the Institute of High Energy Physics of the Chinese Academy of Sciences as an engineer from 1995 to 1998.2009. Mr. Fang graduated from the University of Science and Technology of China in 1995, with aJin received his bachelor’s degree in nuclear technology.marketing management from Upper Iowa University in 2006.
Lori Wheeler Næss has served as our independent director since July 2018. She has served as a director of the technical department of PricewaterhouseCoopers, a global auditing service provider, leading IFRS reviews for companies listed in Oslo from September 2012 to June 2015. Prior to that, Ms. Næss served as a senior advisor of the Section for Prospectuses and Financial Reporting of The Financial Supervisory Authority of Norway, a Norwegian government agency responsible for the supervision of financial companies from January 2011 to September 2012. She served as an audit director and manager for US GAAP and SEC Reporting at PricewaterhouseCoopers and its predecessor Coopers & Lybrand at various offices in the United States, Norway and Germany from September 1994 to January 2011. Ms. Næss has also served as a board member and the audit committee chair of Golar LNG Limited, a Nasdaq-listed liquefied natural gas shipping company and its Nasdaq-listed limited partner, Golar LNG Partners Limited, since March 2016, as well as Klaveness Combination Carriers AS,ASA, a privately held shipping company listed on the Oslo Stock Exchange in Norway. Ms. Næss is a U.S. Certified Public Accountant.Accountant (inactive). She received her bachelor’s degree in business administration in 1994 and her master’s degree in accounting in 1994 from the University of Michigan.
Trond Riiber Knudsen has served as our independent director since July 2018. Mr. Knudsen has served as the founder and CEO of TRK Group AS, an Oslo-based investment and advisory firm since June 2015. He worked of McKinsey & Company, a management consulting firm and served as a senior partner with responsibility for the company’s marketing and sales practice since August 1992 to June 2015. Mr. Knudsen received his sivilingeniør (equivalent of a mastermaster’s of science degree) in structural engineering from the Norwegian University of Science and Technology in 1987 and a master’s degree in business administration from Harvard University in 1992.
James Liu has served as our independent director since July 2019. Mr. Liu had over 20 years of experience with China’s high growth internet and technologies companies. From January 2008 to now, Mr. Liu served as an executive director and chief operating officer of RenRen Inc., a NYSE-listed company. Prior to that, in September 2003, he founded UUMe.com (which was later acquired by RenRen in May 2005), one of the earliest social networking service websites in China. Previously, from February 2002 to August 2003, Mr. Liu served as the founding product management director at Fortinet (NASDAQ: FTNT), a NASDAQ listed network security solution provider. From July 2000 to January 2002, he served as a product manager at Siebel Systems Inc., a U.S. software company. Mr. Liu started his career as a management consultant at Boston Consulting Group in China from September 1995 to August 1998. Mr. Liu earned his bachelor’s degree in computer science from Shanghai Jiao Tong University in 1995 and later received his MBA degree from Stanford University in 2000.
Lin Song has served as our chief operating officer since March 2017. He has worked for our group beginning in 2002 in Oslo, Norway. Mr. Song has an engineering background and has served in various roles inside our group, including project manager of one of our group’s earliest initiatives to enable full web browsing on mobile devices and as director of engineering delivery. Later on, he served as general manager of Opera’s subsidiary in China and assisted in the establishment of Opera’s R&D center in Beijing. Mr. Song obtained a bachelor’s degree in information systems from the University of International Business and Economics in 2004.
Frode Jacobsen has served as the chief financial officer of our group since April 2016. Prior to becoming our chief financial officer, he has worked as the senior vice president responsible for strategic initiatives beginning in February 2015 and as the senior director for corporate development beginning in January 2013. Prior to joining our group, Mr. Jacobsen worked for McKinsey & Company, a management consulting firm which conducts qualitative and quantitative analyses to inform management decisions across the public and private sectors, beginning in August 2008 and served as engagement manager before he left the position in January 2013. He graduated with a master’s degree in management from HEC Paris in 2008 and obtained his bachelor’s degree in economics and business administration from Norwegian School of Economics in 2006. Mr. Jacobsen currently serves on the board of directors and audit committee of Otello Corporation ASA, a Norwegian public company.
Lin Song has served as the chief operating officer of our group since March 2017. He has worked for our group beginning in 2002 in Oslo, Norway. Mr. Song has an engineering background and has served in various roles inside our group, including project manager of one of our group’s earliest initiatives to enable full web browsing on mobile devices and as director of engineering delivery. Later on, he served as general manager of Opera’s subsidiary in China and assisted in the establishment of Opera’s R&D center in Beijing. Mr. Song obtained a bachelor’s degree in information systems from the University of International Business and Economics in 2004.
B. | Compensation |
Compensation of Directors and Executive Officers
In 2016, 2017, 2018 and 2018,2019, we paid an aggregate of US$0.51.0 million, US$1.00.9 million and US$0.92.2 million, respectively, in cash and benefits to our directors and executive officers. Our chairman and chief executive officer, Mr. Yahui Zhou, waived receiving any salary in 2017 and 2018. From and including 2019, however, our board approved the payment of a salary of US$1.0 million per annum to him. Mr. Yahui Zhou recused himself from the board’s decision on the issue. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. We have no service contracts with any of our directors providing for benefits upon termination of employment.
Share Incentive Plan
We maintain share incentive plan in order to attract, motivate, retain and reward talent, provide additional incentives to our officers, employees, directors and other eligible persons, and promote the success of our business and the interests of our shareholders.
We adopted the 2017 Restricted Share Unit Plan on April 7, 2017 and later adopted an Amended and Restated Share Incentive Plan on January 10, 2019 (the “Plan”) to promote the success of our business and the interests of our employees and shareholders by providing long term incentives in the form of Restricted Share Units (“RSUs”) or Options (and together with the RSUs, the “Awards”) to attract, motivate, retain and reward our officers, employees, directors and other eligible persons and to link their interests with those of our shareholders.
Under this Plan, up to a maximum of 20,000,000 ordinary shares are available for Awards, corresponding to 10,000,000 ADSs. Each vested RSU (as reported) entitles the participant of the Plan to receive 1 ADS, subject to adjustments for dividend payments. Each vested option entitles the participant of the Plan to purchase 1 ADS at a defined price. As of the date of this annual report, 4,294,132December 31, 2019, 2,983,940 RSUs and Options to purchase 150,000 ordinary sharesADSs have been granted, net of forfeitures.
The following paragraphs summarize the terms of the Plan:
Plan administration. Our compensation committee or executive officers delegated by our compensation committee acts as the plan administrator.
Type of Awards. The Plan permits the award of Options or grant of RSUs singly, in combination or in tandem.
Award Agreement. Each Award is evidenced by an Award agreement between the Award recipient and our Company.
Eligibility. All of our employees are eligible for the grant of Awards under the Plan at the discretion of the compensation committee. A grant of Awards to any member of the compensation committee requires Board approval.
Vesting Schedule and Other Restrictions. The plan administrator has discretion in making adjustment in the individual vesting schedules and other restrictions applicable to the Awards granted under the Plan. The default vesting period is four years, where 20% vests on January 1 of each of the first and second year, and 30% vests on January 1 of each of the third and fourth year. So long as Mr. Yahui Zhou is a member of the Board, he has authority to cancel equity instruments for any participant of this Plan that are scheduled to vest in the current vesting period, based solely on his assessment that such participant’s professional performance has not been in line with the Company’s expectations. The vesting period is set forth in each Award agreement.
Exercise price. The plan administrator has discretion in determining the price of the Awards, subject to a number of limitations. The plan administrator has absolute discretion in making adjustments to the exercise price of Options.
Payment. The plan administrator determines the methods by which payments by any recipient of any Awards under the Plan are made.
Transfer Restrictions. Except as permitted by the plan administrator, and subject to all the transfer restrictions under the applicable laws and regulations and restrictions set forth in the applicable award agreement, all Awards are not transferable or assignable.
Term of the Options. The term of any Option granted under the Plan cannot exceed ten years from its effective date.
The table below sets forth certain information as of the date of this annual report, concerning the outstanding Awards we have granted to our directors and executive officers individually.
Name | Type of Granted | Ordinary Shares | Price (US$/Share) | Date of Grant | Date of | |||||||||||||||||
Yahui Zhou |
|
|
|
|
| - | - | - | ||||||||||||||
Hongyi Zhou | - | - | - | - | - | |||||||||||||||||
|
| - |
|
|
| |||||||||||||||||
|
|
|
|
|
| - | ||||||||||||||||
Trond Riiber Knudsen |
|
| - |
|
|
| - | - | - | |||||||||||||
Lori Wheeler Næss | - | - | - | - | - | |||||||||||||||||
|
| - |
|
| - | - | - | |||||||||||||||
Frode Jacobsen |
| * | * | * | April 2017 | November 2021 | ||||||||||||||||
Lin Song |
| * | * | * | April 2017, December 2019 | November 2021, January 2026 | ||||||||||||||||
* | The outstanding awards held by each of these directors and executive officers represent less than 1% of our total outstanding shares. |
C. | Board |
Our board of directors consists of fivesix directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director who is in any way, whether directly or indirectly, interested in a contract or proposed contract with our company is required to declare the nature of his interest at a meeting of our directors. A general notice given to the directors by any director to the effect that he is a member, shareholder, director, partner, officer or employee of any specified company or firm and is to be regarded as interested in any contract or transaction with that company or firm is deemed a sufficient declaration of interest for the purposes of voting on a resolution in respect to a contract or transaction in which he has an interest, and after such general notice it is not necessary to give special notice relating to any particular transaction. Subject to any separate requirement for audit committee approval under applicable law or the Listing Rules of the Nasdaq Stock Market and disqualification by the chairman of the relevant board meeting, a director may vote in respect of any contract, proposed contract, arrangement or transaction notwithstanding that he may be interested therein and if he does so his vote is counted and he is counted in the quorum at any meeting of the directors at which any such contract, proposed contract, arrangement or transaction is considered, provided that the nature of the interest of any directors in such contract or transaction is disclosed by him at or prior to its consideration and any vote in that matter. Our board of directors may exercise all of the powers of our company to borrow money, to mortgage or charge its undertaking, property and uncalled capital, or any part thereof, and to issue debentures, debenture stock or other securities whenever money is borrowed or as security for any debt, liability or obligation of our company or of any third-party. None of our directors has a service contract with us that provides for benefits upon termination of service.
Committees of the Board of Directors
We have an audit committee, a compensation committee and a corporate governance and nominating committee under the board of directors. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
Audit Committee. Our audit committee consists of Yahui Zhou, Lori Wheeler Næss, and Trond Riiber Knudsen and James Liu, and is chaired by Yahui Zhou. Lori Wheeler Næss and Trond Riiber Knudsen satisfyss. Each of them satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market and meet the independence standards under Rule 10A-3 under the Exchange Act. We rely on the exemption provided by Rule 10A-3 under the Exchange Act, which allows Yahui Zhou to serve on our audit committee for up to one year from the date of effectiveness of our registration statement on Form F-1. We intend to have our audit committee consist solely of independent directors that satisfy the Nasdaq Global Select Market and SEC requirements within one year from the date of the effectiveness of our registration statement on Form F-1. Our board of directors has also determined that Lori Wheeler Næss qualifies as an “audit committee financial expert” within the meaning of the SEC rules and possesses financial sophistication within the meaning of the Listing Rules of the Nasdaq Stock Market. The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
• reviewing and approving all transactions with the Company’s related parties;
• selecting our independent registered public accounting firm and pre-approving all auditing and non-auditing services permitted to be performed by our independent registered public accounting firm;
• reviewing with our independent registered public accounting firm any audit problems or difficulties and management’s response and approving all proposed related party transactions, as defined in Item 404 of Regulation S-K;
• discussing the annual audited financial statements with management and our independent registered public accounting firm;
• periodically reviewing and reassessing the adequacy of our audit committee charter;
• meeting periodically with the management and our internal auditor and our independent registered public accounting firm;
• reporting regularly to the full board of directors;
• reviewing the adequacy and effectiveness of our accounting and integral control policies and procedures and any steps taken to monitor and control major financial risk exposure; and
• such other matters that are specifically delegated to our audit committee by our board of directors from time to time.
Compensation Committee. Our compensation committee consists of Yahui Zhou,Trond Riiber Knudsen, Hongyi Zhou and James Liu, and is chaired by Trond Riiber Knudsen. Trond Riiber Knudsen and is chaired by Yahui Zhou. Trond Riiber Knudsen satisfiesJames Liu satisfy the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market. As a controlled company and foreign private issuer, we have elected to not have our compensation committee consist of entirely independent directors. Our compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated upon. The compensation committee is responsible for, among other things:
• reviewing and approving to the board with respect to the total compensation package for our chief executive officer;
• reviewing the total compensation package for our employees and recommending any proposed changes to our management;
• reviewing and recommending to the board with respect to the compensation of our directors;
• reviewing annually and administering all long-term incentive compensation or equity plans;
• selecting and receiving advice from compensation consultants, legal counsel or other advisors after taking into consideration all factors relevant to that person’s independence from management; and
• programs or similar arrangements, annual bonuses, employee pension and welfare benefit plans.
Corporate Governance and Nominating Committee. Our corporate governance and nominating committee consists of Yahui Zhou, Lori Wheeler Næss, and Trond Riiber Knudsen and James Liu, and is chaired by Yahui Zhou. Lori Wheeler Næss and Trond Riiber Knudsen satisfyJames Liu.Each of them satisfies the “independence” requirements of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market. As a newly listed company, we intend to have our corporate governance and nominating committee consist solely of independent directors within the one year phase in period afforded by Rule 5615(b)(1) of the Listing Rules of the Nasdaq Stock Market. The corporate governance and nominating committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board of directors and its committees. The corporate governance and nominating committee is responsible for, among other things:
• identifying and recommending nominees for election or re-election to our board of directors or for appointment to fill any vacancy;
• reviewing annually with our board of directors its current composition in light of the characteristics of independence, age, skills, experience and availability of service to us;
• advising the board periodically with respect to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to our board of directors on all matters of corporate governance and on any corrective action to be taken; and
• monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly, and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also owe to our company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and articles of association, as amended and restated from time to time. Our company has the right to seek damages if a duty owed by our directors is breached. In limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
The functions and powers of our board of directors include, among others:
• convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
• declaring dividends and distributions;
• appointing officers and determining the term of office of officers;
• exercising the borrowing powers of our company and mortgaging the property of our company; and
• approving the transfer of shares of our company, including the registering of such shares in our share register.
Terms of Directors and Executive Officers
Each of our directors holds office until the expiration of his or her term, as may be provided in a written agreement with our company, and his or her successor has been elected and qualified, until his or her resignation or until his or her office is otherwise vacated in accordance with our articles of association. At each annual general meeting one-third of the directors for the time being (or, if their number is not a multiple of three, the number nearest to but not greater than one-third) shall retire from office by rotation. A retiring director shall be eligible for re-election. All of our executive officers are appointed by and serve at the discretion of our board of directors. Our directors may be appointed or removed from office by an ordinary resolution of shareholders. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found to be or becomes of unsound mind; (iii) resigns by notice in writing to our company; (iv) without special leave of absence from our board of directors, is absent from three consecutive meetings of the board and the board resolves that his office be vacated; (v) is prohibited by law from being a director; or (vi) is removed pursuant to our amended and restated memorandum and articles of association then in effect. The compensation of our directors is determined by the board of directors. There is no mandatory retirement age for directors.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with our executive officers. Each of our executive officers is employed for a continuous term, or a specified time period which will be automatically extended, unless either we or the executive officer gives prior notice to terminate such employment. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, including but not limited to the commitments of any serious or persistent breach or non-observance of the terms and conditions of the employment, conviction of a criminal offense other than one which in the opinion of the board does not affect the executive’s position, willful, disobedience of a lawful and reasonable order, misconduct being inconsistent with the due and faithful discharge of the executive officer’s material duties, fraud or dishonesty, or habitual neglect of his or her duties. An executive officer may terminate his or her employment at any time with a three- to six-month prior written notice.
Each executive officer has agreed to hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use or disclose to any person, corporation or other entity without written consent, any confidential information or trade secrets. Each executive officer has also agreed to disclose in confidence to us all inventions, intellectual and industry property rights and trade secrets which they made, discover, conceive, develop or reduce to practice during the executive officer’s employment with us and to assign to our company all of his or her associated titles, interests, patents, patent rights, copyrights, trade secret rights, trademarks, trademark rights, mask work rights and other intellectual property and rights anywhere in the world which the executive officer may solely or jointly conceive, invent, discover, reduce to practice, create, drive, develop or make, or cause to be conceived, invented, discovered, reduced to practice, created, driven, developed or made, during the period of the executive officer’s employment with us that are either related to our business, actual or our move demonstrably anticipated research or development or any of our products or services being developed, manufactured, marketed, sold, or are related to the scope of the employment or make use of our resources. In addition, all executive officers have agreed to be bound by non-competition and non-solicitation restrictions set forth in their agreements. Each executive officer has agreed to devote all his or her working time and attention to our business and use best efforts to develop our business and interests. Moreover, each executive officer has agreed not to, for a certain period following termination of his or her employment or expiration of the employment agreement: (i) carry on or be engaged, concerned or interested directly or indirectly whether as shareholder, director, employee, partner, agent or otherwise carry on any business in direct competition with us, (ii) solicit or entice away any of our customer, client, representative or agent, or (iii) employ, solicit or entice away or attempt to employ, solicit or entice away any of our officers, managers, consultants or employees.
We have entered into indemnification agreements with our directors and executive officers, pursuant to which we will agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such a director or executive officer.
D. | Employees |
We had 464 and 819 full-time employees as of December 31, 2018. Among these,2018 and 2019, respectively. As of December 31, 2019, 67% of our full-time 65.1% worked inemployees served research and development roles. The following table below showssets forth the number of our employees in each functional area as of December 31, 2018.the date indicated.
Area | R&D | Other | Total | |||||||||
Mobile | 142 | 31 | 173 | |||||||||
PC | 87 | 15 | 102 | |||||||||
Fintech | 13 | 27 | 40 | |||||||||
| Adtech | 13 | — | 13 | |||||||||
| Sales & Commercial | — | 21 | 21 | |||||||||
Hosting & Infrastructure | 14 | 2 | 16 | |||||||||
Corporate | 8 | 42 | 50 | |||||||||
Investee Services (1) | 25 | 24 | 49 | |||||||||
Total | 302 | 162 | 464 | |||||||||
As of December 31, 2019 | ||||||||||||
Area | R&D | Other | Total | |||||||||
Browser | 309 | 29 | 338 | |||||||||
Fintech | 129 | 5 | 134 | |||||||||
AdTech | 52 | 9 | 61 | |||||||||
OList and verticals | 38 | - | 38 | |||||||||
Retail | 13 | 17 | 30 | |||||||||
Sales & Commercial | - | 26 | 26 | |||||||||
Hosting & Infrastructure | 11 | 5 | 16 | |||||||||
Corporate | - | 62 | 62 | |||||||||
Investee Services | - | 114 | 114 | |||||||||
Total | 552 | 267 | 819 | |||||||||
(1) | Refers to employees that are engaged in providing professional services, predominantly for our associate Opay Digital Services Limited (HK). See “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions.” |
We believe we offer our employees competitive compensation packages and a discrimination-free, collegial and creative working environment. As a result, we have generally been able to attract and retain qualified employees and have had limited attrition at senior leadership levels.
We generally enter into standard confidentiality and employment agreements with our management and other employees. These contracts include a non-solicitation covenant, as well as a standard non-compete covenant that prohibits the employee from competing with us, directly or indirectly, during his or her employment and for one year after the termination of his or her employment.
E. | Share Ownership |
The following table sets forth information concerning the beneficial ownership of our ordinary shares as of the date of this annual report for:
● | each of our directors and executive officers; and |
● | each person known to us to beneficially own more than 5% of our ordinary shares. |
The calculations in the table below are based on 220,576,326238,521,354 ordinary shares issued and outstanding as of the date of this annual report.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days of the date of this annual report, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
Directors and Executive Officers: (1) | Ordinary Shares | Percentage of Total | ||||||||||||||
Ordinary Shares | Percentage of Total | |||||||||||||||
Directors and Executive Officers: (1) | ||||||||||||||||
Yahui Zhou (2) | 143,500,000 | 65.1 | % | 143,500,000 | 60.2 | % | ||||||||||
Hongyi Zhou (3) | 46,750,000 | 21.2 | % | 46,750,000 | 19.6 | % | ||||||||||
Han Fang | * | * | ||||||||||||||
Tian Jin | * | * | ||||||||||||||
Lori Wheeler Næss | * | * | * | * | ||||||||||||
Trond Knudsen | * | * | ||||||||||||||
Trond Riiber Knudsen | * | * | ||||||||||||||
James Liu | * | * | ||||||||||||||
Frode Jacobsen | * | * | * | * | ||||||||||||
Lin Song | * | * | * | * | ||||||||||||
All directors and executive officers as a group | ||||||||||||||||
Principal Shareholders: | ||||||||||||||||
Kunlun Tech Limited (4) | 104,500,000 | 47.4 | % | 104,500,000 | 43.8 | % | ||||||||||
Keeneyes Future Holding Inc. (5) | 39,000,000 | 17.7 | % | 39,000,000 | 16.4 | % | ||||||||||
Qifei International Development Co., Ltd (6) | 46,750,000 | 21.2 | % | 46,750,000 | 19.6 | % | ||||||||||
* | Less than 1% of our total outstanding shares. |
† | For each person and group included in this column, percentage ownership is calculated by dividing the number of ordinary shares beneficially owned by such person or group, including shares that such person or group has the right to acquire within 6 days after the date of this annual report, by the sum of (i) |
(1) | Unless otherwise indicated, the business address of our directors and executive officers is |
(2) | Represents (i) 104,500,000 ordinary shares held by Kunlun Tech Limited, a limited liability company incorporated in Hong Kong, which is wholly owned by Beijing Kunlun Tech Co., Ltd., a company in which Yahui Zhou owns |
(3) | Represents 46,750,000 ordinary shares held by Qifei International Development Co. Limited, a limited liability company incorporated in Hong Kong. Qifei International Development Co. Limited, wholly owned by Qisi (HK) Technology Co. Ltd., which in turn is indirectly wholly owned by 360 Security Technology Inc., a company in which Hongyi Zhou serves as the chairman and chief executive officer. |
(4) | Represents 104,500,000 ordinary shares held by Kunlun Tech Limited, a limited liability company incorporated in Hong Kong. Kunlun Tech Limited is wholly owned by Beijing Kunlun Tech Co., Ltd., a company in which Yahui Zhou owns |
(5) | Represents 39,000,000 ordinary shares held by Keeneyes Future Holding Inc., an exempted company established in the Cayman Islands. Keeneyes Future Holding Inc. is wholly owned by Yahui Zhou. The registered address of Keeneyes Future Holding Inc., is P.O. Box 2075, George Town, Grand Cayman, KY1-1105, Cayman Islands. |
(6) | Represents 46,750,000 ordinary shares held by Qifei International Development Co. Limited, a limited liability company incorporated in Hong Kong. Qifei International Development Co. Limited is wholly owned by Qisi (HK) Technology Co. Ltd., which in turn is indirectly wholly owned by 360 Security Technology Inc., a company in which Hongyi Zhou serves as chairman and chief executive officer. The registered address of Qifei International Development Co. Limited is Flat 402, Jardine House, 1 Connaught Place, Central, Hong Kong. |
As of the date of this annual report, we had no ordinary share outstanding that were held by a record holder in the United States. None of our shareholders has informed us that it is affiliated with a registered broker-dealer or is in the business of underwriting securities. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.
MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS |
A. | Major Shareholders |
See “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. | Related Party Transactions |
Transactions with Certain Shareholders
On June 25, 2018, allWe leased office facilities from one of the existing members of Kunhoo Software LLC exchanged their membership interestsour shareholders, Beijing Kunlun Tech, in Kunhoo Software LLC for ordinary shares having substantially the same rights in Opera Limited.Beijing, China.
Transactions with Other Related Parties
StarMaker Interactive Inc., or StarMaker Interactive, is a company controlled by our chief executive officer and chairman. In 2017, we provided a loan of US$0.5 million to StarMaker, which was fully repaid in March 2018.
360 Mobile Security Limited, or 360 Mobile, is a company controlled by our director, Mr. Hongyi Zhou. Our chairman and chief executive officer, Mr. Yahui Zhou, has significant influence over 360 Mobile. We received professional services related to distribution and promotion of our advertising services worldwide from 360 Mobile and recorded expenses of US$9.7 million in 2016 consisting of US$4.5 million in the period from January 1, 2016 to November 3, 2016 and US$5.2 million in the period from November 4, 2016 to December 31, 2016, US$8.4 million in 2017 and US$7.5 million in 2018. We paid 360 Mobile Security Limited a service fee equal to the expenses it incurred in providing us services such as engaging with media owners for negotiation of advertising space booking, buying and payment, subject to an agreed cap. As of December 31, 2016, 2017 and 2018, we had distribution liability of US$5.4 million, US$3.3 million and US$10.4 million, due to 360 Mobile, respectively.
nHorizon Innovation (Beijing) Software Ltd, or nHorizon, is our equity investee. We provided professional services to nHorizon and recorded revenue of US$0.3 million or US$2.6 million on a pro forma consolidated basis in 2016 consisting of US$2.3 million in the period from January 1, 2016 to November 3, 2016 and US$0.3 million in the period from November 4, 2016 to December 31, 2016, US$0.4 million in 2017 and US$18,000 in 2018, respectively. We also received professional services from nHorizon and recorded expenses of US$1.1 million on a pro forma consolidated basis in 2016 consisting of US$1.1 million in the period from January 1, 2016 to November 3, 2016 and nil (US$0) in the period from November 4, 2016 to December 31, 2016, US$0.5 million in 2017 and US$0.9 million in 2018, respectively. As of December 31, 2016, 2017 and 2018, we had professional service receivable of US$0.2 million, US$0.2 million and nil, due from nHorizon, respectively. As of December 31, 2016, 2017 and 2018, we had revenue share liability of US$0.2 million, US$0.2 million and nil, due to nHorizon, respectively. As of December 31, 2017 and 2018, we also had professional service liability of US$0.5 million and US$1.0 million, respectively.
Powerbets Holdings Limited, or Powerbets, is our equity investee.investee, in which we have a 50.1% of ownership interest. On October 4, 2018, we provided a revolving line of credit of US$6.0 million to Powerbets. Prior to this, we had already advanced a sum of US$2.0 million to Powerbets, which was deemed to be advanced under the terms of the credit facility. The principal, together with all accrued and unpaid interest, shall be repaid on the date set by Powerbets’ board of directors.directors, which effectively requires the consent of the other investor in Powerbets. As of December 31, 2018,2019, a total of US$2.63.0 million was drawn under the credit facility. That long-termNo repayment date has been set. This loan is accounted for as part of our long-term interest in Powerbets. Effective from January 1, 2018, we and Powerbets entered into a software development and consultancy agreement. Under the agreement, we effectively sold an online gaming platform to Powerbets for US$1.5 million. We have also provided advertising services to Powerbets. A total of US$2.2 million was recognized as revenue from Powerbets duringin 2019. As of December 31, 2019, the total outstanding balance on trade receivable was US$6.6 million, compared to US$4.4 million as of year-end 2018.
Opay Digital ServicesOPay Limited, (HK), or Opay,OPay, is our equity investee, in which we have 13.1% of ownership interest and our chairman and chief executive officer, and chairman controls through Balder Investment Inc., where certain of our other officers also have financial interests but no voting rights. OpayMr. Yahui Zhou has control or significant influence. OPay is an online payment service provider targeting African users. In 2017,On April 16, 2019, we providedsold 1,242,322 shares in OPay to Wisdom Connection III Holding Inc. for a loanconsideration of US$5.60.5 million, in parallel with OPay’s other founder selling an equal portion of its shares at the same valuation. These transactions were carried out to Opayfacilitate an equity pool for OPay’s employees ahead of new investor funding of the company. On May 27, 2019, we acquired 3,210,617 preference shares in relationOPay for US$7.5 million by converting loan to equity. Moreover, on May 29, 2019, we acquired an additional 1,230,736 preference shares in OPay for US$4.6 million by converting US$2.67 million of debt to equity and by transferring US$1.93 million in cash. By the end of 2019, the accumulated investment made in OPay was US$12.1 million. In addition, on December 18, 2019, we entered into a sales agreement with OPay to sell an inventory of mobile phones for US$6.27 million, which was based on the prevailing market price. The transaction closed in 2020. Furthermore, on July 5, 2019, Blue Ridge Microfinance Bank Limited, or Blue Bridge, our Nigerian subsidiary, entered into a service agreement with Paycom Nigeria Limited, a subsidiary of OPay, to facilitate OPay’s launch of a savings product to its business expansionusers. Under the service agreement, deposits from customers of OPay were transferred to Blue Ridge, which invested the funds in Nigeria, US$5.0 million of which is considered part of the Group’s net investmentfinancial instruments, including microloans offered in Opay. In 2018, we providedNigeria. Blue Ridge paid a loan of US$0.4 million to Opay in relation to its business expansion in Kenya. Both loans are interest-free for the first 60 days and are due and payable upon notice.fixed interest rate on deposits from Paycom. We also provided professionaldevelopment and key management personnel services to OpayOPay, which has been invoiced based on time used and with a 5-8% markup dependent of the type of service. In 2019, we recorded revenue relating to development and personnel services of US$2.822.2 million and US$10.9 million in 2017 and 2018, respectively.As of December 31, 2018, we had US$4.2 million of trade receivable and US$1.8 million loan receivable, due from Opay. Our investment in and relevant transactions with Opay are in line with our business growth strategy and we expect to continue investing in Opay as its business develops. On December 19, 2018, we acquired a microfinance business launched in Kenya from Opay, for a total consideration of US$9.5 million. The acquisition of this microfinance business represents a new user-driven business opportunity that will benefit from our existing reach and scale in African markets.OPay.
StarMaker Inc.,Mobimagic Digital Technology Ltd (formerly known as 360 Mobile Security) and its associated companies, or StarMaker,Mobimagic, is a company controlled by our chairman and chief executive officer, and chairman, Mr. Yahui Zhou. In November 5, 2018,mid-2019, we invested US$30entered into service agreements with Mobimagic, under which Mobimagic provides app, systems and platform maintenance, and data processing services as well as managerial oversight to PC Financial Services Private Limited, our Indian subsidiary offering microloans. Under the agreement, we will pay a combination of fixed fees and a variable fee that is calculated based on revenue less credit losses and indirect taxes, recorded as a cost of revenue amounting to $US25.6 million at a US$125 million pre-money valuation by purchasing preferred shares issued by StarMaker, resulting in an ownership stake of 19.35%. As part of the investment,2019. In addition, we also obtained an option to increase ownership to 51% in the second half of the year 2020. StarMaker has an engaged user base in India and has expanded its operations into India during 2018. Given Opera’s own long history and expertise in India, we have providedreceived professional services of $US0.3 million related to StarMaker to facilitate its expansion.distribution and promotion of our advertising services worldwide from Mobimagic. As of December 31, 2018,2019, we had US$175,000 receivable due from StarMakerprovided prepayments to Mobimagic for distribution and promotion services as part of an agreement where Mobimagic accepts financial risk related to these services.the retention of acquired new users. The prepayments had a carrying amount of US$15.5 million as of December 31, 2019, compared to US$10.4 million as of December 31, 2018.
interest and net revenue sharing from the Putu’s operations. As of December 31, 2019, no loans had been provided under this credit facility.
Share Incentive Plan
See “Item 6. Directors, Senior Management and Employees—B. Compensation—Share Incentive Plan.”
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—C. Board Practice—Employment Agreements and Indemnification Agreements.”
C. | Interest of Experts and Counsel |
Not applicable.
FINANCIAL INFORMATION |
A. | Consolidated Statement and Other Financial Information |
We have appended consolidated financial statements filed as part of this annual report.
Legal and Administrative Proceedings
From time to time, we are subject to various legal proceedings, investigations and claims incidental to the conduct of our business. WeSuch proceedings can be costly and time consuming, and are inherently unpredictable. Therefore, no assurance can be given of the final outcome of any proceeding or that such proceeding will not materially impact our financial condition or results of operation.
In January 2020, we and certain of our directors and officers were named as defendants in a putative class action filed in the United States District Court for the Southern District of New York: Brown v. Opera Limited. et al., Case No. 20-cv-674 (S.D.N.Y.). The complaint asserts violations of Sections 11 and 15 of the Securities Act of 1933, Section 10(b) and 20(a) of the Securities and Exchange Act of 1934, and SEC Rule 10b-5 promulgated under the Securities Exchange Act of 1934. The complaint alleges that the Company made material misstatements and/or omissions during the period from July 27, 2018 through January 15, 2020. The allegations relate to statements regarding the Company sustainable growth and market opportunity for its browser applications and the alleged business practices of certain loan service applications owned or controlled by the Company. The complaint seeks unspecified damages on behalf of all person and entities who purchased or acquired the Company’s (a) American depositary shares (“ADSs”) pursuant and/or traceable to the Company’s initial public offering commenced on or about July 27, 2018 (the “IPO” or “Offering”); and/or (b) Opera securities between July 27, 2018 and January 15, 2020, both dates inclusive. Several individuals have sought to be appointed as the lead plaintiff to represent the putative class, but no lead plaintiff has been appointed yet. As the case remains in its preliminary stages, we express no opinion on the likelihood of any unfavorable outcome or any estimate of the amount or range of any potential loss. The Company intends to vigorously defend itself against these claims.
Apart from the class action, as of the date of this annual report, we are not a party to, nor are we aware of, any legal proceeding, investigation or claim which, in the opinion of our management, is likely to have an adverse material effect on our business, financial condition or results of operations. We may periodically be subject to legal proceedings, investigations and claims relating to our business. We may also initiate legal proceedings to protect our rights and interests.
Dividend Policy
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.
Our board of directors has discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividend out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant. If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the ordinary shares underlying the ADSs to the depositary, as the registered holder of such ordinary shares, and the depositary then will pay such amounts to the ADS holders who will receive payment to the same extent as holders of our ordinary shares, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder.
We are aan exempted holding company incorporated in the Cayman Islands. For our cash requirements, including any payment of dividends to our shareholders, we may rely on our substantial cash position remaining from the initial public offering of our securities, as further described in Part II, Item 14 of this annual report. We may further rely upon payments from our operating entities. We may rely on a combination of dividend payments from our subsidiaries in markets we operate such as Norway. Regulations in Norway where we utilize dividend payments may restrict the ability of our subsidiaries to pay dividends to us.
B. | Significant Changes |
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report.
THE OFFER AND LISTING |
A. | Offer and Listing Details |
Our ADSs have been listed on the Nasdaq Global Select Market since July 27, 2018 and traded under the symbol “OPRA.” Each ADS represents two ordinary shares.
B. | Plan of Distribution |
Not applicable.
C. | Markets |
Our ADSs have been listed on the Nasdaq Global Select Market since July 27, 2018 under the symbol “OPRA.”
D. | Selling Shareholders |
Not applicable.
E. | Dilution |
Not applicable.
F. | Expenses of the Issue |
Not applicable.
ADDITIONAL INFORMATION |
A. | Share Capital |
Not applicable.
B. | Memorandum and Articles of Association |
We incorporate by reference into this annual report our Second Amended and Restated Memorandum and Articles of Association, as currently in effect, filed as Exhibit 3.2 to our registration statement on Amendment No.1 to Form F-1 (File No. 333-226017), filed with the SEC on July 13, 2018.
C. | Material Contracts |
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 7. Major Shareholders and Related Party Transactions,” or elsewhere in this annual report.
D. | Exchange Controls |
The Cayman Islands currently has no exchange control regulations or currency restrictions. See “Item 4. Information of the Company—B. Business Overview—Norwegian Regulations—Regulations on Foreign Exchange.”
E. | Taxation |
The following summary of Cayman Islands, Norway and U.S. federal income tax consequences of an investment in the ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in the ADSs or ordinary shares, such as the tax consequences under state, local and other tax laws, or tax laws of jurisdictions other than the Cayman Islands, Norway, and the United States.
Cayman Islands Tax Considerations
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in or, after execution brought within, the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to any payments made by or to our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of our ordinary shares or the ADSs will not be subject to taxation in the Cayman Islands and no withholding tax will be required on the payment of a dividend or capital to any holder of our ordinary shares or the ADSs, as the case may be, nor will gains derived from the disposal of our ordinary shares or the ADSs be subject to Cayman Islands income or corporation tax. The Cayman Islands currently have no income, corporation or capital gains tax and no estate duty, inheritance tax or gift tax.
An unstamped document that is required to be stamped may not be admissible in evidence until duly stamped and unstamped documents may be subject to penalties and interest for late stamping. Certain criminal offenses may also be committed in connection with unstamped documents.
No stamp duty is payable in respect of the issue of our ordinary shares or the ADSs or on an instrument of transfer in respect of our ordinary shares or the ADSs.
Norway Tax Considerations
Below is a summary of the primary tax issue in Norway for Norwegian corporate holders of the ADSs.
The ADS is a financial instrument with shares in Opera Limited, an exempted company incorporated under the laws of the Cayman Islands with limited liability, as the underlying object. For Norwegian tax purposes, the ADSs will not be covered by the participation exemption since the underlying object is an entity in a low tax jurisdiction outside the EU/EEA. For limited liability companies (and certain similar entities) resident in Norway for tax purposes, dividends from the ADSs will be considered as taxable income. Gains on realization (including sales) of the ADSs will also be considered as taxable income for limited liability companies (and certain similar entities) resident in Norway for tax purposes. The tax rate for 20182019 for limited liability companies (and certain similar entities) was 23%is 22%, and will be 22% for 2019.2020.
United States Federal Income Tax Considerations
The following discussion describes the material United States federal income tax consequences to a United States Holder (as defined below), under current law, of an investment in our ADSs or ordinary shares. This discussion is based on the federal income tax laws of the United States as of the date of this annual report, including the United States Internal Revenue Code of 1986, as amended, or the Code, existing and proposed Treasury Regulations promulgated thereunder, judicial authority, published administrative positions of the United States Internal Revenue Service, or the IRS, and other applicable authorities, all as of the date of this annual report. All of the foregoing authorities are subject to change, which change could apply retroactively and could significantly affect the tax consequences described below. We have not sought any ruling from the IRS with respect to the statements made and the conclusions reached in the following discussion and there can be no assurance that the IRS or a court will agree with our statements and conclusions.
This discussion applies only to a United States Holder (as defined below) that holds ADSs or ordinary shares as capital assets for United States federal income tax purposes (generally, property held for investment). The discussion neither addresses the tax consequences to any particular investor nor describes all of the tax consequences applicable to persons in special tax situations, such as:
banks and certain other financial institutions;
insurance companies;
regulated investment companies;
real estate investment trusts;
brokers or dealers in stocks and securities, or currencies;
persons who use or are required to use a mark-to-market method of accounting;
certain former citizens or residents of the United States subject to Section 877 of the Code;
entities subject to the United States anti-inversion rules;
tax-exempt organizations and entities;
persons subject to the alternative minimum tax provisions of the Code;
persons whose functional currency is other than the United States dollar;
persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion or integrated transaction;
persons that actually or constructively own ADSs or ordinary shares representing 10% or more of our voting power or value;
persons who acquired ADSs or ordinary shares pursuant to the exercise of an employee equity grant or otherwise as compensation;
partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through such entities;
• | banks and certain other financial institutions; | |
• | insurance companies; | |
• | regulated investment companies; | |
• | real estate investment trusts; |
persons required to accelerate the recognition of any item of gross income with respect to our ADSs or ordinary shares as a result of such income being recognized on an applicable financial statement; or
persons that held, directly, indirectly or by attribution, ADSs or ordinary shares or other ownership interests in us prior to our initial public offering.
• | brokers or dealers in stocks and securities, or currencies; | |
• | persons who use or are required to use a mark-to-market method of accounting; | |
• | certain former citizens or residents of the United States subject to Section 877 of the Code; | |
• | entities subject to the United States anti-inversion rules; | |
• | tax-exempt organizations and entities; | |
• | persons subject to the alternative minimum tax provisions of the Code; | |
• | persons whose functional currency is other than the United States dollar; | |
• | persons holding ADSs or ordinary shares as part of a straddle, hedging, conversion or integrated transaction; | |
• | persons that actually or constructively own ADSs or ordinary shares representing 10% or more of our voting power or value; | |
• | persons who acquired ADSs or ordinary shares pursuant to the exercise of an employee equity grant or otherwise as compensation; | |
• | partnerships or other pass-through entities, or persons holding ADSs or ordinary shares through such entities; | |
• | persons required to accelerate the recognition of any item of gross income with respect to our ADSs or ordinary shares as a result of such income being recognized on an applicable financial statement; or | |
• | persons that held, directly, indirectly or by attribution, ADSs or ordinary shares or other ownership interests in us prior to our initial public offering. |
This discussion, moreover, does not address the United States federal estate, gift, Medicare, andor alternative minimum tax considerations, or any state, local andor non-United States tax considerations, relating to the ownership and disposition of our ADSs or ordinary shares.
Except as specifically described below, this discussion does not address any tax consequences or reporting obligations that may be applicable to persons holding our ADSs or ordinary shares through a bank, financial institution or other entity, or a branch thereof, located, organized or resident outside the United States.
If a partnership (including an entity or arrangement treated as a partnership for United States federal income tax purposes) holds theour ADSs or ordinary shares, the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partnership or partner in a partnership holding our ADSs or ordinary shares should consult its own tax advisors regarding the tax consequences of investing in and holding theour ADSs or ordinary shares.
THE FOLLOWING DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT A SUBSTITUTE FOR CAREFUL TAX PLANNING AND ADVICE. HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE UNITED STATES FEDERAL ESTATE OR GIFT TAX LAWS OR THE LAWS OF ANY STATE, LOCAL OR NON-UNITED STATES TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
For purposes of the discussion below, a “United States Holder” is a beneficial owner of the ADSs or ordinary shares that is, for United States federal income tax purposes:
an individual who is a citizen or resident of the United States;
a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia;
an estate, the income of which is subject to United States federal income taxation regardless of its source; or
• | an individual who is a citizen or resident of the United States; | |
• | a corporation (or other entity treated as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States, any state thereof or the District of Columbia; | |
• | an estate, the income of which is subject to United States federal income taxation regardless of its source; or | |
• | a trust, if (i) a court within the United States is able to exercise primary jurisdiction over its administration and one or more United States persons have the authority to control all of its substantial decisions or (ii) in the case of a trust that was treated as a domestic trust under the law in effect before 1997, a valid election is in place under applicable Treasury Regulations to treat such trust as a domestic trust. |
The discussion below assumes that the representations contained in the deposit agreement and any related agreement are true and that the obligations in such agreements will be complied with in accordance with their terms.
ADSs
If you own our ADSs, then you should be treated as the owner of the underlying ordinary shares represented by those ADSs for United States federal income tax purposes. Accordingly, deposits or withdrawals of ordinary shares for ADSs should not be subject to United States federal income tax.
The United States Treasury Department and the IRS have expressed concerns that United States holders of American depositary shares may be claiming foreign tax credits in situations where an intermediary in the chain of ownership between the holder of an American depositary share and the issuer of the security underlying the American depositary share has taken actions that are inconsistent with the ownership of the underlying security by the person claiming the credit. Such actions (for example, a pre-release of an American depositary share by a depositary) also may be inconsistent with the claiming of the reduced rate of tax applicable to certain dividends received by non-corporate United States holders of
American depositary shares, including individual United States holders. Accordingly, the availability of foreign tax credits or the reduced tax rate for dividends received by non-corporate United States Holders, each discussed below, could be affected by actions taken by intermediaries in the chain of ownership between the holder of an ADS and our company.
