Falanx Group Limited - Final Results
29/09/2022 07:00
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RNS Number : 0705B Falanx Group Limited 29 September 2022
This announcement contains inside information for the purposes of Article 7 of
the UK version of Regulation (EU) No 596/2014 which is part of UK law by
virtue of the European Union (Withdrawal) Act 2018, as amended ("MAR"). Upon
the publication of this announcement via a Regulatory Information Service,
this inside information is now considered to be in the public domain.
Falanx Group Limited
("Falanx", "Group" or "the Company")
Final Results
Falanx Group Limited (AIM: FLX), the AIM listed provider
of cyber security services, is pleased to announce its audited results
for the year-ended 31 March 2022.
Financial highlights
• Revenues £3.54m (2021: £3.12m), an increase of 14%
• Closing Monthly Recurring Revenues ("MRR") 25% greater than prior year
• Gross margin increased to 41% (2021: 33%) following the rationalisation of
cyber security monitoring technology platform and much improved professional
services utilisation
• Reduction in adjusted EBITDA* loss to £1.27m (2021: £1.35m)
• Loss per share from continuing operations 0.37p (2021: 0.75p)
• Overall profit of £1.48m (2021: loss £3.55m) following the disposal of the
Assynt Strategic Intelligence division ("Assynt") in October 2021
• £2.5m of debt raised from BOOST&Co
• Cash balances at 31 March 2022 £3.5m (2021: £0.55m), the vast majority of
HMRC COVID-19 backlog paid down in the year
• Shareholders' funds £4.35m (2021: £2.73m)
Operational Highlights
• Strategic focus on the high growth cyber security market including expansion
of sales and marketing capabilities, product development and automation
capabilities
• Restructured sales function with the creation of dedicated team focussed on
winning new clients, channel growth and creation of further recurring revenue
streams
• Initial launch of mass market Cyber Security Assessment tool - f:CEL (Cyber
Exposure Level)
Post Period Highlights
• Strong growth in sales pipeline (**) to £6.0m as at 22 September 2022 (1
April 2022: £4.1m), including MRR pipeline increasing in the same period from
£1.7m to £4.0m
• 18% growth in sales orders for core offensive and defensive services in the
first five months of FY23 compared to FY22
• Ongoing investment in focussed and controlled sales growth
• Launch of new Retained Incident Response ("R-IR") and Continuous Vulnerability
Scanning ("CVS") services
Mike Read, Chief Executive, said:
"We are delighted that the demand for our cyber security services continues to
grow. In addition to the recent high profile cyber security concerns, we are
seeing even more attacks on Small to Medium size Enterprises ("SMEs"). These
SMEs often receive initial support via their trusted IT providers (who are not
Cyber Security specialists) and hence these are the channel for our cyber
services. Therefore, we have added some key new partners to our existing base
to expand our reach into these IT providers. This, together with strengthened
marketing, increased PR and hard work from the sales and marketing team, has
resulted in a significant increase in our pipeline and today it is in excess
of £6.0m - 2/3rds of which is for our MDR Services.
"Within the Company, it has been a challenging backdrop as we came through the
pandemic, sold our Assynt strategic intelligence business and raised our first
significant round of debt. This has allowed us to focus on the cyber business
and reposition accordingly. The Falanx team is very focused on growth in a
buoyant market and, whilst H1 of FY23 revenues are expected to be similar to
the same period in FY22, orders for our core services are already up by over
18% and we are expecting further growth in orders for the second half of FY23,
and with ongoing significant growth thereafter.
"We are well financed and expect our existing financial resources to be
sufficient to see us through to profitability."
(*) Adjusted EBITDA is a non-IFRS headline measure used by management to
measure the Group's and divisional performance and is based on operating
profit before the impact of financing costs, IFRS16, share based payment
charges, depreciation, amortisation, impairment charges and highlighted items.
IFRS16 is excluded so that the underlying rental costs of the premises are
reflected in this metric.
(**) Pipeline is the total contract value of all current sales prospects with
a potential to close in the current financial year.
The Company will post its report and accounts onto its website (www.falanx.com
(http://www.falanx.com) ) for the financial year ended 31 March 2022 together
with its notice of AGM shortly and these will be available to download in
accordance with AIM Rule 20.