Dividends and Other Distributions on the ADSs or Our Ordinary Shares
Subject to the passive foreign investment company rules discussed below, the gross amount of any distribution that we make to you with respect to the ADSs or ordinary shares (including any amounts withheld to reflect withholding taxes) will be taxable as a dividend, to the extent paid out of our current or accumulated earnings and profits, as determined under United States federal income tax principles. Such income (including any withheld taxes) will be includable in your gross income on the day actually or constructively received by you, if you own the ordinary shares, or by the depositary, if you own ADSs.
Because we do not intend to determine our earnings and profits on the basis of United States federal income tax principles, any distribution paid generally will be reported as a “dividend” for United States federal income tax purposes. Such dividends will not be eligible for the dividends- received deduction allowed to qualifying corporations under the Code.
Dividends received by a non-corporate United States Holder may qualify for the lower rates of tax applicable to “qualified dividend income,” if the dividends are paid by a “qualified foreign corporation” and other conditions discussed below are met. A non-United States corporation is treated as a qualified foreign corporation (i) with respect to dividends paid by that corporation on shares (or American depositary shares backed by such shares) that are readily tradable on an established securities market in the United States or (ii) if such non-United States corporation is eligible for the benefits of a qualifying income tax treaty with the United States that includes an exchange of information program. We do not expect to be eligible for the benefits of such an income tax treaty. However, aA non-United States corporation will not be treated as a qualified foreign corporation if it is a passive foreign investment company in the taxable year in which the dividend is paid or the preceding taxable year.
Under a published IRS Notice, common or ordinary shares, or American depositary shares representing such shares (such as our ADSs), are considered to be readily tradable on an established securities market in the United States if they are listed on the Nasdaq Global Select Market, as our ADSs (but not our ordinary shares) are expected to be.. Based on existing guidance, it is unclear whether the ordinary shares will be considered to be readily tradable on an established securities market in the United States, because only theour ADSs, and not the underlying ordinary shares, will beare listed on a securities market in the United States. We believe, but we cannot assure you, that dividends we pay on the ordinary shares that are represented by our ADSs, but not on the ordinary shares that are not so represented, will, subject to applicable limitations, be eligible for the reduced rates of taxation.
Even if dividends would be treated as paid by a qualified foreign corporation, a non-corporate United States Holder will not be eligible for reduced rates of taxation if it does not hold our ADSs or ordinary shares for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date or if the United States Holder elects to treat the dividend income as “investment income” pursuant to Section 163(d)(4) of the Code. In addition, the rate reduction will not apply to dividends of a qualified foreign corporation if the non-corporate United States Holder receiving the dividend is obligated to make related payments with respect to positions in substantially similar or related property.
You should consult your own tax advisors regarding the availability of the lower tax rates applicable to qualified dividend income for any dividends that we pay with respect to the ADSs or ordinary shares, as well as the effect of any change in applicable law after the date of this annual report.
Any non-United States withholding taxes imposed on dividends paid to you with respect to the ADSs or ordinary shares generally will be treated as foreign taxes eligible for credit against your United States federal income tax liability, subject to the various limitations and disallowance rules that apply to foreign tax credits generally. For purposes of calculating the foreign tax credit limitation, dividends paid to you with respect to the ADSs or ordinary shares will be treated as income from sources outside the United States and generally will constitute passive category income. The rules relating to the determination of the foreign tax credit are complex, and you should consult your tax advisors regarding the availability of a foreign tax credit in your particular circumstances.
Disposition of the ADSs or Our Ordinary Shares
You will recognize gain or loss on a sale or exchange of the ADSs or ordinary shares in an amount equal to the difference between the amount realized on the sale or exchange and your tax basis in the ADSs or ordinary shares. Subject to the discussion under “—Passive Foreign Investment Company” below, such gain or loss generally will be capital gain or loss. Capital gains of a non-corporate United States Holder, including an individual that has held the ADSs or ordinary shares for more than one year currently are eligible for reduced tax rates. The deductibility of capital losses is subject to limitations.
Any gain or loss that you recognize on a disposition of the ADSs or ordinary shares generally will be treated as United States-source income or loss for foreign tax credit limitation purposes. You should consult your tax advisors regarding the proper treatment of gain or loss, as well as the availability of a foreign tax credit, in your particular circumstances.
Passive Foreign Investment Company
A non-UnitedBased on the market price of our ADSs, the value of our assets and the composition of our income and assets, we do not believe that we were a passive foreign investment company, or PFIC, for United States corporation suchfederal income tax purposes for our taxable year ended December 31, 2019, although there can be no assurances in this regard. The determination of PFIC status is based on an annual determination that cannot be made until the close of a taxable year, involves extensive factual investigation, including ascertaining the fair market value of all of our assets on a quarterly basis and the character of each item of income that we earn, and is subject to uncertainty in several respects. Accordingly, we cannot assure you that we will not be treated as ourselvesa PFIC for our taxable year ended December 31, 2019, the current taxable year or any future taxable year, or that the IRS will not take a contrary position to any determination we make.
We will be treated as a passive foreign investment company, or PFIC, for United States federal income tax purposes for any taxable year if, applying applicable look-through rules, either:
at least 75% of its gross income for such year is passive income; or
at least 50% of the value of its assets (determined(generally determined based on a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income.
For this purpose, passive income generally includes dividends, interest, royalties and rents (other than certain royalties and rents derived in the active conduct of a trade or business and not derived from a related person). We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, at least 25% by value of the stock. Although the law in this regard is unclear, we treat our VIEs as being owned by us for United States federal income tax purposes, not only because we exercise effective control over the operation of such entities but alsoand because we are entitled to substantially all of their economic benefits, and, as a result, we consolidate their results of operations in our consolidated IFRS financial statements. If it were determined, however, that we are not the owner of our VIEs for United States federal income tax purposes, the composition of our income and assets would change and we may be more likely to be treated as a PFIC.
Additionally, if a “controlled foreign corporation” (as defined for United States federal income tax purposes), or CFC, is a “publicly traded corporation” for the taxable year, the PFIC asset test for such year is applied based on the value of the CFC’s assets. Otherwise, the asset test is applied based on the adjusted tax bases of the CFC’s assets as determined for the purposes of computing earnings and profits under United States federal income tax principles. We believe we were a CFC for our taxable year ended December 31, 2018, and while we became a publicly traded corporation in our third quarter, it is unclear how the asset test will apply to us in respect of our taxable year ended December 31, 2018, as it is not clear how the asset test should be applied to a CFC in respect of its taxable year in which it becomes a publicly traded corporation (specifically, it is not clear whether the CFC can be treated as a “publicly traded corporation” for such taxable year).
Changes in the composition of our income or composition of our assets, including as a result of our investment in new businesses, products, services and technologies, may cause us to be or become a PFIC. The determination of whether we will be a PFIC for any taxable year may depend in part upon the value of our goodwill and other unbooked intangibles not reflected on our balance sheet (which may depend upon the market value of the ADSs or ordinary shares from time to time, which may be volatile) and also may be affected by how, and how quickly, we spend our liquid assets and the cash raisedwe generate from our operations and raise in the initial publicany offering. In estimating the value of our goodwill and other unbooked intangibles, we have taken into account our market capitalization. Among other matters, if our market capitalization declines, we may be or become a PFIC for the current or future taxable years because our liquid assets and cash (which are for this purpose considered assets that produce passive income) may then represent a greater percentage of our overall assets. Further, while we believe our classification methodology and valuation approach isare reasonable, it is possible that the IRS may challenge our classification or valuation of our goodwill and other unbooked intangibles, which may result in our being or becoming a PFIC for our taxable year ended December 31, 2019, the current taxable year or one or more future taxable years.
Based on the current and anticipated value
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, we will continue to be treated as a PFIC with respect to you for all succeeding years during which you hold ADSs or ordinary shares, unless we were to cease to be a PFIC and you make a “deemed sale” election with respect to the ADSs or ordinary shares. If such election is made, you will be deemed to have sold the ADSs or ordinary shares you hold at their fair market value and any gain from such deemed sale would be subject to the rules described in the following two paragraphs. After the deemed sale election, so long as we do not become a PFIC in a subsequent taxable year, the ADSs or ordinary shares with respect to which such election was made will not be treated as shares in a PFIC and, as a result, you will not be subject to the rules described below with respect to any “excess distribution” you receive from us or any gain from an actual sale or other disposition of the ADSs or ordinary shares. You are strongly urged to consult your tax advisors as to the possibility and consequences of making a deemed sale election if we are and then cease to be a PFIC and such an election becomes available to you.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, then, unless you make a “mark-to-market” election (as discussed below), you generally will be subject to special adverse tax rules with respect to any “excess distribution” that you receive from us and any gain that you recognize from a sale or other disposition, including a pledge, of the ADSs or ordinary shares. For this purpose, distributions that you receive in a taxable year that are greater than 125% of the average annual distributions that you received during the shorter of the three preceding taxable years or your holding period for the ADSs or ordinary shares will be treated as an excess distribution. Under these rules:
the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or ordinary shares;
the amount of the excess distribution or recognized gain allocated to the taxable year of distribution or gain, and to any taxable years in your holding period prior to the first taxable year in which we were treated as a PFIC, will be treated as ordinary income; and
the amount of the excess distribution or recognized gain allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the resulting tax will be subject to the interest charge generally applicable to underpayments of tax.
• | the excess distribution or recognized gain will be allocated ratably over your holding period for the ADSs or ordinary shares; | |
• | the amount of the excess distribution or recognized gain allocated to the taxable year of distribution or gain, and to any taxable years in your holding period prior to the first taxable year in which we were treated as a PFIC, will be treated as ordinary income; and | |
• | the amount of the excess distribution or recognized gain allocated to each other taxable year will be subject to the highest tax rate in effect for individuals or corporations, as applicable, for each such year and the resulting tax will be subject to the interest charge generally applicable to underpayments of tax. |
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares and any of our non-United States subsidiaries orthat are corporations (or other corporate entitiescorporations in which we own equity interestsinterests) is also a PFIC, you would be treated as owning a proportionate amount (by value) of the shares of each such non-United States entitycorporation classified as a PFIC (each such entity,corporation, a lower tier PFIC) for purposes of the application of these rules. You should consult your own tax advisoradvisors regarding the application of the PFIC rules to any of our lower tier PFICs.
If we are a PFIC for any taxable year during which you hold ADSs or ordinary shares, then in lieu of being subject to the tax and interest-charge rules discussed above, you may make an election to include gain on our ADSs or ordinary shares as ordinary income under a mark-to-market method, provided that such ADSs or ordinary shares constitute “marketable stock.” Marketable stock is stock that is regularly traded on a qualified exchange or other market, as defined in applicable Treasury regulations. We expect that ourOur ADSs, but not our ordinary shares, will beare listed on the Nasdaq Global Select Market, which is a qualified exchange or other market for these purposes. Consequently, if theour ADSs areremain listed on the Nasdaq Global Select Market and are regularly traded, and you are a holder of ADSs, we expect that the mark-to-market election would be available to you if we became a PFIC, but no assurances are given in this regard.
Because a mark-to-market election cannot be made for any lower-tier PFICs that we may own, if we were a PFIC for any taxable year, a United States Holder that makes the mark-to-market election may continue to be subject to the tax and interest charges under the general PFIC rules with respect to such United States Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for United States federal income tax purposes.
In certain circumstances, a shareholder in a PFIC may avoid the adverse tax and interest-charge regime described above by making a “qualified electing fund” election to include in income its share of the corporation’s income on a current basis. However, you may make a qualified electing fund election with respect to the ADSs or ordinary shares only if we agree to furnish you annually with a PFIC annual information statement as specified in the applicable Treasury regulations. We currently do not intend to prepare or provide the information that would enable you to make a qualified electing fund election.
A United States Holder that holds the ADSs or ordinary shares in any year in which we are a PFIC will be required to file an annual report containing such information as the United States Treasury Department may require. You should consult your own tax advisoradvisors regarding the application of the PFIC rules to your ownership and disposition of the ADSs or ordinary shares and the availability, application and consequences of the elections discussed above.
Information Reporting and Backup Withholding
Information reporting to the IRS and backup withholding generally will apply to dividends in respect of our ADSs or ordinary shares, and the proceeds from the sale or exchange of our ADSs or ordinary shares, that are paid to you within the United States (and in certain cases, outside the United States), unless you furnish a correct taxpayer identification number and make any other required certification, generally on IRS Form W-9 or you otherwise establish an exemption from information reporting and backup withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding generally are allowed as a credit against your United States federal income tax liability, and you may be entitled to obtain a refund of any excess amounts withheld under the backup withholding rules if you file an appropriate claim for refund with the IRS and furnish any required information in a timely manner. United States Holders should consult their tax advisors regarding the application of the information reporting and backup withholding rules.
Information with Respect to Foreign Financial Assets
United States Holders who are individuals (and certain entities closely held by individuals) generally will be required to report our name, address and such information relating to an interest in the ADSs or ordinary shares as is necessary to identify the class or issue of which the ADSs or ordinary shares are a part. These requirements are subject to exceptions, including an exception for ADSs or ordinary shares held in accounts maintained by certain financial institutions and an exception applicable if the aggregate value of all “specified foreign financial assets” (as defined in the Code) does not exceed US$50,000.
United States Holders should consult their tax advisors regarding the application of these information reporting rules.
F. | Dividends and Paying Agents |
Not applicable.
G. | Statement by Experts |
Not applicable.
H. | Documents on Display |
We previously filed with the SEC a registration statement on Form F-1 (File NumberNo. 333-226017), as amended, including the prospectus contained therein to register our ordinary shares in relation to our initial public offering and later filed with the SEC a registration on Form F-3 (File No. 333-233691), as amended, including the prospectus contained therein to register our ordinary shares in relation to our follow-on public offering. We also filed with the SEC a related registration statement on Form F-6 (File NumberNo. 333-226171) to register the ADSs and a registration statement on Form S-8 (File NumberNo. 333-229285) to register our securities to be issued under our Amended and Restated Share Incentive Plan.
We are subject to the periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F within four months after the end of each fiscal year. Copies of reports and other information, when so filed with the SEC, can be inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the Commission at 1-800-SEC-0330
The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act.
We will furnish The Bank of New York Mellon, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with IFRS, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
I. | Subsidiary Information |
For a list of our significant subsidiaries, see Exhibit 8.1 filed with this annual report.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Foreign Currency RiskOverview
Foreign currencyWe are exposed to market risk, liquidity risk and credit risk. Our management seeks to minimize potential adverse effects of these risks through sound business practices and risk management. The board of directors, together with senior management, is involved in the risk assessment process. We have not utilized derivatives for hedging purposes.
Market risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Our exposure to the risk of changes in foreign exchange rates relates primarily to the U.S. Dollar, the primary currency in which revenuesmarket prices. We are generated, relative to other currencies. The Group incurs operating expenses in various currencies, including the Norwegian Krone, Chinese Renminbi, Polish Zloty, Swedish Krone and the Euro. The latter is also the base currency of some of the Group’s revenue. Additionally, the Group is exposed to foreign currencythree types of market risk: Interest rate risk, due to monetary items recognized in the balance sheet being denominated in currencies other than the functional currency, which for most of the Group’s entities is the U.S. Dollar. Our accounts receivable balances at the end of the reporting period have similar exposures. Such amounts include balances within the subsidiaries which, although eliminated from the consolidated balance sheets, will continue to contribute to foreign exchange risk exposures in the consolidated statements of operations and consolidated statements of comprehensive income. We may seek to reduce the currency risk by entering into foreign currency instruments. We did not have any currency hedging instruments as of December 31, 2018, 2017 and 2016. Management is closely monitoring the Group’s exposure to foreign currency risk and seeks to minimize its exposure to suchequity price risk. We were not exposed to material foreign currencyFinancial instruments affected by market risk in 2018, 2017 or 2016. include loans and borrowings, trade receivables, trade payables, accrued liabilities and listed equity instruments.
Interest Rate Riskrate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Our
In 2019, we obtained a credit facility from a financial institution. Loans under the credit facility, denominated in Indian Rupee, were used to fund the microlending business in India. As of December 31, 2019, the total amount of loans under the credit facility was US$42,247 thousand. The resulting positive impact to our financing cash flow was offset by us transferring US$52,878 thousand into an U.S. Dollar denominated escrow account as collateral for these loans; which has been classified as a receivable and as such, as a cash outflow under investing activities in the Statement of Cash Flows. The interest rate on these loans is based on the bank’s 6-month marginal cost of funds-based lending rate plus 0.3%. As of year-end 2019, that rate was 8.85%. Except for the above, our exposure to interest risk is not material.immaterial. Financial liabilities other than loans under the credit facility have fixed interest rates and future interest payments on these will thus not fluctuate. We expect to settle all financial liabilities at maturity, meaning changes in market interest rates will only impact their fair value temporarily. Financial assets are not interest-bearing, except for deposits with banks.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Our exposure to the risk of changes in foreign exchange rates relates primarily to our consolidated results being presented in U.S. Dollar, while our revenues are generated in nearly all global currencies, though often converted to USD or EUR before being paid to us from our partners. We incur operating expenses in various currencies, including the Norwegian Krone, Chinese Renminbi, Polish Zloty, Swedish Krone, Indian Rupee, Kenyan Shilling, Nigerian Naira and the Euro. Additionally, we are exposed to foreign currency risk due to monetary items recognized in the balance sheet being denominated in currencies other than the functional currency, which for most of our entities is the U.S. Dollar. Management is closely monitoring our exposure to foreign currency risk and seeks to minimize its exposure to such risk. We were not exposed to material foreign currency risk in 2018 and 2019.
Equity price risk
We are exposed to equity price risk related to ourits limited holding of publicly traded equity securities. Such holdings are susceptible to market price risk arising from uncertainties about future valuevalues of thesuch securities.
Our holding of publicly traded securities is overseen by our CEO and conducted within a US$2070 million initial capital allocation.
As of December 31, 2018,2019, the fair value of oursuch holdings was US$0.7 million. Total loss42,146 thousand.
The net gain from publicly traded securities in 20182019 was US$1.5 million.8,477 thousand (2018: net loss of US$1,485 thousand). We did not invest in publicly traded equity securities in 2017.
Liquidity risk
Liquidity risk is the risk that we will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. We are not exposed to material liquidity risk given its significant cash position and low debt-to-equity ratio as of December 31, 2019. See Note 17 to our consolidated financial statements included elsewhere in this annual report for an overview of maturity profile on our financial liabilities.
Credit Riskrisk
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Group isloss for us.
We are exposed to credit risk from itsour operating activities, primarily loans to customers and trade receivables, and from its cash management activities, including deposits with banks and financial institutions, and other receivables, such as loans to associates and joint ventures. The Group’sventures (details in Note 28 to our consolidated financial statements included elsewhere in this annual report). Our revenue comes mainly from sales where settlement in cash generally takes place within 30-90 days of the invoice being issued, which is concurrently when the Group haswe have an unconditional right to consideration. For some specific revenue streams, including relativethose relating to OpayOPay and Powerbets, settlement is agreed to exceed 90 days. Provision for bad debt was US$1.6 million, US$1.8 millionDetails of outstanding trade receivable are disclosed in Notes 21 and nil (US$0) as of December 31, 2018, 2017 and 2016, as collection risk was already reflected28 to our consolidated financial statements included elsewhere in the fair value assessment of acquired receivables. In addition, we are exposedthis annual report. The maximum exposure to credit risk from ourat the end of the reporting period is the carrying amount of each class of financial assets.
Credit risk for loans to customers
We are continuously monitoring its credit risk relating to microlending. Under the credit risk policies, the exposure is subject to regular reviews of risk tolerance levels. All operating activities (primarily from accountdecisions in terms of exposure and other receivables)geographic profile are made in accordance with applicable risk management policies. Furthermore, we review the occurrence, progress and from our financing activities,status of all credit risks, and take appropriate actions to mitigate any adverse effects. Credit risk is measured by a variety of methods, including deposits with bankstotal outstanding loan balance, delinquency rates by aging, credit scorecards and financial institutions, foreign exchange transactionsby way of collection models. The objectives and other financial instruments. Our objective is to seek continual revenue growth while minimizing losses incurred duepolicies to credit risk exposure. Financial instruments that potentially subject ushave not changed relative to significant concentrations of2018, though the processes and methods to measure and manage credit risk consist primarilyhas been continuously evolving.
Management of cashrisk concentration is conducted by using a variety of systems to monitor and cash equivalents, accounts receivabletrack concentration. This enables quantification and other receivables. Asanalyzing of December 31, 2018, 2017risks relating to concentration on a real-time basis. Measurement of expected credit losses is calculated from analysis of the outstanding loans, including loan tenure and 2016, substantially allhistorical delinquency rates. When considering whether the credit risk has increased significantly, metrics including first payment delinquency and delinquency by aging are evaluated, directly affecting our credit loss provisions.
When considering whether loans are credit impaired, management considers market and borrower indicators. The disappearance of our cash and cash equivalents were heldan active market for the financial asset is an indicator of the need for credit-impairment, as is transactions of comparable financial assets at majorsteep discounts that reflect incurred credit losses. Borrower indicators of credit-impaired financial institutionsassets include observing that a borrower has significant financial difficulties, breaches the loan agreement or enters into, or the likely entrance into, a form of reorganization (such as bankruptcy). We find that these indicators reduce the likelihood of receiving payment of the outstanding loan balance. We do not incorporate forward-looking information into the determination of expected credit losses, as reliable data supporting credit impairment is deemed not to be available in the respective locationsmarkets in which we offer microloans.
DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
A. | Debt Securities |
Not applicable.
B. | Warrants and Rights |
Not applicable.
C. | Other Securities |
Not applicable.
D. | American Depositary Shares |
Fees and Expenses
For details of description of our ADSs, see Exhibit 2.4 filed with this annual report.
Our ADS holders are required to pay the following service fees to the depositary bank, the Bank of New York Mellon, and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs):
Persons depositing or withdrawing shares or ADS holders must pay: | For: | |
US$5.00 (or less) per 100 ADSs (or portion of 100 ADSs) | Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property Cancelation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates | |
US$0.05 (or less) per ADS | Any cash distribution to ADS holders | |
A fee equivalent to the fee that would be payable if securities distributed to you had been shares and the shares had been deposited for issuance of ADSs | Distribution of securities distributed to holders of deposited securities (including rights) that are distributed by the depositary to ADS holders | |
US$0.05 (or less) per ADS per calendar year | Depositary services | |
Registration or transfer fees | Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares | |
Expenses of the depositary | Cable and facsimile transmissions (when expressly provided in the deposit agreement) | |
Taxes and other governmental charges the depositary or the custodian has to pay on any ADSs or shares underlying ADSs, such as stock transfer taxes, stamp duty or withholding taxes | As necessary | |
Any charges incurred by the depositary or its agents for servicing the deposited securities | As necessary |
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a portion of securities or other property distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other service providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions.
The depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will retain for its own account.
The revenue is based on, among other things, the difference between the exchange rate assigned to the currency conversion made under the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its own account. The depositary makes no representation that the exchange rate used or obtained in any currency conversion under the deposit agreement will be the most favorable rate that could be obtained at the time or that the method by which that rate will be determined will be the most favorable to ADS holders, subject to the depositary’s obligations under the deposit agreement. The methodology used to determine exchange rates used in currency conversions is available upon request.
DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
None.
MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
A.—D. | Material Modifications to the Rights of Security Holders |
See “Item 10. Additional Information” for a description of the rights of shareholders, which remain unchanged.
E. | Use of Proceeds |
The following “Use of Proceeds” information relates to (i) the registration statement on Form F-1 (File No. 333-226017), as amended, including the prospectus contained therein, which registered 19,200,000 ordinary shares represented by ADSs and was declared effective by the SEC on July 27, 2018, for our initial public offering, which closed in July 27, 2018, and the underwriters’ exercise of their option to purchase from us an additional 334,672 ADSs representing 669,344 ordinary shares, or the optional offering, which closed in August 9, 2018 at an initial offering price of US$12.00 per ADS, and (ii) the registration statement on Form F-3 (File No. 333-233691), as amended, including the prospectus contained therein, which registered 15,000,000 ordinary shares represented by ADSs and was declared effective by the SEC on September 16, 2019, for our follow-on offering, which closed in September 24, 2019, and the underwriters’ exercise of their option to purchase from us an additional 1,125,000 ADSs representing 2,250,000 ordinary shares, or the optional offering, which closed on October 16, 2020, at an offering price of US$10.00 per ADS. China International Capital Corporation Hong Kong Securities Limited and Citigroup Global Markets were the representatives of the underwriters.underwriters for both of our initial public offering and follow-on offering.
We received an aggregated net proceeds of approximately US$110.8 million from our initial public offering and the optional offering. In addition, we received an additional US$57.0 million from three contemporaneous private placements, net of underwriting commissions paid.
Our expenses incurred and paid to others in connection with the issuance and distribution of the ADSs in our initial public offering and the optional offering totaled US$3.4 million, which included US$0.4 million deducted directly from equity and US$3.0 million for other expenses. The additional material items upon which we have used the proceeds of our initial public offering and the optional offering include (i) US$10.7 used16.1 million in our share repurchase program,programs in 2018, 2019 and 2020, (ii) an investment of US$30 million in acquiring 19.35% equity interest of StarMaker Inc., and(iii) US$9.5 million for the purchase of TenSpot Pesa Limited and its microfinance business (OKash)., and (iv) the funding of our microlending business which ended 2019 with a net loan book of US$93.1 million.
We received net proceeds of approximately US$82.6 million from our follow-on offering. These proceeds are currently held in cash and marketable securities.
Except forOther than reimbursement of officer and director travel expenses to attend out listing ceremony in New York, IPOcertain limited bonuses paid to our officers,chief financial officer and chief operating officer, and the annual board fees paid to our two independent directors, none of thesethe net proceeds from the initialany of our public offering and the optional offeringofferings were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates or others.
CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the end of the period covered by this report, as required by Rule 13a-15(b) under the Exchange Act.
The management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by the Form 20-F. Based onupon that evaluation, the chief executive officer and chief financial officer haveour management has concluded that as a result of a material weaknessweaknesses in internal controlscontrol over financial reporting described above, thesebelow, as of December 31, 2019, our disclosure controls and procedures were ultimately not effective at a reasonable level of assurance as of 31 December 2018.effective.
Management’s Annual Report on Internal Control over Financial Reporting
This annual report on Form 20-F does not include a report of management’s assessment regardingOur management is responsible for establishing and maintaining adequate internal control over financial reporting, dueas such term is defined in Rules 13a-15(f) under the Exchange Act, for our company. Internal control over financial reporting is a process designed to a transition period establishedprovide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) as issued by rulesthe International Accounting Standards Board (IASB). The company’s internal control over financial reporting includes policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with IFRS and that receipts and expenditures are being made only in accordance with authorizations of the SEC for newly public companies.management and directors, and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements.
Material weaknesses
As required by Section 404 of the Sarbanes-Oxley Act and related rules as promulgated by the SEC, our management has assessed the effectiveness of internal control over financial reporting based on the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that the company’s internal control over financial reporting as of December 31, 2019 was not effective due to the presence of control deficiencies.
A material weakness is a deficiency, or combination of deficiencies, in Internal Control over Financial Reporting, such that there is a reasonable possibility that a material misstatement of the Company's consolidated financial statements will not be prevented or detected on a timely basis. Management has identified the following control deficiencies that constitute material weaknesses in our Internal Control over Financial Reporting as of December 31, 2019:
1. | The Company did not design and maintain effective internal control over certain accounting transactions. Specifically, the Company has not performed an appropriate risk assessment, designed and implemented appropriate controls including the monitoring of the effectiveness of those controls to ensure that accounting transactions are sufficiently analyzed and assessed against the requirements and to analyze complex accounting matters, including the timely preparation and review of contemporaneous documentation. The Company has introduced appropriately qualified accounting personnel however there was insufficient time to allow them to appropriately identify and implement robust controls prior December 31, 2019. |
| 2. | The Company did not design and maintain effective internal control, specifically the Company did not perform an appropriate risk assessment in identifying specific risks with microlending businesses across several countries being operated, and thereafter designing and implementing controls including the monitoring of these controls in terms of oversight. Our process to evaluate the competence and expertise necessary to support the growth and complexity of the business, its financial reporting, and response to address shortcomings was not sufficiently implemented during 2019. As a result, we did not have a sufficient number of adequately trained personnel within the organization with assigned responsibility and accountability for the design, effective operation, and documentation of internal control over financial reporting. |
To our knowledge, these control deficiencies did not result in a material misstatement to the consolidated financial statements. However, the deficiencies created a possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis, and accordingly a remediation plan has been undertaken.
Management has performed additional analysis and mitigation controls and procedures in preparing our consolidated financial statements. We have concluded that our consolidated financial statements, in all material respects, fairly present our financial condition, results of operations and cash flows at and for the periods presented. Apart from the material weaknesses described above, our management has not identified any other deficiencies that have led management to conclude that the company’s internal control over financial reporting was not effective.
Remediation plan
Our management is actively undertaking remediation efforts to address the material weaknesses identified above through the following actions:
● | We have hired employees with IFRS, external financial reporting and internal controls expertise to finalize policies and procedures that will ensure transactions are sufficiently analyzed and assessed against the requirements of IFRS and our corporate governance standards, and that contemporaneous documentation is prepared and reviewed. |
● | In 2019, we engaged external consultants to assist us in designing and implementing a formalized framework for internal control, based on the “Internal Control - Integrated Framework (2013)” issued by COSO. Our internal controls are being designed to ensure that all financial statement assertions are maintained in our consolidated financial statements. We intend to finalize the internal control framework in 2020, including the implementation and monitoring of effectiveness of internal controls related to risk assessment, compliance and oversight of the Company's legacy and developing microlending businesses. |
● | In 2020, management will evaluate the need to engage external consultants to support testing the design and operating effectiveness of the internal controls as of December 31, 2020. |
● | We have hired additional employees at the group level to strengthen our management oversight and compliance structures over our legacy and developing microlending businesses, as well as obtained additional expertise in enterprise risk management. |
● | We have established a policy clarifying the roles and responsibilities of our various finance and control functions across our group, as well as the lines of reporting and responsibilities of local resources, and we will continue to refine this policy as it is implemented across our businesses and new initiatives. |
● | We are evaluating the long-term needs of our various finance and control functions, both at group headquarters as well as in certain local markets, and intend to hire additional resources or engage external support as needed. |
These remediation measures may be time consuming, costly and might place significant demands on our financial and operational resources. Further, we may not be able to complete them by the end of 2020. However, once completed, management believes the remediation plan will effectively resolve the deficiencies constituting the material weaknesses. As the remediation plan is implemented, management may take additional measures or modify the plan described above.
Attestation Report of the Registered Public Accounting Firm
This annual report on Form 20-F does not include an attestation report of the company’s registered public accounting firm due to a transition period established by rules of the SEC for newly publicemerging growth companies.
Changes in Internal Control over Financial ReportingControls
Except forManagement has evaluated, with the improvements that are being carried out to remediate the material weakness described under "Item 3. Key Information - D. Risk Factors," no change toparticipation of our chief executive officer and chief financial officer, whether any changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)that occurred during theour last fiscal year ended December 31, 2018, that hashave materially affected, or isare reasonably likely to materially affect, our internal control over financial reporting. Since one of the material weaknesses disclosed above also was identified when preparing the consolidated financial statements for 2018, management has concluded that while we are making progress on the matter, we cannot at this stage conclude that our internal control over financial reporting has sufficiently improved during the period covered by this annual report on Form 20-F.
AUDIT COMMITTEE FINANCIAL EXPERT |
Our board of directors has determined that Lori Wheeler Næss, an independent director and a member of our audit committee, qualifies as an “audit committee financial expert” within the meaning of the SEC rules and possesses financial sophistication within the meaning of Listing Rules of the Nasdaq Stock Market. Lori Wheeler Næss meets the independence standards under Rule 10A-3 under the Exchange Act.
CODE OF ETHICS |
Our board of directors has adopted a code of business conduct and ethics that applies to all of our directors, officers, employees, including certain provisions that specifically apply to our principal executive officer, principal financial officer, principal accounting officer or controller and any other persons who perform similar functions for us. We have filed our code of business conduct and ethics as Exhibit 99.1 of our registration statement on Form F-1 (file No. 333-226017) filed with the SEC on June 29, 2018 and posted a copy of our code of business conduct and ethics on our website at investor.opera.com. We hereby undertake to provide to any person without charge, a copy of our code of business conduct and ethics within ten working days after we receive such person’s written request.
PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by KPMG AS, our independent registered public accounting firm, for the periods indicated. We did not pay any other fees to our independent registered public accounting firm during the periods indicated below.
|
| For the Year Ended December 31, | For the Year Ended December 31, | |||||||||
|
| 2017 |
| 2018 | 2018 | 2019 | ||||||
|
| (US$ in thousands) | (US$ in thousands) | |||||||||
Audit fees (1) |
| 1,455 |
| 1,505 | 1,505 | 1,970 | ||||||
Audit-related fees (2) |
| 190 |
| 225 | 225 | 53 | ||||||
Tax fees (3) |
| — |
| 10 | 10 | 44 | ||||||
| All other fees | — | — | - | - | ||||||||
(1) | Audit fees include the audit of |
(2) | Audit-related fees means the aggregate fees billed for professional services rendered by our principal auditors for the assurance and related services, which were not included under Audit Fees above. |
(3) | Tax fees means the aggregate fees billed in each of the fiscal periods listed for professional services rendered by our principal auditors for tax compliance. |
The policy of our audit committee is to pre-approve all audit and non-audit services provided by KPMG AS, our independent registered public accounting firm, including audit services and audit-related services as described above.
EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
We are in compliance with Rule 10A-3 under the Exchange Act and The Nasdaq Stock Market, Inc. Marketplace Rules with respect to the audit committee.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
On November 8, 2018, we announced that our board of directors had approved a share repurchase program of up to 1.5 million ADSs to be purchased on the open market, commencing on November 12, 2018. AtAs of December 31, 2018, we had purchased 728,912 ADSs, at a total cost of US$4.9 million. In February 2019, the share repurchase program was completed following the successful repurchase of all 1.5 million ADSs for an aggregate purchase price of approximately US$10.6 million.
The following table provides information about the shares we repurchased each month under the program.
Period | (a) Total Number of ADSs Purchased | (b) Average Price Paid per ADS | (c) Total Number of ADSs Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number (or Appropriate Dollar Value of ADSs that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
Nov 1 - Nov 30, 2018 | 481,837 | 6.79 | 481,837 | $ | 1,018,163 | |||||||||||
Dec 1 - Dec 31, 2018 | 247,075 | 6.44 | 247,075 | $ | 771,008 | |||||||||||
Jan 1 - Jan 31, 2019 | 649,640 | 7.38 | 649,640 | $ | 121,448 | |||||||||||
Feb 1 - Feb 28, 2019 | 121,448 | 7.99 | 121,448 | 0 | ||||||||||||
Total | 1,500,000 | 7.08 | 1,500,000 | 0 | ||||||||||||
On January 17, 2020 we announced that our board of directors had approved an additional share repurchase program, which authorized us to execute the repurchase of up to US$50 million of ADSs by January 17, 2021, in any form that management may deem appropriate. As of the date of this report, we have purchased 773,486 ADSs under this program, at a total cost of US$5.48 million.
The following table provides information about the shares we repurchased each month under the program.
Issuer Purchases of Equity Securities
Period |
| (a) Total Number of ADSs Purchased |
|
| (b) Average Price Paid per ADS |
|
| (c) Total Number of ADSs Purchased as Part of Publicly Announced Plans or Programs |
|
| (d) Maximum Number (or Appropriate Dollar Value of ADSs that May Yet Be Purchased Under the Plans or Programs |
| ||||
Month #1 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #2 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #3 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #4 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #5 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #6 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #7 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #8 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #9 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #10 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Month #11 2018 |
|
| 481,837 |
|
|
| 6.79 |
|
|
| 481,837 |
|
|
| 1,018,163 |
|
Month #12 2018 |
|
| 247,075 |
|
|
| 6.44 |
|
|
| 247,075 |
|
|
| 771,088 |
|
Month #1 2019 | 649,640 | 7.38 | 649,640 | 121,448 | ||||||||||||
Month #2 2019 | 121,448 | 7.99 | 121,448 | 0 | ||||||||||||
Total |
|
| 1,500,000 |
|
|
| 7.08 |
|
|
| 1,500,000 |
|
|
| 0 |
|
Period | (a) Total Number of ADSs Purchased | (b) Average Price Paid per ADS | (c) Total Number of ADSs Purchased as Part of Publicly Announced Plans or Programs | (d) Maximum Number or Appropriate Dollar Value of ADSs that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
Jan 1 - Jan 31, 2020 | 0 | 0 | 0 | $ | 50,000,000 | |||||||||||
Feb 1 - Feb 29, 2020 | 110,664 | 7,97 | 110,664 | $ | 49,118,374 | |||||||||||
Mar 1 - Mar 31, 2019 | 662,822 | 6.93 | 773,486 | $ | 44,523,100 | |||||||||||
CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not applicable.
CORPORATE GOVERNANCE |
As a Cayman Islands exempted company listed on the Nasdaq Global Select Market, we are subject to Nasdaq corporate governance listing standards. However, Rule 5615(a)(3) of The Listing Rules of the Nasdaq Stock Market (the “Nasdaq Rules”) permits foreign private issuers like us to follow certain home country corporate governance practices in lieu of certain provisions of the Rule 5600 Series of the Nasdaq Rules. A foreign private issuer that elects to follow a home country practice instead of such provisions, must disclose in its annual reports each requirement that it does not follow and describe the home country practice followed by it.
Our current corporate governance practices differ from Nasdaq corporate governance requirements for U.S. companies in certain respects, as summarized below:
• Rule 5605(b)(1) of the Nasdaq Rules requires a Nasdaq listed company to have a majority of the board be independent. In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which practices do not require a majority independent board; and
• Rule 5605(d)(2) of the Nasdaq Rules requires a Nasdaq listed company to have a compensation committee composed solely of independent directors to determine or recommend the compensation of the executive officers of the company. In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which practices do not require that any of the members of a company’s compensation committee be independent directors;directors.
• Rule 5605(e)(1) of the Nasdaq Rules requires a Nasdaq listed company to have a corporate governance and nomination committee composed solely of independent directors to select or recommend for director nominees. The practices of our home country, the Cayman Islands, do not require that any of the members of a company’s corporate governance and nomination committee be independent directors. As a newly listed company, however, we intend to have our corporate governance and nomination committee consist solely of independent directors within the one year phase in period afforded by Rule 5615(b)(1) of the Nasdaq Rules;
In addition, under Rule 5615(a)(3) of the Nasdaq Rules, foreign private issuers following home country practices are subject to several important exceptions, among which, a foreign private issuer must have an audit committee that satisfies the requirements of Rule 10A-3 of Exchange Act. Rule 10A-3 (b)(1)(iv)(2) of Exchange Act allows Yahui Zhou, our CEO, to serve on our audit committee for up to one year from the date of effectiveness of our registration statement on Form F-1, i.e. July 26, 2018. We intend to have our audit committee consist solely of independent directors that satisfy the Nasdaq Rules and SEC requirements within one year from the date of the effectiveness of our registration statement on Form F-1.
MINE SAFETY DISCLOSURE |
Not applicable.
FINANCIAL STATEMENTS |
We have elected to provide financial statements pursuant to Item 18.
FINANCIAL STATEMENTS |
The consolidated financial statements of Opera Limited are included at the end of this annual report.
EXHIBITS |
Exhibit |
| Description of Document |
1.1 |
| |
2.1 |
| Form of Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3) |
2.2 |
| |
2.3 |
| |
| 2.4* | Description of the Rights of Securities Registered under Section 12 of the Securities Act as of December 31, 2019. | |
4.1 |
| |
4.2 |
| |
4.3 |
| |
4.4† |
| |
4.5† |
| |
4.6 |
| |
| ||
| ||
| ||
4.10* | ||
4.11 |
| |
| ||
| ||
4.14* | ||
4.15* | ||
8.1* | Significant Subsidiaries and Consolidated Affiliated Entities of the Registrant | |
11.1 | ||
12.1* | ||
12.2* | ||
13.1** | ||
13.2** | ||
15.1* | Consents of KPMG, Independent Registered Public Accounting Firm | |
| 101.INS** | XBRL Instance | |
| 101.SCH** | XBRL Taxonomy Extension Schema | |
| 101.CAL** | XBRL Taxonomy Extension Calculation | |
| 101.DEF** | XBRL Taxonomy Extension Definition | |
| 101.LAB** | XBRL Taxonomy Extension Labels | |
| 101.PRE** | XBRL Taxonomy Extension Presentation |
* | Filed with this annual report on Form 20-F. |
** | Furnished with this annual report on Form 20-F. |
† | Confidential treatment has been granted with respect to portions of the exhibit that have been redacted pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| Opera Limited | ||
|
|
| |
| By: | /s/ Yahui Zhou | |
| Name: Yahui Zhou | ||
Date: April 17, 201930, 2020
[Signature Page to 20-F]
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM | F-2 |
CONSOLIDATED STATEMENT OF OPERATIONS | F-3 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME | F-4 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION | F-5 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY | F-6 |
CONSOLIDATED STATEMENT OF CASH FLOWS | F-7 |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS | F-9 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Opera Limited:Limited
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statementsstatement of financial position of Opera Limited and subsidiaries (the Company) as of December 31, 20182019 and 2017, and2018, the related consolidated statements of operations, comprehensive income, (loss), changes in equity, and cash flows for each of the years in the two-yearthree-year period ended December 31, 2018 (Successor) and for the period from July 26, 2016 to December 31, 2016 (Successor), and for the period from January 1, 2016 to November 3, 2016 (Predecessor),2019, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182019 and 2017,2018, and the results of its operations and its cash flows for each of the years in the two-yearthree-year period ended December 31, 2018 and for the period from July 26, 2016 to December 31, 2016 (Successor), and for the period from January 1, 2016 to November 3, 2016 (Predecessor)2019 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
Board (IFRS).
Preparation of Predecessor Financial Statements
Change in Accounting Principle
As discussed in Note 2.23 to the consolidated financial statements, the Predecessor financial statements have been prepared on a carve-out basis,Company has changed its method of accounting for leases as the business acquired did not operate as a separate group of entities throughout the period from January 1, 20162019 due to November 3, 2016.the adoption IFRS 16 Leases.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG AS
We have served as the Company’s and its predecessor's auditor since 2000.
Oslo, Norway
April 17, 201930, 2020
| |||||||||||
CONSOLIDATED STATEMENT OF OPERATIONS |
Predecessor | Successor | |||||||||||||||||||||||||||||||||||
Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||||
[US$ thousands, except per share and ADS amounts] | Notes | 2016 | 2016 | 2017 | 2018 | Notes | 2017 | 2018 | 2019 | |||||||||||||||||||||||||||
Revenue | 4 | 88,518 | 18,767 | 128,893 | 172,276 | 4, 5 | 128,893 | 172,276 | 334,855 | |||||||||||||||||||||||||||
Other income | 4 | — | — | 5,460 | — | 4 | 5,460 | - | - | |||||||||||||||||||||||||||
Operating expenses | ||||||||||||||||||||||||||||||||||||
Cost of revenue | (638 | ) | (469 | ) | (1,303 | ) | (13,316 | ) | ||||||||||||||||||||||||||||
Cost of revenue (1) | 7 | (3,969 | ) | (20,009 | ) | (73,991 | ) | |||||||||||||||||||||||||||||
Personnel expenses including share-based remuneration | 5 | (35,493 | ) | (5,972 | ) | (44,315 | ) | (40,968 | ) | 6 | (42,134 | ) | (34,683 | ) | (61,029 | ) | ||||||||||||||||||||
Marketing and distribution expenses | 4 | (30,971 | ) | (31,381 | ) | (73,150 | ) | |||||||||||||||||||||||||||||
| Credit loss expense | 4, 21 | (1,837 | ) | 678 | (577 | ) | ||||||||||||||||||||||||||||||
| Other changes in fair value of loans to customers | 4, 5, 21 | - | (528 | ) | (54,302 | ) | ||||||||||||||||||||||||||||||
Depreciation and amortization | 8, 9 | (9,586 | ) | (3,082 | ) | (16,604 | ) | (12,694 | ) | 9, 10 | (16,604 | ) | (12,694 | ) | (18,933 | ) | ||||||||||||||||||||
Other expenses | 6 | (42,486 | ) | (19,032 | ) | (58,652 | ) | (59,997 | ) | 8 | (25,359 | ) | (28,359 | ) | (32,210 | ) | ||||||||||||||||||||
Restructuring costs | 7 | (3,911 | ) | — | (3,240 | ) | — | (3,240 | ) | - | - | |||||||||||||||||||||||||
Total operating expenses | (92,113 | ) | (28,555 | ) | (124,114 | ) | (126,975 | ) | (124,114 | ) | (126,975 | ) | (314,192 | ) | ||||||||||||||||||||||
Operating profit (loss) | (3,595 | ) | (9,788 | ) | 10,239 | 45,301 | ||||||||||||||||||||||||||||||
Operating profit | 10,239 | 45,301 | 20,662 | |||||||||||||||||||||||||||||||||
Share of net income (loss) of associates and joint ventures | 29 | (2,664 | ) | (237 | ) | (1,670 | ) | (3,248 | ) | 27 | (1,670 | ) | (3,248 | ) | (3,818 | ) | ||||||||||||||||||||
| Change in fair value of preferred shares in associates | 16, 27 | - | - | 37,900 | ||||||||||||||||||||||||||||||||
Net finance income (expense) | ||||||||||||||||||||||||||||||||||||
Finance income | 22 | — | 37 | 1,054 | 1,637 | 23 | 1,054 | 1,637 | 10,530 | |||||||||||||||||||||||||||
Finance expense | 22 | (1,378 | ) | (24 | ) | (238 | ) | (1,695 | ) | 23 | (238 | ) | (1,695 | ) | (1,505 | ) | ||||||||||||||||||||
Net foreign exchange gain (loss) | 22 | (1,212 | ) | 212 | (1,881 | ) | (354 | ) | 23 | (1,881 | ) | (354 | ) | (269 | ) | |||||||||||||||||||||
Net finance income (expense) | (2,590 | ) | 225 | (1,065 | ) | (412 | ) | (1,065 | ) | (412 | ) | 8,756 | ||||||||||||||||||||||||
Net Income (loss) before income taxes | (8,849 | ) | (9,800 | ) | 7,504 | 41,641 | ||||||||||||||||||||||||||||||
Income tax (expense) benefit | 24 | 743 | 2,096 | (1,440 | ) | (6,481 | ) | |||||||||||||||||||||||||||||
Net income (loss) | (8,106 | ) | (7,704 | ) | 6,064 | 35,160 | ||||||||||||||||||||||||||||||
Net income before income taxes | 7,504 | 41,641 | 63,500 | |||||||||||||||||||||||||||||||||
Income tax expense | 25 | (1,440 | ) | (6,481 | ) | (5,602 | ) | |||||||||||||||||||||||||||||
Net income | 6,064 | 35,160 | 57,899 | |||||||||||||||||||||||||||||||||
Net income (loss) attributable to: | ||||||||||||||||||||||||||||||||||||
Net income attributable to: | ||||||||||||||||||||||||||||||||||||
Equity holders of the parent | 26 | (8,106 | ) | (7,704 | ) | 6,064 | 35,160 | 6,064 | 35,160 | 57,899 | ||||||||||||||||||||||||||
Non-controlling interests | — | — | — | — | - | - | - | |||||||||||||||||||||||||||||
| Total net income (loss) attributed | (8,106 | ) | (7,704 | ) | 6,064 | 35,160 | ||||||||||||||||||||||||||||||
Total net income attributed | 6,064 | 35,160 | 57,899 | |||||||||||||||||||||||||||||||||
Net income (loss) per ordinary share | ||||||||||||||||||||||||||||||||||||
Net income per ordinary share | ||||||||||||||||||||||||||||||||||||
Basic, US$ | 31 | (0.043 | ) | (0.040 | ) | 0.032 | 0.174 | 29 | 0.03 | 0.17 | 0.26 | |||||||||||||||||||||||||
Diluted, US$ | 31 | (0.043 | ) | (0.040 | ) | 0.031 | 0.168 | 29 | 0.03 | 0.17 | 0.25 | |||||||||||||||||||||||||
Net income (loss) per ADS | ||||||||||||||||||||||||||||||||||||
Net income per ADS | ||||||||||||||||||||||||||||||||||||
Basic, US$ | 31 | (0.085 | ) | (0.081 | ) | 0.064 | 0.347 | 29 | 0.06 | 0.35 | 0.52 | |||||||||||||||||||||||||
Diluted, US$ | 31 | (0.085 | ) | (0.081 | ) | 0.063 | 0.337 | 29 | 0.06 | 0.34 | 0.51 | |||||||||||||||||||||||||
(1) Certain expenses in the comparative periods have been reclassified as Cost of revenue. See Note 7 for more details. The accompanying notes are an integral part of this financial statement. |
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME |
Predecessor | Successor | |||||||||||||||||||||||||||||||||
Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | Year Ended December 31, | ||||||||||||||||||||||||||||||
[US$ thousands] | Notes | 2016 | 2016 | 2017 | 2018 | Notes | 2017 | 2018 | 2019 | |||||||||||||||||||||||||
Net income (loss) | (8,106 | ) | (7,704 | ) | 6,064 | 35,160 | ||||||||||||||||||||||||||||
Net income | 6,064 | 35,160 | 57,899 | |||||||||||||||||||||||||||||||
Other comprehensive income (loss) that may be reclassified to Statement of Operations in subsequent periods (net of tax) | ||||||||||||||||||||||||||||||||||
Other comprehensive income that may be reclassified to the Statement of Operations in subsequent periods (net of tax) | ||||||||||||||||||||||||||||||||||
Exchange differences on translation of foreign operations | (667 | ) | (630 | ) | 2,235 | (1,245 | ) | 2,235 | (1,245 | ) | (1,790 | ) | ||||||||||||||||||||||
Reclassification of exchange differences on loss of control | — | — | — | (138 | ) | - | (138 | ) | 7 | |||||||||||||||||||||||||
Share of other comprehensive income (loss) of associates and joint ventures | 29 | — | — | — | 94 | 27 | - | 94 | (41 | ) | ||||||||||||||||||||||||
Net other comprehensive income (loss) that may be reclassified to the Statement of Operations in subsequent periods | (667 | ) | (630 | ) | 2,235 | (1,289 | ) | 2,235 | (1,289 | ) | (1,824 | ) | ||||||||||||||||||||||
Total comprehensive income (loss), net of tax | (8,773 | ) | (8,334 | ) | 8,299 | 33,871 | ||||||||||||||||||||||||||||
Total comprehensive income | 8,299 | 33,871 | 56,075 | |||||||||||||||||||||||||||||||
Total comprehensive income (loss) attributable to: | ||||||||||||||||||||||||||||||||||
Total comprehensive income attributable to: | ||||||||||||||||||||||||||||||||||
Equity holders of the parent | 26 | (8,773 | ) | (8,334 | ) | 8,299 | 33,871 | 8,299 | 33,871 | 56,075 | ||||||||||||||||||||||||
Non-controlling interests | — | — | — | — | - | - | - | |||||||||||||||||||||||||||
| Total comprehensive income (loss) attributed | (8,773 | ) | (8,334 | ) | 8,299 | 33,871 | ||||||||||||||||||||||||||||
Total comprehensive income attributed | 8,299 | 33,871 | 56,075 | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of this financial statement. |
| |||||||
CONSOLIDATED STATEMENT OF FINANCIAL POSITION |
As of | As of | |||||||||||||||||||||||
December 31, | December 31, | As of December 31, | ||||||||||||||||||||||
[US$ thousands] | Notes | 2017 | 2018 | Notes | 2018 | 2019 | ||||||||||||||||||
ASSETS | ||||||||||||||||||||||||
Non-current assets | ||||||||||||||||||||||||
Furniture, fixtures and equipment | 8 | 13,460 | 12,162 | 9 | 12,162 | 26,053 | ||||||||||||||||||
Intangible assets | 9 | 118,620 | 115,444 | 10 | 115,444 | 110,807 | ||||||||||||||||||
Goodwill | 9 | 421,578 | 421,578 | 10 | 421,578 | 421,578 | ||||||||||||||||||
Investments in associates and joint ventures | 29 | 5,517 | 35,060 | 16, 27 | 35,060 | 76,300 | ||||||||||||||||||
Other financial assets | 15 | 1,857 | 2,025 | |||||||||||||||||||||
Non-current financial assets | 16 | 2,025 | 1,351 | |||||||||||||||||||||
Deferred tax assets | 24 | 958 | 944 | 25 | 944 | 6,204 | ||||||||||||||||||
Total non-current assets | 561,989 | 587,213 | 587,213 | 642,293 | ||||||||||||||||||||
Current assets | ||||||||||||||||||||||||
Trade receivables | 20 | 31,072 | 37,468 | 21 | 37,468 | 49,371 | ||||||||||||||||||
Loans to customers | 5, 16 | 3,092 | 93,115 | |||||||||||||||||||||
Other receivables | 20 | 7,865 | 7,123 | 21 | 4,031 | 59,112 | ||||||||||||||||||
Prepayments | 20 | 2,166 | 14,372 | 21 | 14,372 | 25,809 | ||||||||||||||||||
Other financial assets | 15 | — | 1,254 | |||||||||||||||||||||
Inventories | 11 | - | 7,752 | |||||||||||||||||||||
Other current financial assets | 16 | 89 | 1,535 | |||||||||||||||||||||
Marketable securities | 16 | 1,165 | 42,146 | |||||||||||||||||||||
Cash and cash equivalents | 19 | 33,207 | 177,873 | 20 | 177,873 | 139,487 | ||||||||||||||||||
Total cash, cash equivalents, and marketable securities | 179,038 | 181,633 | ||||||||||||||||||||||
Total current assets | 74,311 | 238,090 | 238,090 | 418,327 | ||||||||||||||||||||
TOTAL ASSETS | 636,300 | 825,303 | 825,303 | 1,060,620 | ||||||||||||||||||||
EQUITY AND LIABILITIES | ||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||
Share capital | 26 | 19,025 | 22,012 | 29 | 22 | 24 | ||||||||||||||||||
Other paid in capital | 557,506 | 716,700 | 738,690 | 814,177 | ||||||||||||||||||||
Retained earnings | 5,366 | 36,432 | 36,432 | 99,513 | ||||||||||||||||||||
Foreign currency translation reserve | 1,605 | 316 | 316 | (1,508 | ) | |||||||||||||||||||
Equity attributed to equity holders of the parent | 583,503 | 775,460 | 775,460 | 912,206 | ||||||||||||||||||||
Non-controlling interests | — | — | - | - | ||||||||||||||||||||
Total Equity | 583,503 | 775,460 | ||||||||||||||||||||||
Total equity | 775,460 | 912,206 | ||||||||||||||||||||||
Non-current liabilities | ||||||||||||||||||||||||
Finance lease liabilities and other loans | 10, 11 | 4,032 | 2,271 | |||||||||||||||||||||
Non-current lease liabilities and other loans | 12, 13 | 2,271 | 9,181 | |||||||||||||||||||||
Deferred tax liabilities | 24 | 11,828 | 13,358 | 25 | 13,358 | 10,526 | ||||||||||||||||||
Other non-current liabilities | 15 | 87 | 212 | 16 | 212 | 137 | ||||||||||||||||||
Total non-current liabilities | 15,947 | 15,841 | 15,841 | 19,844 | ||||||||||||||||||||
Current liabilities | ||||||||||||||||||||||||
Trade and other payables | 21 | 21,401 | 17,957 | 22 | 17,957 | 57,125 | ||||||||||||||||||
Finance lease liabilities and other loans | 10, 11 | 2,073 | 2,490 | |||||||||||||||||||||
Current lease liabilities and other loans | 12, 13 | 2,490 | 47,793 | |||||||||||||||||||||
Income tax payable | 24 | 3,709 | 1,920 | 25 | 1,920 | 7,803 | ||||||||||||||||||
Deferred revenue | 1,472 | 1,932 | 1,932 | 708 | ||||||||||||||||||||
Other current liabilities | 12, 14 | 8,195 | 9,701 | 15, 16 | 9,701 | 15,142 | ||||||||||||||||||
Total current liabilities | 36,850 | 34,002 | 34,002 | 128,570 | ||||||||||||||||||||
Total liabilities | 52,797 | 49,843 | 49,843 | 148,414 | ||||||||||||||||||||
TOTAL EQUITY AND LIABILITIES | 636,300 | 825,303 | 825,303 | 1,060,620 | ||||||||||||||||||||
The accompanying notes are an integral part of this financial statement. |
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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY |
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for the year ended December 31, 2017 | ||||||||||||||||||||
[US$ thousand] | Share capital (1) | Other paid in capital (1) | Retained earnings | Foreign currency translation reserve | Total equity | |||||||||||||||
As of January 1, 2017 | 19 | 576,512 | (7,704 | ) | (630 | ) | 568,197 | |||||||||||||
Net income | - | - | 6,064 | - | 6,064 | |||||||||||||||
Other comprehensive income (loss) | - | - | - | 2,235 | 2,235 | |||||||||||||||
Total comprehensive income | - | - | 6,064 | 2,235 | 8,299 | |||||||||||||||
Share-based payments (Note 6) | - | - | 7,006 | - | 7,006 | |||||||||||||||
As of December 31, 2017 | 19 | 576,512 | 5,366 | 1,605 | 583,503 | |||||||||||||||
for the year ended December 31, 2018 | ||||||||||||||||||||
[US$ thousands] | Share capital (1) | Other paid in capital (1) | Retained earnings | Foreign currency translation reserve | Total equity | |||||||||||||||
As of December 31, 2017, as previously reported | 19 | 576,512 | 5,366 | 1,605 | 583,503 | |||||||||||||||
Impact of implementing IFRS 9 and IFRS 15 | - | - | (629 | ) | - | (629 | ) | |||||||||||||
As of January 1, 2018, restated | 19 | 576,512 | 4,737 | 1,605 | 582,874 | |||||||||||||||
Net income | - | - | 35,160 | - | 35,160 | |||||||||||||||
Other comprehensive income (loss) | - | - | - | (1,289 | ) | (1,289 | ) | |||||||||||||
Total comprehensive income | - | - | 35,160 | (1,289 | ) | 33,871 | ||||||||||||||
Business combination with entity under common control (Note 26) | - | - | (9,904 | ) | - | (9,904 | ) | |||||||||||||
Acquisition of treasury shares (Note 19) | - | (4,875 | ) | - | - | (4,875 | ) | |||||||||||||
Contribution of equity, net of transaction costs | 3 | 167,053 | - | - | 167,056 | |||||||||||||||
Share-based remuneration expense (Note 6) | - | - | 6,439 | - | 6,439 | |||||||||||||||
As of December 31, 2018 | 22 | 738,690 | 36,432 | 316 | 775,460 | |||||||||||||||
for the year ended December 31, 2019 | ||||||||||||||||||||
[US$ thousands] | Share capital (1) | Other paid in capital (1) | Retained earnings | Foreign currency translation reserve | Total equity | |||||||||||||||
As of December 31, 2018 | 22 | 738,690 | 36,432 | 316 | 775,460 | |||||||||||||||
Impact of implementing IFRS 16 | - | - | 64 | - | 64 | |||||||||||||||
As of January 1, 2019, restated | 22 | 738,690 | 36,496 | 316 | 775,524 | |||||||||||||||
Net income | - | - | 57,899 | - | 57,899 | |||||||||||||||
Other comprehensive income (loss) | - | - | - | (1,824 | ) | (1,824 | ) | |||||||||||||
Total comprehensive income | - | - | 57,899 | (1,824 | ) | 56,075 | ||||||||||||||
Contribution of equity, net of transaction costs (Note 19) | 2 | 81,267 | - | - | 81,269 | |||||||||||||||
Acquisition of treasury shares (Note 19) | - | (5,780 | ) | - | - | (5,780 | ) | |||||||||||||
Share-based remuneration expense (Note 6) | - | - | 5,118 | - | 5,118 | |||||||||||||||
As of December 31, 2019 | 24 | 814,177 | 99,513 | (1,508 | ) | 912,206 | ||||||||||||||
(1) Opera Limited, the Group's parent, was established in 2018. The amount of share capital in the prior period reflects the share capital of the parent at the time of incorporation, as if the share capital was contributed in 2016. In 2019, the amounts of share capital and other paid in capital have been amended by reclassifying amounts between the two equity components.
| SUCCESSOR | ||||||||||||||||||||
2016 | ||||||||||||||||||||
[US$ thousands] | Share capital (1) | Other paid in capital | Retained Earnings (accumulated deficit) | Foreign currency translation reserve | Total Equity | |||||||||||||||
As of inception on July 26, 2016 | — | — | — | — | — | |||||||||||||||
Net income (loss) | — | — | (7,704 | ) | — | (7,704 | ) | |||||||||||||
Other comprehensive income (loss) | — | — | — | (630 | ) | (630 | ) | |||||||||||||
Total comprehensive income (loss) | — | — | (7,704 | ) | (630 | ) | (8,334 | ) | ||||||||||||
Contributed equity | 19,025 | 557,506 | — | — | 576,531 | |||||||||||||||
As of December 31, 2016 | 19,025 | 557,506 | (7,704 | ) | (630 | ) | 568,197 | |||||||||||||
2017 | ||||||||||||||||||||
[US$ thousands] | Share capital (1) | Other paid in capital | Retained Earnings (accumulated deficit) | Foreign currency translation reserve | Total Equity | |||||||||||||||
As of January 1, 2017 | 19,025 | 557,506 | (7,704 | ) | (630 | ) | 568,197 | |||||||||||||
Net income (loss) | — | — | 6,064 | — | 6,064 | |||||||||||||||
Other comprehensive income (loss) | — | — | — | 2,235 | 2,235 | |||||||||||||||
Total comprehensive income (loss) | — | — | 6,064 | 2,235 | 8,299 | |||||||||||||||
Share-based payments | — | — | 7,006 | — | 7,006 | |||||||||||||||
As of December 31, 2017 | 19,025 | 557,506 | 5,366 | 1,605 | 583,503 | |||||||||||||||
The accompanying notes are an integral part of this financial statement.
2018 | ||||||||||||||||||||
[US$ thousands] | Share capital (1) | Other paid in capital | Retained Earnings | Foreign currency translation reserve | Total Equity | |||||||||||||||
As of December 31, 2017, as previously reported | 19,025 | 557,506 | 5,366 | 1,605 | 583,503 | |||||||||||||||
Impact of new accounting standards (Note 3) | — | — | (629 | ) | — | (629 | ) | |||||||||||||
As of January 1, 2018, restated | 19,025 | 557,506 | 4,737 | 1,605 | 582,874 | |||||||||||||||
Net income (loss) | — | — | 35,160 | — | 35,160 | |||||||||||||||
Other comprehensive income (loss) | — | — | — | (1,289 | ) | (1,289 | ) | |||||||||||||
Total comprehensive income (loss) | — | 35,160 | (1,289 | ) | 33,871 | |||||||||||||||
Contribution of equity, net of transaction costs (Note 18) | 2,987 | 164,069 | — | — | 167,056 | |||||||||||||||
Business combination with entity under common control (Note 28) | — | — | (9,904 | ) | — | (9,904 | ) | |||||||||||||
Acquisition of treasury shares (Notes 18 and 26) | — | (4,875 | ) | — | — | (4,875 | ) | |||||||||||||
Share-based payments (Note 25) | — | — | 6,439 | — | 6,439 | |||||||||||||||
As of December 31, 2018 | 22,012 | 716,700 | 36,432 | 316 | 775,460 | |||||||||||||||
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CONSOLIDATED STATEMENT OF CASH FLOWS |
Predecessor | Successor | |||||||||||||||||||||||||||||||||||
Year ended December 31, | ||||||||||||||||||||||||||||||||||||
[US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | Notes | 2017 | 2018 | 2019 | ||||||||||||||||||||||||||||
Notes | 2016 | 2016 | 2017 | 2018 | ||||||||||||||||||||||||||||||||
Cash flow from operating activities | ||||||||||||||||||||||||||||||||||||
Net income (loss) before income taxes | (8,849) | (9,800) | 7,504 | 41,641 | ||||||||||||||||||||||||||||||||
Net income before income taxes | 7,504 | 41,640 | 63,500 | |||||||||||||||||||||||||||||||||
Income taxes paid | (1,759) | (369) | (3,202) | (4,381) | (3,202 | ) | (4,381 | ) | (9,870 | ) | ||||||||||||||||||||||||||
Gain on disposal of equipment and intangible assets | 4 | — | — | (5,460) | — | 4 | (5,460 | ) | - | - | ||||||||||||||||||||||||||
Depreciation and amortization | 8 | 9,586 | 3,082 | 16,604 | 12,694 | 9, 10 | 16,604 | 12,694 | 18,934 | |||||||||||||||||||||||||||
Share of net loss (income) of associates and joint ventures | 29 | 2,664 | 237 | 1,670 | 3,248 | 27 | 1,670 | 3,248 | 3,818 | |||||||||||||||||||||||||||
| Change in fair value of preferred shares in associates | 16, 27 | - | - | (37,900 | ) | |||||||||||||||||||||||||||||||
Share-based payment expense | 25 | 768 | — | 7,006 | 6,439 | 6 | 7,006 | 6,439 | 5,118 | |||||||||||||||||||||||||||
Net finance income (expense) | 23 | 1,065 | 412 | (8,756 | ) | |||||||||||||||||||||||||||||||
Change in inventories | 11 | - | - | (7,752 | ) | |||||||||||||||||||||||||||||||
Change in trade and other receivables | 20 | (5,391) | (3,947) | (235) | (9,635) | 21 | (235 | ) | (6,543 | ) | (14,206 | ) | ||||||||||||||||||||||||
Change in loans to customers | 5 | - | (3,092 | ) | (90,023 | ) | ||||||||||||||||||||||||||||||
Change in trade and other payables | 21 | 2,645 | 11,855 | (8,509) | (5,635) | 22 | (8,509 | ) | (5,635 | ) | 39,168 | |||||||||||||||||||||||||
Change in deferred revenue | (81) | (429) | (2,106) | 460 | (2,106 | ) | 460 | (1,224 | ) | |||||||||||||||||||||||||||
Change in prepayments | 20 | — | — | (136) | (12,205) | 21 | (136 | ) | (12,205 | ) | (11,437 | ) | ||||||||||||||||||||||||
Change in other liabilities | — | — | (1,402) | 1,507 | (1,402 | ) | 1,507 | 5,441 | ||||||||||||||||||||||||||||
Other | (14) | 1,067 | (81) | (303) | (1,146 | ) | (715 | ) | 726 | |||||||||||||||||||||||||||
Net cash flow from (used in) operating activities | (432) | 1,697 | 11,653 | 33,828 | 11,653 | 33,828 | (44,464 | ) | ||||||||||||||||||||||||||||
Cash flow from investment activities | ||||||||||||||||||||||||||||||||||||
Proceeds from sales of equipment and intangible assets | — | — | 5,716 | — | 4 | 5,716 | - | 6 | ||||||||||||||||||||||||||||
Purchase of equipment | 8 | (2,569) | (314) | (3,523) | (2,616) | 9 | (3,523 | ) | (2,616 | ) | (8,868 | ) | ||||||||||||||||||||||||
Settlement of earnout obligation | 12 | — | — | — | (600) | - | (600 | ) | - | |||||||||||||||||||||||||||
Receipt of contingent consideration (1) | 29 | — | 31,655 | — | 2,945 | |||||||||||||||||||||||||||||||
Receipt of contingent consideration | - | 2,945 | - | |||||||||||||||||||||||||||||||||
Acquisition of subsidiary, net of cash acquired | 28 | — | — | — | (7,901) | - | (7,901 | ) | - | |||||||||||||||||||||||||||
Release of escrow account | — | — | 5,402 | 2,508 | 5,402 | 2,508 | - | |||||||||||||||||||||||||||||
Disbursement of short-term loans | — | — | (500) | (2,400) | (500 | ) | (2,400 | ) | - | |||||||||||||||||||||||||||
Investment in, and loans to associates and joint ventures | 29 | (4,050) | (5,486) | (6,896) | (32,867) | 27 | (6,896 | ) | (32,867 | ) | (6,550 | ) | ||||||||||||||||||||||||
Net proceeds from purchase and sale of listed equity instruments | 15 | — | — | — | (2,188) | |||||||||||||||||||||||||||||||
| Repayment of loans to associates and joint ventures | - | - | 726 | |||||||||||||||||||||||||||||||||
Deposit of collateral for subsidiaries' loan facility | 19 | - | - | (52,878 | ) | |||||||||||||||||||||||||||||||
Net purchase of listed equity instruments | 16, 19 | - | (2,188 | ) | (35,250 | ) | ||||||||||||||||||||||||||||||
Development expenditure | 9 | (1,610) | (318) | (3,503) | (4,132) | 10 | (3,503 | ) | (4,132 | ) | (4,173 | ) | ||||||||||||||||||||||||
Net cash flow from (used in) investment activities | (8,229) | 25,538 | (3,305) | (47,250) | ||||||||||||||||||||||||||||||||
Net cash flow from (used in) investing activities | (3,305 | ) | (47,250 | ) | (106,987 | ) | ||||||||||||||||||||||||||||||
Cash flow from financing activities | ||||||||||||||||||||||||||||||||||||
Proceeds from issues of equity instruments | — | 1,580 | — | 170,871 | 19 | - | 170,871 | 82,630 | ||||||||||||||||||||||||||||
Transaction costs on issue of equity instruments | — | — | — | (2,992) | 19 | - | (2,992 | ) | (1,364 | ) | ||||||||||||||||||||||||||
Acquisition of treasury shares | 18, 26 | — | — | — | (4,875) | 19 | - | (4,875 | ) | (5,780 | ) | |||||||||||||||||||||||||
Proceeds from loans and borrowings | 23 | — | 5,512 | — | — | 13, 19 | - | - | 43,163 | |||||||||||||||||||||||||||
Payment of interests on loans and borrowings | 23, 24 | �� | - | - | (1,184 | ) | ||||||||||||||||||||||||||||||
Repayment of loans and borrowings | 23 | — | — | (4,372) | (1,765) | 13 | (4,372 | ) | (1,765 | ) | (1,509 | ) | ||||||||||||||||||||||||
Payment of finance lease liabilities | 23 | (4,980) | (146) | (5,659) | (2,293) | |||||||||||||||||||||||||||||||
Payment of lease liabilities | 12 | (5,659 | ) | (2,293 | ) | (2,755 | ) | |||||||||||||||||||||||||||||
Net cash flow from (used in) financing activities | (4,980) | 6,946 | (10,031) | 158,946 | (10,031 | ) | 158,946 | 113,200 | ||||||||||||||||||||||||||||
Net change in cash and cash equivalents | (13,641) | 34,181 | (1,683) | 145,524 | (1,683 | ) | 145,524 | (38,248 | ) | |||||||||||||||||||||||||||
Cash and cash equivalents at beginning of period | 19 | 30,602 | — | 34,181 | 33,207 | 20 | 34,181 | 33,207 | 177,873 | |||||||||||||||||||||||||||
Net foreign exchange difference | 212 | — | 709 | (857) | 709 | (857 | ) | (137 | ) | |||||||||||||||||||||||||||
Cash and cash equivalents at end of period | 19 | 17,173 | 34,181 | 33,207 | 177,873 | 20 | 33,207 | 177,873 | 139,487 | |||||||||||||||||||||||||||
The accompanying notes are an integral part of this financial statement. |
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INDEX TO NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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Note 1. Corporate information | F-9 |
Note 2. Significant accounting policies | F-10 |
Note 3. Changes in accounting policies and disclosures | F-24 |
Note 4. Segment and revenue information | F-26 |
Note 5. Loans to customers | F-29 |
Note 6. Personnel expenses including share-based remuneration | F-31 |
| Note 7. Cost of revenue | F-33 |
Note 8. Other expenses | F-34 |
Note 9. Furniture, fixtures and equipment | F-35 |
Note 10. Intangible assets | F-36 |
| Note 11. Inventories | F-38 |
Note 12. Leases | F-39 |
Note 13. Lease liabilities and other loans | F-40 |
Note 14. Guarantees and other commitments | F-41 |
Note 15. Other current liabilities | F-42 |
Note 16. Financial assets and liabilities | F-43 |
Note 17. Scheduled maturities of financial liabilities | F-47 |
Note 18. Financial risk management | F-48 |
Note 19. Capital management | F-50 |
Note 20. Cash and cash equivalents | F-51 |
Note 21. Trade receivables, prepayments and other receivables | F-52 |
Note 22. Trade and other payables | F-53 |
Note 23. Finance income and expense | F-54 |
Note 24. Changes in liabilities arising from financing activities | F-55 |
Note 25. Income tax | F-56 |
Note 26. Group information | F-58 |
Note 27. Investments in associates and joint ventures | F-60 |
Note 28. Related party disclosures | F-63 |
Note 29. Net income per share | F-66 |
Note 30. Events after the reporting period | F-67 |
Note 1 Corporate information
Successor
NOTE 1. | CORPORATE INFORMATION |
Opera Limited (the “Company” and “Parent”), with its office at Maples Corporate Services Limited, PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands, is an exempted company under the laws of Cayman Islands. The address of the principal executive office is Gjerdrums vei 19, 0484Vitaminveien 4, 0485 Oslo, Norway. The Company was incorporated in the Cayman Islands as of March 19, 2018, with the purpose of being the issuer in our initial public offering of American Depository Shares (ADSs) on Nasdaq following a corporate reorganization in 2018. The reorganization resulted in the members of Kunhoo Software LLC, the group’s parent company as of December 31, 2017 and at the time of the reorganization, exchanging their ownership interests for common shares and ownership in Opera Limited with substantially the same rights and proportionate ownership. For periods prior to the reorganization, the share amounts have been adjusted to reflect those of Opera Limited. In July 2018, Opera Limitedis listed on Nasdaq under the OPRA ticker symbol.symbol OPRA.
Opera Limited and its subsidiaries (the “Group”) are onehas become a leading global internet brand with an engaged and growing base. Building on over 20 years of innovation, starting with its browser products, the Group is increasingly leveraging its brand as well as its user base in order to expand its offerings and its business. Today, the Group offers users across Europe, Africa and Asia a range of products and services that include PC and mobile browsers as well as AI-powered news reader Opera News and app-based microfinance solutions. Information on the Group’s structure is provided in Notes 4 and 26. Information on other related party relationships of the world’s leading browser providers and an influential playerGroup is provided in the field of integrated AI-driven digital content discovery and recommendation platforms.Note 28.
The consolidated financial statements of the Group for the year ended December 31, 20182019 were authorized for issue in accordance with a resolution of the directors on April 17, 2019.
Predecessor
On November 3, 2016, Kunhoo Software LLC through wholly-owned subsidiaries acquired Opera Software AS (with subsidiaries, the “Acquired Companies”), which included the “Consumer Business” of Otello Corporation ASA, formerly Opera Software ASA (“Otello”). The Consumer Business consisted of mobile and PC web browsers as well as certain related products and services. It was managed from Norway, with key engineering operations located in Poland, Sweden and China.30, 2020.
Note 2 Significant accounting policies
NOTE 2. | SIGNIFICANT ACCOUNTING POLICIES |
2.1 Basis of preparation of Successor and Predecessor
The Successor and Predecessor Financial Statements (collectively,consolidated financial statements of the “consolidated financial statements”), as defined below, are presented as required by Regulation S-X Article 3 andGroup have been prepared in accordance with International Financial Reporting Standards ("IFRS"(“IFRS”) as issued by the International Accounting Standards Board (“IASB”(the “IASB”). The consolidated financial statements of Opera Limited, which became our parent company in June 2018 by way of an exchange of equity interests, are a continuation of the consolidated financial statements of Kunhoo Software LLC, the parent company as of December 31, 2017. As a result of the acquisition of Opera Software AS (with subsidiaries, the “Acquired Companies”) on November 3, 2016, the Group carries forward and continues to operate the Acquired Companies’ business from that date. Prior to the acquisition of the Acquired Companies, the Group had no operations in the period from July 26, 2016 to November 3, 2016 but did incur transaction costs.
The Successor and Predecessor Financial Statements are defined as follows:
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The Successor and Predecessor Financial Statements have been prepared with a “black line presentation” to distinctly highlight the periods pre- and post-acquisition.
The comparability of the Successor periods to the Predecessor periods is affected by the application of the acquisition method.
The consolidated financial statements have been prepared on a historical cost basis, except for the financial assetsdebt instruments, including loans to customers and liabilities described in Notes 12preferred shares, and 15, which arelisted equity instruments that have been measured at fair value. The consolidated financial statements are presented in U.S. Dollars (US$) and all values are rounded to the nearest thousand (US$ thousand)000), except when otherwise indicated. SubtotalsThe subtotals and totals in some of the tables in the notes may not equal the sum of the amounts shown.
Certain prior year balances have been reclassified to conform toshown in the current year’s presentation. Such reclassifications did not affect total cash flows, total net revenues, operating loss, net loss, total assets, total liabilities or shareholders’ equity.
2.2 Basis of preparation of the Predecessor
Prior to November 3, 2016, the Consumer Business was one of Otello’s major businesses lines. A significant part of the Consumer Business was owned and operated within Otello’s ultimate holding company until March 2016 when the Consumer Business was contributed to Opera Software AS, its wholly owned subsidiary that was formed in December 2015. Otello completed a reorganization in order to establish Opera Software AS as the ultimate holding company of all entities related to its Consumer Business, and to have Otello’s other businesses held outside Opera Software AS, prior to the sale to the Group.
The Predecessor and Successor have applied the same accounting policies.
Carve-out approach
Neither the Acquired Companies nor the Consumer Business had presented standaloneprimary financial statements on a consolidated basis priordue to the formation of the Group. Preparing such financial statements was accomplished by extracting information for the Consumer Business from Otello’s historical financial records and applying certain adjustments and allocations as required to reflect all of the revenues and costs relevant to the Consumer Business. Accordingly, financial performance, cash flows and changes in owner’s equity of the Consumer Business have been “carved out” from Otello for the period January 1, 2016 to November 3, 2016 to prepare the Predecessor’s consolidated financial statements.
The Consumer Business was generally managed separately from Otello’s other businesses and did not have significant recurring inter-business relationships with Otello other than cash pooling, financing and certain sales, corporate and administrative functions. Intercompany transactions within the Consumer Business have been eliminated in preparing the consolidated financial statements of the Predecessor.rounding.
The consolidated financial statements provide comparative information in respect of the Predecessor doprevious two periods, except for the Statement of Financial Position and related disclosures, which provide comparative information as of December 31, 2018. Certain amounts in the comparable years have been restated to conform to current year presentation. In 2019, the Group reclassified items in the Statement of Financial Position, specifically Loans to customers, Inventories and Marketable securities. These items were not necessarily reflectpresented separately in the consolidated financial performance, cash flowsstatements for the year ended December 31, 2018. The Group has not presented a third Statement of Financial Position as of January 1, 2018 due to the reclassifications not having material effects on the information in the statement at that date.
Expenses in the Statement of Operations are classified by nature, except for Cost of revenue, which includes expenses directly attributable to revenue. The combination of presentation by nature and changes equity that would be been presented iffunction is made based on historical and industry factors, and the Consumer Business existed as an independent business duringnature of the period presented.Group. See section for Cost of revenue below and Note 7 for more information on the nature of expenses included in Cost of revenue.
Revenue
In the Predecessor’s consolidated financial statements, the majority of the revenues of the Consumer Business were included within distinct business units and were readily identifiable from Otello’s other revenues.
Personnel expenses
Otello’s personnel expenses have been tracked on an individual employee level. Accordingly, in the Predecessor’s consolidated financial statements, employee compensation costs were allocated to the Consumer Business based upon the actual employees included within the Consumer Business, reflecting costs for product development, sales, corporate and administrative functions including accounting and finance.
Furthermore, the cost of Otello’s share-based incentive program is reflected in the Predecessor’s consolidated financial statements based upon the cost allocated by Otello to the specific employees that were part of the Consumer Business.
Depreciation and amortization
In the Predecessor financial statements, depreciation and amortization expenses were directly identifiable based on the furniture, fixtures and equipment and intangible assets that were included within the Consumer Business.
Other operational expenses
The majority of the Consumer Business’s other operational expenses could be clearly identified. In the limited instances where cost categories within an entity were shared across the Otello businesses, such expense categories were reviewed and allocated using an appropriate method. For example, the Consumer Business shared office space with Otello in its Oslo, Norway headquarters. Related office costs been allocated to the Consumer Business based on the relative number of full time equivalent employees of the Consumer Business and Otello’s other activities.
Restructuring costs
In 2016, the Consumer Business underwent restructuring activities that included offering separation agreements to certain employees and reducing the office area usage in two locations. Restructuring costs have been included based on the specific severance agreements with affected employees, and the specific costs related to the reduction in office space relative to pre-existing lease commitments.
Finance expense
Otello maintained a bank credit facility for general corporate purposes, which was not transferred to the Consumer Business as part of the business combination described above. Certain of the Consumer Business assets were pledged as security for the bank credit facility. In preparing the Predecessor’s consolidated financial statements, management reviewed the historical borrowings under the bank credit facility that were linked to the Consumer Business. Based upon this review and Otello’s estimated borrowing rate, interest cost has been allocated to the Predecessor’s consolidated financial statements based upon an estimate of Otello’s borrowings that were related to the Consumer Business.
Income taxes
Income taxes have been prepared on a separate return basis for the net income (loss) from operations of the Consumer Business, based upon the estimated applicable income tax rates for the jurisdictions in which the Consumer Business is taxable.
2.32.2 Basis of consolidation
The consolidated financial statements comprise the financial statements of Opera Limited and its subsidiaries. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Control is achieved when the Group is exposed, or has rights, to variable returns from ourits involvement with an investee and has the ability to affect those returns through its power over the investee. Generally, there is a presumption that a majority of voting rights results in control. Specifically, the Group controls an investee if, and only if, the Group has:
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If the Group loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resultant gain or loss is recognized in profit or loss. Any investment retained is recognized at fair value.
2.4 Significant2.3 Summary of significant accounting policies
Foreign currencies |
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The Successor and Predecessorconsolidated financial statements are presented in U.S. Dollars, (US$), which is also the functional currency of the parent company.
For each entity, the Group determines the functional currency, which is the currency of the primary economic environment in which the entity operates. Items included in the financial statements of each entity are measured using that functional currency.
Foreign currency transactions are recognized by the Group’s entities at their respective functional currency spot rate at the date the transaction first qualifies for initial recognition. Monetary assets and liabilities denominated in foreign currencies are translated at the functional currency spot rates at the reporting date. Gains or losses arising from settlement or translation of monetary items are recognized in the Statement of Operations as Net foreign exchange gain (loss). Non-monetary items that are measured at historical cost in a foreign currency are translated using the exchange rates at the dates of the initial transactions.
The assets and liabilities of entities within the Group with a functional currency which differs from the Group’s presentation currency, are translated using the currency exchange rates of the reporting date. Income and expense items are translated at average currency exchange rates for the respective period. The overall net foreign currency impact from translating assets, liabilities, income and expenses to U.S. Dollars is recognized in the Statement of Comprehensive Income (Loss).as Exchange differences on translation of foreign operations.
Investments in joint ventures and associates |
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A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.
Associates are those entities in which the Group has significant influence, meaning power to participate in the financial and operating policy decisions of the investee, but not control or joint control of those policies. Significant influence is presumed to exist when the Group holds between 20 and 50 percent of the voting power of another entity.
Investments in associates and joint ventures are accounted for using the equity method (equity-accounted investees) and are recognized initially at cost.
The consolidated financial statements include the Group’s share of the net income or loss and other comprehensive income, after adjustments, to align the accounting policies of the associates and joint ventures with those of the Group from the date that significant influence or joint control commences until the date that significant influence or joint control ceases. Any change in other comprehensive income of those investees is presented as part of the Group’s other comprehensive income. Unrealized gains arising from transactions with equity-accounted investees are eliminated against the investment to the extent of the Group’s interest in the investee. However, in the acquisition of a business from an equity-accounted investee, Opera does not eliminate its share of gains or losses.
When the Group’s share of losses exceeds its interest in an equity-accounted investee, the carrying amount of that interest, including any long-term interests that in substance form part of its net investment, is reduced to zero, and the recognition of further losses is discontinued. Additional losses are provided for, and a liability is recognized, only to the extent that the Group has incurred legal or constructive obligations or has made payments on behalf of the investee.
The Group has invested in preferred shares in OPay and StarMaker, resulting in us having significant influence,both entities classified as discussed in Note 28.associates of the Group. These preferred shares represent a long-term interest that in substance form part of the net investment in the associate. Theassociates. Due to their characteristics the preferred shares accounted for as financial assetsare not equity instruments and do not give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. Thus, the preferred shares are measured at fair value on a recurring basis through profit or loss. The carrying amount of the preferred shares is presented as Investments in associates and joint ventures in the Statement of Financial Position, while changes in fair value is presented as Change in fair value of preferred shares in associates in the Statement of Operations. As of December 31, 2018, the Group has not taken account of any losses of the associate that would have arisen from applyingLosses recognized using the equity method or any impairment losses onin excess of the net investment.Group's investment in ordinary shares are applied to the other components of the entity's interest in the associates, including preferred shares, in the reverse order of their seniority (i.e., priority in liquidation).
Business combinations and goodwill |
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Business combinations, except those occurring under common control, are accounted for using the acquisition method. Acquired businesses are included in the consolidated financial statements from the date the Group obtains control. The cost of an acquisition is measured as the consideration transferred, which is measured at acquisition date fair value. Acquisition-related costs are expensed as incurred.
The Group initially measures goodwill at cost, being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held, over the net identifiable assets acquired and liabilities assumed.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is from the acquisition date allocated to the Group’s cash generating units (CGUs) that are expected to benefit from the transaction. Due to growth and expansion into new businesses in 2019, including microlending, management organized the Group into four operating segments effective from 2019: Browser and News, Fintech, Retail and Other. The goodwill recognized byand the Group istrademark that previously was allocated to the Consumer Businessbusiness CGU was reallocated to the Browser and News CGU.
The acquisition of a microfinance business primarily operating under the brand OKash, as discussed in Note 28, occurred under common control. Business combinations under common control are accounted for using predecessor accounting. Under this method, assets and liabilities of the acquired entity are stated at predecessor carrying values; they are not measured at acquisition date fair values. No new goodwill is recognized. Any difference between the consideration given and the aggregate carrying value of the assets and liabilities of the acquired entity at the date of the transaction is included in equity in retained earnings. The acquired entity’s results from operations, assets and liabilities are incorporated prospectively from the date on which the business combination between entities under common control occurred.
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Furniture, fixtures and equipment, including leasehold improvements, are recognized at cost, less accumulated depreciation and impairment losses.
Depreciation and amortization of furniture, fixtures and equipment is recognized on a straight-line basis over the asset’s estimated useful life as follows:
| Leasehold improvements: Up to 6 years. |
| Equipment: Up to 10 years. |
| Furniture and |
Residual values, useful lives and depreciation method are reviewed at each financial year-end and adjusted prospectively, if appropriate.
At the end of each reporting period, furniture, fixtures and equipment are assessed for any indications of impairment. If there are indications implying that an asset may be impaired, the recoverable amount is estimated. See below for accounting policies for impairment of non-financial assets.
Intangible assets |
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Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination, which for the group includes customer relationships and trademark, is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles, excluding capitalized development costs, are not capitalized and the related expenditure is reflected in the Statement of Operations in the period in which the expenditure is incurred.
The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period.
For goodwill and intangible assets that have an indefinite useful life and intangible assets that are not yet available for use, the recoverable amount is estimated at a minimum at each reporting date.
Research costs are expensed as incurred. Development expenditures on an individual project are recognized as an intangible asset when the Group can demonstrate all of the following:
| the technical feasibility of completing the intangible asset so that it will be available for use or sale; |
| its intention to complete the intangible asset and use or sell it; |
| its ability to use or sell the intangible asset; |
| how the intangible asset will generate probable future economic benefits. Among other things, the entity can demonstrate the existence of a market for the output of the intangible asset or the intangible asset itself or, if it is to be used internally, the usefulness of the intangible asset; |
| the availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset; |
| its ability to measure reliably the expenditure attributable to the intangible asset during its development. |
The cost of developing new features, together with significant and pervasive improvements of core platform functionality, are capitalized as development costs and amortized on a straight-line basis, generally over a period of up to 3 years. Intangible assets classified as technology acquired in the acquisition of Opera Norway AS (formerly Opera Software ASAS) in 2016 are amortized over 5 years.
Other engineering work related to research activities or ongoing product maintenance, such as “bug fixes”, updates needed to comply with changes in laws and regulations, or updates needed to keep pace with the latest web trends, are expensed in the period they are incurred.
Intangible assets related to customer relationships, which result from business combinations, are recognizedmeasured at cost less accumulated amortization and impairment losses and are amortized over the estimated customer relationship period up to 15 years. Customer relationship and trademark assets are evaluated for impairment at least annually and more frequently when circumstances warrant.
Leases
At the commencement date of the lease (i.e., the date the underlying asset is available for use), the Group recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include:
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● | Variable lease payments that depend on an index or a rate; and | |
● | Amounts expected to be paid under residual value guarantees. | |
● | The exercise price of any purchase option reasonably certain to be exercised by the Group, and payments of penalties for terminating a lease, if the lease term reflects the Group’s expectation of exercising the option to terminate. |
AVariable lease payments that do not depend on an index or a rate are recognized as expense in the period when the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Group uses the estimated incremental borrowing rate at the lease commencement date unless the interest rate implicit in the lease is readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the lease payments (e.g., changes to future payments resulting from a change in an index or rate used to determine such lease payments), or a change in the assessment of an option to purchase the underlying asset.
The Group recognizes right-of-use assets at the commencement date of the lease. Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Group is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of-use assets are subject to impairment.
The Group applies the short-term lease recognition exemption to its short-term leases of office properties and equipment. It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.
Prior to the implementation of IFRS 16 Leases as of January 1, 2019, details of which are provided in Note 3, the Group applied IAS 17 Leases. In accordance with IAS 17, a lease was classified at the inception date as a finance lease or an operating lease. A lease that transferstransferred substantially all the risks and rewards incidental to ownership to the Group iswas classified as a finance lease. Additional details about the accounting policies applied prior to 2019 are provided below.
Finance leases, which for the Group primarily relateswere related to network server equipment, arewere capitalized at the commencement of the lease at the inception date fair value of the leased equipment or, if lower, at the present value of the minimum lease payments. Lease payments arewere apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges arewere recognized in finance costs in the Statement of Operations.
A leased asset iswas depreciated over the useful life of the asset, consistent with the useful lives for furniture, fixtures and equipment disclosed above. However, if there iswas no reasonable certainty that the Group willwould obtain ownership by the end of the lease term, the asset iswas depreciated over the shorter of the estimated useful life of the asset and the lease term.
An operating lease iswas a lease other than a finance lease. Operating lease payments arewere recognized as an operating expense in the Statement of Operations on a straight-line basis over the lease term.
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The Group has the following financial assets:
| Loans and receivables: Trade receivables, loans to customers, other receivables, preferred shares and non-current financial assets. |
| Equity instruments: Holdings of publicly traded securities. |
See Note 3 for information about the implementation of IFRS 9 Financial Instruments. IFRS 9 mainly changed the Group’s accounting for impairment losses for trade receivables by replacing the incurred loss approach with a forward-looking expected loss approach. See accounting policy below for impairment of financial assets for a description of both the accounting policies prior and subsequent to the implementation of IFRS 9 as of January 1, 2018.
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income, or fair value through profit or loss. The Group did not have financial assets measured at fair value through other comprehensive income.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Group’s business model for managing them. With the exception of tradeTrade receivables that do not contain a significant financing component or for which the Group has applied the practical expedient, which are initially measured at the transaction price determined in accordance with the accounting principlespolicies for revenue recognition (see below), the Group. All other financial assets are initially measures a financial assetmeasured at itstheir fair value plus, in the case of a financial asset not at fair value through the Statementprofit or loss, transaction costs. Transaction costs of Operations, transaction costs.financial assets measured at fair value through profit or loss are expensed when incurred.
In order for a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income it needs to give rise to cash flows that are solely payments of principal and interest (SPPI)("SPPI") on the principal amount outstanding. This assessment is performed at an instrument level. The Group’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets are measured at amortized cost if the financial assets satisfy the SPPI criteria and are held within a business model whose objective is to collect the contractual cash flows. If the financial asset is held within a business model that is achieved by both collecting contractual cash flows and selling and which contain contractual terms that are SPPI, the assets are measured at fair value through other comprehensive income. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of business model.
The microloans are held within a business model whose objective is to hold the assets and collect the contractual cash flows over the life of the instruments. There is no pattern of selling the loans, and the performance of the business is not measured at fair value for internal purposes. However, the Group has established a contractual obligation based on its business practices and external communication to limit the total amount of interest in the form of late fees to the amount of the principal and origination fee. This means that for overdue loans that are repaid after having reached such limit, the contractual cash flows are not payments of principal and interest on the principal amount outstanding. This is due to the interest amounts not being consideration for the time value of money. Consequently, the microloans are measured at fair value through profit or loss. In the Statement of Financial Position, the microloans are presented as Loans to customers.
Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the market place (regular way trades)trades, such as publicly traded securities) are recognized on the trade date, i.e., the date that the Group commits to purchase or sell the asset.
Subsequent measurement
For purposes of subsequent measurement, financial assets of the Group are classified in two categories:
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The Group measures financial assets at amortized cost if both of the following conditions are met:
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Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method (EIR) and are subject to impairment. Gains and losses are recognized in the Statement of Operationsprofit or loss when the asset is derecognized, modified or impaired.
The Group’s financial assets at amortized cost includes trade receivables, and loans to associates and joint ventures.ventures and other loans. A receivable represents the Group’s right to an amount of consideration that is unconditional (i.e., only the passage of time is required before payment of the consideration is due).
Subsequent measurement at fair value through profit or loss
Financial assets at fair value through profit or loss are carried in the Statement of Operations include financial assetsFinancial Position at fair value with changes in fair value recognized in the Statement of Operations. This category includes loans to customers, listed equity instruments held for trading and financial assets mandatorily required to be measured at fair value.preferred shares in OPay and StarMaker. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. For the Group, financial assets held for trading includes holdings of publicly traded securities. Financial assets with cash flows that
While microloans are not solely payments of principal and interest are classified and measured at fair value through profit or loss, changes in fair value are disaggregated in the Statement of Operations irrespective of the business model. This includes the Group’s investment in preferred shares in StarMaker (see Note 29).
Financial assets at fair value through the Statement of Operations are carried in the statement of financial position at fair value with netinto interest income (presented as revenue) and other changes in fair value recognized(primarily driven by realized and expected cash shortfalls, i.e. credit losses). See section below on Revenue for information about accounting policies related to measurement of interest income from microloans. The net of interest income and other changes in fair value of loans to customers represents the Statement of Operations.change in fair value.
Derecognition
A financial asset is primarily derecognized when:
| The rights to receive cash flows from the asset have |
| The Group has transferred its rights to receive cash flows from the asset and either (a) the Group has transferred substantially all the risks and rewards of the asset, or (b) the Group has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the |
Financial liabilities |
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Financial liabilities of the Group comprise of loans, borrowings and payables, including interest bearing loans, finance lease liabilities, short (liability) positions, trade payables, other payables and other current and non-current financial liabilities.
See Note 3 for information about the implementation of IFRS 9.
Initial recognition and measurement
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
Subsequent measurement
Financial liabilities held for trading, which for the Group include liabilities arising from short positions related to publicly traded securities, are measured at fair value through the Statement of Operations. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term.
Interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest method (EIR). Gains and losses are recognized in the Statement of Operations when the liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by taking into account any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the Statement of Operations.
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires.expires
Impairment |
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Impairment of financial assets
The Group recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through the Statement of Operations. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Group expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.
For trade receivables and contract assets, the Group applies a simplified approach in calculating ECLs. Therefore, the Group does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Group makes specific loss provisions at the level of specific invoices where information exists that management can utilize in its determination of credit risk. For trade receivables where no specific risk information is identified, the Group has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Group normally considers a financial asset in default when contractual payments are 90 days past due. In certain cases, the Group may also consider a financial asset to be in default when internal or external information indicates that the Group is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Group. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.
Prior to the implementation of IFRS 9 as of January 1, 2018, the Group assessed, at each reporting date, whether there was objective evidence that a financial asset or a group of financial assets was impaired. An impairment existed if one or more events that had occurred since the initial recognition of the asset (an incurred "loss event"), had an impact on the estimated future cash flows of the financial asset or the group of financial assets that could be reliably estimated. The amount of impairment losses identified was measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future expected credit losses that had not yet been incurred).
Impairment of non-financial assets
The Group assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Group estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
Goodwill is tested for impairment annually as of December 31, and when circumstances indicate that the carrying value may be impaired.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset.
The Group bases its impairment calculation on detailed budgets and forecast calculations. These budgets and forecast calculations cover a period of one year. Because the length of the projection period for the cash flow forecast where a CGU has goodwill or intangible assets with indefinite lives is into perpetuity, we identify a “steady state” set of assumptions for the cash flows based on an approach where we estimate cash flows for the following four years and then using the estimated cash flows in the final year of estimation as the basis for the terminal value. A long-term growth rate is calculated and applied to project future cash flows after the projected period. See Note 910 for more information.
For assets, excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Group estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized.
Fair value measurement |
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The Group measures certain financial assets and liabilities, as disclosed in Note 15,Notes 5 and 16, at fair value at each reporting date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:
| In the principal market for the asset or |
| In the absence of a principal market, in the most advantageous market for the asset or liability. |
The principal or the most advantageous market must be accessible by the Group. The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
All assets and liabilities for which fair value is disclosed in the financial statements are categorized within the fair value hierarchy, based on the lowest level input that is significant to the fair value measurement as a whole:
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For the investments in listed equity instruments, including, when applicable, the fair value of a short position in listed equities, quoted market prices in active markets for identical assets form the basis for fair value measurement.
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Group determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.
Provisions |
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A provision is recognized in the statementStatement of financial positionFinancial Position when the Group has a currently existing legal or constructive obligation as a result of a past event, and it is probable that a future outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability.
A provision for restructuring costs is recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced.
Inventories
Inventories in the form of handsets and airtime are valued at the lower of cost and net realizable value. The costs of individual items of inventory are determined using weighted average costs. Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to make the sale.
Revenue
The Group has the following primary sources of revenue:
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| ii. | Advertising | |
| iii. | Origination fees and interest (Fintech) | |
| iv. | Airtime and handsets (Retail) | |
| v. | Technology licensing and other revenue |
All categories of revenue are within the scope of IFRS 15 Revenue from contracts with customers, except for origination fees and interest, which represent components of changes in fair value of microloans to customers.
Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Group expects to be entitled in exchange for those goods or services (the transaction price).
The Group has the following primary sources of revenue:
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See Note 3 for information about the implementation of IFRS 15 Revenue from Contracts with Customers. Prior to the implementation of IFRS 15 as of January 1, 2018, the Group recognized revenue to the extent that it was probable that the economic benefits would flow to the Group and the revenue could be reliably measured, regardless of when the payment was received. Revenue was measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment and excluding taxes or duty. The sections below describe the accounting principles for revenue recognition in 2018.2018 and 2019.
Revenues from each of these areascategories are recognized as follows:
i. | Search |
Search revenue is generated when a user conducts a qualified search using a search partner (such as Google or Yandex) through the built-in combined address and search bar provided in Opera’s PC and mobile browsers, or when otherwise redirected to the search partner via browser functionality. Search revenue is recognized in the period the qualified search occurs based upon the contractually agreed revenue share amount.
ii. | Advertising |
Advertising includes revenues from all other user-generated activities excluding search revenues. Advertising revenues include revenues from industry-standard ad units, predefined partner bookmarks (“Speed Dials”) and subscriptions of various promoted services that are provided by the Group. Revenue is recognized when our advertising services are delivered based on the specific terms of the underlying contract, which are commonly based on revenue sharing, clicks, or subscription revenues collected by third parties on behalf of the Group.
The majority of advertising revenue is reported based on the amounts the Group is entitled to receive from advertising partners. In limited instances where the Group has developed or procured a service which it promotes to the users, the Group considers itself the principal party to a transaction and not an agent of another entity. In such cases, the Group will recognize revenue on a gross basis. In the Group’s determination as to whether it is the principal, it considers its (i) responsibility to provide the service to the end-user, (ii) ability to determine pricing, (iii) exposure to risk. The associated costs for these transactions are included in the Statement of Operations within cost of revenue.
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The Group provides instant app-based microloans to customers in exchange for an origination fee that remains fixed regardless of any early repayment. The origination fee is compensation for the credit risk and time value of money. Additional fees in the form of interest accrues only if and after a loan is not repaid by its due date.
While loans to customers are classified as financial assets measured at fair value through profit or loss, the Group disaggregates changes in fair value into interest income and credit losses in the Statement of Operation. Interest income, classified as revenue, is recognized when the interest is accrued based on the effective interest rate – the rate that at inception exactly discounts the estimated contractual future cash receipts through the expected life of the loans to the disbursed amount.
iv. | Airtime and handsets |
The Retail segment includes sale of handsets, prepaid airtime and data to consumers and wholesalers in certain African countries and Indonesia. Retail revenues also includes consideration from sale of handsets to wholesalers in Indonesia.wholesalers. Revenue is recognized when the contracted good or service is transferred to the customer, after which the Group does not have any remaining obligations, except for a potential obligation to provide refunds customers in some arrangements if certain criteria are met. This right of refund creates variability in the transaction price. The amount of revenue recognized includes variable consideration to which we expect to be entitled. In 2018,2019, customers’ right of refund did not materially impact the amount of revenue recognized. The Group updates its estimates of refund liabilities (and the corresponding change in the transaction price) at the end of each reporting period.
The Group has concluded that it is a principal for all its existing arrangements with customers classified as retail, based on the factors discussed above for Advertising revenue. Although other parties are involved in the supply of the contracted good or service to the customer, Opera controls the contracted good or service before it is transferred.
| Technology licensing and other revenue |
Technology licensing and other revenue include other revenues that are not generated by the Group’s user base, such as revenues from providing professional services, from device manufacturers and mobile communication operators. We generate such revenue mainly from licensing of our proprietary compression technology and providing related maintenance, supporting and hosting services to third parties, as well as providing professional services, and enabling customized browser configurations to mobile operators. We also generate such revenue from providing development and managerial services to certain equity-accounted investees.
Licensing agreements may in addition to licensing of technology, include related professional services, maintenance and support, as well as hosting services. Depending on the customization and integration level, the software licenses are either distinct or not distinct performance obligations from related professional services, and accordingly, the licensing revenue is recognized either separately when control is transferred to the customer or together with the implementation services. Sale of licenses that are part of a multi-element contract where the license is not distinct from maintenance, support or hosting services, are recognized over the contract period.
Maintenance, support and hosting revenues are generally recognized ratably over the term that these services are provided.
Revenue from software developed specifically for one customer is recognized over the development period in line with the degree of completion, provided that the criteria for recognizing revenue over time defined in IFRS 15 are met.
Revenue from distinct professional services are recognized over the development period in line with the degree of completion.
Set-up activities that do not result in the transfer of a promised good or service, are not identified as a performance obligation to the customer. The costs of set-up activities are recognized as an asset, provided the criteria defined in IFRS 15 are met.
The allocation of revenue for contracts with multiple elements is based on the Group’s estimate of its standalone selling prices. Such estimates are based on relevant historical information and can include past contracts with fewer elements, or the Group’s typical hourly rates for professional services compared with an estimated number of hours required.
Revenue from operators is included in the “Technology licensing and other revenue” category even if there are variable components that scales with the number of users. This is related to the fact that such operator agreements typically contain licensing fees based on usage, as well as hosting and support services.
Other income |
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Other income is income which is not related to the Group’s ordinary activities and is presented net of associated costs. This includesIn 2017, other income included net gain from sale of certain fixed and intangible assets in 2017.assets.
Cost of revenue |
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Cost of revenue comprises the fintech cost categories of transaction and communication platform expenses, as well as third party credit scoring, data and risk control costs, as well as the cost of handsets and airtime sold to customers. It also includes revenue shares to content creators on our Opera News platform, and payments to publishers and monetization partners, including the costs of any platform or collection service used to facilitate subscription services where the Group is the principal of the transaction. Payments to publishers and monetization partners typically consist of fees based upon a percentage of relevant revenues, such as publishers providing content in which the Group delivers mobile ads or operators facilitating payments of Opera branded services. Cost of revenue also includes expenses directly attributable to revenue recognized in the period, such as employee benefits for individuals who provided maintenance, support, and managerial services to customers for which revenue was recognized. The Group recognizes such costs at the same time it recognizes the associated revenue.
Personnel expenses Personnel expenses, other than share-based payments to employees, include short-term employee benefits, such as wages, salaries and social security contributions, paid annual leave and paid sick leave, performance-based bonuses and non-monetary benefits. It also includes expenses related to defined contribution schemes provided to employees as post-employment benefit. Expenses related to certain outsourced services, primarily sales, debt collection and customer support, are classified as personnel expenses if the nature of the arrangement is that the Group is functioning as the employer. Personnel expenses are recognized at the undiscounted amount due to the employees or the de-facto employees when these have rendered service to the Group or when the liability otherwise arises. Income taxes |
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Income tax expense consists of the sum of (i) current year income taxes payable plus (ii) the change in deferred taxes and liabilities, except if income taxes relate to items recognized in other comprehensive income, in which case it is recognized in other comprehensive income (loss).income.
Current year income taxes payable is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the year-end date, and any adjustment to tax payable in respect of previous years. The Group includes deductions for uncertain tax positions when it is probable that the tax position will be sustained in a tax review. The Group records provisions relating to uncertain or disputed tax positions at the amount expected to be paid. The provision is reversed if the disputed tax position is settled in favor of the Group and can no longer be appealed.
Deferred tax is provided using the liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred tax provided is based on the expected manner of realization or settlement of the underlying items, using tax rates enacted or substantively enacted at the reporting date.
A deferred tax asset is only recognized to the extent that it is probable that future taxable profits will allow the deferred tax asset to be realized. Recognized assets are reversed when realization is no longer probable. Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different tax entities, but they intend to settle current tax liabilities and assets on a net basis, or their tax assets and liabilities will be realized simultaneously.
Income taxes include all domestic and foreign taxes, which are based on taxable profits, including withholding taxes.
Government grants |
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Government grants are recognized when there is reasonable assurance that the grant will be received and all attached conditions will be complied with. The Group has received government grants that relate to the development of technology, which includes expenditures that are capitalized. Those government grants are deducted in arriving at the carrying amount of the asset.
Treasury shares |
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Treasury shares are shares in Opera Limited, the parent, that are reacquired under a repurchase program. Treasury shares are recognized at cost and deducted from equity. No gain or loss is recognized in the Statement of Operations on the purchase, sale, reissue or cancellation of the Group’s own equity instruments.
2.52.4 Significant accounting estimates, judgments and assumptions
The preparation of the Group’s consolidated financial statements requires management to make judgments, estimates and assumptions that may affect the reported amounts of assets, liabilities, income and expenses, and the accompanying disclosures. The estimates and assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the result of which forms the basis for making the judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed continuously. Changes in accounting estimates are recognized in the period in which the estimate is revised, if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.
The following summarizes the most significant judgments and estimates in preparing the consolidated financial statements.
Control over Opera Limited In 2018, in connection with the Group’s acquisition of TenSpot Pesa Limited, the Group concluded that Opera Limited was controlled by its Chairman and CEO. Since the Group’s Chairman and CEO also controlled TenSpot Pesa Limited, the business combination occurred under common control. The determination that Opera Limited was controlled by its Chairman and CEO was based on significant judgment. The Chairman and CEO’s ownership interest and voting rights were established by his control of Keeneyes Future Holding Inc and Kunlun Tech Limited, a subsidiary of Beijing Kunlun Tech Co. Ltd. Although the Chairman and CEO did not hold a majority of the shares and voting rights in the latter, the Group concluded that he had de facto control over that entity based on his practical ability to direct the relevant activities unilaterally. This was based on him being the largest holder of voting rights in Beijing Kunlun Tech Co. Ltd, effectively controlling 33.77% of the voting rights directly. The history of voting in general meetings for Beijing Kunlun Tech Co. Ltd demonstrated that the Group’s Chairman and CEO controlled significantly more than 50% of the shares registered to vote. The remaining shares in Beijing Kunlun Tech Co. Ltd were widely dispersed among a large number of other shareholders. Significant influence over OPay and basis for accounting of investment The Group determined that it has significant influence over OPay Limited even though it was diluted in 2019 from holding 19.9% to 13.1% of the voting rights in the company and did not have a direct representation on the board of directors. In determining that it has significant influence, the Group considered the influence its chairman and CEO is capable of exercising on its behalf. The Group’s chairman and CEO is also the chairman and CEO of OPay, though appointed as a representative of a personal investment entity, which also is an investor in OPay. Based on the assessment that the chairman and CEO of the Group is capable of exercising significant influence in OPay on behalf of the Group, it was determined that it has power to participate in the financial and operating policy decisions of OPay and thus the investment was classified as an associate. In 2019, the Group acquired preferred shares in OPay, as disclosed in Notes 16 and 27. While the preferred shares have characteristics similar to equity instruments, the Group determined that the rights and benefits inherent in the preferred shares, including redemption rights and liquidation preference, entail that they in substance are debt instruments. Consequently, the Group classified the preferred shares as financial instruments measured at fair value through profit or loss. The carrying amount of the preferred shares is part of the Group’s net investment in OPay. The Group applied significant judgment in determining the share of net income (loss) to be recognized under the equity method. The Group considered the rights and benefits of all classes of shares issued by OPay and determined that the Group's share was to be calculated based on its number of ordinary shares relative to the total number of shares outstanding, including preferred shares, opposed to only the total number of ordinary shares outstanding. Fair value of preferred shares in associates The Group has invested in preferred shares in OPay and StarMaker, both entities classified as associates of the Group. These preferred shares represent a long-term interest that in substance form part of the net investment in the associates. Due to their characteristics the preferred shares are not equity instruments and do not give rise to cash flows that are solely payments of principal and interest on the principal amount outstanding. Thus, the preferred shares are measured at fair value through profit or loss. The fair values of preferred shares in OPay and StarMaker as of December 31, 2019 were measured using methods and techniques that reflect the economic rights and benefits of the preferred shares. These rights and benefits include redemption rights and liquidation preferences. A combination of the following three valuation methods was used to estimate the fair value of the preferred shares: Probability weighted expected return model (“PWERM”); Option pricing model (“OPM”); and Current value method (“CV”). These models build on estimates, such as discount for lack of marketability and the fair value of equity in OPay and StarMaker. Moreover, the PWERM model is based on estimates for future scenarios and outcomes, including sale transactions, initial public offering, dissolution, and redemption. More details on the models and input are provided in Note 16. Fair value of microloans Microloans are measured at fair value through profit or loss. Fair value is estimated by discounting projected future cash flows to their present value using the credit-adjusted effective interest rate, determined as at the date loans were granted. This method is deemed appropriate for estimating fair value due to the short duration of the loans and the amounts of origination fees and interest reflecting market rates at the point in time when the loans were granted. The credit-adjusted effective interest rate reflects the risk of defaulted payment. The total cash flows (both principal, origination fees and interest) expected to be collected are regularly reviewed. The impact of changes in expected cash flows is adjusted in the carrying amount of Loans to customers and is, together with the difference between the realized and expected cash flow of the period, recognized in the Statement of Operations as Revenue or Other changes in fair value of loans to customers. The underlying estimates for future cash flows, which form the basis for revenue recognition, depends on variables such as the ability to contact the debtor and reach an agreement, timing of cash flows, general economic environment, and statutory regulations. Events or changes in assumptions and management’s judgment will affect the recognition of revenue in the period. Provision for expected credit losses For trade receivables and other financial assets measured at amortized cost, a loss allowance is recognized based on lifetime expected credit losses. For trade receivables, the Group makes specific loss provisions at the level of specific customer invoices where information exists that management can utilize in its determination of credit risk. For trade receivables where no specific risk information is identified, the Group uses a provision matrix that is based on the nature of the receivable, location of its invoicing and the age of the invoice relative to its due date, reflecting its historical credit loss experience and adjusting for forward-looking factors specific to the debtors and the economic environment. See Note 21 for more information. Collectability of consideration from Powerbets In order to recognize revenue from a contract with a customer within the scope of IFRS 15, certain criteria must be met, including it being probable that the Group will collect the consideration to which it will be entitled in exchange for the goods or services transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, the Group considers the customer’s ability and intention to pay that amount of consideration, which may involve significant judgment. In 2019, the Group recognized US$2,210 thousand of revenue from contracts with Powerbets (2018: US$4,369 thousand and 2017: US$0). As of December 31, 2019, the total amount of outstanding trade receivables due from Powerbets was US$6,579 thousand, compared to US$4,369 thousand as of December 31, 2018. In assessing whether the collectability criterion was met for contracts with Powerbets, management considered the likelihood of and timing for when Powerbets will start generating net cash inflows from its operating activities and other factors that are relevant in assessing the timing of revenue recognition and collectability of related accounts receivable. See Notes 21, 27 and 28 for more information. As of December 31, 2019, the Group estimated the lifetime expected credit losses on the receivables due from Powerbets for the purpose of recognizing a loss allowance. In estimating the cash flows the Group expects to receive, it considered a range of possible outcomes, which were assigned weights based on probabilities. Possible outcomes included scenarios in which Powerbets starts generating sufficient cash flows from its operating activities to settle the receivables and capital contributions from new investors in the company. Impairment of non-financial assets |
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Impairment exists when the carrying value of an asset or cash generating unit exceeds its recoverable amount, which is the higher of its fair value less costs of disposal and its value in use. The Group has tested the consumer businessBrowser and News CGU, which includes goodwill and the Opera brand (“Trademark”), for impairment as of December 31, 2018,2019, based on an estimate of its value in use. The value in use calculation is based on a discounted cash flow (“DCF”) model. It requires management to estimate future cash flows expected to arise from the CGU using a suitable discount rate. The key assumptions in determining the value in use are the expected future cash flows, long-term growth rate and the discount rate. The key assumptions, including a sensitivity analysis, are disclosed in Note 9.
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The Group has concluded that Opera Limited is controlled by its Chairman and CEO. Business combinations in which the Group acquires control of another business controlled by its Chairman and CEO will thus occur under common control. The determination that Opera Limited is controlled by its Chairman and CEO is based on significant judgment. The Chairman and CEO’s ownership interest and voting rights are established by his control of Keeneyes Future Holding Inc and Kunlun Tech Limited, a subsidiary of Beijing Kunlun Tech Co. Ltd. Although the Chairman and CEO does not hold a majority of the shares and voting rights in the latter, the Group has concluded that he has de facto control over that entity based on his practical ability to direct the relevant activities unilaterally. This is based on him being the largest holder of voting rights in Beijing Kunlun Tech Co. Ltd, effectively controlling 33.77% of the voting rights directly. The recent history of voting in general meetings for Beijing Kunlun Tech Co. Ltd demonstrates that the Group’s Chairman and CEO controlled significantly more than 50% of the shares registered to vote. The remaining shares in Beijing Kunlun Tech Co. Ltd are widely dispersed among a large number of other shareholders.10.
Applicable IFRS does not prescribe how to account for business combinations under common control. Accordingly, the Group has established accounting policies for such transactions that results in information that is relevant to the economic decisions-making needs of users and reliable. Specifically, the Group has adopted predecessor method accounting, or historical cost accounting as it is known in some jurisdictions, when accounting for business combinations under common control. See Note 28 for more information.
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The Group has established an employee equity plan to provide long-term incentives for its employees.
Estimating fair value for share-based awards requires an assessment of an appropriate valuation model, which depends on the terms and conditions of the grant. The estimate also requires an assessment of the most appropriate inputs to the valuation model including grant date fair value of the underlying equity, the expected life of the grant, volatility and dividend yield. Assumptions and models used for current grants are disclosed in Note 25.6.
When applicable, employer social security costs are accrued over the vesting period of each award, based on the award’s intrinsic value of the underlying equity interest as of the reporting date.
Both periodic equity costs and social security cost accruals are adjusted for estimated forfeitures.
Capitalized development costs |
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The Group capitalizes expenditure incurred in the development of new products and services. Initial capitalization of expenditure is based on management’s judgment that the project meets all of the six criteria discussed above in the accounting policy for intangible assets. Assessing if and when all of these criteria are met is based on judgment, which takes into account past experiences and expectations about the technical ability to complete the asset as intended.intended
The Group periodically, and when circumstances warrant, reviews capitalized costs to evaluate whether there are indicators of impairment for individual assets. If indicators of impairment are identified, the Group tests the asset or CGU to which it is included for impairment in accordance with the principles discussed above. In the event the Group abandons a development project, the asset is written off immediately. See Note 910 for more information.
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A trade receivable represents the Group’s right to an amount
At each reporting date a loss allowance is recognized based on lifetime expected credit losses. The Group makes specific loss provisions at the level of specific invoices where information exists that management can utilize in its determination of credit risk. For trade receivables where no specific risk information is identified, the Group uses a provision matrix that is based on the nature of the receivable, location of its invoicing and the age of the invoice relative to its due date, reflecting its historical credit loss experience and adjusting for forward-looking factors specific to the debtors and the economic environment. See Note 20 for more information.
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In order to recognize revenue from a contract with a customer within the scope of IFRS 15, certain criteria must be met, including it being probable that the Group will collect the consideration to which it will be entitled in exchange for the goods or services transferred to the customer. In evaluating whether collectability of an amount of consideration is probable, the Group considers the customer’s ability and intention to pay that amount of consideration, which may involve significant judgment.
In 2018, the Group recognized US$10.9 million of revenue under the "Technology licensing and other revenue" category from contracts with Opay. As of December 31, 2018, the total amount of outstanding trade receivables due from Opay was US$4.3 million.
In assessing whether the collectability criterion was met for contracts with Opay, management considered the maturity of Opay’s businesses, its access to debt and equity capital from existing and new investors, and other factors that are relevant in assessing the timing of revenue recognition and collectability of related accounts receivable.
See Note 30 for more information.
Note 3 Changes in accounting policies and disclosures
NOTE 3. | CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES |
3.1 New standards, interpretations and amendments adopted by the Group
The accounting policies adopted in the preparation of the consolidated financial statements are consistent with those followedapplied in the preparation of the Group’s annual consolidated financial statements as of for the year ended December 31, 2017,2018, except for the adoption of IFRS 1516 Revenue from Contracts with Customers and IFRS 9 Financial InstrumentsLeases, which became effective starting from January 1, 2018.as outlined below, and a change in accounting policy for expenditure related to software as a service ("SaaS") cloud computing arrangement. Prior to 2019, the Group capitalized expenditure related to implementation of SaaS arrangement, while under the amended policy, such expenditure is expensed when incurred. The change in accounting policy for SaaS arrangement had an immaterial impact on the Group’s consolidated financial statements. Several other amendments and interpretations apply for the first time in 2019 but did not have a material impact on the consolidated financial statements of the Group. The Group has alsonot early adopted thestandards, interpretations or amendments to IAS 28 Investments in Associates and Joint Ventures for long-term interests in associates and joint ventures, and the amendments to IFRS 10 Consolidated Financial Statements and IAS 28 for sale or contribution of assets between an investor and its associate or joint venture.that have been issued but is not yet effective. See Note 2 for information about the Group’s accounting policies.
Several other amendments and interpretations apply for the first time in 2018 but did not have an impact on the consolidated financial statements of the Group. Except for the amendments to IAS 28 and IFRS 10, the Group has not early adopted other standards, interpretations or amendments that have been issued but is not yet effective.
IFRS 15 Revenue from Contracts with Customers16 Leases
The Group appliedadopted IFRS 15 starting from January 1, 2018. In accordance with the transition provisions in the standard, the new principles have been adopted using the modified retrospective method and the cumulative effect of the initial application of the standard has been recognized as an adjustment to the opening balance of retained earnings on the effective date. The Group chose to apply the standard only to contracts that were not completed at this date.
The Group’s accounting principles for revenue recognition have been adjusted to align with IFRS 15. The adjusted principles did not lead to any significant changes in the amount and timing of revenue recognition. The effect on equity January 1, 2018 is a decrease of retained earnings of US$552 thousand due to a change in revenue recognition of one licensing agreement.
The cumulative effect of the adjustments made to our consolidated statement of financial position at January 1, 2018 from the adoption of IFRS 15 was as follows:
[US$ thousands] | Balance as of December 31, 2017 (IAS 18) | Adjustments due to IFRS 15 | Balance as of (IFRS 15) | |||||||||
Assets | ||||||||||||
Deferred tax asset | 958 | 165 | 1,123 | |||||||||
Liabilities | ||||||||||||
Deferred revenue | 1,472 | 717 | 2,188 | |||||||||
Equity | ||||||||||||
Retained earnings | 5,366 | (552) | 4,814 | |||||||||
The impact of the adoption of IFRS 15 on our consolidated Statement of Financial Position, Statement of Operations and Statement of Cash Flows for the year ended December 31, 2018 is immaterial.
16 IFRS 9 Financial Instruments
IFRS 9 replaced IAS 39 Financial Instruments: Recognition and MeasurementLeases for the annual period beginning on January 1, 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting.
The Group has applied IFRS 9 retrospectively with the initial application date of January 1, 2018 and applied the exemption, as allowed by the standard, not to restate comparative periods.
The Group’s accounting principles for financial instruments have been adjusted to align with IFRS 9. The adoption of IFRS 9 has mainly changed the Group’s accounting for impairment losses for trade receivables by replacing the incurred loss approach with a forward-looking expected loss approach. This new model lead to an increase of US$100 thousand in the provision for bad debt as of January 1, 2018. The post-tax adjustment of US$77 thousand was recognized in retained earnings at the date of initial application, i.e. January 1, 2018. There were no other impacts due to the adoption.
3.2 New standards, interpretations and amendments not yet effective
Future consolidated financial statements will be affected by IFRS 16 Leases, which became effective on January 1, 2019. Other new and amended IFRSs, interpretations and amendments, which have been published but are not effective as of December 31, 2018, are not expected to have a material impact on the consolidated financial statements.
IFRS 16 Leases
IFRS 16 was issued in January 2016 and it replaces IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model similar to the accounting for finance leases under IAS 17. The standard includes two optional recognition exemptions for lessees – leases of “low-value” assets (e.g., printers) and short-term leases (i.e., leases with a lease term of 12 months or less). At the commencement date of a lease, a lessee will recognize a liability to make lease payments (i.e., the lease liability) and an asset representing the right to use the underlying asset during the lease term (i.e., the right-of-use asset). Lessees will be required to separately recognize the interest expense on the lease liability and the depreciation expense on the right-of-use asset.
Lessees will also be required to remeasure the lease liability upon the occurrence of certain events (e.g., a change in the lease term, a change in future lease payments resulting from a change in an index or rate used to determine those payments). The lessee will generally recognize the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.
IFRS 16 also requires more extensive disclosures than under IAS 17.
The Group plans to adopt IFRS 16 retrospectively2019 with the cumulative effect of initially applying the standard recognized at the date of initial application. This entails that the group does not restate comparative information, but instead recognizes the cumulative effect of initially applying this standard as an adjustment to the opening balance of retainedRetained earnings at that date. Comparative information has not been restated.
For leases which had previously been classified as operating leases under the dateprinciples of initial application.IAS 17, the lease liability upon adoption of IFRS 16 was measured as the present value of the remaining lease payments, discounted using the lessee’s estimated incremental borrowing rate as of January 1, 2019. The incremental borrowing rate is the rate of interest that a lessee would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value to the right-of-use asset in a similar economic environment. The Group used a single discount rate to a portfolio of leases with reasonably similar characteristics. The incremental borrowing rate was estimated based on yields for government bonds denominated in the same currency as the lease payments and a credit risk premium. The discount rates were in the range 2.15% to 12.3%, where the variance is primarily explained by the currencies in which the lease payments are denominated in. The right-of-use asset iswas recognized at the amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments relating to that lease recognized in the statementStatement of financial positionFinancial Position immediately before the date of initial application.
For leases that were classified as finance leases applying IAS 17, the carrying amountamounts of the right-of-use asset and the lease liability at January 1, 2019 will bewere the carrying amountamounts of the lease asset and lease liability immediately before that date measured applying IAS 17.
[US$ thousands] | As of January 1, 2019 | |||
Measurement of lease liabilities | ||||
Operating lease commitments disclosed as of December 31, 2018 | 7,790 | |||
Discounted using the lessee’s incremental borrowing rate (4%) of at the date of initial application | 7,202 | |||
Add: adjustments as a result of a different treatment of extension and termination options | 7,533 | |||
Add: finance lease liabilities recognized as of December 31, 2018 | 234 | |||
Lease liability recognized as of January 1, 2019 | 14,969 | |||
The Group will electelected to apply the recognition exemptions for short-term leases (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option), and leases for which the underlying asset is of low value. The Group has certainThese exemptions are applied to short-term office leases, and leases of office equipment, including printers and photocopying machines, where the underlying assets are of low value.machines. Non-lease components, such as maintenance and supply of utilities, will be identified andare accounted for separately from lease components.
During 2018 and into 2019, the Group has performed a detailed assessment of the impact IFRS 16 will have on the Consolidated FinancialThe Statement of Financial Position on adoption of the standard. In summary, the impact of adopting IFRS 16 is expected to be as follows:
The statement of financial position increase (decrease) as of January 1, 2019:
[US$ thousands] |
| |||
Assets | ||||
Furniture, fixtures and equipment | ||||
Liabilities | ||||
| ||||
| ||||
Other current liabilities | ) | |||
Net impact on equity | ||||
The net impact on the Group’s equity onas of January 1, 2019 iswas due to the derecognition of an accrued liability related to a period of free rent of an office space, which was accounted for as a lease incentive under IAS 17 and SIC 15.
3.2 New standards, interpretations and amendments not yet effective
New and amended IFRSs, interpretations and amendments, which have been published but are not effective as of December 31, 2019, are not expected to have a material impact on the consolidated financial statements upon adoption. As of January 1, 2020, the amendments disclosed below became effective. These could impact the Group’s consolidated financial statements for future periods.
Amendments to IFRS 3: Definition of a Business
The IASB has issued amendments to the definition of a business in IFRS 3 Business Combinations to help entities determine whether an acquired set of activities and assets is a business or not. The amendments clarify the minimum requirements for a business, remove the assessment of whether market participants are capable of replacing any missing elements, add guidance to help entities assess whether an acquired process is substantive, narrow the definitions of a business and of outputs, and introduce an optional fair value concentration test. Since the amendments apply prospectively to transactions or other events that occur on or after the date of first application, the Group will not be affected by these amendments on the date of transition. The Group adopted the amendments on January 1, 2020.
Amendments to IAS 1 and IAS 8: Definition of Material
IAS 1 Presentation of Financial Statements and IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors have been amended by the IASB to align the definition of “material” across the standards and to clarify certain aspects of the definition. The new definition states that, “Information is material if omitting, misstating or obscuring it could reasonably be expected to influence decisions that the primary users of general purpose financial statements make on the basis of those financial statements, which provide financial information about a specific reporting entity.” The amendments to the definition of material is not expected to have a significant impact on the Group’s consolidated financial statements. The Group adopted the amendments prospectively on January 1, 2020.
NOTE 4. | SEGMENT AND REVENUE INFORMATION |
Note 4 Revenue
For management reporting purposes, the Group is organized into business units based on its products and services and has four reportable segments, as follows:
● | Browser and News | |
● | Fintech | |
● | Retail | |
● | Other |
In prior periods, the Group had one operating segment. The change in 2019 follows the Group’s expansion and growth into new businesses including microlending, and related changes to how financial information is reviewed by the Group’s chief operating decision maker (the “CODM”).
An operating segment captures relatively distinct business activities from which the Group earns revenue and incurs expenses. Furthermore, the segments’ operating results are regularly reviewed by the CODM to make decisions about resources to be allocated to the various business activities and to assess performance. Management has determined that the CEO, who is also the Chairman of the Board, is the Group’s CODM.
The operating and reportable segments are based on the Group’s main categories of products and services. The segment profit or loss is the Contribution by segment, which is calculated as revenue, less (i) cost of revenue, (ii) marketing and distribution expense, and (iii) credit loss expense.
The Browser and News segment includes the Group’s PC and mobile browser business as well as the Opera News platform, both as leveraged within the Group’s browsers and as made available through standalone apps. These products, which have similar characteristics and are often closely bundled, generate search and advertising revenue for the Group. The Fintech segment relates to app-based microfinance services that offer instant credit to approved borrowers. The retail segment includes sale of handsets, prepaid airtime, and data to consumers and wholesalers. The segment Other includes licensing of the Group’s proprietary technology to third parties, including related maintenance, support and hosting services, providing professional services, and providing customized browser configurations to mobile operators.
[US$ thousands] | Year ended December 31, 2017 | |||||||||||||||||||
Segments | Browser and News | Fintech | Retail | Other | Total | |||||||||||||||
Revenue | ||||||||||||||||||||
Revenue from contracts with customers | 109,239 | - | - | 19,653 | 128,892 | |||||||||||||||
Total revenue | 109,239 | - | - | 19,653 | 128,892 | |||||||||||||||
Cost of revenue | (1,303 | ) | - | - | (2,666 | ) | (3,969 | ) | ||||||||||||
Marketing and distribution expenses | (30,971 | ) | - | - | - | (30,971 | ) | |||||||||||||
Credit loss expense (1) | (1,837 | ) | - | - | - | (1,837 | ) | |||||||||||||
Direct expenses | (34,111 | ) | - | - | (2,666 | ) | (36,777 | ) | ||||||||||||
| - | ||||||||||||||||||||
Contribution by segment | 75,128 | - | - | 16,987 | 92,115 | |||||||||||||||
[US$ thousands] | Year ended December 31, 2018 | |||||||||||||||||||
Segments | Browser and News | Fintech | Retail | Other | Total | |||||||||||||||
Revenue | ||||||||||||||||||||
Revenue from contracts with customers | 138,444 | - | 9,287 | 22,890 | 170,621 | |||||||||||||||
Other revenue | - | 1,655 | - | - | 1,655 | |||||||||||||||
Total revenue | 138,444 | 1,655 | 9,287 | 22,890 | 172,276 | |||||||||||||||
Cost of revenue | (3,637 | ) | (428 | ) | (9,096 | ) | (6,848 | ) | (20,009 | ) | ||||||||||
Marketing and distribution expenses | (31,336 | ) | (45 | ) | - | - | (31,381 | ) | ||||||||||||
Credit loss expense (1) | 678 | (528 | ) | - | - | 150 | ||||||||||||||
Direct expenses | (34,295 | ) | (1,001 | ) | (9,096 | ) | (6,848 | ) | (51,240 | ) | ||||||||||
Contribution by segment | 104,149 | 654 | 191 | 16,042 | 121,036 | |||||||||||||||
[US$ thousands] | Year ended December 31, 2019 | |||||||||||||||||||
Segments | Browser and News | Fintech | Retail | Other | Total | |||||||||||||||
Revenue | ||||||||||||||||||||
Revenue from contracts with customers | 154,968 | - | 29,802 | 21,712 | 206,482 | |||||||||||||||
Other revenue | - | 128,373 | - | - | 128,373 | |||||||||||||||
Total revenue | 154,968 | 128,373 | 29,802 | 21,712 | 334,855 | |||||||||||||||
Cost of revenue | (2,642 | ) | (29,759 | ) | (29,836 | ) | (11,754 | ) | (73,991 | ) | ||||||||||
Marketing and distribution expenses | (64,685 | ) | (8,464 | ) | - | - | (73,150 | ) | ||||||||||||
Credit loss expense (1) | (577 | ) | (54,302 | ) | - | - | (54,879 | ) | ||||||||||||
Direct expenses | (67,904 | ) | (92,525 | ) | (29,836 | ) | (11,754 | ) | (202,019 | ) | ||||||||||
| - | ||||||||||||||||||||
Contribution by segment | 87,064 | 35,848 | (34 | ) | 9,958 | 132,835 | ||||||||||||||
(1) For the Browser and News segment, Credit loss expense in the segment reporting is consistent with Credit loss expense in the Statement of Operations, while for the Fintech segment, Credit loss expense is consistent with Other changes in fair value of loans to customers in the Statement of Operations.
Other income, personnel expenses, depreciation and amortization, share of net income (loss) of associates and joint ventures, change in fair value of preferred shares in associates, finance income and expense, net foreign exchange gain (loss), income tax expense and other incomeexpenses are not allocated to those segments as they are managed and monitored on a group basis.
[US$ thousands] | Year ended December 31, | |||||||||||
Reconciliation | 2017 | 2018 | 2019 | |||||||||
Contribution by segment | 92,115 | 121,036 | 132,835 | |||||||||
Other income | 5,460 | - | - | |||||||||
Personnel expenses including share-based remuneration | (42,134 | ) | (34,683 | ) | (61,029 | ) | ||||||
Depreciation and amortization | (16,604 | ) | (12,694 | ) | (18,933 | ) | ||||||
Other expenses | (25,359 | ) | (28,359 | ) | (32,210 | ) | ||||||
Restructuring costs | (3,240 | ) | - | - | ||||||||
Share of net income (loss) of associates and joint ventures | (1,670 | ) | (3,248 | ) | (3,818 | ) | ||||||
| Change in fair value of preferred shares in associates | - | - | 37,900 | |||||||||
Finance income | 1,054 | 1,637 | 10,530 | |||||||||
Finance expense | (238 | ) | (1,695 | ) | (1,505 | ) | ||||||
Net foreign exchange gains (losses) | (1,881 | ) | (354 | ) | (269 | ) | ||||||
Net income (loss) before income taxes | 7,504 | 41,641 | 63,500 | |||||||||
Revenue
The businessSet out below is the disaggregation of the Group’s revenue from contracts with customers. Origination fees and reporting structure forlate interest from loans to customers are also presented as revenue in the Statement of Operations.
[US$ thousands] | Year ended December 31, 2017 | |||||||||||||||||||
Segments | Browser and News | Fintech | Retail | Other | Total | |||||||||||||||
Type of goods or service | ||||||||||||||||||||
Search | 68,192 | - | - | - | 68,192 | |||||||||||||||
Advertising | 41,047 | - | - | - | 41,047 | |||||||||||||||
Airtime and handsets | - | - | - | - | - | |||||||||||||||
Technology licensing and other revenue (1) | - | - | - | 19,653 | 19,653 | |||||||||||||||
Total revenue from contracts with customers | 109,239 | - | - | 19,653 | 128,892 | |||||||||||||||
Origination fees and late interest | - | - | - | - | - | |||||||||||||||
Total revenue | 109,239 | - | - | 19,653 | 128,892 | |||||||||||||||
[US$ thousands] | Year ended December 31, 2018 | |||||||||||||||||||
Segments | Browser and News | Fintech | Retail | Other | Total | |||||||||||||||
Type of goods or service | ||||||||||||||||||||
Search | 80,204 | - | - | - | 80,204 | |||||||||||||||
Advertising | 58,240 | - | - | - | 58,240 | |||||||||||||||
Airtime and handsets | - | - | 9,287 | - | 9,287 | |||||||||||||||
Technology licensing and other revenue (1) | - | - | - | 22,890 | 22,890 | |||||||||||||||
Total revenue from contracts with customers | 138,444 | - | 9,287 | 22,890 | 170,621 | |||||||||||||||
Origination fees and late interest | - | 1,655 | - | 1,655 | ||||||||||||||||
Total revenue | 138,444 | 1,655 | 9,287 | 22,890 | 172,276 | |||||||||||||||
[US$ thousands] | Year ended December 31, 2019 | |||||||||||||||||||
Segments | Browser and News | Fintech | Retail | Other | Total | |||||||||||||||
Type of goods or service | ||||||||||||||||||||
Search | 86,155 | - | - | - | 86,155 | |||||||||||||||
Advertising | 68,813 | - | - | - | 68,813 | |||||||||||||||
Airtime and handsets | - | - | 29,802 | - | 29,802 | |||||||||||||||
Technology licensing and other revenue (1) | - | - | - | 21,712 | 21,712 | |||||||||||||||
Total revenue from contracts with customers | 154,968 | - | 29,802 | 21,712 | 206,482 | |||||||||||||||
Origination fees and late interest | - | 128,373 | - | - | 128,373 | |||||||||||||||
Total revenue | 154,968 | 128,373 | 29,802 | 21,712 | 334,855 | |||||||||||||||
(1) Technology licensing and other revenue in 2019 include US$18,632 thousand related to professional services provided to associates and other related parties of the Group based on information provided to its chief operating decision maker, consists of one operating segment (Consumer Business)(2018: US$18,319 thousand and 2017: US$3,216 thousand). The Group sees the current consumer products to be an integrated portfolio with key resources leveraged across the Consumer Business.
Predecessor | Successor | |||||||||||||||
Period from | Period from | |||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | ||||||||||||
Revenue by customer location | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Ireland | 32,730 | 9,310 | 63,152 | 76,791 | ||||||||||||
Russia | 13,883 | 2,868 | 18,251 | 17,356 | ||||||||||||
Other | 41,904 | 6,589 | 47,490 | 78,129 | ||||||||||||
Total | 88,518 | 18,767 | 128,893 | 172,276 | ||||||||||||
The table below presents the revenue by customer location.
[US$ thousands] | Year ended December 31, | |||||||||||
Revenue by customer location | 2017 | 2018 | 2019 | |||||||||
Ireland | 63,152 | 76,791 | 81,637 | |||||||||
Russia | 18,251 | 17,356 | 17,265 | |||||||||
India | - | 1,549 | 98,504 | |||||||||
| Kenya | - | 3,426 | 35,086 | |||||||||
Other (1) | 47,490 | 73,154 | 102,363 | |||||||||
Total | 128,893 | 172,276 | 334,855 | |||||||||
(1) No other individual country exceeded 10% of total revenue.
Revenue by country is based upon the customers’customers' countries of domicile, which is not necessarily an indication of where activities occur because the end-users of the Group’sGroup's products are located worldwide.
The Group has two customer groups that have each has exceeded 10% of the Group’sGroup's revenue in the periods below:below.
Predecessor | Successor | |||||||||||||||||||||||||||
Period from | Period from | |||||||||||||||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||||||||||||||
November 3, | December 31, | December 31, | December 31, | |||||||||||||||||||||||||
[US$ thousands] | 2016 | 2016 | 2017 | 2018 | Year ended December 31, | |||||||||||||||||||||||
| Customer groups | 2017 | 2018 | 2019 | |||||||||||||||||||||||||
Customer group 1 | 33,265 | 7,561 | 55,685 | 67,882 | 55,685 | 67,882 | 74,572 | |||||||||||||||||||||
Customer group 2 | 12,775 | 2,594 | 16,604 | 17,017 | 16,604 | 17,017 | 17,758 | |||||||||||||||||||||
Revenue from Customer group 1 includes both search and advertising services, while revenue from Customer group 2 includes only search services.
The table below specifies the amount of revenue recognized from each of the Group’s four categories of products and services:
Predecessor | Successor | |||||||||||||||
Period from | Period from | |||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | ||||||||||||
Revenue type | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Search | 44,347 | 10,215 | 68,192 | 80,204 | ||||||||||||
Advertising | 27,960 | 5,219 | 41,047 | 59,895 | ||||||||||||
Retail | — | — | — | 9,287 | ||||||||||||
Technology licensing and other revenue | 16,211 | 3,333 | 19,653 | 22,890 | ||||||||||||
Total | 88,518 | 18,767 | 128,893 | 172,276 | ||||||||||||
For more details about the revenue types, please refer to Note 2.
Retail
In 2018 the Group entered into the business of selling prepaid airtime and data to consumers and wholesalers in certain African countries and Indonesia. Retail revenues also includes consideration from sale of handsets to wholesalers in Indonesia.
Other income
During 2017, the Group entered into a set of agreements with one customer that included a sale of intellectual property, which had embedded technology licensed from Otello CorporationsCorporation ASA, and certain time-restricted hosting services. The sale of intellectual property (IP), net of associated costs and the book value of the divested IP, and the costs of external technology required to enable the intellectual property to be transferred, is presented net as Other income.Income. Revenue related to the licensing of the Group’sGroup's own IP and the revenues from hosting services are included in the Technology licensingLicensing and other revenue category.category
Predecessor | Successor | |||||||||||||||||||||||||||
Period from | Period from | |||||||||||||||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | Year ended December 31, | |||||||||||||||||||||||
Other income | 2016 | 2016 | 2017 | 2018 | 2017 | 2018 | 2019 | |||||||||||||||||||||
Proceeds allocated to divestment of IP | — | — | 7,800 | — | 7,800 | - | - | |||||||||||||||||||||
Cost of technology license obtained from | — | — | — | — | ||||||||||||||||||||||||
Otello Corporation ASA | — | — | (2,000) | — | ||||||||||||||||||||||||
Cost of technology license obtained from Otello Corporation ASA | (2,000 | ) | - | - | ||||||||||||||||||||||||
Book value of associated capitalized development costs | — | — | (256) | — | (256 | ) | - | - | ||||||||||||||||||||
Legal fees related to the divestment process | — | — | (84) | — | (84 | ) | - | - | ||||||||||||||||||||
Total | — | — | 5,460 | — | 5,460 | - | - | |||||||||||||||||||||
NOTE 5. | LOANS TO CUSTOMERS |
The Group engages in microlending in several developing countries, including Kenya and India. In 2019, the Group provided loans to customers with a relatively short duration, up to 365 days, in exchange for an origination fee that remained fixed regardless of any early repayment. The average duration for microloans provided in 2019 was 15 days. Additional fees in the form of interest, limited to the sum of the principal and origination fee, is accrued only if and after a loan was not repaid by its due date.
The fair value of microloans is presented in the Statement of Financial Position as Loans to customers. In the Statement of Operations, changes in fair value are disaggregated into Revenue and Other changes in fair value of loans to customers. While fair value of loans to customers is estimated as the present value of expected cash flows discounted by the credit-adjusted effective interest rate, the amount of revenue recognized related to origination fees and interest is measured based on the effective interest rate method. The amount of Other changes in fair value of loans to customers, presented as credit loss expense in the segment reporting in Note 5 Personnel expenses including share-based remuneration4, is the difference between the fair value at inception or the beginning of the period and the fair value at the end of the period, less cash flows received in the period and interest revenue. Other changes in fair value of loans to customers consist primarily of changes in fair value of expected cash flows.
See Note 18 for information on the Group’s exposure to credit risk and its policies for managing that risk.
The following tables present detailed financial information related to the microloans to customers:
| Loans to customers | Loans to customers | Loans to customers | Loans to customers | ||||||||||||||||
[US$ thousands] Statement of Financial Position as of December 31, 2018 | not yet overdue | overdue 1-30 days | overdue 31-90 days | overdue >90 days | Total | |||||||||||||||
| Disbursed amounts | 1,520 | 503 | 235 | 310 | 2,568 | |||||||||||||||
| Accumulated interest revenue | 247 | 223 | 276 | 400 | 1,146 | |||||||||||||||
| Accumulated credit loss expense (1) | - | (91 | ) | (99 | ) | (337 | ) | (528 | ) | |||||||||||
| Accumulated partial repayments | (6 | ) | (37 | ) | (34 | ) | (18 | ) | (95 | ) | ||||||||||
Net loans to customers | 1,762 | 598 | 378 | 355 | 3,092 | |||||||||||||||
| Loans to customers | Loans to customers | Loans to customers | Loans to customers | ||||||||||||||||
[US$ thousands] Statement of Financial Position as of December 31, 2019 | not yet overdue | overdue 1-30 days | overdue 31-90 days | overdue >90 days | Total | |||||||||||||||
| Disbursed amounts | 88,271 | 10,350 | 13,462 | 20,335 | 132,418 | |||||||||||||||
| Accumulated interest revenue | 5,101 | 2,017 | 3,390 | 6,830 | 17,338 | |||||||||||||||
| Accumulated credit loss expense (1) | (4,754 | ) | (8,629 | ) | (15,950 | ) | (24,969 | ) | (54,302 | ) | ||||||||||
| Accumulated partial repayments | (30 | ) | (137 | ) | (300 | ) | (1,375 | ) | (1,843 | ) | ||||||||||
Net loans to customers | 88,588 | 3,601 | 602 | 325 | 93,115 | |||||||||||||||
(1) Accumulated credit loss expense is part of Other changes in fair value of loans to customers in the Statement of Operations.
[US$ thousands] | Year ended December 31, | |||||||||||
Statement of Operations | 2017 | 2018 | 2019 | |||||||||
Origination fees and late interest | - | 1,655 | 128,373 | |||||||||
| Other changes in fair value of loans to customers | - | (528 | ) | (54,431 | ) | |||||||
| Net change in fair value of loans to customers | - | 1,127 | 74,071 | |||||||||
[US$ thousands] | Year-ended December 31, | |||||||
Reconciliation of fair value measurement of loans to customers | 2018 | 2019 | ||||||
As of January 1 | - | 3,092 | ||||||
Disbursements | 9,728 | 856,883 | ||||||
Interest revenue | 1,655 | 128,373 | ||||||
Other changes in fair value | (528 | ) | (54,302 | ) | ||||
Repayments | (8,840 | ) | (840,003 | ) | ||||
Other movements | 1,077 | (928 | ) | |||||
As of December 31 | 3,092 | 93,115 | ||||||
Fair value measurement
The fair value of microloans is estimated as the present value of expected cash flows discounted by the credit-adjusted effective interest rate. The fair value is a level 3 measurement. Future expected cash flows are estimated based on historic data and management overlay when necessary to reflect current expectations.
In the Group’s fair value model, each individual loan is designated into groups of loans where each group of loans has a corresponding recovery curve. The recovery curve reflects the expected cash flows for that group of loans and is constructed based on the observed historic data for loans with similar characteristics (e.g., to a first-time borrower or a returning borrower, disbursed amounts, loan term (maturity) and actual repayments). As the loan progresses and the Group obtains payment data (behavior data) on the customer, the contract remains in its current loan group or switch to the loan group whose recovery curve is most aligned with the observed payment history for that specific contract. Based on accumulated data, Opera has no reasonable expectation of receiving cash flows subsequent to 180 days after maturity, and consequently do not include any expected cash flow after 180 days past due in the estimation of fair value.
A basic premise applied for the initial and subsequent measurement of fair value is that each loan is issued without the creation of a gain or loss on issue. Thus, at initial recognition, the fair value of the loan, being the net present value of expected future cash flows, equals the cash flows disbursed when issuing the loan. Due to the short duration of the loan, the credit adjusted effective interest rate, that resulted in no gain or loss at inception, is kept constant when measuring the fair value of the loan for the remaining of the duration of the loan.
Due to the short duration of the microloans, the most significant factor when evaluating the loans is the estimation of future expected cash flows (the recovery curve). The estimate of fair value is also sensitive to the discount rate.
A 10% increase in the expected future cash flows would result in the fair value of the loans to customers being US$101,641 thousand, while a 10% decrease would result in the fair value being US$84,589 thousand. If the annualized discount rate was 100 percentage points higher, the fair value would be US$92,933 thousand, and if the annualized discount rate was 100 percentage points lower, the fair value would be US$93,348 thousand.
See Note 16 for additional details.
NOTE 6. | PERSONNEL EXPENSES INCLUDING SHARE-BASED REMUNERATION |
The table below specifies the amounts of personnel expenses including share-based remuneration:remuneration. The amount of personnel expenses presented as cost of revenue is specified in Note 7.
Predecessor | Successor | |||||||||||||||||||||||||||
Period from | Period from | |||||||||||||||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | Year ended December 31, | |||||||||||||||||||||||
Personnel expenses including share-based remuneration | 2016 | 2016 | 2017 | 2018 | 2017 | 2018 | 2019 | |||||||||||||||||||||
Salaries including bonuses | 26,599 | 3,965 | 25,895 | 26,697 | ||||||||||||||||||||||||
Salaries incl. bonuses | 23,714 | 20,412 | 34,186 | |||||||||||||||||||||||||
Social security cost, excluding amounts related to share-based remuneration | 4,260 | 1,007 | 4,235 | 3,428 | 4,235 | 3,428 | 3,777 | |||||||||||||||||||||
External temporary hires | 672 | 27 | 686 | 1,687 | 686 | 1,687 | 8,159 | |||||||||||||||||||||
Defined-contribution pension cost | 1,555 | 429 | 2,068 | 2,066 | 2,068 | 2,066 | 3,616 | |||||||||||||||||||||
Other personnel related expenses | 1,493 | 544 | 1,935 | 2,244 | 1,935 | 2,244 | 5,364 | |||||||||||||||||||||
Personnel expenses excluding share-based remuneration | 34,579 | 5,972 | 34,819 | 36,121 | 32,638 | 29,836 | 55,101 | |||||||||||||||||||||
Share-based remuneration, including related social security costs | 914 | — | 9,496 | 4,846 | 9,496 | 4,846 | 5,928 | |||||||||||||||||||||
Total | 35,493 | 5,972 | 44,315 | 40,968 | 42,134 | 34,683 | 61,029 | |||||||||||||||||||||
The amount of expensed versus capitalized development cost is detailed in the following table:
Predecessor | Successor | |||||||||||||||||||||||||||
Period from | Period from | |||||||||||||||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | Year ended December 31, | |||||||||||||||||||||||
Research and development expenditure | 2016 | 2016 | 2017 | 2018 | 2017 | 2018 | 2019 | |||||||||||||||||||||
Total research and development expenditure | 17,660 | 3,504 | 23,386 | 26,418 | 23,386 | 26,418 | 34,143 | |||||||||||||||||||||
Less: Capitalized development expenditure excluded from personnel expenses | 1,610 | 318 | 3,503 | 4,545 | 3,503 | 4,545 | 4,056 | |||||||||||||||||||||
Net expensed research and development expenditure | 16,050 | 3,186 | 19,883 | 21,873 | 19,883 | 21,873 | 30,087 | |||||||||||||||||||||
The table below specifies the amount of compensation to key management personnel, which include Officers and Directors of the Group:
Predecessor | Successor | |||||||||||||||||||||||||||
Period from | Period from | |||||||||||||||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | Year ended December 31, | |||||||||||||||||||||||
Compensation of key management personnel | 2016 | 2016 | 2017 | 2018 | 2017 | 2018 | 2019 | |||||||||||||||||||||
Short-term employee benefits | 398 | 55 | 946 | 843 | 946 | 843 | 2,121 | |||||||||||||||||||||
Post-employment and medical benefits | 34 | 7 | 47 | 57 | 47 | 57 | 59 | |||||||||||||||||||||
Termination benefits | — | — | — | — | ||||||||||||||||||||||||
Share-based payment transactions | 107 | — | — | 621 | - | 621 | 536 | |||||||||||||||||||||
Total | 539 | 62 | 993 | 1,521 | 993 | 1,521 | 2,716 | |||||||||||||||||||||
The Chairman and CEO did not receive any remuneration from the Group in the periods presented. The amounts disclosed as short-term benefits in the table above are the amounts recognized as an expense during the reporting period related to key management personnel.period. In 2019, the Chairman and CEO started receiving remuneration from the Group. The cost of equity grants to Officers that vested in 20182019 was $536 thousand, compared to US$621 thousand. During the periods from July 26, 2016 to December 31, 2016 and 2017, nothousand in 2018. No equity grants vested.vested in 2017. No loans have been granted and no guarantees have been issued to key management personnel. Key management personnel do not have any agreements for compensation upon termination or change of employment or directorship.
Share-based remuneration
On April 7, 2017 the Group adopted an RSU (Restricted Share Unit) plan for employees of the Group. The program was transferred to the Group’s new parent company, Opera Limited, in connection with the Group’s IPO in 2018. Awards equal to 10% of the equity of the Company are made available for grants.
The program was established with an assumption that there would be 500 million shares in the ultimate issuer entity. Opera Limited was set up with 200 million shares, resulting in a conversion ratio of 0.4 from the count of RSUs granted to the ultimate shares to be delivered. As each traded ADS represents two shares, the reported grants have been further adjusted by a factor of 0.5.
On January 10, 2019, the Group amended and restated its share incentive plan. The plan was adopted for the purpose of rewarding, attracting and retaining employees of the Group. Under the amended plan, a total of 20,000,000 ordinary shares are issuable to employees, corresponding to 10,000,000 ADSs. For the purpose of these consolidated financial statements, all counts of RSUs and options, as well as per-unit values, are communicated as converted to ADS equivalent units.
In 2019, grants were made in the months of March, June, September, November and December. The average vesting schedule for the majority of 2019 grants were 16%, 22%, 28%, 34% on January 1 in each of the years 2020-2023.
The equity unit value applied for the 2019 grants was determined based on the market value of the Company on the date of each grant. The fair value for RSUs granted was determined by Monte Carlo simulation, while the fair value of options was determined based on the Black-Scholes model, as specified below. The table presents the weighted average values across grants within each category of equity award instruments. The equity cost of each award is recognized on a straight-line basis over the vesting period.
The Group accrues for relevant social security costs based on the most recent available measure of the equity value, with the same straight-line recognition over the vesting period. As of December 31, 2019, social security cost was accrued based on the period-end market value of the Company, and corresponded to US$1,050 thousand. The full amount of social security payable on grants outstanding at period end, assuming all grants become exercisable at the current period-end market value of the Company, amounts to US$1,442 thousand.
The expense recognized for the employee services received is shown in the following table:
[US$ thousands] | Year ended December 31, | |||||||||||
Expense from share-based payment transactions | 2017 | 2018 | 2019 | |||||||||
Expense arising from equity-settled share-based payment transactions (1) | 9,496 | 4,846 | 5,928 | |||||||||
Expense arising from cash-settled share-based payment transactions | - | - | - | |||||||||
Total | 9,496 | 4,846 | 5,928 | |||||||||
(1) Including accrued social security cost.
Movements during the period: Number of RSUs and options as expressed in equivalent ADSs:
Year ended December 31, | ||||||||
RSUs | 2018 | 2019 | ||||||
Outstanding at period start | 3,882,600 | 4,244,132 | ||||||
Granted during the period | 516,000 | 1,019,000 | ||||||
Forfeited during the period | (154,468 | ) | (550,700 | ) | ||||
Exercised during the period | - | (1,728,492 | ) | |||||
Expired during the period | - | - | ||||||
Outstanding at period end | 4,244,132 | 2,983,940 | ||||||
Year ended December 31, | ||||||||
Options | 2018 | 2019 | ||||||
Outstanding at period start | - | - | ||||||
Granted during the period | - | 150,000 | ||||||
Forfeited during the period | - | - | ||||||
Exercised during the period | - | - | ||||||
Expired during the period | - | - | ||||||
Outstanding at period end | - | 150,000 | ||||||
The weighted average remaining vesting period for the equity instruments outstanding as of December 31, 2019 was 0.95 years (December 31, 2018: 0.97 years). On January 1, 2020, 1,130,000 RSUs and 30,000 options became exercisable, with no exercise price for the RSUs and $7.42 exercise price for the options.
Fair value measurement per awarded equity unit as converted to ADS equivalent:
2018 RSU grants: RSU valuation input | 2019 RSU grants: RSU valuation input | 2019 RSU grants: Option valuation input | ||||||||||
Equity unit price valuation ($) | 7.75 | 9.09 | (3) | 7.42 | ||||||||
Model Used | Monte Carlo |
| Monte Carlo |
| Black-Scholes | |||||||
Expected Volatility (%) (1), (2) | 35.28 | % | 40.00 | % | 40 | % | ||||||
Risk free interest rate (%) (1) | 2.43 | % | 1.70 | % | 2.43 | % | ||||||
Dividend Yield (%) | 0 | % | 0 | % | 0 | % | ||||||
Duration of initial simulation period (years to longstop date) | 4.73 | 3.16 | 4.81 | |||||||||
Duration of second simulation period with postponed exercise (years) | 3.00 | 3.00 | N/A | |||||||||
Fair value at the measurement date ($) | 7.12 | 8.92 | 2.36 | |||||||||
(1) Specified value is 4 years (modelled on yearly basis).
(2) Based on a defined peer group of companies considered comparable to the Group.
(3) Weighted average equity unit price valuation of all grants in 2019.
NOTE 7. | COST OF REVENUE |
The table below specifies the nature of expenses presented as Cost of revenue.
[US$ thousands] | Year ended December 31, | |||||||||||
Cost of revenue | 2017 | 2018 | 2019 | |||||||||
Payouts to publishers and monetization partners | 1,303 | 1,227 | 2,096 | |||||||||
Cost of prepaid airtime and handsets sold | - | 9,096 | 29,836 | |||||||||
Microlending service fee (1) | - | 428 | 29,759 | |||||||||
Cost of professional services (2) | 2,181 | 6,693 | 11,754 | |||||||||
Other expenses | 485 | 2,565 | 546 | |||||||||
Total | 3,969 | 20,009 | 73,991 | |||||||||
(1) Includes accrued fee for provision of app, systems and platform maintenance, and data processing services as well as managerial oversight to P C Financial Services, the subsidiary of the Group offering microloans in India. See Note 628 for more details.
(2) The Group provided development and managerial services to equity-accounted investees. Related to this, the Group incurred expenses, predominantly personnel expenses. In 2019, the Group reclassified personnel and other operating expenses in prior periods as cost of revenue. In 2018, the Group reclassified personnel expenses of US$6,285 thousand as cost of revenue, compared to US$2,181 thousand in 2017. Other operating expenses reclassified as cost of revenue was US$408 thousand in 2018 and US$485 thousand in 2017.
NOTE 8. | OTHER EXPENSES |
The table below specifies the nature of other expenses:expenses.
Predecessor | Successor | |||||||||||||||
Period from | Period from | |||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | ||||||||||||
Other expenses | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Marketing and distribution | 22,550 | 7,980 | 30,971 | 31,581 | ||||||||||||
Hosting | 7,894 | 2,215 | 12,105 | 10,146 | ||||||||||||
Audit, legal and other advisory services | 1,577 | 6,359 | 3,529 | 8,324 | ||||||||||||
Software license fees | 1,068 | 253 | 1,346 | 1,799 | ||||||||||||
Rent and other office expenses | 3,407 | 545 | 4,304 | 4,573 | ||||||||||||
Travel | 1,880 | 983 | 1,775 | 2,058 | ||||||||||||
Other | 4,110 | 698 | 4,622 | 1,517 | ||||||||||||
Total | 42,486 | 19,032 | 58,652 | 59,997 | ||||||||||||
Note 7 Restructuring costs
The restructuring costs mainly consist of severance payments to former employees and reductions of office space, with certain associated legal fees. The Group’s restructuring (including the restructuring within the Predecessor period) represents a streamlining of the Consumer Business carried out over a limited time-period.
Predecessor | Successor | |||||||||||||||
Period from | Period from | |||||||||||||||
January 1 to | July 26 to | Year ended | Year ended | |||||||||||||
[US$ thousands] | November 3, | December 31, | December 31, | December 31, | ||||||||||||
Restructuring costs | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Severance cost | 3,586 | — | 2,707 | — | ||||||||||||
Office restructuring cost | 231 | — | 306 | — | ||||||||||||
Legal fees related to restructuring | 94 | — | 227 | — | ||||||||||||
Total | 3,911 | — | 3,240 | — | ||||||||||||
[US$ thousands] | Year ended December 31, | |||||||||||
Other expenses | 2017 | 2018 | 2019 | |||||||||
Hosting | 12,105 | 10,146 | 6,941 | |||||||||
Audit, legal and other advisory services | 3,529 | 8,306 | 8,533 | |||||||||
Software license fees | 1,346 | 1,799 | 2,566 | |||||||||
Rent and other office expenses | 4,304 | 4,573 | 5,379 | |||||||||
Travel | 1,775 | 2,057 | 3,990 | |||||||||
Other | 2,300 | 1,477 | 4,801 | |||||||||
Total | 25,359 | 28,359 | 32,210 | |||||||||
Note 8 Furniture, fixtures and equipment
NOTE 9. | FURNITURE, FIXTURES AND EQUIPMENT |
[US$ thousands] | Furniture and fixtures | Equipment | Leasehold improvements | Total | Office properties | Furniture and fixtures | Equipment | Leasehold improvements | Total | |||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||
Cost as of January 1, 2017 | 518 | 11,584 | 1,454 | 13,556 | ||||||||||||||||||||||||||||||||
Additions | 15 | 8,434 | — | 8,449 | ||||||||||||||||||||||||||||||||
Disposals | (68 | ) | (-356 | ) | (14 | ) | (438 | ) | ||||||||||||||||||||||||||||
Exchange rate differences | 13 | 1,023 | 252 | 1,288 | ||||||||||||||||||||||||||||||||
As of December 31, 2017 | 478 | 20,685 | 1,692 | 22,855 | ||||||||||||||||||||||||||||||||
Cost as of January 1, 2018 | - | 478 | 20,685 | 1,692 | 22,855 | |||||||||||||||||||||||||||||||
Additions | 149 | 4,201 | 139 | 4,489 | - | 149 | 4,201 | 139 | 4,489 | |||||||||||||||||||||||||||
Disposals | — | — | — | — | - | - | - | - | - | |||||||||||||||||||||||||||
Exchange rate differences | 4 | (-312 | ) | (93 | ) | (401 | ) | - | 4 | (312 | ) | (93 | ) | (401 | ) | |||||||||||||||||||||
As of December 31, 2018 | 629 | 24,574 | 1,738 | 26,942 | - | 629 | 24,574 | 1,738 | 26,942 | |||||||||||||||||||||||||||
Adjustment for change in accounting policy (1) | 6,739 | - | 8,230 | - | 14,969 | |||||||||||||||||||||||||||||||
Restated cost as of January 1, 2019 | 6,739 | 629 | 32,804 | 1,738 | 41,911 | |||||||||||||||||||||||||||||||
Additions | 1,228 | 243 | 9,197 | 78 | 10,746 | |||||||||||||||||||||||||||||||
Disposals | - | - | (13,672 | ) | - | (13,672 | ) | |||||||||||||||||||||||||||||
Exchange rate differences | - | 5 | (321 | ) | (69 | ) | (384 | ) | ||||||||||||||||||||||||||||
As of December 31, 2019 | 7,967 | 878 | 28,008 | 1,747 | 38,601 | |||||||||||||||||||||||||||||||
Depreciation and impairment | ||||||||||||||||||||||||||||||||||||
As of January 1, 2017 | 58 | 1,575 | 135 | 1,768 | ||||||||||||||||||||||||||||||||
Depreciation for the year | 163 | 7,562 | 249 | 7,974 | ||||||||||||||||||||||||||||||||
Disposals | — | (326 | ) | — | (326 | ) | ||||||||||||||||||||||||||||||
Exchange rate differences | (35 | ) | (9 | ) | 22 | (21 | ) | |||||||||||||||||||||||||||||
As of December 31, 2017 | 186 | 8,802 | 406 | 9,394 | ||||||||||||||||||||||||||||||||
As of January 1, 2018 | - | 186 | 8,802 | 406 | 9,394 | |||||||||||||||||||||||||||||||
Depreciation for the year | 116 | 5,001 | 243 | 5,360 | - | 116 | 5,001 | 243 | 5,360 | |||||||||||||||||||||||||||
Disposals | — | — | — | — | - | - | - | - | - | |||||||||||||||||||||||||||
Exchange rate differences | 21 | 28 | (22 | ) | 26 | - | 21 | 28 | (22 | ) | 26 | |||||||||||||||||||||||||
As of December 31, 2018 | 324 | 13,832 | 628 | 14,780 | - | 324 | 13,831 | 628 | 14,780 | |||||||||||||||||||||||||||
Depreciation for the year | 1,766 | 139 | 8,585 | 258 | 10,748 | |||||||||||||||||||||||||||||||
Disposals | - | - | (12,994 | ) | - | (12,994 | ) | |||||||||||||||||||||||||||||
Exchange rate differences | - | 1 | 24 | (17 | ) | 8 | ||||||||||||||||||||||||||||||
As of December 31, 2019 | 1,766 | 464 | 9,446 | 869 | 12,543 | |||||||||||||||||||||||||||||||
Net book value as of December 31, 2017 | 291 | 11,883 | 1,286 | 13,460 | ||||||||||||||||||||||||||||||||
Net book value as of December 31, 2018 | 306 | 10,742 | 1,109 | 12,162 | - | 306 | 10,742 | 1,109 | 12,162 | |||||||||||||||||||||||||||
Net book value as of December 31, 2019 | 6,201 | 415 | 18,562 | 878 | 26,053 | |||||||||||||||||||||||||||||||
properties | Fixture and fittings | Equipment | Leasehold improvements | |||||
Useful life | Up to 6 years | Up to 5 years | Up to 10 years, or term of lease | Up to 6 years, or term of lease | ||||
Depreciation | Straight-line | Straight-line | Straight-line | Straight-line |
(1) See Note 3 for information about change in accounting policy related to implementation of IFRS 16.
|
|
Note 9 Intangible assets
NOTE 10. | INTANGIBLE ASSETS |
Customer | Other intangible | |||||||||||||||||||||||||||||||||||||||||||||||
[US$ thousands] | Goodwill | Customer relationships | Technology | Trademarks | Other intangible assets | Total | Goodwill | relationships | Technology | Trademarks | assets | Total | ||||||||||||||||||||||||||||||||||||
Cost | ||||||||||||||||||||||||||||||||||||||||||||||||
Cost as of January 1, 2017 | 421,578 | 40,700 | 12,835 | 70,600 | 1,877 | 547,590 | ||||||||||||||||||||||||||||||||||||||||||
Additions (1) | — | — | 2,936 | — | 143 | 3,079 | ||||||||||||||||||||||||||||||||||||||||||
Disposals | — | — | (1,226 | ) | — | — | (1,226 | ) | ||||||||||||||||||||||||||||||||||||||||
Exchange differences | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2017 | 421,578 | 40,700 | 14,545 | 70,600 | 2,020 | 549,443 | ||||||||||||||||||||||||||||||||||||||||||
Cost as of January 1, 2018 | 421,578 | 40,700 | 14,545 | 70,600 | 2,020 | 549,443 | ||||||||||||||||||||||||||||||||||||||||||
Additions (1) | — | — | 4,132 | — | 27 | 4,159 | - | - | 4,132 | - | 27 | 4,159 | ||||||||||||||||||||||||||||||||||||
Disposals | — | — | — | — | — | — | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
Exchange differences | — | — | — | — | — | — | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
As of December 31, 2018 | 421,578 | 40,700 | 18,677 | 70,600 | 2,047 | 553,602 | 421,578 | 40,700 | 18,677 | 70,600 | 2,047 | 553,602 | ||||||||||||||||||||||||||||||||||||
Amortization and impairment | ||||||||||||||||||||||||||||||||||||||||||||||||
As of January 1, 2017 | — | 497 | 855 | — | 124 | 1,476 | ||||||||||||||||||||||||||||||||||||||||||
Amortization for the year | — | 2,980 | 4,033 | — | 1,617 | 8,630 | ||||||||||||||||||||||||||||||||||||||||||
Additions (1) | - | - | 3,545 | - | - | 3,545 | ||||||||||||||||||||||||||||||||||||||||||
Disposals | — | — | (861 | ) | — | — | (861 | ) | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||
Exchange differences | — | — | — | — | — | — | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||
As of December 31, 2017 | — | 3,477 | 4,028 | — | 1,741 | 9,246 | ||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2019 | 421,578 | 40,700 | 22,222 | 70,600 | 2,047 | 557,147 | ||||||||||||||||||||||||||||||||||||||||||
| — | ||||||||||||||||||||||||||||||||||||||||||||||||
Amortization and impairment | ||||||||||||||||||||||||||||||||||||||||||||||||
As of January 1, 2018 | - | 3,477 | 4,028 | - | 1,741 | 9,246 | ||||||||||||||||||||||||||||||||||||||||||
Amortization for the year | — | 2,980 | 4,094 | — | 261 | 7,335 | - | 2,980 | 4,094 | - | 261 | 7,335 | ||||||||||||||||||||||||||||||||||||
Disposals | — | — | — | — | — | — | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||
Exchange differences | — | — | — | — | — | — | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||
As of December 31, 2018 | — | 6,457 | 8,122 | — | 2,003 | 16,581 | - | 6,457 | 8,122 | - | 2,002 | 16,581 | ||||||||||||||||||||||||||||||||||||
Amortization for the year | - | 2,980 | 5,203 | - | 2 | 8,185 | ||||||||||||||||||||||||||||||||||||||||||
Disposals | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Exchange differences | - | - | - | - | (4 | ) | (4 | ) | ||||||||||||||||||||||||||||||||||||||||
As of December 31, 2019 | - | 9,437 | 13,325 | - | 2,000 | 24,762 | ||||||||||||||||||||||||||||||||||||||||||
Net book value as of December 31, 2017 | 421,578 | 37,222 | 10,518 | 70,600 | 279 | 540,197 | ||||||||||||||||||||||||||||||||||||||||||
Net book value as of December 31, 2018 | 421,578 | 34,243 | 10,555 | 70,600 | 44 | 537,021 | 421,578 | 34,243 | 10,555 | 70,600 | 45 | 537,022 | ||||||||||||||||||||||||||||||||||||
Net book value as of December 31, 2019 | 421,578 | 31,263 | 8,897 | 70,600 | 47 | 532,385 | ||||||||||||||||||||||||||||||||||||||||||
| Goodwill | Customer relationships | Technology | Trademarks | Other intangible assets | |||||||||
Useful life | Indefinite | Up to 15 | Up to 5 year | Indefinite | Up to 5 years |
| ||||||||
Amortization method | Straight-line | Straight-line | Straight-line |
| (1)Represents capitalized development expenditure net of grants received from the Norwegian government. |
Goodwill and our brand of Opera (the Trademark)trademark) have indefinite useful lives and are tested for impairment at least annually. Both assets were initially recognized in November 2016 through the acquisition of the Consumer Business. The Group consistsOpera Norway AS with subsidiaries, consisting of one segment – “the Consumer business”. Due to growth and expansion into new businesses in 2019, including microlending, management organized the Group into four operating segment: the Consumer Business, to whichsegments effective from 2019: Browser and News, Fintech, Retail and Other. The goodwill and the trademark are allocated.that previously was allocated to the Consumer business CGU was reallocated to the Browser and News CGU.
The Group performed its annual impairment test of Browser & News CGU as of December 2018. The Group considers the relationship between its market capitalization and its book value of equity, among other factors, when reviewing for indicators of impairment. As of December 31, 2018, the market capitalization of the Group was below the book value of its equity, indicating a potential impairment of goodwill. This contrasted to the overall positive performance of the Consumer Business in 2018 and management’s outlook for the future.2019 as required by IFRS.
The carrying amount of the Browser & News CGU as of December 31, 20182019 was US$580,705577,376 thousand (December 31, 2017:2018: US$566,356580,705 thousand). In addition to goodwill and trademark it included customer relationships, trade and other receivables, trade and other payables and other assets and liabilities allocated to Browser & News CGU.
For carrying out the annual impairment testing, a discounted cash flow model is used to determine the value in use for the cash generating unit with goodwill and intangible assets with indefinite lives. The projected cash flows are based on the most up-to-date forecast that have been approved by management and do not include cash flows arising from future enhancements. The approved forecast is for 20192020 only as management does not approve forecasts for a longer period. Because the length of the projection period for the cash flow forecast where a CGU has goodwill or intangible assets with indefinite lives is into perpetuity, we have identified a “steady state” set of assumptions for the cash flows based an approach where we estimate cash flows for the years 20202021 to 20222023 and then using the estimated cash flows in 20222023 as the basis for the terminal value. This two-stage approach is aimed to take cash flows to a level at which they can be regarded as reflecting maintainable earnings and to the period in a mid-point of the cycle – i.e., not at peak or trough of the cycle. Beyond 2022,2023, the cash flows are extrapolated using constant nominal growth rates.
The value-in-use calculation demonstrates that the value in use exceed the carrying amount of the CGU, i.e. it was not impaired.
Key assumptions
Key assumptions used in the calculation of value in use are the nominal cash flows in the forecast period, including revenue growth rate, discount rate, and estimated long-term growth.
Cash flows
Cash inflows in the Browser & News CGU are expected to continue to grow over the projected period.period reaching its long-term stable level. The cash inflows are forecasted for each product and country where we have sufficient and reliable data on which to base the projections. Our PC browser revenue is expected to grow steadily, reflecting an expectation that we will continue to strengthen our position in western markets. This will bring users with strong monetization potential. Our mobile revenues are expected to increase faster, including in developing markets by continuous product development and the undertaking of cost-effective and efficient marketing and distribution initiatives.
Forecasted cash outflows are partly based on actual costs in 20182019 and a bottom-up assessment for eachthe relevant operating unit. Operating expenditures are expected to grow, primarily due to user acquisition initiatives by engaging more publishers and increases inmonetization partners, which is expected to increase our revenue, but also our cost of revenue following full-year effectsas we pay a share of the Retail business as well as closer cooperation with publishers that collect revenue shares.revenues generated to these parties. The estimated increase in users will also lead to an uplift in hosting costs that are variable by its nature, like CDN,content delivery networks, bandwidth and cloud services.
Discount rate
The discount rate represents the current market assessment of the risk specific to the Consumer BusinessBrowser & News CGU. The discount rate is based on the after-tax Weighted Average Cost of Capital (WACC) derived from the Capital Asset Pricing Model (CAPM) methodology and incremental borrowing rate, assuming cash flows in U.S. Dollars. The WACC calculation is based on a risk-free rate of 1.9% (2018: 3.0% (2017: 2.6%), in 20182019 based on the 10-year US Treasury Rate, while in 2017 based on the 30-year US Treasury Rate, and a market risk premium of 5.68% (6.0%5.2% (5.68% in 2017)2018). The estimated beta for equity was 1.20 (2017: 1.35)1.4 (2018: 1.20). Cost of debt after tax was estimated to be 4.0%, while theThe equity to total capital ratio was 100% (2018: 97% (2017: 100%). This resulted in a post-tax WACC of 13.1% (2018: 10.6% (2017: 10.7%).
Long-term growth
In estimating the long-term growth in the terminal value, we estimated long-term GDP growth in the relevant regions. We assumed no growth in labor force as well as no improvement in labor productivity, which results in zero real GDP growth. Moreover, for estimating long-term inflation we used IMF’s inflation estimates for 2023,2024, broken down across regions as the basis. Based on this we estimated a long-term nominal growth rate 2.5%3% for the Consumer BusinessBrowser & News CGU (2017:(2018: 2.5%).
Sensitivity
We have simulated a variety of sensitivities to the key assumptions, including revenue growth rate, OPEXoperating expenditure (as % of revenue), capital expenditure necessary for maintenance, long-term growth and the WACC. Since Opera is in a high-growth period, we consider changes of +/-5- 3 percentage points for the three former metrics and narrower +/- 1 percentage point for the long-term growth and WACC to be reasonable possible changes. No reasonable possible change in the key assumptions would result in the CGU being impaired as of December 31, 2018.2019. The following thresholds would trigger an impairment loss:
- Decrease in annual revenue growth in the projected period of 6.0 percentage points.
- Increase in operating expenditure as percent of revenue by more than 9.4 percentage points.
- Increase of WACC by more than 8.6
● | Decrease in annual revenue growth in the projected period of 3.8 percentage points. |
● | Increase in operating expenditure as percent of revenue by more than 12.3 percentage points. |
● | Increase of WACC by more than 3.1 percentage points. |
No economically reasonable changes to capital maintenance expenditure and the long-term growth rate would trigger the CGU to be impaired. For instance, there is no positive value of long-term growth that would result in impairment.
NOTE 11. | INVENTORIES |
Note 10 Leases
[US$ thousands] | As of December 31, | |||||||
Inventories | 2018 | 2019 | ||||||
Handsets | - | 7,656 | ||||||
Prepaid airtime | - | 96 | ||||||
Total | - | 7,752 | ||||||
Operating leasesInventories were measured at cost. No items of inventory were written down to net realizable value. The cost of inventory sold in the period is recognized as Cost of revenue. See Note 7 for more details.
NOTE 12. | LEASES |
The Group has operating lease agreementsis the lessee for leases of office rentals. The major office leases are for officesspace, data centers and servers and other equipment used in Oslo, Norway, Wroclaw, Poland, Linköping and Gothenburg, Sweden, and Beijing, China.its operations.
The Statement of Financial Position has the following amounts relating to leases:
[US$ thousands] | As of December 31, | |||||||
Amounts recognized in the Statement of Financial Position | 2018 (2) | 2019 | ||||||
Right-of-use assets (1) | ||||||||
Office properties | 0 | 6,178 | ||||||
Equipment | 0 | 5,528 | ||||||
Total | 0 | 11,706 | ||||||
Lease liabilities | ||||||||
Current | 0 | 4,625 | ||||||
Non-current | 0 | 7,378 | ||||||
Total | 0 | 12,003 | ||||||
(1) Additions to the right-of-use assets during the 2019 financial year were US$1.2 million.
(2) In the previous year, the Group has subleases of 50%only recognized lease assets and lease liabilities in relation to leases that were classified as "finance leases" under IAS 17. The assets were presented in property, plant and equipment and the liabilities as part of the Oslo officeGroup’s borrowings. For adjustments recognized on adoption of IFRS 16 on 1 January 2019, please refer to OtelloNote 3
The Statement of Operations has the following amounts relating to leases:
[US$ thousands] | Year ended December 31, | |||||||
Amounts recognized in the Statement of Operations | 2018 | 2019 | ||||||
Depreciation charge of right-of-use assets | ||||||||
Office properties | - | 1,752 | ||||||
Equipment | - | 2,739 | ||||||
Total | - | 4,491 | ||||||
Interest expense (included in Finance expense) | - | 457 | ||||||
The total cash outflow for leases in 2019 was US$5,328 thousand.
Lease contracts are typically made for fixed periods of 6 months up to 6 years but may have extension options as described below. Contracts may contain both lease and non-lease components, which are accounted for separately. The Group allocates the consideration in the period Octobercontract to the lease and non-lease components based on their relative stand-alone prices. Lease terms are negotiated on an individual basis and are for a wide range of different terms and conditions. Some lease agreements required that the Group provide cash deposits as security for lease payments, while a guarantee is made by the Group in favor of Dell Bank International d.a.c. ("Dell") as security for all present and future lease liabilities, as disclosed in Note 14. Leased assets may not be used as security for borrowing purposes.
Prior to the adoption of IFRS 16 on January 1, 2016 until2019, as disclosed in Note 3, leases of office properties and equipment were classified as finance or operating leases. Note 12 provides information about the lease expiration on November 30, 2019. The remaining Oslo office lease obligation was approximately US$0.8 millionliabilities as of December 31, 2018 (December 31, 2017: US$1.6 million)related what then were finance leases. From January 1, 2019, leases other than those leases that have a lease term of 12 months or less and leases for which 50%, US$0.4 million, will be coveredthe underlying asset is of low value, are recognized as a right-of-use asset and a corresponding liability at the date at which the leased asset is available for use by Otello under the sublease agreement. The remaining Wroclaw officeGroup. Assets and liabilities arising from a lease obligation is approximately US$4.9 million as of December 31, 2018 (December 31, 2017: US$6.5 million).are initially measured on a present value basis.
The Group also has operating leases relating to data center locations. These are located inTo determine the US, Singapore andincremental borrowing rate, which were the Netherlands. These leases are cancelablebasis on a short-term basis. Thewhich lease withpayments were discounted, the longest lease term is cancelable with a termination period of 12 months.Group:
Predecessor | Successor | |||||||||||||||
[US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | ||||||||||||
Leasing costs expensed | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Office leasing costs expensed (1) | 2,619 | 494 | 3,085 | 3,063 | ||||||||||||
Data center leasing costs expensed (2) | — | 1,717 | 5,366 | 4,627 | ||||||||||||
|
| |
|
| |
● | Made adjustments specific to the lease, e.g., term, country, currency and security. |
| As of | As of | |||||||
| [US$ thousands] | December 31, | December 31, | ||||||
Non-cancellable operating leases due in: | 2017 | 2018 | ||||||
Less than one year | 3,250 | 3,249 | ||||||
Between one to five years | 6,702 | 4,541 | ||||||
More than five years | 638 | — | ||||||
Total | 10,589 | 7,790 | ||||||
Finance lease liabilitiesExtension and termination options
TheExtension and termination options are included in a number of property and equipment leases across the Group. To the extent the Group leases server equipment, some of which provide the option to buy the equipment at the end of the leasing period. Minimum lease payments made for finance leases are allocated between interest expense and the reduction of the outstanding liability.
[US$ thousands] Finance lease liabilities as of December 31, 2017 | Present value of | Interest | Future minimum lease payments | |||||||||
Less than one year | 2,073 | 74 | 2,148 | |||||||||
Between one and five years | 265 | 13 | 278 | |||||||||
More than five years | — | — | — | |||||||||
Total | 2,339 | 87 | 2,426 | |||||||||
[US$ thousands] Finance lease liabilities as of December 31, 2018 | Present value of | Interest | Future minimum lease payments | |||||||||
Less than one year | 196 | 5 | 201 | |||||||||
Between one and five years | 33 | — | 33 | |||||||||
More than five years | — | — | — | |||||||||
Total | 229 | 5 | 234 | |||||||||
No assetsis reasonable certain it will exercise these extension options, they have been pledged as security, butincluded in the right-of-use asset and lease liability. Extension and termination options are used to maximize operational flexibility in terms of managing the assets used in the Group’s operations. The majority of extension and termination options held are exercisable only by the Group has issued a guarantee as disclosed in Note 13.and not by the respective lessor.
NOTE 13. | LEASE LIABILITIES AND OTHER LOANS |
Note 11 Finance
The terms, including interest rates and maturities, and the total carrying amount of lease liabilities and otherinterest-bearing loans are presented below.
[US$ thousands] |
|
| As of December 31, | As of December 31, | ||||||||||||
| Finance lease liabilities and other loans | Interest rate | Maturity | 2017 | 2018 | ||||||||||||
| Finance leases | 3.7% | February 2020 | 2,338 | 229 | ||||||||||||
Interest bearing loans | 1.6% | - | 3.8% | February 2019 | - | July 2023 | 3,767 | 4,040 | ||||||||
Total | 6,105 | 4,269 | ||||||||||||||
[US$ thousands] | As of December 31, | |||||||||||||||
Lease liabilities and interest-bearing loans | Interest rate | Maturity | 2018 | 2019 | ||||||||||||
Lease liabilities | 229 | 12,003 | ||||||||||||||
Interest-bearing loans (1) | 2% | - | 9% | January 2020 | - | July 2023 | 4,040 | 43,904 | ||||||||
Total | 4,269 | 55,907 | ||||||||||||||
(1) See Notes 18 and 19 for more information about a loan of US$42,247 thousand as of December 31, 2019.
Total finance lease liabilities and other loans, non-current and current are summarized below:below.
As of | As of | |||||||
[US$ thousands] | December 31, | December 31, | ||||||
Finance lease liabilities and other loans, non-current | 2017 | 2018 | ||||||
Finance lease liabilities | 265 | 33 | ||||||
Interest bearing loans | 3,767 | 2,238 | ||||||
Total | 4,032 | 2,271 | ||||||
[US$ thousands] | As of December 31, | |||||||
Non-current lease liabilities and other loans | 2018 | 2019 | ||||||
Lease liabilities | 33 | 7,378 | ||||||
Interest-bearing loans | 2,238 | 736 | ||||||
Other loans | - | 1,067 | ||||||
Total | 2,271 | 9,181 | ||||||
As of | As of | |||||||||||||||
[US$ thousands] | December 31, | December 31, | As of December 31, | |||||||||||||
Finance lease liabilities and other loans, current | 2017 | 2018 | ||||||||||||||
Finance lease liabilities | 2,073 | 196 | ||||||||||||||
Interest bearing loans | — | 1,802 | ||||||||||||||
Current lease liabilities and other loans | 2018 | 2019 | ||||||||||||||
Lease liabilities | 196 | 4,625 | ||||||||||||||
Interest-bearing loans | 1,802 | 43,169 | ||||||||||||||
Other loans | — | 492 | 492 | 0 | ||||||||||||
Total | 2,073 | 2,490 | 2,490 | 47,793 | ||||||||||||
See Note 12 for additional details regarding the Group’s leases and Note 17 for a maturity analysis of the financial liabilities.
Note 12 Other commitments
As part of the agreement to acquire Opera Software AS, the Group assumed a liability of up to US$2.0 million related to a certain earn-out obligation of Otello, originating from a business retained by Otello. The liability was variable and dependent on the user base adoption of certain features in the Group’s Opera browsers that were enabled by technology that Otello had retained.
At the time of the acquisition on November 3, 2016, and as of December 31, 2016, the fair value of the liability was estimated at US$1.6 million, which was included in other non-current liabilities as of December 31, 2016. As the realized operational benefits were lower than estimated in 2016, the fair value of the obligation was reduced to US$0.6 million as of December 31, 2017 and then classified as other current liabilities. In February 2018 the earn-out obligation was settled by the Group paying US$0.6 million.
Note 13 Guarantees
NOTE 14. | GUARANTEES AND OTHER COMMITMENTS |
A guarantee ishas been made by the Group in favor of Dell Bank International d.a.c. ("Dell") as a security for any and all present and future finance lease liabilities of the Group subsidiaries (as the Lessee)lessee) to Dell.
This guarantee is limited to a principal amount of approximately US$11.6 million,11,382 thousand, with the addition of any interests, costs and/or expenses accruing on the liabilities and/or as a result of the Lessee’sGroup’s non-fulfilment of the liabilities;liabilities. The guarantee is independent and separate from the obligations of the Lessee;Group as the lessee and is valid for 10 years from January 17, 2017.
In 2019, the Group entered into an agreement with Putu Novi Financing Corporation, a related party, under which the Group provided a revolving credit facility limited to US$10 million and would be entitled to interest and gross profit sharing of the borrower’s operations. The credit facility was provided for a period of 18 months starting on December 18, 2019. As of December 31, 2019, no loans were provided under the credit facility. See Note 14 Other current liabilities28 for additional details.
In 2018, the Group provided a revolving credit facility of US$6 million to Powerbets, a related party. As of December 31, 2019, a total of US$3.0 million was drawn under the credit facility. The loan to Powerbets forms part of the Group’s net investment in the company due to settlement neither being planned nor being likely to occur in the foreseeable future. See Note 28 for more information.
| As of | As of | |||||||
[US$ thousands] | December 31, | December 31, | ||||||
Other current liabilities | 2017 | 2018 | ||||||
Accrued personnel expenses | 6,195 | 6,919 | ||||||
Trading liability (1) | — | 500 | ||||||
Unsettled trades (1) | — | 335 | ||||||
Other current liabilities | 2,000 | 1,947 | ||||||
Total | 8,195 | 9,701 | ||||||
|
|
NOTE 15. | OTHER CURRENT LIABILITIES |
[US$ thousands] | As of December 31, | |||||||
Other current liabilities | 2018 | 2019 | ||||||
Accrued personnel expenses | 6,919 | 10,472 | ||||||
Trading liability (1) | 500 | - | ||||||
Unsettled trades (1) | 335 | - | ||||||
Customer deposits | - | 2,694 | ||||||
Other current liabilities | 1,947 | 1,976 | ||||||
Total | 9,701 | 15,142 | ||||||
(1) See Note 15 Financial assets and liabilities16 for additional information.
NOTE 16. | FINANCIAL ASSETS AND LIABILITIES |
The group has the following financial instruments:
- Loans and receivables: Trade receivables, other receivables and current and non-current financial assets.
- Equity instruments: Holdings of publicly traded securities.
- Loans, borrowings and payables: Interest bearing
● | Loans and receivables: Trade receivables, loans to customers, other receivables, preferred shares, and current and non-current financial assets. | |
● | Equity instruments: Holdings of publicly traded securities. | |
● | Loans, borrowings and payables: Interest-bearing loans, |
The table below shows the various financial assets and liabilities, grouped in the different categories of financial instruments according to IFRS 9.instruments.
Financial | Financial | |||||||||||||||||||
assets at | liabilities | |||||||||||||||||||
fair value | Debt | at fair value | Financial | |||||||||||||||||
through | instrument at | through | liabilities | |||||||||||||||||
[US$ thousands] | net income | amortized | net income | at amortized | ||||||||||||||||
As of December 31, 2017 | (loss) | cost | (loss) | cost | Total | |||||||||||||||
Financial assets | ||||||||||||||||||||
Non-current | ||||||||||||||||||||
Other financial assets (1) | — | 1,857 | — | — | 1,857 | |||||||||||||||
Current | ||||||||||||||||||||
Trade receivables (Note 20) | — | 31,072 | — | — | 31,072 | |||||||||||||||
Other receivables (Note 20) | — | 7,865 | — | — | 7,865 | |||||||||||||||
Total | — | 40,795 | — | — | 40,795 | |||||||||||||||
Financial liabilities | ||||||||||||||||||||
Non-current | ||||||||||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) | — | — | — | 4,032 | 4,032 | |||||||||||||||
Other non-current liabilities | — | — | — | 87 | 87 | |||||||||||||||
Current | ||||||||||||||||||||
Trade and other payables (Note 21) | — | — | — | 21,401 | 21,401 | |||||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) | — | — | — | 2,073 | 2,073 | |||||||||||||||
Other current liabilities (Note 14) | — | — | 600 | 7,595 | 8,195 | |||||||||||||||
Total | — | — | 600 | 35,789 | 35,789 | |||||||||||||||
[US$ thousands] | As of December 31, | |||||||
Financial assets | 2018 | 2019 | ||||||
Financial assets at amortized cost | ||||||||
Non-current financial assets (1) | 2,025 | 1,351 | ||||||
Trade receivables | 37,468 | 49,371 | ||||||
Other short-term receivables (2) | 4,031 | 59,112 | ||||||
Other current financial assets | 89 | 1,535 | ||||||
Total financial assets at amortized cost | 43,612 | 111,369 | ||||||
Financial assets at fair value through profit or loss | ||||||||
Preferred shares in associates (3) | 30,000 | 80,000 | ||||||
Loans to customers | 3,092 | 93,115 | ||||||
Listed equity instruments | 1,165 | 42,146 | ||||||
Total financial assets at fair value through profit or loss | 34,257 | 215,261 | ||||||
Total financial assets | 77,869 | 326,630 | ||||||
(1) Includes long-term deposits for office rent (2) Includes cash of US$52,878 thousand deposited into an escrow account as security for loans from a credit institution. See Note 19 for more information. (3) Carrying amount of preferred shares is presented as Investments in associates and joint ventures in the Statement of Financial Position, while changes in fair value is presented as Change in fair value of preferred shares in associates in the Statement of Operations. In 2019, the Group recognized an unrealized gain on the preferred shares of US$37,900 thousand (2018: US$0). See Note 27 for more information. |
|
[US$ thousands] | As of December 31, | |||||||
Financial liabilities | 2018 | 2019 | ||||||
Financial liabilities at amortized cost | ||||||||
Lease liabilities and other loans (1) | 4,761 | 56,974 | ||||||
Trade and other payables | 17,957 | 57,125 | ||||||
Other financial liabilities | 9,413 | 15,279 | ||||||
Total financial liabilities at amortized cost | 32,132 | 129,378 | ||||||
Financial liabilities at fair value through profit or loss | ||||||||
Short position in listed equity instruments | 500 | - | ||||||
Total financial liabilities at fair value through profit or loss | 500 | - | ||||||
Total financial liabilities | 32,632 | 129,378 | ||||||
Financial | Financial | |||||||||||||||||||
assets at | liabilities | |||||||||||||||||||
fair value | Debt | at fair value | Financial | |||||||||||||||||
through | instrument at | through | liabilities | |||||||||||||||||
[US$ thousands] | net income | amortized | net income | at amortized | ||||||||||||||||
As of December 31, 2018 | (loss) | cost | (loss) | cost | Total | |||||||||||||||
Assets | ||||||||||||||||||||
Non-current | ||||||||||||||||||||
Other financial assets - non-current (2) | — | 2,025 | — | — | 2,025 | |||||||||||||||
| Investment in associate (preferred shares in StarMaker) (Note 29) | 30,000 | — | — | — | 30,000 | |||||||||||||||
Current | ||||||||||||||||||||
Trade receivables (Note 20) | — | 37,468 | — | — | 37,468 | |||||||||||||||
Other receivables (Note 20) | — | 7,123 | — | — | 7,123 | |||||||||||||||
Other financial assets - current (3) | 1,165 | 89 | — | — | 1,254 | |||||||||||||||
Total financial assets | 1,165 | 46,704 | — | — | 77,869 | |||||||||||||||
Liabilities | ||||||||||||||||||||
Non-current | — | |||||||||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) | — | — | — | 2,271 | 2,271 | |||||||||||||||
Other non-current liabilities | — | — | — | 212 | 212 | |||||||||||||||
Current | ||||||||||||||||||||
Trade and other payables (Note 21) | — | — | — | 17,957 | 17,957 | |||||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) | — | — | — | 2,490 | 2,490 | |||||||||||||||
Other current liabilities (Note 14) (3) | — | — | 500 | 9,201 | 9,701 | |||||||||||||||
Total financial liabilities | — | — | 500 | 32,132 | 32,632 | |||||||||||||||
|
|
|
|
The tabletables below specifiesspecify the gain (loss) in 2018gains (losses) from the Group’s investments in listed equity instruments. The Group did not invest in listed equity instruments in prior periods.
[US$ thousands] | Realized gain (loss) | Unrealized gain (loss) | Total | |||||||||||||||||||||
Gain (loss) on listed equity instruments in 2018 | Realized gain (loss) | Unrealized gain (loss) | Total | |||||||||||||||||||||
Long positions | (1,353) | (169) | (1,522) | (1,353 | ) | (169 | ) | (1,522 | ) | |||||||||||||||
Short positions | 48 | (11) | 38 | 48 | (11 | ) | 38 | |||||||||||||||||
Total | (1,305) | (180) | (1,485) | (1,305 | ) | (180 | ) | (1,485 | ) | |||||||||||||||
[US$ thousands] | ||||||||||||
Gain (loss) on listed equity instruments in 2019 | Realized gain (loss) | Unrealized gain (loss) | Total | |||||||||
Long positions | 6,278 | 2,564 | 8,842 | |||||||||
Short positions | (365 | ) | - | (365 | ) | |||||||
Total | 5,913 | 2,564 | 8,477 | |||||||||
Net lossgain from publicly traded securities in 2019 is recognized in the Statement of Operations as finance income, while net loss in 2018 was presented as a finance expense. The Group did not hold investments in listed equity instruments in 2017.
16.1 Fair value of financial instruments
The fair values of cash and cash equivalents, trade receivables, accountstrade payables and other current liabilities approximate their carrying amounts largely due to the relatively short-term maturities of these instruments. For finance lease liabilities and other loans, the difference between the carrying amount and fair value is not material.
The fair values of financial assets and liabilities are measured as the price that would be received to sell the assets or paid to transfer the liabilities in an orderly transaction between market participants at the measurement date.
Fair values of listed equity instruments are determined by reference to published price quotations in an active market. Short positions in listed equity instruments are equally measured at the published price quotations of the equity instrument the Group has a short position in.markets.
TheSee Note 5 for information about fair value measurement of loans to customers.
Fair value of preferred shares in OPay and StarMaker
The fair values of preferred shares in OPay and StarMaker isas of December 31, 2019 are measured using methods and techniques that reflect the economic rights and benefits of the preferred shares. These rights and benefits include a right to redeem the preferred shares at each reporting date usingthe preferred share issue price plus 8% interest rate per year and a discounted cash flow method. Free cash flowright to receive the invested amount in the event of liquidation before payments are made to holders of ordinary shares. Moreover, the preferred shares in StarMaker have a priority on dividends by providing a right to 8% annual return to the Group prior to dividends being made to holders of ordinary shares. The Group's preferred shares in both OPay and StarMaker have the same voting rights as ordinary shares.
A combination of the following three valuation methods was used to estimate the fair value of the preferred shares:
● | Probability weighted expected return model (“PWERM”) | |
● | Option pricing model (“OPM”) | |
● | Current value method (“CV”) |
Under the probability weighted expected return model, fair value of the preferred shares is estimated based upon the probability-weighted present value of expected future investment returns, considering a range of possible future scenarios and outcomes available to the company, as well as the rights of each share class. The PWERM is most appropriate when there are a set of visible future liquidity events and when the time to liquidity is short.
The option pricing model treats ordinary and preferred shares as call options on the company’s equity value, with exercise prices based on the liquidation preferences of the preferred shares. Under this model, the ordinary shares have a positive fair value only if the funds available for distribution to shareholders exceed the value of the liquidation preferences. The OPM is most appropriate when specific future liquidity events are challenging to forecast.
The current value method allocates value to each share class based on an estimated equity value (on a controlling basis). The method bases allocation of value as of the valuation date and not a future date. It is most appropriate when a liquidity event, such as an acquisition or dissolution, is imminent, or when the company budgetsis very early stage.
Under all three methods, a discount for lack of marketability (“DLOM”) was applied to reflect that the shares in a private and forecastsearly stage company are considered to be illiquid. Shares that cannot be readily liquidated generally have a lower fair value and it is therefore appropriate to consider a discount when estimating fair value. For the preferred shares in OPay, a DLOM in the range 5-15% was applied, while for the preferred shares in StarMaker, a DLOM in the range of 25-35% was applied. That a lower DLOM range was applied for the preferred shares in OPay reflect that there were multiple transactions in equity instruments of the company in 2019, including transactions with investors that are not related parties of the Group.
The option pricing model and the current value method builds on estimates of the fair value of the equity in the investees. For OPay, the estimate of fair value of equity as of December 31, 2019 was US$500 million, while for StarMaker it was US$155 million. The value of equity in OPay was observed to increase through 2019 following several transactions of equity instruments in the company during the year. The estimated fair values of OPay and StarMaker at year-end was primarily based on discounted byfuture expected cash flows and valuation multiples, but also, for OPay, to a lesser extent indications of the value of equity as expressed in a term sheet for a capital increase in OPay signed in early 2020.
The Group determined that the rounded mid-points of the averages of estimated ranges of fair values reflect the best estimate of the price that would be received in orderly transactions if the preferred shares were sold as of December 31, 2019. Consequently, the preferred shares in OPay were measured at US$46,000 thousand, while the preferred shares in StarMaker were measured at US$34,000 thousand (December 31, 2018: US$30,000 thousand). The preferred shares in OPay were acquired in 2019 for US$12,100 thousand, while the preferred shares in StarMaker were acquired in 2018 for US$30,000 thousand.
A key unobservable input in all the three methods was the discount for lack of marketability. Other key unobservable input included the weighted average cost of capital (WACC). Terminal value is calculated using Gordon growth. The fairfor PWERM method and the value of the Group’s preferred shares in StarMaker was the same as of December 31, 2018 as of the point in time of acquisition, at November 5, 2018, and no adjustment has been made to accountequity for the OPM and CV methods. The table below specified commitments byshow the investee over the short time period of relevance. The preferred shares have the following rights and benefits over other shares in StarMaker: 1) priority on any dividend equal to a specified annual minimum return on the invested amount, 2) liquidation preference upsensitivities to the invested amount, 3) ability to reclaimkey unobservable inputs in the invested amount plus a specified return p.a. following certain covenant breaches.
The measurement of fair value of the Group’s preferred shares in StarMaker as of December 31, 2018, is based on significant unobservable input, including
- long-term growth of 5%
- long-term EBITDA margin of 34%
- WACC of 21%
If the long-term growth increased by 1 percentage point, or the long-term EBITDA margin increased by 2 percentage points, the fair value of the Group’s preferred shares would increase by US$2.0 million. Ifin OPay.
[US$ thousands] | WACC % | |||||||||||||||||||||||
PWERM sensitivity - fair value of preferred shares | 20% | 22% | 24% | 26% | 28% | |||||||||||||||||||
| 5 | % | 65,529 | 61,957 | 57,991 | 55,572 | 52,715 | |||||||||||||||||
| DLOM % | 10 | % | 62,080 | 58,696 | 54,939 | 52,647 | 49,941 | |||||||||||||||||
| 15 | % | 58,631 | 55,435 | 51,887 | 49,722 | 47,166 | ||||||||||||||||||
[US$ thousands] | Value of equity in the company (US$ million) | |||||||||||||||||||||||
OPM sensitivity - fair value of preferred shares | 400 | 450 | 500 | 550 | 600 | |||||||||||||||||||
| 5 | % | 34,739 | 39,657 | 44,570 | 49,479 | 54,383 | |||||||||||||||||
| DLOM % | 10 | % | 32,910 | 37,570 | 42,225 | 46,875 | 51,521 | |||||||||||||||||
| 15 | % | 31,082 | 35,482 | 39,879 | 44,271 | 48,659 | ||||||||||||||||||
[US$ thousands] | Value of equity in the company (US$ million) | |||||||||||||||||||||||
CVM sensitivity - fair value of preferred shares | 400 | 450 | 500 | 550 | 600 | |||||||||||||||||||
| 5 | % | 33,870 | 38,734 | 43,598 | 48,462 | 53,327 | |||||||||||||||||
| DLOM % | 10 | % | 32,087 | 36,696 | 41,304 | 45,912 | 50,520 | |||||||||||||||||
| 15 | % | 30,305 | 34,657 | 39,009 | 43,361 | 47,713 | ||||||||||||||||||
The table below show the costsensitivities to the key unobservable inputs in the measurement of capital was reduced by 1 percentage point, the fair value would increase by US$3.3 million.of the preferred shares in StarMaker.
[US$ thousands] | WACC % | |||||||||||||||||||||||
PWERM sensitivity - fair value of preferred shares | 13% | 15% | 17% | 19% | 21% | |||||||||||||||||||
| 25 | % | 32,151 | 31,332 | 30,552 | 29,809 | 29,101 | |||||||||||||||||
| DLOM % | 30 | % | 30,008 | 29,243 | 28,515 | 27,822 | 27,161 | |||||||||||||||||
| 35 | % | 27,864 | 27,154 | 26,479 | 25,835 | 25,221 | ||||||||||||||||||
Due to the rights and benefits inherent in the Group’s preferred shares, the risk of loss in future periods is immaterial.
[US$ thousands] | Value of equity in the company (US$ million) | |||||||||||||||||||||||
OPM sensitivity - fair value of preferred shares | 145 | 150 | 155 | 160 | 165 | |||||||||||||||||||
| 25 | % | 37,011 | 37,787 | 38,558 | 39,327 | 40,092 | |||||||||||||||||
| DLOM % | 30 | % | 34,544 | 35,268 | 35,988 | 36,705 | 37,419 | |||||||||||||||||
| 35 | % | 32,076 | 32,749 | 33,417 | 34,083 | 34,746 | ||||||||||||||||||
[US$ thousands] | Value of equity in the company (US$ million) | |||||||||||||||||||||||
CVM sensitivity - fair value of preferred shares | 145 | 150 | 155 | 160 | 165 | |||||||||||||||||||
| 25 | % | 39,194 | 39,919 | 40,645 | 41,371 | 42,097 | |||||||||||||||||
| DLOM % | 30 | % | 36,581 | 37,258 | 37,935 | 38,613 | 39,290 | |||||||||||||||||
| 35 | % | 33,968 | 34,597 | 35,226 | 35,855 | 36,484 | ||||||||||||||||||
FairThe following table provides the fair value measurement hierarchy for liabilities as of 31 December 2017:
[US$ thousands] | Date of valuation | Carrying amount | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Liabilities measured at fair value | ||||||||||||||||||
Contingent consideration (Note 12) | December 31, 2017 | 600 | 600 | X | ||||||||||||||
Liabilities for which fair values are disclosed | ||||||||||||||||||
Financial lease liabilities and other loans (Note 10) | December 31, 2017 | 6,106 | 6,106 | X | ||||||||||||||
There were no financialthe Group’s assets measured at fair value as of December 31, 2017. For all other financial assets, the carrying amount approximated fair value.and liabilities.
Fair value measurement hierarchy for assets as ofat 31 December 2018:
[US$ thousands] | Date of valuation | Carrying amount | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Assets measured at fair value | ||||||||||||||||||
Other financial assets (listed equity instruments) | December 31, 2018 | 1,165 | 1,165 | X | ||||||||||||||
Investment in associate (preferred shares in StarMaker) (Note 29) | December 31, 2018 | 30,000 | 30,000 | X | ||||||||||||||
Fair value measurement using | ||||||||||||||
[US$ thousands] | Date of valuation | Quoted prices in active markets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
Assets measured at fair value | ||||||||||||||
Preferred shares in associates | December 31, 2018 | - | - | 30,000 | ||||||||||
Loans to customers | December 31, 2018 | - | - | 3,092 | ||||||||||
Listed equity instruments | December 31, 2018 | 1,165 | - | - | ||||||||||
Fair value measurement hierarchy for liabilities as ofat 31 December 2018:
[US$ thousands] | Date of valuation | Carrying amount | Fair value | Level 1 | Level 2 | Level 3 | ||||||||||||
Liabilities measured at fair value | ||||||||||||||||||
Other liabilities (short position) | December 31, 2018 | 500 | 500 | X | ||||||||||||||
Liabilities for which fair values are disclosed | ||||||||||||||||||
Finance lease liabilities and other loans (Note 10) | December 31, 2018 | 4,762 | 4,762 | X | ||||||||||||||
Fair value measurement using | ||||||||||||||
[US$ thousands] | Date of valuation | Quoted prices in active markets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
Liabilities measured at fair value | ||||||||||||||
Short position | December 31, 2018 | 500 | - | - | ||||||||||
Fair value measurement hierarchy for assets as at 31 December 2019:
Fair value measurement using | ||||||||||||||
[US$ thousands] | Date of valuation | Quoted prices in active markets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | ||||||||||
Assets measured at fair value | ||||||||||||||
Preferred shares in associates | December 31, 2019 | - | - | 80,000 | ||||||||||
Loans to customers | December 31, 2019 | - | - | 93,115 | ||||||||||
Listed equity instruments | December 31, 2019 | 42,146 | - | - | ||||||||||
Note 16 Scheduled maturities
For all financial liabilities recognized as of financialDecember 31, 2019, the estimates of fair values were not materially different from the carrying amounts. There were no liabilities measured at fair value as of December 31, 2019.
There were no transfers between the fair value measurement levels during 2018 and 2019.
[US$ thousands] | Less than | 1 to 3 | Over 3 | |||||||||||||
As of December 31, 2017 | 12 months | years | years | Total | ||||||||||||
Non-current | ||||||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) including interest | — | 4,230 | — | 4,230 | ||||||||||||
Other liabilities | — | — | 87 | 87 | ||||||||||||
Current | ||||||||||||||||
Trade and other payables (Note 21) | 21,401 | — | — | 21,401 | ||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) including interest | 2,148 | — | — | 2,148 | ||||||||||||
Other liabilities (Note 14) | 8,195 | — | — | 8,195 | ||||||||||||
Total financial liabilities including interest | 31,744 | 4,230 | 87 | 36,060 | ||||||||||||
[US$ thousands] | Less than | 1 to 3 | Over 3 | |||||||||||||
As of December 31, 2018 | 12 months | years | years | Total | ||||||||||||
Non-current | ||||||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) including interest | — | 2194 | 158 | 2,352 | ||||||||||||
Other liabilities | — | — | 212 | 212 | ||||||||||||
Current | ||||||||||||||||
Trade and other payables (Note 21) | 17,957 | — | — | 17,957 | ||||||||||||
Financial lease liabilities and other loans (Notes 10 and 11) including interest | 2,591 | — | — | 2,591 | ||||||||||||
Other liabilities (Note 14) | 9,701 | — | — | 9,701 | ||||||||||||
Total financial liabilities including interest | 30,249 | 2,194 | 370 | 32,813 | ||||||||||||
NOTE 17. | SCHEDULED MATURITIES OF FINANCIAL LIABILITIES |
Note 17 Financial risk management
[US$ thousands] | Less than | 1 to 3 | Over 3 | |||||||||||||
As of December 31, 2018 | 12 months | years | years | Total | ||||||||||||
Non-current | ||||||||||||||||
Lease liabilities and other loans (Notes 12 and 13) including interest | - | 2,194 | 158 | 2,352 | ||||||||||||
Other liabilities | - | - | 212 | 212 | ||||||||||||
Current | ||||||||||||||||
Trade and other payables (Note 22) | 17,957 | - | - | 17,957 | ||||||||||||
Lease liabilities and other loans (Notes 12 and 13) including interest | 2,591 | - | - | 2,591 | ||||||||||||
Other liabilities (Note 15) | 9,701 | - | - | 9,701 | ||||||||||||
Total financial liabilities including interest | 30,249 | 2,194 | 370 | 32,813 | ||||||||||||
[US$ thousands] | Less than | 1 to 3 | Over 3 | |||||||||||||
As of December 31, 2019 | 12 months | years | years | Total | ||||||||||||
Non-current | ||||||||||||||||
Lease liabilities (Note 12) | - | 7,681 | 1,247 | 8,928 | ||||||||||||
Interest-bearing loans (Note 13) including interest | - | 1,840 | - | 1,840 | ||||||||||||
Other liabilities | - | - | 137 | 137 | ||||||||||||
Current | ||||||||||||||||
Trade and other payables (Note 22) | 57,125 | - | - | 57,125 | ||||||||||||
Lease liabilities (Note 12) | 4,930 | - | - | 4,930 | ||||||||||||
Interest-bearing loans (Note 13) including interest | 43,303 | - | - | 43,303 | ||||||||||||
Other liabilities (Note 15) | 15,142 | - | - | 15,142 | ||||||||||||
Total financial liabilities including interest | 120,500 | 9,521 | 1,384 | 131,405 | ||||||||||||
NOTE 18. | FINANCIAL RISK MANAGEMENT |
Overview
The Group is exposed to market risk, liquidity risk and credit risk. The Group’s management seeks to minimize potential adverse effects of these risks through sound business practices and risk management. The Board of Directors, together with senior management, is involved in the risk assessment process. The Group has not utilized derivatives for hedging purposes.
Market riskMarket risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Group is exposed to three types of market risk: Interest rate risk, foreign currency risk and equity price risk. Financial instruments affected by market risk include loans and borrowings, trade receivables, trade payables, accrued liabilities and accrued liabilities.listed equity instruments.
Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.
In 2019, the Group obtained a credit facility from a financial institution. Loans under the credit facility, denominated in Indian Rupee, were used to partially fund the microlending business in India. As of December 31, 2019, the total amount of loans under the credit facility was US$42,247 thousand. The resulting positive impact to our financing cash flow was offset by the Group transferring US$52,878 thousand into an U.S. Dollar denominated escrow account as collateral for these loans; which has been classified as a receivable and as such, as a cash outflow under investing activities in the Statement of Cash Flows. The interest rate on these loans is based on the bank’s 6-month marginal cost of funds-based lending rate plus 0.3%. As of year-end 2019, that rate was in the range from 8.7% to 9.0%.
Except for the above, the Group’s exposure to interest risk is not material.immaterial. Financial liabilities other than loans under the credit facility have fixed interest rates and future interest payments on these will thus not fluctuate. The Group expects to settle all financial liabilities at maturity, meaning changes in market interest rates will only impact their fair value temporarily. Financial assets are not interest-bearing, except for deposits with banks.
Foreign currency risk
Foreign currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. Our exposure to the risk of changes in foreign exchange rates relates primarily to theour consolidated results being presented in U.S. Dollar, the primary currency in whichwhile our revenues are generated relativein nearly all global currencies, though often converted to other currencies.USD or EUR before being paid to us from our partners. The Group incurs operating expenses in various currencies, including the Norwegian Krone,krone, Chinese Renminbi,renminbi, Polish Zloty,zloty, Swedish Kronekrone, Indian rupee, Kenyan shilling, Nigerian naira and the Euro. The latter is also the base currency of some of the Group’s revenue. Additionally, the Group is exposed to foreign currency risk due to monetary items recognized in the balance sheet being denominated in currencies other than the functional currency, which for most of the Group’s entities is the U.S. Dollar. Management is closely monitoring the Group’s exposure to foreign currency risk and seeks to minimize its exposure to such risk. The Group was not exposed to material foreign currency risk in 20172018 and 2018.2019.
Equity price risk
The Group is exposed to equity price risk related to its limited holding of publicly traded equity securities. Such holdings are susceptible to market price risk arising from uncertainties about future values of such securities.
Our holding ofinvestment in publicly traded securities is overseen by the Group’s CEO and conducted within a US$2070 million initial capital allocation.
As of December 31, 2018,2019, the fair value of such holdings was US$42,146 thousand (2018: US$667 thousand.thousand).
Total lossThe net gain from publicly traded securities in 20182019 was US$8,477 thousand (2018: net loss of US$1,485 thousand.thousand). The Group did not invest in publicly traded equity securities in 2017.
The primary objective is to preserve capital while generating long-term capital growth by achieving the highest possible return on invested capital relative to the risk taken. The company seeks to invest in liquid equity instruments in order to reduce costs when instruments are to be realized.
Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset. The group is not exposed to material liquidity risk given its significant cash position and low debt-to-equity ratio as of December 31, 2018.2019. See note 16Note 17 for an overview of maturity profile on the Group’s financial liabilities.
Credit risk
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss for the Group.
The Group is exposed to credit risk from its operating activities, primarily loans to customers and trade receivables, and from its cash management activities, including deposits with banks and financial institutions, and other receivables, such as loans to associates and joint ventures (details in Note 29)Notes 27 and 28). The Group’s revenue comes mainly from sales where settlement in cash generally takes place within 30-90 days of the invoice being issued, which is concurrently when the Group has an unconditional right to consideration. For some specific revenue streams, including relativethose relating to OpayOPay and Powerbets, settlement is agreed to extend beyond 90 days. Details of outstanding accounts receivable are disclosed in Notes 2021 and 30.28. The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets.
Credit risk for loans to customers
The Group is continuously monitoring its credit risk relating to microlending. Under the credit risk policies, the exposure is subject to regular reviews of risk tolerance levels. All operating decisions in terms of exposure and geographic profile are made in accordance with applicable risk management policies. Furthermore, the Group reviews the occurrence, progress and status of all credit risks, and takes appropriate actions to mitigate any adverse effects. Credit risk is measured by a variety of methods, including total outstanding loan balance, delinquency rates by aging, credit scorecards and by way of collection models. The objectives and policies to credit risk have not changed relative to 2018, though the processes and methods to measure and manage credit risk have been continuously evolving.
Management of risk concentration is conducted by using a variety of systems to monitor and track concentration. This enables quantification and analyzing of risks relating to concentration on a real-time basis.
Measurement of expected credit losses is calculated from analysis of the outstanding loans, including loan tenure and historical delinquency rates. When considering whether the credit risk has increased significantly, metrics including first payment delinquency and delinquency by aging are evaluated.
When considering whether loans are credit impaired, management considers market and borrower indicators. The disappearance of an active market for the financial asset is an indicator of the need for credit-impairment, as is transactions of comparable financial assets at steep discounts that reflect incurred credit losses. Borrower indicators of credit-impaired financial assets include observing that a borrower has significant financial difficulties, breaches the loan agreement or enters into, or the likely entrance into, a form of reorganization (such as bankruptcy). The Group finds that these indicators reduce the likelihood of receiving payment of the outstanding loan balance. Forward-looking information is not incorporated by the Group into the determination of expected credit losses, as reliable data supporting credit impairment is deemed not to be available in the markets the Group offers microloans.
For loans to customers that are more than 180 days past due, the Group has no reasonable expectations of recovering the assets. These loans are written off.
Note 18 Capital management
NOTE 19. | CAPITAL MANAGEMENT |
The Group’s capital management policy is to maintain a strong capital base to support investor, creditor and market confidence and to sustain future development of the business in accordance with its growth plans.
In July 2018,2019, the Group completedobserved significant growth for its IPO of ADSs on Nasdaq, raising US$110.8 million net proceeds. Concurrent with the IPO, the Group also completed a private placement of shares to certain private investors, raising an additional US$57.0 million net proceeds.microlending businesses in multiple countries, as disclosed in Notes 4 and 5. The microlending businesses are capital intensive by nature. As of December 31, 2018,2019, the Group had loans due from customers with a carrying amount of US$93,115 thousand. The Group effectively used its balance of cash and cash equivalents totalingto finance the microlending business, either directly or via local credit institutions. As of December 31, 2019, short-term loans denominated in Indian Rupee from the credit institution used to partially fund the microlending business totaled US$177.9 million.42,247 thousand. The loans from the credit institution are provided under a credit facility, which requires that the Group transfers cash representing at least 111% of the credit facility amount into a restricted U.S. Dollar escrow account as collateral for the credit institution. As of December 31, 2019, the Group had transferred US$52,878 thousand into the escrow account. The balance in the escrow account is classified as a receivable in the Statement of Financial Position due to it not being available to meet the Group’s short-term commitments. The balance in the escrow account is restricted for the duration of the credit facility term, which is one year, with an option to extend the term. Management of the Group is continuously monitoring and evaluating the capital needs of the microlending businesses and seeks to achieve a capital allocation that maximizes the expected return while minimizing the credit and foreign exchange risks. See Note 18 for information on the Group’s financial risk management.
As part of the Group's cash management policy, up to US$70 million of the Group’s capital may be used to invest in publicly traded securities in accordance with the applicable board instructions to the management of the Group. The CEO is managing and overseeing this investment activity. The primary objective of investing in publicly traded securities is to preserve capital while generating long term capital growth by achieving the highest possible return on invested capital relative to acceptable risk. In accordance with the board instructions, the Group may enter short positions in publicly traded securities, which was done to a limited extent in 2019. Total net loss from short positions was US$365 thousand in 2019, compared to a net gain of US$38 thousand in 2018. As of December 31, 2019, the Group had investments in publicly traded equity instruments with a fair value of US$42,146 thousand, an increase from US$667 thousand as of year-end 2018. The Group did not have any open short positions as of year-end 2019. The net gain in 2019 on investments in publicly traded securities was US$8,477 thousand (2018: net loss of US$1,485 thousand).
In February 2019, the Group completed the share repurchase program which was announced in November 2018. A total of 1.5 million ADSs were repurchased for a total cost of US$5,780 thousand. The treasury shares were transferred to employees in February 2019 under the share-based remuneration scheme.
In September and October 2019, the Group raised additional equity of US$81,269 thousand, net of underwriting discounts, commissions, and other transaction costs, through the successful completion of a follow-on offering of 8,625,000 ADSs at a public offering price of US$10.00 per ADS. Underwriting discounts, commission and other transaction costs totaled US$4,981 thousand. At the point in time of the follow-on offering, the Group intended to use the net proceeds for general corporate purposes.
As of December 31, 2019, the Group had an equity ratio of 86% and working capital, as expressed by total current assets less total current liabilities, of US$289,757 thousand. Total amount of cash, cash equivalents, and marketable securities was US$181,633 thousand.
See Note 1617 for a schedule of maturities for financial liabilities.
In November 2018 the Board of Directors approved a share repurchase program of up to 1.5 million ADSs to be purchased in the open market. As of December 31, 2018, the Group had repurchased a total of 728,912 ADSs, at a total cost of US$4.9 million. In February 2019, the share repurchase program was completed following the successful repurchase of all 1.5 million ADSs at a total cost of US$10.6 million (US$10.7 million including commissions).
The Group does not have any present plans of cash dividends or additional share repurchase programs.
Note 19 Cash and cash equivalents
NOTE 20. | CASH AND CASH EQUIVALENTS |
As of | As of | |||||||||||||||
[US$ thousands] | December 31, | December 31, | As of December 31, | |||||||||||||
Cash and cash equivalents | 2017 | 2018 | 2018 | 2019 | ||||||||||||
Restricted cash | 238 | 229 | 229 | 216 | ||||||||||||
Cash and cash equivalents | 32,969 | 177,643 | 177,643 | 139,271 | ||||||||||||
Total | 33,207 | 177,873 | 177,873 | 139,487 | ||||||||||||
Restricted cash
Restricted cash is related to employee payroll tax withholdings for Norwegian employees, which are held in restricted deposit accounts under applicable regulations. The Group considers these balances to be cash equivalents because the related liabilities are settled from these accounts on a continuous basis.
Note 20 Trade receivables, other receivables and prepayments
As of | As of | |||||||
[US$ thousands] | December 31, | December 31, | ||||||
Trade receivables | 2017 | 2018 | ||||||
Trade receivables | 14,072 | 24,594 | ||||||
Unbilled receivables | 17,001 | 12,874 | ||||||
Total | 31,073 | 37,468 | ||||||
As of | As of | |||||||
[US$ thousands] | December 31, | December 31, | ||||||
Other receivables | 2017 | 2018 | ||||||
VAT | 367 | 754 | ||||||
Receivable from Otello Corporation ASA | 2,945 | 1,267 | ||||||
Escrow account pledged as loan for joint venture | 2,508 | — | ||||||
Other | 2,046 | 5,102 | ||||||
Total | 7,866 | 7,123 | ||||||
As of | As of | |||||||
December 31, | December 31, | |||||||
[US$ thousands] | 2017 | 2018 | ||||||
Prepayments | ||||||||
Prepaid expenses (1) | 2,167 | 14,372 | ||||||
Total | 2,167 | 14,372 | ||||||
|
|
NOTE 21. | TRADE RECEIVABLES, OTHER RECEIVABLES AND PREPAYMENTS |
[US$ thousands] | As of December 31, | As of December 31, | ||||||
Provision for impairment of trade receivables | 2017 | 2018 | ||||||
As of period start, as previously reported | — | 1,837 | ||||||
Impact of IFRS 9 | — | 100 | ||||||
As of period start, restated | — | 1,937 | ||||||
Change in the period | 1,837 | (318 | ) | |||||
As of period end | 1,837 | 1,619 | ||||||
[US$ thousands] | As of December 31, | |||||||
Trade receivables | 2018 | 2019 | ||||||
Trade receivables | 24,594 | 39,981 | ||||||
Unbilled receivables | 12,874 | 9,390 | ||||||
Total | 37,468 | 49,371 | ||||||
[US$ thousands] | As of December 31, | |||||||
Other receivables | 2018 | 2019 | ||||||
VAT | 754 | 1,232 | ||||||
Receivable from Otello Corporation ASA | 1,267 | 924 | ||||||
Deposit in restricted escrow account(1) | - | 52,878 | ||||||
Other | 5,102 | 4,078 | ||||||
Total | 7,123 | 59,112 | ||||||
(1)As of January 1, 2017, there was no provisionDecember 31, 2019, the Group had transferred US$52,878 thousand into the escrow account as collateral for impairmenta credit facility. See Note 19 for more information.
[US$ thousands] | As of December 31, | |||||||
Prepayments | 2018 | 2019 | ||||||
Prepaid expenses (1) | 14,372 | 25,809 | ||||||
Total | 14,372 | 25,809 | ||||||
(1) See Note 28 for specification of trade receivablesamount of prepaid expenses with Mobimagic Digital Technology Ltd (formerly known as collection risk was already reflected360 Mobile Security).
[US$ thousands] | As of December 31, | |||||||
Allowance for impairment of trade receivables | 2018 | 2019 | ||||||
As of period start, as previously reported | 1,837 | 1,619 | ||||||
Impact of IFRS 9 | 100 | - | ||||||
As of period start, restated | 1,937 | 1,619 | ||||||
Change in the period (1) | (318 | ) | (173 | ) | ||||
As of period end | 1,619 | 1,446 | ||||||
(1) The change in loss allowance in the fair value of receivablesperiods is recognized in the Acquired Companies.Statement of Operations.
As of period end, the aging of trade receivables was as follows:follows.
[US$ thousands] | Neither past due | Past due | Neither past due | Past due | ||||||||||||||||||||||||||||||||||||||||||||
Aging analysis of trade receivables | Total | nor impaired | <30 days | 31-60 days | 61-90 days | >90 days | Total | nor impaired | <30 days | 31-60 days | 61-90 days | >90 days (1) | ||||||||||||||||||||||||||||||||||||
As of December 31, 2017 | 14,072 | 4,172 | 1,597 | 1,390 | 518 | 6,395 | ||||||||||||||||||||||||||||||||||||||||||
As of December 31, 2018 | 24,594 | 15,603 | 3,252 | 2,588 | 690 | 2,460 | 24,594 | 15,603 | 3,252 | 2,588 | 690 | 2,460 | ||||||||||||||||||||||||||||||||||||
As of December 31, 2019 | 39,981 | 22,125 | 8,761 | 657 | 341 | 8,097 | ||||||||||||||||||||||||||||||||||||||||||
(1) As of year-end 2019, the total amount of trade receivables due from Powerbets, a joint venture, that were more than 90 days past due was US$5,946 thousand (December 31, 2018: US$0).
For trade receivables, the Group recognizes a loss allowance based on lifetime expected credit losses as of each reporting date. The Group makes specific loss provisions at the level of specific invoices where information exists that management can utilize in its determination of credit risk. For trade receivables where no specific risk information is identified, the Group uses a provision matrix that is based on the nature of the receivable, location of its invoicing and the age of the invoice relative to its due date, reflecting its historical credit loss experience and adjusting for forward-looking factors specific to the debtors and the economic environment. Receivables associated with the newly acquired microfinance business are subject to significantly higher general provisions due to the nature of the receivables, including the direct exposure to individuals. The Group has not recognized loss provisions related to receivables due from related parties due to the Group’s influence and insight over these entities. As ofat December 31, 2018,2019, the loss allowance totaled US$1,446 thousand, corresponding to 2.9% of trade receivables (December 31, 2018: US$1,619 thousand, corresponding to 4.3% of trade receivables (December 31, 2017: US$1,837 thousand, corresponding to 5.9% of trade receivables).
The Group implemented IFRS 9 as of January 1, 2018. IFRS 9 introduced a new impairment model for debt instruments, including accounts receivable. This new model lead to an increase of US$100 thousand in the provision for bad debt as of January 1, 2018.
For details regarding the Group’s procedures on managing credit risk, please refer to Note 17.18.
NOTE 22. | TRADE AND OTHER PAYABLES |
[US$ thousands] | As of December 31, | |||||||
Trade and other payables | 2018 | 2019 | ||||||
Trade payables due to related parties (1) | 624 | 28,864 | ||||||
| Other trade payables | 14,290 | 19,813 | ||||||
Sales tax payables | 9 | - | ||||||
Employee withholding tax | 24 | 325 | ||||||
VAT | 809 | 7,361 | ||||||
Payroll tax (2) | 2,200 | 761 | ||||||
Total | 17,957 | 57,125 | ||||||
(1) See Note 21 Trade and other payables28 for more information.
[US$ thousands] | As of December 31, | As of December 31, | ||||||
Trade and other payables | 2017 | 2018 | ||||||
Trade payables | 16,521 | 14,914 | ||||||
Sales tax payables | 20 | 9 | ||||||
Employee withholding tax | 370 | 24 | ||||||
VAT | 792 | 809 | ||||||
Payroll tax (1) | 3,699 | 2,200 | ||||||
Total | 21,401 | 17,957 | ||||||
| (2)Includes accruals for social security costs related to share-based remuneration. |
For a schedule of maturities for trade and other payables, see Note 16.
Note 22 Finance income and expense17.
Predecessor | Successor | |||||||||||||||
Period from | ||||||||||||||||
January 1 to | Period from July 26 | Year ended | Year ended | |||||||||||||
[US$ thousands] | November 3, | to December 31, | December 31, | December 31, | ||||||||||||
Finance income | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Interest income | — | 37 | 54 | 1,386 | ||||||||||||
Other finance income | — | — | 1,000 | 251 | ||||||||||||
Total | — | 37 | 1,054 | 1,637 | ||||||||||||
Predecessor | Successor | |||||||||||||||
Period from | ||||||||||||||||
January 1 to | Period from July 26 | Year ended | Year ended | |||||||||||||
[US$ thousands] | November 3, | to December 31, | December 31, | December 31, | ||||||||||||
Finance expense | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Interest expense | 1,378 | 24 | 238 | 184 | ||||||||||||
Other financial cost | — | — | — | 27 | ||||||||||||
Decrease in fair value financial instruments (1) | — | — | — | 1,485 | ||||||||||||
Total | 1,378 | 24 | 238 | 1,695 | ||||||||||||
|
|
Predecessor | Successor | |||||||||||||||
Period from | ||||||||||||||||
January 1 to | Period from July 26 | Year ended | Year ended | |||||||||||||
[US$ thousands] | November 3, | to December 31, | December 31, | December 31, | ||||||||||||
Foreign exchange gain (loss) | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Unrealized foreign exchange gain (loss) | (1,777 | ) | (352 | ) | (1,172 | ) | (1,091 | ) | ||||||||
Realized foreign exchange gain (loss) | 565 | 564 | (709 | ) | 736 | |||||||||||
Total | (1,212 | ) | 212 | (1,881 | ) | (354 | ) | |||||||||
NOTE 23. | FINANCE INCOME AND EXPENSE |
[US$ thousands] | Year ended December 31, | |||||||||||
Finance income | 2017 | 2018 | 2019 | |||||||||
Interest income | 54 | 1,386 | 2,045 | |||||||||
Other finance income | 1,000 | 251 | 8 | |||||||||
Net fair value gain related to listed equity instruments (1) | - | - | 8,477 | |||||||||
Total | 1,054 | 1,637 | 10,530 | |||||||||
[US$ thousands] | Year ended December 31, | |||||||||||
Finance expense | 2017 | 2018 | 2019 | |||||||||
Interest expense | 238 | 184 | 1,242 | |||||||||
Other financial cost | - | 27 | 263 | |||||||||
Net fair value loss related to listed equity instruments (1) | - | 1,485 | - | |||||||||
Total | 238 | 1,695 | 1,505 | |||||||||
(1) The increase in fair value of listed equity instruments is the net gain from our investments of listed equity instruments in 2019. In 2018, the investments in listed equity instruments resulted in a net loss, classified as a finance expense. See Note 23 16 for more information.
[US$ thousands] | Year ended December 31, | |||||||||||
Foreign exchange gain (loss) | 2017 | 2018 | 2019 | |||||||||
Unrealized foreign exchange gain (loss) | (1,172 | ) | (1,091 | ) | 194 | |||||||
Realized foreign exchange gain (loss) | (709 | ) | 736 | (463 | ) | |||||||
Total | (1,881 | ) | (354 | ) | (269 | ) | ||||||
NOTE 24. | CHANGES IN LIABILITIES ARISING FROM FINANCING ACTIVITIES |
Changes in liabilities arising from financing activities in 2018
[US$ thousands] | As of January 1, 2018 | Impact of adopting IFRS 16(1) | Cash flows | Foreign exchange movement | Other (1) | As of December 31, 2018 | ||||||||||||||||||
Interest-bearing loans and liabilities, non-current | 3,767 | - | - | - | (1,529 | ) | 2,238 | |||||||||||||||||
Lease liabilities, non-current | 265 | - | - | - | (232 | ) | 33 | |||||||||||||||||
Interest bearing loans and liabilities, current | - | - | (1,739 | ) | - | 1,935 | 196 | |||||||||||||||||
Lease liabilities, current | 2,073 | - | (2,042 | ) | - | 1,771 | 1,802 | |||||||||||||||||
Other loans | - | - | - | - | 492 | 492 | ||||||||||||||||||
Total liabilities from financing activities | 6,106 | - | (3,781 | ) | - | 2,437 | 4,761 | |||||||||||||||||
(1) The "Other" column includes the effect of reclassification of the non-current portion of liabilities to current due to the passage of time and the effect of accrued but not yet paid interest on interest-bearing loans and borrowings, including lease liabilities.
Changes in liabilities arising from financing activities in 2019
As of January 1, | As of December 31, | | |||||||||||||||||||||||||||||||||||||||||||||||
[US$ thousands] 2017 |
2017 | Cash flows | Foreign exchange movement | New liabilities | Other (1) |
2017 | |||||||||||||||||||||||||||||||||||||||||||
[US$ thousands] | As of January 1, 2019 | Impact of adopting IFRS 16(1) | Cash flows | Foreign exchange movement | Other (2) | As of December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||
Interest-bearing loans and liabilities, non-current | | — | (889 | ) | 456 | 4,199 | — | 3,767 | 2,238 | (1,509 | ) | - | 7 | 736 | |||||||||||||||||||||||||||||||||||
Finance lease liabilities, non-current | | 1,724 | — | — | 688 | (2,147 | ) | 265 | |||||||||||||||||||||||||||||||||||||||||
Lease liabilities, non-current | 33 | 10,709 | (1,693 | ) | (33 | ) | (1,638 | ) | 7,378 | ||||||||||||||||||||||||||||||||||||||||
Interest bearing loans and liabilities, current | | 5,512 | (3,483 | ) | — | — | (2,029 | ) | — | 196 | 43,163 | - | 10 | 43,369 | |||||||||||||||||||||||||||||||||||
Finance lease liabilities, current | | 4,809 | (5,659 | ) | 521 | — | 2,402 | 2,073 | |||||||||||||||||||||||||||||||||||||||||
Lease liabilities, current | 1,802 | 4,260 | (1,062 | ) | - | (375 | ) | 4,625 | |||||||||||||||||||||||||||||||||||||||||
Other loans | 492 | (64 | ) | - | - | 439 | 867 | ||||||||||||||||||||||||||||||||||||||||||
Total liabilities from financing activities | | 12,045 | (10,031 | ) | 978 | 4,887 | (1,774 | ) | 6,106 | 4,761 | 14,905 | 38,899 | (33 | ) | (1,557 | ) | 56,975 | ||||||||||||||||||||||||||||||||
(1) See Note 3 for information about the implementation of IFRS 16.
|
|
(2) The "Other" column includes the effect of reclassification of the non-current portion of liabilities to current due to the passage of time and the effect of accrued but not yet paid interest on interest-bearing loans and borrowings, including lease liabilities.
As of January 1, | As of December 31, | |||||||||||||||||||||||
[US$ thousands] 2018 |
2018 | Cash flows | Foreign exchange movement | New liabilities | Other (2) |
2018 | ||||||||||||||||||
Interest-bearing loans and liabilities, non-current | 3,767 | — | — | 1,435 | (2,964 | ) | 2,238 | |||||||||||||||||
Finance lease liabilities, non-current | 265 | — | — | — | (232 | ) | 33 | |||||||||||||||||
Interest bearing loans and liabilities, current | — | (1,739 | ) | — | 191 | 1,744 | 196 | |||||||||||||||||
Finance lease liabilities, current | 2,073 | (2,042 | ) | — | — | 1,771 | 1,802 | |||||||||||||||||
Other loans | — | — | — | 492 | — | 492 | ||||||||||||||||||
Total liabilities from financing activities | 6,106 | (3,781 | ) | — | 2,118 | 319 | 4,761 | |||||||||||||||||
All items of liabilities are included in "Finance lease"Lease liabilities and other loans" in the Statement of Financial Position.
|
Note 24 Income tax (expense) benefit
| INCOME TAX |
A summary of income tax (expense) benefit is as follows.
| Predecessor | Successor | |||||||||||||||||||||||||||
[US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended | Year ended | Year ended December 31, | |||||||||||||||||||||||
Income tax (expense) benefit | 2016 | 2016 | 2017 | 2018 | 2017 | 2018 | 2019 | |||||||||||||||||||||
Current income taxes | (2,077 | ) | (223 | ) | (5,449 | ) | (4,322 | ) | (5,449 | ) | (4,322 | ) | (5,112 | ) | ||||||||||||||
| Currency effect on income tax (expense) benefit and adjustments recognized in the period for current tax of prior periods (1) | — | — | — | (615 | ) | - | (615 | ) | (322 | ) | ||||||||||||||||||
Deferred taxes | 2,820 | 2,319 | 4,009 | (1,544 | ) | 4,009 | (1,544 | ) | (168 | ) | ||||||||||||||||||
Income tax (expense) benefit | 743 | 2,096 | (1,440 | ) | (6,481 | ) | (1,440 | ) | (6,481 | ) | (5,602 | ) | ||||||||||||||||
(1) Currency effect on income tax (expense) benefit due to corporate income tax filing in NOK for Norwegian entities with USD as functional currency.
The Group’s parent company is domiciled in the Cayman Islands, where the applicable tax rate is zero. With the headquarter of the Group being located in Norway and a large share of the income from the browser and news segment being recognized by Opera Norway AS, the reconciliation of the expected to actual income tax (expense) benefit effective tax rate is consequently based on the applicable tax rate in Norway, which was 22% in 2019 (2018: 23% and 2017: 24%). The tax rate in Norway will remain 22% in 2020.
Predecessor | Successor | |||||||||||||||
[US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended | ||||||||||||
Reconciliation of tax (expense) benefit to Norwegian nominal statutory tax rate | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Net income (loss) before income taxes | (8,849 | ) | (9,800 | ) | 7,504 | 41,641 | ||||||||||
Tax (expense) benefit at applicable tax rate | 2,212 | 2,450 | (1,801 | ) | (9,577 | ) | ||||||||||
Effect of different tax rates applied by subsidiaries | (99 | ) | (2,339 | ) | 1,120 | (167 | ) | |||||||||
Permanent differences | ||||||||||||||||
Tax effect of translation differences exempted for tax | 0 | 1,599 | (1,287 | ) | 218 | |||||||||||
Tax effect of financial items exempted from tax | 0 | 144 | 1,614 | 1,726 | ||||||||||||
Tax effects of losses in associates and joint ventures which are non-deductible | (636 | ) | (84 | ) | (401 | ) | (744 | ) | ||||||||
Net other permanent differences (not) tax deductible | (685 | ) | (344 | ) | 2,289 | (617 | ) | |||||||||
Other effects | ||||||||||||||||
Change to previously recognized deferred tax assets | — | (70 | ) | (1,812 | ) | 1,589 | ||||||||||
Currency effect on income tax (expense) benefit and adjustments recognized in the period for current tax of prior periods | — | — | — | (615 | ) | |||||||||||
Change in unrecognized deferred tax assets | (48 | ) | (7 | ) | (1,554 | ) | 1,144 | |||||||||
Change in tax rate | — | 746 | 392 | 561 | ||||||||||||
Income tax (expense) benefit for the year | 743 | 2,096 | (1,440 | ) | (6,481 | ) | ||||||||||
Effective tax rate | 8.4 | % | 21.4 | % | 19.2 | % | 15.6 | % | ||||||||
[US$ thousands] | Year ended December 31, | |||||||||||
Reconciliation of tax (expense) benefit to Norwegian nominal statutory tax rate | 2017 | 2018 | 2019 | |||||||||
Net income (loss) before income taxes | 7,504 | 41,641 | 63,500 | |||||||||
Tax (expense) benefit at applicable tax rate in Norway | (1,801 | ) | (9,577 | ) | (13,970 | ) | ||||||
Effect of different tax rates applied by subsidiaries | 1,120 | (167 | ) | (2,118 | ) | |||||||
Permanent differences | ||||||||||||
Tax effect of translation differences exempted for tax | (1,287 | ) | 218 | 1,155 | ||||||||
Tax effect of financial items exempted from tax | 1,614 | 1,726 | 1,917 | |||||||||
Tax effects of losses in associates and joint ventures which are non-deductible | (401 | ) | (744 | ) | 383 | |||||||
Withholding taxes paid | - | - | (232 | ) | ||||||||
Net other permanent differences (not) tax deductible | 2,289 | (617 | ) | 4,269 | ||||||||
Other effects | ||||||||||||
Change to previously recognized deferred tax assets | (1,812 | ) | 1,589 | 27 | ||||||||
Currency effect on income tax (expense) benefit and adjustments recognized in the period for current tax of prior periods | - | (615 | ) | 3,162 | ||||||||
Change in unrecognized deferred tax assets | (1,554 | ) | 1,144 | (314 | ) | |||||||
Change in tax rate | 392 | 561 | 119 | |||||||||
Income tax (expense) benefit for the year | (1,440 | ) | (6,481 | ) | (5,602 | ) | ||||||
Effective tax rate | 19.2 | % | 15.6 | % | 8.8 | % | ||||||
The following summarizes the Group’s deferred tax assets and liabilities:liabilities.
[US$ thousands] | As of December 31, | As of December 31, | As of December 31, | |||||||||||||
Deferred tax asset and deferred tax liability | 2017 | 2018 | 2018 | 2019 | ||||||||||||
Furniture, fixtures and equipment, and intangible assets | 24,496 | 22,201 | 22,201 | 22,703 | ||||||||||||
| Loans to customers | - | (7,744 | ) | |||||||||||||
Other | (1,003 | ) | (445 | ) | (445 | ) | (735 | ) | ||||||||
Trade receivables | (134 | ) | (133 | ) | (133 | ) | (121 | ) | ||||||||
Intercompany interest costs subject to limitations | (3,841 | ) | (5,243 | ) | (5,243 | ) | (7,714 | ) | ||||||||
Withholding tax expected to be credited (credit method) | — | (3,849 | ) | (3,849 | ) | (1,065 | ) | |||||||||
Tax losses carried forward | (8,648 | ) | (117 | ) | (117 | ) | (1,003 | ) | ||||||||
Net deferred tax liability (asset) recognized | 10,870 | 12,414 | 12,414 | 4,322 | ||||||||||||
The following summarizes the Group’s changes in deferred taxes during the periods:periods.
[US$ thousands] | As of December 31, | As of December 31, | As of December 31, | |||||||||||||
2017 | 2018 | |||||||||||||||
Change in net deferred tax liability (asset) | 2018 | 2019 | ||||||||||||||
Net deferred tax liability (asset) as of January 1 | 14,879 | 10,870 | 10,870 | 12,414 | ||||||||||||
Expense (benefit) in Statement of Operations | (4,009 | ) | 1,544 | 1,544 | (8,092 | ) | ||||||||||
Net deferred tax liability (asset) | 10,870 | 12,414 | 12,414 | 4,322 | ||||||||||||
| [US$ thousands] | As of December 31, | As of December 31, | As of December 31, | |||||||||||||
2017 | 2018 | |||||||||||||||
Deferred tax assets and liabilities | 2018 | 2019 | ||||||||||||||
Deferred tax assets | 958 | 944 | 944 | 6,204 | ||||||||||||
Deferred tax liabilities | 11,828 | 13,358 | 13,358 | 10,526 | ||||||||||||
Net deferred tax liability | 10,870 | 12,414 | 12,414 | 4,322 | ||||||||||||
(1) Deferred tax assets / liabilities are netted within each tax jurisdiction within the group.
Deferred tax liability related to furniture, fixtures and equipment
The deferred tax liability relates mainly to excess values identified in the purchase price allocation performed in accounting for the Acquired Companies, as describedacquisition of the Consumer business in Notes 1 and 2.2016.
Deferred tax assets on interest charges carried forward
Deferred tax assets relate to Norwegian limitations to interest deductions on intercompany loans, carried forward due to restrictions. The interest subject to limitations must be utilized within ten years.
Management has assessed that there is convincing evidence that future taxable profits will be available in order to utilize the interest charges within the time restriction period.
Note 25 Share-based payments
On April 7, 2017 the Group adopted an RSU (Restricted Share Unit) plan for employees in the Group. The program was transferred to the Group’s new parent company, Opera Limited, in connection with the Group’s IPO in 2018. Awards equal to 10% of the equity of the Company are made available for grants.
The program was established with an assumption that there would be 500 million shares in the ultimate issuer entity. Opera Limited was set up with 200 million shares, resulting in a conversion ratio of 0.4 from the count of RSUs granted to the ultimate shares to be delivered. As each traded ADS represents two shares, the reported grants have been further adjusted by a factor of 0.5. Accordingly, for the purpose of these consolidated financial statements, all counts of RSUs and per-unit values are communicated as converted to ADS equivalent units.
In 2018, grants were made on three dates: February 12 (488,000 RSUs), April 23 (10,000 RSUs) and June 27 (18,000 RSUs). The default vesting schedule for the majority of 2018 grants were 20%, 20%, 30%, 30% on January 1 in each of the years 2019-2022.
The equity unit value applied for the 2018 grants of US$7.75 was determined based on a combination of DCF and multiple based analyses carried out as of February 12, 2018. The fair value per RSU of US$7.12 was determined by Monte Carlo simulation, as specified below. The equity cost of each RSU is recognized on a straight-line basis over the vesting period.
The Group accrues for relevant social security costs based on the most recent available measure of the equity value, with the same straight-line recognition over the vesting period. As of December 31, 2018, social security cost was accrued based on the year-end market value of Opera Limited.
The expense recognized for the employee services received is shown in the following table:
[US$ thousands] | Year ended December 31, | Year ended December 31, | ||||||
Expense from share-based payment transactions | 2017 | 2018 | ||||||
Expense arising from equity-settled share-based payment transactions (1) | 9,496 | 4,846 | ||||||
Expense arising from cash-settled share-based payment transactions | — | — | ||||||
Total expense from share-based payment transactions | 9,496 | 4,846 | ||||||
|
|
Year ended December 31, | Year ended December 31, | |||||||
2017 | 2018 | |||||||
Outstanding at period start | — | 3,882,600 | ||||||
Granted during the period | 4,221,600 | 516,000 | ||||||
Forfeited during the period | (339,000 | ) | (154,468 | ) | ||||
Exercised during the period | — | — | ||||||
Expired during the period | — | — | ||||||
Outstanding at period end | 3,882,600 | 4,244,132 | ||||||
The weighted average remaining vesting period for the RSUs outstanding as of December 31, 2018 was 0.97 years (December 31, 2017: 1.61 years).
Fair value measurement per RSU as converted to ADS equivalent:
2017 RSU grants: RSU valuation input | 2018 RSU grants: RSU valuation input | |||||||
Current equity unit price valuation ($) | 5.70 | 7.75 | ||||||
Model Used | Monte Carlo | Monte Carlo | ||||||
Expected Volatility (%) (1), (2) | 37.44 | % | 35.29 | % | ||||
Risk free interest rate (%) (1) | 1.61 | % | 2.43 | % | ||||
Dividend Yield (%) | 0 | % | 0 | % | ||||
Duration of initial simulation period (years to longstop date) | 4.55 | 4.73 | ||||||
Duration of second simulation period with postponed exercise (years) | 3.00 | 3.00 | ||||||
Fair value at the measurement date ($) | 4.50 | 7.12 | ||||||
|
|
|
|
|
|
| As of December 31, | As of December 31, | ||||||
2017 | 2018 | |||||||
Kunlun Tech Limited | 33.33 | % | 43.90 | % | ||||
Keeneyes Future Holding Inc. | 21.67 | % | 17.84 | % | ||||
Future Holding L.P. | 12.50 | % | 0.00 | % | ||||
Qifei International Development Co, Ltd | 27.50 | % | 21.38 | % | ||||
Golden Brick Capital Private Equity Fund I L.P. | 5.00 | % | 3.89 | % | ||||
Tospring Technology Ltd. | 0.00 | % | 3.81 | % | ||||
The Bank of New York Mellon (1) | 0.00 | % | 8.42 | % | ||||
IDG China Capital Fund III L.P. | 0.00 | % | 0.73 | % | ||||
IDG China Capital III Investors L.P. | 0.00 | % | 0.04 | % | ||||
| 100.00 | % | 100.00 | % | |||||
|
|
|
|
Note 27 Group entities
The following subsidiaries are included in the Group'sGroup’s consolidated financial statements:statements.
| ||||||
Parent company | Registered office | Domicile | ||||
Opera Limited | George Town | Cayman Islands |
Registered | Ownership interest | |||||
Group | office | Domicile | and voting rights | |||
Kunhoo Software LLC | George Town | Cayman Islands | 100% | |||
Kunhoo Software Limited | Hong Kong | Hong Kong | 100% | |||
Kunhoo Software | Luxembourg | Luxembourg | 100% | |||
Kunhoo Software AS | Oslo | Norway | 100% | |||
Opera | Oslo | Norway | 100% | |||
Opera Software Holdings LLC | San Mateo |
| 100% | |||
Opera Software Americas LLC | San Mateo |
| 100% | |||
Opera Software Ireland | Dublin | Ireland | 100% | |||
| Linköping | Sweden | 100% | |||
Opera Software International AS | Oslo | Norway | 100% | |||
Opera Software Netherlands | Amsterdam | Netherlands | 100% | |||
Opera Software India | Chandigarh | India | 100% | |||
Opera Software Poland sp. | Wroclaw | Poland | 100% | |||
Opera Software Technology (Beijing) Co. | Beijing | China | 100% | |||
Beijing | Beijing | China | 100% | |||
Opera Unite HK Limited (1) | Hong Kong | Hong Kong | 100% | |||
Opera Unite Pte. Ltd. (1) | Singapore | Singapore | 100% | |||
Opesa South Africa (Pty) Limited | Cape Town | South Africa | 100% | |||
O-Play Digital Services Ltd. | Lagos | Nigeria | 100% | |||
O-Play Kenya Limited(2) | Nairobi | Kenya | 80% | |||
Phoneservice Technologies Co. Ltd.(2) | Nairobi | Kenya | 80% | |||
O-Play Zambia Limited | Lusaka | Zambia | 100% | |||
PT Inpesa Digital Teknologi (3) | Jakarta | Indonesia | 100% | |||
Opera Lifestyle (1) | George Town | Cayman Islands | 100% | |||
Opera Lifestyle Nigeria Ltd. (1) | Lagos | Nigeria | 100% | |||
TenSpot Pesa Limited | Hong Kong | Hong Kong | 100% | |||
LLC "Microcredit Company | St. Petersburg | Russia | 100% | |||
Neofin Malelane (Pty) Ltd. | Johannesburg | South Africa | 100% | |||
Opay Finance India | Mumbai | India | 100% | |||
Blue Ridge Micro Finance Bank Ltd. | Lagos | Nigeria | 100% | |||
Oplay Digital | Mexico City | Mexico | 100% | |||
|
|
|
| |||
TenSpot Kenya Limited | Nairobi | Kenya | 100% | |||
P C Financial Services | Delhi | India | 100% |
|
| Indonesia | 100% | |||
App de Préstamos, S.A. de C.V. (1) | ||||||
|
| |||||
|
| |||||
|
|
| ||||||
Opera Financial Technologies Limited (1) | London | United Kingdom | 100% | |||
Beijing Yuega Software | Beijing | China | 100% |
(1) Entities were incorporated in 2019
(2) 20% is held by a nominee shareholder.
(3) Variable Interest Entity (VIE) contractually controlled by the Group.
The Group’s ownership interest and voting rights did not change in 2019. There were no material non-controlling interests in the Group's subsidiaries.
Note 28 Business combinationsAcquisition of TenSpot Pesa Limited in 2018
On December 19, 2018, the Group acquired 100% of the shares and voting rights in TenSpot Pesa Limited (with subsidiaries, the “TenSpot Group”). The TenSpot Group is the owner of OKash, a microfinance business, currentlywhich was active in Kenya with plans to launch in additional countries2018, and which in 2019. OKash represents a new user-driven business opportunity that will benefit from Opera’s existing reach2019 was launched by the Group in India and scale in relevant African and Asian markets, and of relevant demographics. We determined that the TenSpot Group met the definition of a business after considering that it had technology, key processes and was generating revenue from customers as of the acquisition date.
Nigeria. A net cash consideration of US$9.5 million was transferred to Opay Digital Services Limited (Opay)(“OPay”), the seller of TenSpot Pesa Limited. Opay,OPay, in which the Group hashad a 19.9% ownership share in 2018, which was reduced to 13.1% as of December 31, 2019, is an associate accounted for in accordance withof the equity methodGroup (see Note 2927 for more information).
The Group determined that the combined businesses are ultimately were controlled by the Group’s Chairman and CEO, both before and after the transaction. As such, it was a business combination under common control. The determination that Opera Limited is controlled by its Chairman and CEO iswas based on significant judgment. The Chairman and CEO’s ownership interest and voting rights are established by his control of Keeneyes Future Holding Inc and Kunlun Tech Limited, a subsidiary of Beijing Kunlun Tech Co. Ltd. Although the Chairman and CEO does not hold a majority of the shares and voting rightsjudgment, as disclosed in the latter, the Group has concluded that he has de-facto control over that entity based on his practical ability to direct the relevant activities. This is based on him being the largest holder of voting rights in Beijing Kunlun Tech Co. Ltd, effectively controlling 33.77% of the voting rights directly. The recent history of voting in general meetings for Beijing Kunlun Tech Co. Ltd demonstrates that the Group’s Chairman and CEO controlled significantly more than 50% of the shares registered to vote. The remaining shares in Beijing Kunlun Tech Co. Ltd are widely disbursed among a large number of other shareholders.
Note 2. IFRS does not prescribe how to account for business combinations under common control. In the absence of specific guidance in IFRS, management has used judgment in developing and applying an accounting policy that is relevant and reliable. Other standard-setting bodies have issued guidance for common control business combinations and some allow or require predecessor accounting, or historical cost accounting as it is known in some jurisdictions, in accounting for business combinations involving entities under common control. Historical cost accounting is also supported by authoritative accounting literature. Based on this, the Group decided to adopt historical cost accounting in accounting for the acquisition of TenSpot Pesa Limited.
Under the predecessor method of accounting, as adopted by the Group, the assets and liabilities of the TenSpot Group are reflectedwere recognized at their carrying amounts as they were in the consolidated financial statements for TenSpot Pesa Limited. No adjustments were made to reflect fair values, or recognize any new assets or liabilities, at the date of the combination that would otherwise be done under the acquisition method. Moreover, no adjustments were necessary to align accounting policies of TenSpot Pesa Limited with those adopted by the Group.
In addition to the net cash consideration transferred to Opay,OPay, the Group had receivables due from TenSpot Pesa Limited with a carrying amount of US$2.0 million, which was effectively settled in the acquisition. The acquired companies had no material assets or liabilities except for cash and cash equivalents with a carrying amount of US$1.6 million. The difference between the consideration transferred, including the effective settlement of receivables, and the net assets acquired, was recognized as a reduction of retained earnings (US$9.9 million).
The Group decided not to re-present its comparatives and adjust its current reporting period before the date of the acquisition as if the business combination had occurred before the start of the earliest period presented. Consequently, the impact of transactions between the Group and the TenSpot Group prior to December 19, 2018 have not been eliminated.
See Note 29 for information about the gain recognized by Opay from the loss of control over TenSpot Pesa Limited.
Note 29 Investments in associates and joint ventures
NOTE 27. | INVESTMENTS IN ASSOCIATES AND JOINT VENTURES |
The Group has investments in associates and joint ventures, which are accounted for in accordance with the equity method, except for the investmentpreferred shares in StarMaker,OPay and Starmaker, as detailedoutlined below.
Opay Digital ServicesOPay Limited
OpayOPay is an associate in which the Group hashad a 19.9%13.10% ownership share. Itinterest, of which 10.24% is held in preferred shares and 2.86% in ordinary shares as of December 31, 2019. The investment in ordinary shares is accounted for in accordance with the equity method, while the preferred shares are accounted for as long-term interests in the associate and measured at fair value through profit or loss. For information about the measurement of the preferred shares, see Note 16.
In 2018, OPay launched itsa mobile money services in 2018. Opay has focused its effortswallet to customers in Nigeria, a market characterized by a large un-banked population with low mobile money penetration. OpayIn 2019, OPay launched an agent-centric operationmultiple new initiatives in July 2018 as a means to reachNigeria, most notably the underserved population. By December 31, 2018, Opay had recruited 3,000 agentsridesharing service ORide and average daily transaction volume in December 2018 wasthe food-delivery service OFood. ORide achieved in excess of US$1 million, with peak days exceeding US$1.5 million, placing Opay among150,000 daily orders already from its first three months of operations, and more than 27,000 riders contributed to the top-tier mobile money providersplatform model. Other new initiatives launched in Nigeria less than one year after launch.2019 include lending through OCredit and point of sale solutions for merchants through OPos. OPay’s goal is to become a one-stop mobile-based platform for financial and social inclusion.
In 2018, OpayOPay also launched a separate microfinance productmicrolending business in Kenya with Opera as its partner, branded OKash. On December 19, 2018, the Group paid US$9.5 million to OpayOPay to acquire 100% of the shares in TenSpot Pesa Limited (“TenSpot”), the then owner of the OKash business. TheTenSpot had previously been established as an entity held directly by Mr. Yahui Zhou with the sole purpose of obtaining microlending licenses in select markets for OPay, while OPay had the option to acquire all the shares in TenSpot for US$1 (one dollar). By December 2018, TenSpot had subsidiaries, or had entered into agreements to acquire subsidiaries, with either licenses or pending license applications in several countries including India and Nigeria. Prior to OPay’s sale of the microlending business to Opera, OPay exercised its option to acquire TenSpot for $1, and assigned all intellectual property rights in OKash to TenSpot.
OPay recognized revenue of US$16.7 million in 2019, versus US$0.8 million in 2018. Establishing OPay as the leading provider of both mobile wallet and other services in Nigeria was given priority over near-term conversion of transaction resulted in Opay recognizing a gain in its separate financial statementsvalue to revenue. Net loss for OPay during 2019 was US$71.5 million. Cost of revenue was US$41.1 million, of which US$1.936.0 million related to the launch and scaling of ORide to become the dominant ride-hailing service in Lagos, including incentives to attract drivers in this initial period of operations. Operating expenses were US$47.6 million, driven by, and supporting, the substantial growth that OPay saw across its business lines. These 2019 operating expenses included expenses incurred to expand the user base and business operations of OPay, such as marketing expenses of US$6.6 million, compensation to personnel of US$15.5 million and depreciation and amortization of US$5.9 million.
To fund its growth, OPay raised a total of US$170 million in new capital from investors in 2019 by issuing both ordinary and preferred shares. On June 14, 2019, the Group acquired 3,210,617 Series Seed+ preferred shares in OPay for US$7.5 million by converting loans to equity. On the same date, the Group also acquired 1,230,736 Series A preferred shares in OPay for US$4.6 million by converting US$2.67 million of debt to equity and by transferring US$1.93 million in cash. By the end of 2019, the accumulated investment made in OPay was US$12.1 million. Of the loans converted to equity in 2019, US$5.0 million was classified as part of the Group’s proportionatenet investment in prior periods. In 2019, the Group recognized an unrealized gain on the preferred shares of US$33.9 million. See Note 16 for more details.
Summary information regarding OPay: | ||||||||||||
Year ended December 31, | ||||||||||||
[US$ thousands] | 2017 | (1) | 2018 | 2019 | ||||||||
The Group’s interest | 19.9 | % | 19.9 | % | 13.1% | (2) | ||||||
Revenue | - | 848 | 16,687 | |||||||||
Other income | - | 9,500 | 339 | |||||||||
Cost of revenue | - | (255 | ) | (41,117 | ) | |||||||
Personnel expenses including share-based remuneration | (2,331 | ) | (5,738 | ) | (15,490 | ) | ||||||
Marketing and distribution expenses | - | (162 | ) | (6,623 | ) | |||||||
Depreciation and amortization | - | (260 | ) | (5,858 | ) | |||||||
Other expenses | (500 | ) | (4,293 | ) | (19,616 | ) | ||||||
Operating profit (loss) | (2,831 | ) | (359 | ) | (71,678 | ) | ||||||
Finance income | - | 1 | 736 | |||||||||
Finance expense | - | (25 | ) | (417 | ) | |||||||
Income tax (expense) benefit | - | - | (114 | ) | ||||||||
Net income (loss) | (2,831 | ) | (384 | ) | (71,474 | ) | ||||||
Other comprehensive income that may be reclassified to net income | - | - | - | |||||||||
Total comprehensive income | (2,831 | ) | (384 | ) | (71,474 | ) | ||||||
Group's share of net income (loss) | (563 | ) | (76 | ) | (2,938 | ) | ||||||
Gain on partial disposal (3) | - | - | 1,174 | |||||||||
Total share of net income (loss) | (563 | ) | (76 | ) | (1,764 | ) | ||||||
Current assets | 5,600 | 4,302 | 99,238 | |||||||||
Non-current assets | 55 | 4,918 | 24,656 | |||||||||
Current liabilities | 8,431 | 12,043 | 28,870 | |||||||||
Non-current liabilities (4) | - | 453 | 170,015 | |||||||||
Equity | (2,776 | ) | (3,276 | ) | (74,992 | ) | ||||||
(1) Period from November 1 to December 31, 2017.
(2) Reflects the total ownership interest in OPay as of December 31, 2019, 10.24% of which is held in preferred shares and 2.86% in ordinary shares. The ownership interest reduced during 2019. The share whichof net income (loss) recognized under the equity method was calculated based on the investment in ordinary shares, relative to the total number of shares outstanding. The Group owns 8.85% of the total number of ordinary shares issued by OPay.
(3) In 2019, the Group sold some of its ordinary shares in OPay for the purpose of an employee equity program in the company. The gain on partial disposal is included in Share of net income (loss) of associates and joint ventures in the shareStatement of Opay’s net loss recognized by the Group.Operations. See Note 28 for more information.
(4) Preferred shares issued by OPay are classified as financial liabilities in the financial statements of the company.
StarMaker Inc.
StarMaker is an associate in which the Group acquiredhad preferred shares representing a 19.35% ownership share on November 5, 2018, by investing US$30 million in exchange forinterest as of December 31, 2019. The preferred shares, in the company. The preferred sharesaccounted for as long-term interests and measured at fair value through profit or loss, have dividend and liquidation preference. As part of the investment,In 2019, the Group also obtainedrecognized an unrealized gain on the preferred shares of US$4.0 million. The Group has an option to increase its ownership to 51% in the second half of the year 2020. The option, if exercised, will entail the Group acquiring the shares at either fair value, or at a proxy of fair value. Accordingly, the fair value of the option is immaterial as at December 31, 2019. For information about the measurement of the preferred shares, see Note 16.
StarMaker is a technology-driven social media company focused on music and entertainment. StarMaker enables users to record and share their own music videos, collaborate with other musicians, connect with other users and follow their idols on the social platform. During the second half of 2018, StarMaker expanded into short-form music and video clips of a more viral nature.
The preferred shares are accounted for as long-term interests in StarMaker, measured at fair value through the Statement of Operations. In future periods, if StarMaker remains loss-making, the Group may be required to apply the equity method and recognize its share of losses in reverse order of seniority versus the ordinary shares of the company.
The option to increase our ownership to 51% in the second half of the year 2020, if exercised, will entail the Group acquiring the shares at either fair value, or at a proxy of fair value. Accordingly, the fair value of the option is immaterial as of December 31, 2018.
nHorizon
nHorizon is a joint venture in which the Group has a 29.09% ownership share.interest. nHorizon operates an Opera browser in China with monetization partners, including Baidu, Sogou and others. nHorizon consists of nHorizon Innovation (Beijing) Software Limited and nHorizon Infinite (Beijing) Software Limited (collectively, “nHorizon”). The joint venture was co-founded by Otello Corporation ASA and Telling Telecom in August 2011. The Group acquired the investment in nHorizon as a result of the acquisition of Opera SoftwareNorway AS in 2016.
Powerbets Holdings Limited
Powerbets is a joint venture in which the Group has a 50.1% ownership share.interest. It is a joint venture with a group related to Supabets HKHL Limited. The joint venture was established on August 1, 2017. It provides a platform for sports betting, virtual sports betting, and gaming services throughout Africa. Having one of the largest gaming footprints in Africa, Powerbets is licensed in nine African markets and operational in seven.eight.
2016 summary information regarding nHorizon:
| Predecessor | Successor | |||||||
| [US$ thousands] | Period from | Period from | ||||||
Revenue | 21,590 | 9,187 | ||||||
Operating profit (loss) | (8,713 | ) | (736 | ) | ||||
Net income (loss) | (9,159 | ) | (815 | ) | ||||
Group’s share of net income (loss) | (2,664 | ) | (237 | ) | ||||
Assets | 12,954 | 22,487 | ||||||
Short-term liabilities | 27,627 | 18,854 | ||||||
Equity | (14,673 | ) | 3,634 | |||||
2017 summary information regarding nHorizon Powerbets and Opay:Powerbets:
nHorizon | Powerbets Holdings Limited | Opay Digital Services Limited | Year ended December 31, 2017 | Period from August 1 to December 31, 2017 | ||||||||||||||||
| [US$ thousands] | Year ended December 31, | Period from August 1 to December 31, | Period from November 1 to December 31, | nHorizon | Powerbets | |||||||||||||||
The Group’s interest | 29.09 | % | 50.10 | % | 19.90 | % | ||||||||||||||
The Group’s interest | 29.09 | % | 50.10 | % | ||||||||||||||||
Revenue | 42,298 | 7,562 | — | 42,298 | 7,562 | |||||||||||||||
Operating profit (loss) | (2,219 | ) | (505 | ) | (2,831 | ) | (2,219 | ) | (505 | ) | ||||||||||
Net income (loss) | (2,710 | ) | (529 | ) | (2,831 | ) | (2,710 | ) | (529 | ) | ||||||||||
Group’s share of net income (loss), before adjustment | (788 | ) | (265 | ) | (563 | ) | (788 | ) | (265 | ) | ||||||||||
Adjustments related to amortization of intangible assets | — | (54 | ) | — | - | (54 | ) | |||||||||||||
Group’s share of net income (loss) | (788 | ) | (318 | ) | (563 | ) | ||||||||||||||
Group's share of net income (loss) | (788 | ) | (318 | ) | ||||||||||||||||
Assets | 19,302 | 2,672 | 5,655 | 19,302 | 2,672 | |||||||||||||||
Short-term liabilities | 15,720 | 5,649 | 8,431 | 15,720 | 5,649 | |||||||||||||||
Equity | 3,583 | (2,977 | ) | (2,776 | ) | 3,583 | (2,977 | ) | ||||||||||||
2018 summary information regarding nHorizon, Powerbets Opay and StarMaker:
nHorizon | Powerbets Holdings Limited | Opay Digital Services Limited | StarMaker Inc. | Year ended December 31, 2018 | ||||||||||||||||||||||||
| [US$ thousands] | Year ended December 31, | Year ended December 31, | Year ended December 31, | Year ended December 31, | nHorizon | Powerbets | StarMaker | |||||||||||||||||||||
The Group’s interest | 29.09 | % | 50.10 | % | 19.90 | % | 19.35 | % | ||||||||||||||||||||
The Group’s interest | 29.09 | % | 50.10 | % | 19.35% | (1) | ||||||||||||||||||||||
Revenue | 48,992 | 4,498 | 848 | 12,332 | 48,992 | 4,498 | 12,332 | |||||||||||||||||||||
Operating profit (loss) | (1,568 | ) | (4,528 | ) | (384 | ) | (9,639 | ) | (1,568 | ) | (4,528 | ) | (9,639 | ) | ||||||||||||||
Net income (loss) | (2,056 | ) | (4,735 | ) | (384 | ) | (8,602 | ) | (2,056 | ) | (4,735 | ) | (8,602 | ) | ||||||||||||||
Other comprehensive income that may be reclassified to net income | — | 188 | — | — | - | 188 | - | |||||||||||||||||||||
Total comprehensive income | (2,056 | ) | (4,547 | ) | (384 | ) | (8,602 | ) | (2,056 | ) | (4,547 | ) | (8,602 | ) | ||||||||||||||
Group’s share of net income (loss) | (598 | ) | (2,372 | ) | (76 | ) | N/a | |||||||||||||||||||||
Group's share of net income (loss) | (598 | ) | (2,372 | ) | N/A | |||||||||||||||||||||||
Current assets | 9,761 | 2,751 | 4,302 | 21,366 | 9,761 | 2,751 | 21,366 | |||||||||||||||||||||
Non-current assets | 1,065 | 2,851 | 4,918 | 11,245 | 1,065 | 2,851 | 11,245 | |||||||||||||||||||||
Current liabilities | 3,818 | 7,818 | 12,043 | 30,163 | 3,818 | 7,818 | 30,163 | |||||||||||||||||||||
Non-current liabilities | 5,469 | 5,114 | 453 | — | 5,469 | 5,114 | - | |||||||||||||||||||||
Equity | 1,539 | (7,331 | ) | (3,276 | ) | 2,448 | 1,539 | (7,331 | ) | 2,448 | ||||||||||||||||||
2019 summary information regarding nHorizon, Powerbets and StarMaker:
Year ended December 31, 2019 | ||||||||||||
[US$ thousands] | nHorizon | Powerbets | StarMaker | |||||||||
The Group’s interest | 29.09 | % | 50.10 | % | 19.35% | (1) | ||||||
Revenue | 43,335 | 4,990 | 29,035 | |||||||||
Operating profit (loss) | 1,821 | (3,016 | ) | (8,485 | ) | |||||||
Net income (loss) | 1,780 | (5,134 | ) | (8,485 | ) | |||||||
Other comprehensive income that may be reclassified to net income | - | - | - | |||||||||
Total comprehensive income | 1,780 | (5,134 | ) | (8,485 | ) | |||||||
Group's share of net income (loss) | 518 | (2,572 | ) | N/A | ||||||||
Current assets | 8,225 | 4,447 | 13,869 | |||||||||
Non-current assets | 695 | 1,560 | 11,377 | |||||||||
Current liabilities | 5,875 | 13,074 | 29,870 | |||||||||
Non-current liabilities | - | 5,754 | - | |||||||||
Equity | 3,045 | (12,822 | ) | (4,624 | ) | |||||||
(1) The Group ownership interest in StarMaker is held through preferred shares, which are measured at fair value through profit or loss.
The following tables specify the carrying amounts for investments in associates and joint ventures:ventures.
As of December 31, 2017 | ||||||||||||
| [US$ thousands] | ||||||||||||
Carrying amount | nHorizon | Powerbets Holdings Limited | Opay Digital Services Limited | |||||||||
Investment (Booked value January 1, 2017) | 1,043 | — | — | |||||||||
Investment during the fiscal year | 770 | 200 | 4,969 | |||||||||
Loan made to Powerbets Holdings reclassified from other receivables | — | 110 | — | |||||||||
FX adjustment | 86 | 8 | 1 | |||||||||
Share of net income (loss) | (788 | ) | (318 | ) | (563 | ) | ||||||
Total | 1,110 | — | 4,406 | |||||||||
Group’s share in % | 29.09 | % | 50.10 | % | 19.90 | % | ||||||
Group’s share in equity | 1,042 | (1,492 | ) | (552 | ) | |||||||
Intangible assets | — | 1,492 | — | |||||||||
Other equity method adjustments | 68 | — | 4,959 | |||||||||
Carrying amount | 1,110 | — | 4,406 | |||||||||
Year ended December 31, 2018 | ||||||||||||||||
[US$ thousands] | nHorizon | Powerbets | OPay | StarMaker | ||||||||||||
Carrying amount as of January 1, 2018 | 1,110 | - | 4,406 | - | ||||||||||||
Investment during the year | - | 2,567 | - | 30,000 | ||||||||||||
FX adjustment | (69 | ) | - | - | - | |||||||||||
Share of net income (loss) | (598 | ) | (2,372 | ) | (76 | ) | - | |||||||||
Share of other comprehensive income | - | 94 | - | - | ||||||||||||
Carrying amount as of December 31, 2018 | 443 | 289 | 4,330 | 30,000 | ||||||||||||
Groups share in % | 29.09 | % | 50.10 | % | 19.90 | % | 19.35 | % | ||||||||
Groups share in equity | 448 | (3,673 | ) | (652 | ) | N/A | ||||||||||
Unrecognized intangible assets | - | 1,492 | - | N/A | ||||||||||||
Equity method adjustments | (5 | ) | 2,469 | 4,982 | N/A | |||||||||||
Carrying amount as of December 31, 2018 | 443 | 289 | 4,330 | 30,000 | ||||||||||||
As of December 31, 2018 | ||||||||||||
| [US$ thousands] | ||||||||||||
Carrying amount | nHorizon | Powerbets Holdings Limited | Opay Digital Services Limited | |||||||||
Investment (Booked value January 1, 2018) | 1,110 | — | 4,406 | |||||||||
Investment during the year | — | 2,567 | — | |||||||||
FX adjustment | (69 | ) | — | — | ||||||||
Share of net income (loss) | (598 | ) | (2,372 | ) | (76 | ) | ||||||
Share of other comprehensive income | — | 94 | — | |||||||||
Total | 443 | 289 | 4,330 | |||||||||
Group’s share in % | 29.09 | % | 50.10 | % | 19.90 | % | ||||||
Group’s share in equity | 448 | (3,673 | ) | (652 | ) | |||||||
Intangible assets | — | 1,492 | — | |||||||||
Equity method adjustments | (5 | ) | 2,469 | 4,982 | ||||||||
Carrying amount | 443 | 289 | 4,330 | |||||||||
Year ended December 31, 2019 | ||||||||||||||||
[US$ thousands] | nHorizon | Powerbets | OPay | StarMaker | ||||||||||||
Carrying amount as of January 1, 2019 | 443 | 289 | 4,330 | 30,000 | ||||||||||||
Investment during the year | - | 366 | 7,131 | - | ||||||||||||
Change in fair value of preferred shares (1) | - | - | 33,900 | 4,000 | ||||||||||||
FX adjustment | 3 | - | - | |||||||||||||
Other adjustments | - | 157 | 673 | - | ||||||||||||
Share of net income (loss) | 518 | (2,572 | ) | (2,938 | ) | N/A | ||||||||||
Share of other comprehensive income | - | - | - | N/A | ||||||||||||
Carrying amount as of December 31, 2019 | 963 | (1,760 | ) | 43,096 | 34,000 | |||||||||||
Groups share in % | 29.09 | % | 50.10 | % | 13.1 | % | 19.35 | % | ||||||||
Groups share in equity | 886 | (6,424 | ) | (2,145 | ) | N/A | ||||||||||
Unrecognized intangible assets | - | 566 | - | N/A | ||||||||||||
Equity method adjustments | 77 | 4,097 | (759 | ) | N/A | |||||||||||
Fair value of preferred shares (1) | - | - | 46,000 | 34,000 | ||||||||||||
Carrying amount as of December 31, 2019 | 963 | (1,760 | ) | 43,096 | 34,000 | |||||||||||
(1) The carrying amount of the preferred shares form part of the net investment in the associates.
In the Statement of Financial Position, the amount of Investments in associates and joint ventures includes both the carrying amount determined using the equity method and the fair value of the preferred shares.
Note 30 Related parties
NOTE 28. | RELATED PARTIES |
At the time of the transactions described in this note, the Group’s Chairman and Chief Executive Officer had control or significant influence over Beijing Kunlun Tech, StarMakerOPay, Starmaker Interactive, Kunlun AI andMobimagic Digital Technology Ltd (formerly known as 360 Mobile Security,Security) and Balder Investment Inc., either directly or through other investments. He further controls Opay through Balder Investment Inc, where certain other officers in the Group also have financial interests but no voting rights.
The Group has significant influence over OpayOPay and StarMakerStarmaker through ownership interests in those entities. Moreover, the Group has joint control over Powerbets and nHorizon by having contractually agreed the sharing of control.
On November 1, 2017, the Group provided a revolving line of credit of US$6.0 million to Opay. The Group may call the principal and interest at any time after November 1, 2019. Opay may elect to make early repayment at any time in its discretion. As of December 31, 2018, the total amount drawn under the credit facility was US$1.4 million (December 31, 2017: 0.2 million). The total amount of loans receivable due from Opay as of December 31, 2018 includes a loan of US$0.4 million provided under a separate loan agreement.
On October 4,In 2018, the Group provided a revolving line of credit of US$6.0 million to Powerbets. Prior to this, the Group had already advanced the sum of US$2.0 million to Powerbets, which was deemed to be advanced under the terms of the credit facility. The principal, together with all accrued and unpaid interest, shall be repaid on the date set by Powerbets’ board of directors, which effectively requires the consent of the other investor in Powerbets. As of December 31, 2018,2019, a total of US$2.63.0 million was drawn under the credit facility.facility (December 31, 2018: US$2.6 million). No repayment date has been set. ThatNo interest has been accrued. The long-term loan is accounted for as part of ourthe Group’s long-term interest in Powerbets.
Effective from January 1, 2018, theThe Group and Powerbets entered into a software development and consultancy agreement.agreement in 2018. The Group has also provided advertising services to Powerbets. A total of US$2.2 million was recognized as revenue from Powerbets duringin 2019 (2018: US$4.4 million). As of December 31, 2019, the total outstanding balance on trade receivable was US$6.6 million, compared to US$4.4 million as of year-end 2018. We expect Powerbets to start repaying the receivables in 2020.
On November 5, 2018,April 16, 2019, the Group investedsold 1,242,322 shares in OPay to Wisdom Connection III Holding Inc., a company controlled by Han Fang, a Director of the Group at the time, for a consideration of US$300.5 million, in StarMaker by purchasingparallel with OPay’s other founder, Balder Investment Inc., selling an equal portion of its shares at the same valuation. These transactions were carried out to establish an equity pool for OPay’s employees within Wisdom Connection III Holding Inc. ahead of new investor funding of OPay. On June 14, 2019, the Group acquired 3,210,617 Series Seed+ preferred shares resulting in a voting interest of 19.35% andOPay for US$7.5 million by converting loan to equity. On the Group having significant influence over the entity. As part of the investment,same date, the Group also obtained an optionacquired 1,230,736 Series A preferred shares in OPay for US$4.6 million by converting US$2.67 million of debt to increase its ownershipequity and by transferring US$1.93 million in cash to 51%the company. By the end of 2019, the accumulated investment made in OPay was US$12.1 million.
In mid-2019, the second halfGroup entered into service agreements with Mobi Magic (Beijing) Information Technology Co., Ltd. and Hong Kong Fintango Limited under which these parties would provide app, systems and platform maintenance, and data processing services as well as managerial oversight to P C Financial Services, the subsidiary of the year 2020. StarMakerGroup offering microloans in India. Under the agreements, the Group will pay a combination of fixed fees and a variable fee that is controlled bycalculated based on revenue less credit losses and indirect taxes.
On July 5, 2019, Blue Ridge Microfinance Bank Limited and Paycom Nigeria Limited, a subsidiary of OPay, entered a partnership to facilitate OPay’s launch of a savings product to its users. Under the Group’s Chairman and Chief Executive Officer. See Note 29 for additional information.agreement, deposits from customers of OPay were transferred to Blue Ridge, which invested the funds in financial instruments, including microloans offered in Nigeria. Blue Ridge paid a fixed interest rate on deposits from Paycom.
On December 19, 2018,18, 2019, the Group acquiredentered into a microfinance businesssales agreement with OPay to sell inventory representing mobile phones for US$6.27 million. The transaction closed in 2020.
On December 18, 2019 the Group entered into an agreement with Putu Novi Financing Corporation, a company indirectly controlled by Opera’s Chairman and CEO, under which the Group provided a revolving credit facility for 18 months in exchange of interest and net revenue sharing from Opay for a total considerationthe company’s operations. As of US$9.5 million. See Notes 28 and 29 for more information onDecember 31, 2019, no loans had been provided under the acquisition.credit facility.
The Group provides and receives professional services to or receives services from, certaina number of other related parties.
Services received from Beijing Kunlun Tech consist of shared office facilities in Beijing, China.
Services provided to OpayOPay consist of development and key management personnel services, and arehas been invoiced based on time used and with a 5-8% markup dependent of the type of service. The Group has also provided development and advertising services to Powerbets.
Services received from Mobimagic Digital Technology Ltd (formerly known as 360 Mobile SecuritySecurity) are related to distribution and promotion of the Group’s products worldwide. Mobimagic Digital Technology was initially a subsidiary of the Qihoo 360 group, later invested into by other investors, including Mr. Yahui Zhou. The Qihoo 360 group and Mr. Yahui Zhou were also two of the original shareholders of Opera Limited. Both Opera and Mobimagic Digital Technology have a need to promote their apps through mobile advertising on third party advertising inventory. As the two companies have operated under overlapping control, it was decided to take advantage of the combined volume of advertising to be procured in order to achieve the most attractive pricing from third parties; hence the partnership. At December 31, 2018,2019, the Group had provided prepayments to 360 Mobile SecurityMobimagic Digital Technology for distribution and promotion services as part of an agreement where 360 Mobile SecurityMobimagic Digital Technology accepts financial risk related to the retention of acquired new users. The prepayments had a carrying amount of US$15.5 million as of December 31, 2019, compared to US$10.4 million. Onmillion as of December 21, 2018, the Group entered into a strategic cooperation agreement with 360 Mobile Security31, 2018. The growth of transactions and balances related to acquiring its assistancethis distribution partnership relates to Opera’s announced growth strategy for 2019, including increased investments in launching microfinance offerings in additional countries.marketing and distribution.
Additional information about transactions with associates and joint ventures is included in Note 29.27.
Outstanding balances as of December 31, 20172018 and 20182019 are unsecured and interest free, except as outlined above, and settlement occurs in cash. There have been no guarantees provided or received for any related party receivable or payable.
[US$ thousands] | As of December 31, | As of December 31, | ||||||||||
Balances with related parties | Category of related party | Type of balance | 2017 | 2018 | ||||||||
360 Mobile Security Limited | Key management personnel | Accounts receivable | — | 770 | ||||||||
360 Mobile Security Limited | Key management personnel | Distribution prepayment (liability) | (3,279 | ) | 10,420 | |||||||
Beijing Kunlun Tech Co., Ltd. | Key management personnel | Other payables | (123 | ) | (169 | ) | ||||||
nHorizon Innovation (Beijing) Software Ltd | Joint venture | Revenue share liability | (150 | ) | — | |||||||
nHorizon Innovation (Beijing) Software Ltd | Joint venture | Professional service receivable | 239 | — | ||||||||
nHorizon Innovation (Beijing) Software Ltd | Joint venture | Professional service payable | (480 | ) | (979 | ) | ||||||
Opay Digital Services Limited (HK) | Associate / Key management personnel | Loans receivable | 631 | 1,779 | ||||||||
Opay Digital Services Limited (HK) | Associate / Key management personnel | Trade receivable | 2,829 | 4,271 | ||||||||
| Opay Digital Services Limited (HK) | Associate / Key management personnel | Accounts payable | — | (455) | ||||||||
Powerbets Holding Limited | Joint venture | Loans receivable | 200 | 2,567 | ||||||||
Powerbets Holding Limited | Joint venture | Trade receivable | — | 4,369 | ||||||||
StarMaker Interactive Inc. | Key management personnel | Loan receivable | 516 | — | ||||||||
[US$ thousands] | As of December 31, 2018 | |||||||||||
Balances with related parties | Category of related party | Type of balance | 2018 | 2019 | ||||||||
Mobimagic Digital Technology Ltd | Key management personnel | Accounts receivable | 770 | - | ||||||||
Mobimagic Digital Technology Ltd | Key management personnel | Distribution prepayment | 10,420 | 15,527 | ||||||||
Mobimagic Digital Technology Ltd | Key management personnel | Trade and other payables | - | (2,760 | ) | |||||||
Beijing Kunlun Tech Co., Ltd. | Key management personnel | Other payables | (169 | ) | (177 | ) | ||||||
| Kunlun Group Limited | Key management personnel | Trade payable | - | (436 | ) | |||||||
Mobi Magic (Beijing) Info. Tech. Co., Ltd / Hong Kong Fintango Limited | Key management personnel | Trade and other payables | - | (25,598 | ) | |||||||
Mobi Magic (Beijing) Information Technology Co., Ltd. | Key management personnel | Trade receivable | - | 303 | ||||||||
nHorizon Innovation (Beijing) Software Ltd. | Joint venture | Revenue share liability | - | (23 | ) | |||||||
nHorizon Innovation (Beijing) Software Ltd. | Joint venture | Trade receivable | - | 146 | ||||||||
nHorizon Innovation (Beijing) Software Ltd. | Joint venture | Professional service payable | (979 | ) | (543 | ) | ||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | Loans receivable | 1,779 | - | ||||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | Trade receivable | 4,271 | 17,450 | ||||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | Trade payable | (455 | ) | - | |||||||
| OPay Digital Services Limited (HK) | Associate / Key management personnel | Contract liability | - | (6,274 | ) | |||||||
Paycom Nigeria Limited | Key management personnel | Trade receivable | - | 1,466 | ||||||||
Paycom Nigeria Limited | Key management personnel | Trade and other payables | - | (26 | ) | |||||||
Powerbets Holding Limited | Joint venture | Loans receivable | 2,567 | 3,039 | ||||||||
Powerbets Holding Limited | Joint venture | Trade receivable | 4,369 | 6,579 | ||||||||
StarMaker Entertainment Technology India Pvt., Ltd. | Associate / Key management personnel | Trade receivable | - | 22 | ||||||||
Wisdom Connection III Holding Inc. | Key management personnel | Other receivables | - | 500 | ||||||||
Predecessor | Successor | |||||||||||||||||||
[US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | ||||||||||||||||
Transactions with related parties | Category of related party | Type of transaction | 2016 | 2016 | 2017 | 2018 | ||||||||||||||
Opay Digital Services Limited (HK) | Associate / Key management personnel | Technology licensing and other revenue | — | — | 2,829 | 10,899 | ||||||||||||||
Powerbets Holdings Limited | Joint venture | Technology licensing and other, and advertising revenue | — | — | — | 4,369 | ||||||||||||||
360 Mobile Security Limited | Entity with board member interest | Technology licensing and other, and advertising revenue | — | — | — | 3,069 | ||||||||||||||
KUNLUN GLOBAL INTERNATIONAL SDN. BHD. | Key management personnel | Advertising revenue | — | — | — | 68 | ||||||||||||||
nHorizon Innovation (Beijing) Software Ltd | Joint venture | Technology licensing and other revenue | 2,238 | 315 | 387 | (18 | ) | |||||||||||||
StarMaker Interactive Inc. | Key management personnel | Investment | — | — | — | (30,000 | ) | |||||||||||||
360 Mobile Security Limited | Entity with board member interest | Marketing and distribution | (4,457 | ) | (5,193 | ) | (8,416 | ) | (7,522 | ) | ||||||||||
Beijing Kunlun Tech Co., Ltd. | Key management personnel | Office facilities | — | (233 | ) | (1,425 | ) | (1,072 | ) | |||||||||||
Kunlun AI Inc. | Key management personnel | Professional services | (600 | ) | (100 | ) | — | — | ||||||||||||
nHorizon Innovation (Beijing) Software Ltd | Joint venture | Cost of revenue | — | — | (72 | ) | (45 | ) | ||||||||||||
nHorizon Innovation (Beijing) Software Ltd | Joint venture | Professional services | (1,107 | ) | — | (513 | ) | (941 | ) | |||||||||||
StarMaker Interactive Inc. | Key management personnel | Professional services | — | — | 16 | 175 | ||||||||||||||
Opay Digital Services Limited (HK) | Associate / Key management personnel | Acquisition of business | — | — | — | (9,500 | ) | |||||||||||||
| Opay Digital Services Limited (HK) | Associate / Key management personnel | Investment | — | — | (4,969 | ) | — | |||||||||||||
| Opay Digital Services Limited (HK) | Associate / Key management personnel | License fee (cost of revenue) | — | — | — | (455 | ) | |||||||||||||
| nHorizon Innovation (Beijing) Software Ltd | Joint venture | Investment | — | (1,314 | ) | (770 | ) | — | ||||||||||||
| Powerbets Holdings Limited | Joint venture | Investment | — | — | (310 | ) | — | |||||||||||||
[US$ thousands] | Year ended December 31, | |||||||||||||||
Transactions with related parties | Category of related party | Type of transaction | 2017 | 2018 | 2019 | |||||||||||
Mobimagic Digital Technology Ltd | Key management personnel | Technology licensing, advertising and other revenue | - | 3,069 | - | |||||||||||
Mobimagic Digital Technology Ltd | Key management personnel | Marketing and distribution | (8,416 | ) | (7,522 | ) | (25,767 | ) | ||||||||
Mobimagic Digital Technology Ltd | Key management personnel | Software license fees | - | - | (500 | ) | ||||||||||
Beijing Kunlun Tech Co., Ltd. | Key management personnel | Office facilities | (1,425 | ) | (1,072 | ) | (1,545 | ) | ||||||||
Beijing Kunlun Tech Co., Ltd. | Key management personnel | Technology licensing and other revenue | - | - | 13 | |||||||||||
Beijing Kunlun Tech Co., Ltd. | Key management personnel | Professional services | - | - | (30 | ) | ||||||||||
| Kunlun Group Limited | Key management personnel | Professional investment advisory services | - | - | (436 | ) | ||||||||||
Beijing Kunlun Lexiang Network Technology Co., Ltd. | Key management personnel | Professional services | - | - | (79 | ) | ||||||||||
Beijing Kunlun Online Network Tech Co., Ltd | Key management personnel | Professional services | - | - | (125 | ) | ||||||||||
Beijing Xianlaihuyu Network Tech Co., Ltd | Key management personnel | Professional services | - | - | (39 | ) | ||||||||||
KUNLUN GLOBAL INTERNATIONAL SDN. BHD. | Key management personnel | Advertising revenue | - | 68 | 2 | |||||||||||
Mobi Magic (Beijing) Information Technology Co., Ltd. | Key management personnel | Technology licensing and other revenue | - | - | 303 | |||||||||||
Mobi Magic (Beijing) Info.Tech. Co., Ltd / Hong Kong Fintango Limited | Key management personnel | Cost of revenue | - | - | (25,598 | ) | ||||||||||
Mobi Magic (Beijing) Information Technology Co., Ltd | Key management personnel | Professional services | - | - | (325 | ) | ||||||||||
nHorizon Innovation (Beijing) Software Ltd. | Joint venture | Technology licensing and other revenue | 387 | (18 | ) | 146 | ||||||||||
nHorizon Innovation (Beijing) Software Ltd. | Joint venture | Investment | (770 | ) | - | - | ||||||||||
nHorizon Innovation (Beijing) Software Ltd. | Joint venture | Cost of revenue | (72 | ) | (45 | ) | (38 | ) | ||||||||
nHorizon Infinite (Beijing) Software Ltd. | Joint venture | Professional services | (513 | ) | (941 | ) | (156 | ) | ||||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | Acquisition of business | - | (9,500 | ) | - | ||||||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | Investment (Note 27) | (4,969 | ) | - | (7,131 | ) | |||||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | License fee (cost of revenue) | - | (455 | ) | - | ||||||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | Technology licensing and other revenue | 2,829 | 10,899 | 15,960 | |||||||||||
OPay Digital Services Limited (HK) | Associate / Key management personnel | Interest income | - | - | 323 | |||||||||||
Paycom Nigeria Limited | Associate / Key management personnel | Advertising revenue | - | - | 1,565 | |||||||||||
Powerbets Holdings Limited | Joint venture | Technology licensing, advertising and other revenue | - | 4,369 | 2,210 | |||||||||||
Powerbets Holdings Limited | Joint venture | Investment | (310 | ) | - | - | ||||||||||
StarMaker Interactive Inc. | Associate / Key management personnel | Investment | - | (30,000 | ) | - | ||||||||||
StarMaker Interactive Inc. | Associate / Key management personnel | Professional services | 16 | 175 | 150 | |||||||||||
Wisdom Connection III Holding Inc. | Key management personnel | Other revenue | - | - | 8 | |||||||||||
Wisdom Connection III Holding Inc. | Key management personnel | Disposal of shares in associates | - | - | 500 | |||||||||||
Following the acquisition of Opera SoftwareNorway AS, the Group and Otello Corporation ASA entered into a time-restricted Transitional Service Agreement whereby individuals from each party provided support to one another in line with historical activity. These activities were tracked and invoiced based on actual cost, which have resulted in only minimal net payments. As of December 31, 2019, the net of receivables and payables was immaterial.
Note 31 Net income (loss) per share
NOTE 29. | NET INCOME PER SHARE |
Basic net income (loss) per share is calculated by dividing the net income (loss) for the year attributable to ordinary equity holders of Opera Limited by the weighted average number of ordinary shares outstanding during the year. Diluted net income (loss) per share is calculated by dividing the net income (loss) attributable to ordinary equity holders of Opera Limited by the weighted average number of ordinary shares outstanding during the year plus the number of ordinary shares that would be issued pursuant to our employee equity program based on period-average employee equity awards. The net dilutive effect of these awards is determined by application of the treasury stock method related to the share equivalents of unrecognized share compensation expense on employee equity grants outstanding at period end.
The net income (loss) per share calculation for all periods prior to the Initial Public Offering reflects 200 million shares as outstanding, less 9.75 million shares that were surrendered by two shareholders upon completion of the IPO. As of December 31, 2018,2019, the total number of shares outstanding for Opera Limited was 218,661,519.237,826,326, each with a par value of US$0.0001.
The following table specifiestables show the income (loss) and share data used in the basic and diluted net income (loss) per share calculations:calculations.
Predecessor | Successor | |||||||||||||||||||||||||||
[Net income (loss) in US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | ||||||||||||||||||||||||
| Basic net income (loss) per share | 2016 | 2016 | 2017 | 2018 | ||||||||||||||||||||||||
Net income (loss) attributable to the owners of the parent | (8,106 | ) | (7,704 | ) | 6,064 | 35,160 | ||||||||||||||||||||||
[Net income in US$ thousands] | Year ended December 31, | |||||||||||||||||||||||||||
Basic net income per share | 2017 | 2018 | 2019 | |||||||||||||||||||||||||
Net income attributable to the owners of the parent | 6,064 | 35,160 | 57,899 | |||||||||||||||||||||||||
Issued ordinary shares at beginning of period | 190,250,000 | 190,250,000 | 190,250,000 | 190,250,000 | 190,250,000 | 190,250,000 | 220,119,343 | |||||||||||||||||||||
Effect of shares issued | — | — | — | 12,504,070 | - | 12,504,070 | 7,422,487 | |||||||||||||||||||||
Effect of treasury shares held | — | — | — | (133,681 | ) | - | (133,681 | ) | (2,913,330 | ) | ||||||||||||||||||
Basic weighted-average number of ordinary shares in the period | 190,250,000 | 190,250,000 | 190,250,000 | 202,620,388 | 190,250,000 | 202,620,388 | 224,628,500 | |||||||||||||||||||||
Basic net income (loss) per share, US$ | (0.043 | ) | (0.040 | ) | 0.032 | 0.174 | ||||||||||||||||||||||
Basic net income per share, US$ | 0.03 | 0.17 | 0.26 | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||||
Predecessor | Successor | |||||||||||||||||||||||||||
[Net income (loss) in US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | ||||||||||||||||||||||||
| Diluted net income (loss) per share | 2016 | 2016 | 2017 | 2018 | ||||||||||||||||||||||||
Net income (loss) attributable to the owners of the parent | (8,106 | ) | (7,704 | ) | 6,064 | 35,160 | ||||||||||||||||||||||
[Net income in US$ thousands] | Year ended December 31, | |||||||||||||||||||||||||||
Diluted net income per share | 2017 | 2018 | 2019 | |||||||||||||||||||||||||
Net income attributable to the owners of the parent | 6,064 | 35,160 | 57,899 | |||||||||||||||||||||||||
Basic weighted-average number of ordinary shares | 190,250,000 | 190,250,000 | 190,250,000 | 202,620,388 | 190,250,000 | 202,620,388 | 224,628,500 | |||||||||||||||||||||
Effect of employee equity grants | — | — | 2,449,186 | 6,107,813 | 2,449,186 | 6,107,813 | 4,437,167 | |||||||||||||||||||||
Diluted weighted-average number of ordinary shares in the period | 190,250,000 | 190,250,000 | 192,699,186 | 208,728,202 | 192,699,186 | 208,728,202 | 229,065,667 | |||||||||||||||||||||
Diluted net income per share, US$ | (0.043 | ) | (0.040 | ) | 0.031 | 0.168 | 0.03 | 0.17 | 0.25 | |||||||||||||||||||
In the period from January 1 to November 3, 2016, and from July 26 to December 31, 2016, restricted share unites were excluded from the diluted weighted average number of ordinary shares calculation because their effect would have been anti-dilutive.
Opera Limited, the parent, has American Depository Shares (ADSs) listed on Nasdaq, trading under the OPRA ticker symbol. Each ADS represents two ordinary shares in the parent. The table below specifies net income (loss) per ADS.
| ||||||||||||||||
Predecessor | Successor | |||||||||||||||
[Net income (loss) in US$ thousands] | Period from January 1 to November 3, | Period from July 26 to December 31, | Year ended December 31, | Year ended December 31, | ||||||||||||
| Net income (loss) per ADS, basic and diluted | 2016 | 2016 | 2017 | 2018 | ||||||||||||
Net income (loss) attributable to the owners of the parent | (8,106 | ) | (7,704 | ) | 6,064 | 35,160 | ||||||||||
ADS equivalent of basic weighted-average number of ordinary shares | 95,125,000 | 95,125,000 | 95,125,000 | 101,310,194 | ||||||||||||
ADS equivalent of diluted weighted-average number of ordinary shares | 95,125,000 | 95,125,000 | 96,349,593 | 104,364,101 | ||||||||||||
Basic net income (loss) per ADS, US$ | (0.085 | ) | (0.081 | ) | 0.064 | 0.347 | ||||||||||
Diluted net income (loss) per ADS, US$ | (0.085 | ) | (0.081 | ) | 0.063 | 0.337 | ||||||||||
[Net income in US$ thousands] | Year ended December 31, | |||||||||||
Net income per ADS, basic and diluted | 2017 | 2018 | 2019 | |||||||||
Net income attributable to the owners of the parent | 6,064 | 35,160 | 57,899 | |||||||||
ADS equivalent of basic weighted-average number of ordinary shares | 95,125,000 | 101,310,194 | 112,314,250 | |||||||||
ADS equivalent of diluted weighted-average number of ordinary shares | 96,349,593 | 104,364,101 | 114,532,833 | |||||||||
Basic net income per ADS, US$ | 0.06 | 0.35 | 0.52 | |||||||||
Diluted net income per ADS, US$ | 0.06 | 0.34 | 0.51 | |||||||||
NOTE 30. | EVENTS AFTER THE REPORTING PERIOD |
Note 32 Events after
In the reporting period from early 2020 until the date these consolidated financial statements were authorized for issue, the coronavirus (COVID-19) was classified as a global pandemic. The coronavirus did not have any impact on the consolidated financial statements for 2019. The Group continues to monitor developments closely as the COVID-19 pandemic develops and beginning in March the COVID-19 pandemic began to impact the Group’s business. This includes increased user traffic which has been offset by declines in user monetization and meaningfully reduced microlending volumes due to COVID-19 related lockdowns in our key markets. If the situation deteriorates or persists for an extended period in key geographies, the risk of a significant adverse impact to the Group’s business will increase. The impact of the COVID-19 pandemic to the Group’s business will depend on a range of factors which the Group is not able to accurately predict, including the duration and scope of the pandemic, the geographies impacted, the impact of the pandemic on economic activity and the nature and severity of measures adopted by governments. These factors include, but are not limited to:
● | Reductions or volatility in consumer demand for one or more of the Group’s products due to illness, quarantine or other travel restrictions, economic hardship, which may impact the Group’s market share. |
| ● | The deterioration of socio-economic conditions and disruptions to the Group’s operations, such as advertising sales, value of monetization partnerships, distribution partnerships, ability to collect outstanding loans and ability to launch new products. |
All of these factors may have material adverse effects on the Group’s results of operations and financial condition.
On January 10, 2019,17, 2020, the Group amendedannounced that its board of directors had approved a share repurchase program, which authorized the Company’s management to execute the repurchase of up to US$50 million of its American Depositary Shares by January 17, 2021, in any form that management may deem fit. The Company’s management launched the repurchase in February 2020 and restated its share incentive plan. The plan was adopted for the purposeas of rewarding, attracting and retaining employees of the Group. Under the amended plan,March 31, 2020, a total of 20,000,000 ordinary shares are issuable773,486 ADSs had been repurchased for US$5,490 thousand. Additional repurchases will be made from time to employees, corresponding to 10,000,000 ADSs.time in an opportunistic manner and depending on market conditions.
On January 31, 2019,24, 2020, Opera Limited and certain of its directors and officers were named as defendants in a putative class action filed in the United States District Court for the Southern District of New York: Brown v. Opera Limited. et al., Case No. 20-cv-674 (S.D.N.Y.). The complaint asserts violations of Sections 11 and 15 of the Securities Act of 1933, Section 10(b) and 20(a) of the Securities and Exchange Act of 1934, and SEC Rule 10b-5 promulgated under the Securities Exchange Act of 1934. The complaint alleges that the Company made material misstatements and/or omissions during the period from July 27, 2018 through January 15, 2020. The allegations relate to statements regarding the Company’s sustainable growth and market opportunity for its browser applications and the alleged business practices of certain loan service applications owned or controlled by the Company. The complaint seeks unspecified damages on behalf of all person and entities who purchased or acquired the Company’s (i) American depositary shares (“ADSs”) pursuant and/or traceable to the Company’s initial public offering commenced on or about July 27, 2018 (the “IPO” or “Offering”); and/or (ii) Opera securities between July 27, 2018 and January 15, 2020, both dates inclusive. Several individuals have sought to be appointed as the lead plaintiff to represent the putative class, but no lead plaintiff has been appointed yet. As the case remains in its preliminary stages, the Group entered into a new lease agreement for our Oslo headquarters. The new lease commencesis not able to express an opinion on November 15, 2019, while the leaselikelihood of any unfavorable outcome or any estimate of the current office terminates on November 30, 2019. Minimum lease payments under the new lease are US$278 thousand per year until November 14, 2024, the endamount or range of the lease term.any potential loss. The Company intends to vigorously defend itself against these claims.
On February 8, 2019,January 27, 2020, the Group announced the completion of the acquisition of the Estonian-based company Pocosys, as well as an agreement to acquire Pocopay, its sister company, which holds a payment institution license and provides financial services in the European Union. Until the acquisition of Pocopay is completed, its share repurchase program by having successfully repurchasedOpera has a totalcommercial relationship with Pocopay. Based on a preliminary allocation of 1.5the purchase price of US$5.0 million, ADSs, representing 3.0 million shares.goodwill was measured at US$3.8 million. The average price paid forGroup did not assume material liabilities in the 1.5 million ADSs was US$7.08 (US$7.10 including commissions).business combination.
Subsequent to February 21, 2019,25, 2020, the firstsecond exercise period of the Group’s equity program took place, including RSUs that had vested on January 1, 2017, and January 1, 2018.2020. A total of 1,728,4921,121,000 RSUs were exchanged for an equivalent number of ADSs in Opera Limited.
On February 25, 2019, Kunlun Tech LimitedMarch 17, 2020, the Group entered into a share transferan agreement with Golden Brick Capital Private Equity Fund I L.P., pursuant to which Golden Brick transferred all its 8,500,000 ordinary sharesOPay Digital Services Limited, a subsidiary of Opera Limited to Kunlun TechOPay Limited, for the sale of 100% of the shares in the Group's subsidiary Blue Ridge Microfinance Bank Ltd. The consideration was US$5.0 million, subject to certain price adjustment clauses. Completion of US$34.8 million.the transaction is pending change of control approval by the Central Bank of Nigeria.
F-63