Enquiries:
Falanx Group Limited Via IFC
Alex Hambro Chairman
Mike Read CEO
Ian Selby CFO
WH Ireland Limited + 44 (0) 207 220 1666
Mike Coe/ Sarah Mather (Nomad)
Joanna Hunt (Corporate Broking)
IFC Advisory Ltd +44 (0) 203 934 663
Financial PR & IR
Graham Herring / Zach Cohen
About Falanx
Falanx Group Limited, is a cyber defence provider providing enterprise class
defensive and offensive security solutions to SME. For further
information: http://www.falanx.com/ (http://www.falanx.com/)
Chairman's Statement
I am pleased to present your Company's Annual Report & Accounts for the
year ended 31 March 2022 ("FY22").
I am delighted to report that the high growth cyber sector market became
Falanx's sole focus through the successful disposal for cash of our non-core
Assynt business intelligence division in October 2021 for an enterprise value
of £4.6m. I am also pleased to report that our cyber revenues have resumed
their growth trend in the period under review, along with improved gross
margins. We are also now well financed with the cash resources needed to
fund our organic growth plans.
In last year's annual report, I highlighted the enormous opportunity for
Falanx in cyber security, with its powerful social, technological, economic
and regulatory drivers, especially with the growing threat of ransomware
attacks and data thefts. Cyber security attacks have increased by over 30% in
the last year and are showing no signs of receding. These factors, combined
with recessionary pressures, create an environment where cyber-attacks and
cybercrime will become even more prevalent, and organisations must step up
their defences or suffer the potentially devastating financial and
reputational consequences. Whilst inevitably exposed to the issues of the
wider UK economy, we expect that this growing threat will require
organisations to further invest in cyber security services and technologies.
Falanx is very much a service, as opposed to a technology development,
company. Our focus is therefore on delivering client solutions as opposed to
investing in the development of new technologies.
Falanx has become a trusted cyber security corporate advisor. This has been
achieved by providing incisive and objective assessments of an organisations'
cyber resilience position. In turn, this often results in us providing clients
with monitoring services on a recurring basis under long term contracts
thereby increasing the Company's contractual monthly recurring revenues.
The successful disposal of the Assynt division has provided us with the
capital to fulfil our expansion plans for our cyber security business,
specifically investing in our sales and marketing capabilities, product
development and infrastructure to support this high growth opportunity. Our
cash position has been further strengthened by the £2.5m loan received from
BOOST&Co in October 2021, and all of this has been achieved without
shareholder dilution.
Whilst our underlying cyber business is fundamentally solid, the significant
investments we have been making and will continue to make, as outlined above,
are already making a difference in terms of additional sales, creating a wider
and more effective partner base as well as innovative service developments. We
are optimistic that this investment will generate significant growth in the
next year as sales momentum builds.
Approved by the Board on 28 September 2022 and signed on its behalf by
A Hambro
Chairman
Chief Executive Officer's Report
Falanx is a provider of Offensive and Defensive cyber security services, which
protect around 400 customers worldwide. Customers include Managed Service
Providers ("MSPs"), IT providers, public sector organisations, large
multinationals and SMEs.
Attack
These are our Offensive Services and are primarily centred around Penetration
Testing / ethical hacking ("PT"). Our comprehensive portfolio of PT services
covers a wide range of skills and techniques which we use to emulate potential
attackers looking for vulnerabilities in our client's infrastructure. These
services are provided under a traditional professional services business model
with a mix of day rate and fixed price contracts. This service benefits from a
high level of repeat business, long term relationships and has negligible
churn. We have provided these services to nearly 400 customers over the last
four years, many on an annual repeat basis.
Defend
Our Defensive managed services are provided by our Security Operations Centre
("SOC") based in Reading. The SOC operates a 24/7/365 service, continually
watching our customers' IT estates, looking for unusual items which may be a
sign of a cyber-attack or data theft. To achieve this, we monitor billions of
client's log events, such as a user logon, each week and distil this down, via
AI and our assembled skills, to the few actionable items which must be alerted
to the client. Our growing client base, and the move to the online world has
grown the number of log events by over 150% compared to previous years. This
service is supplied on a monthly recurring basis and has a largely fixed cost
base of people and infrastructure with some licence fees as a function of
client volumes.
Protect
Through both our Offensive and Defensive services, we help our customers to
protect themselves against cyber-attacks. Through the use of either or a
combination of both Attack and Defend, we inform our customers as to their
strengths and weaknesses, so that they can be better protected against hostile
threats. To help SMEs understand their exposure to these threats, we
introduced our Cyber Security posture scoring, f:CEL (the falanx Cyber
Exposure Level). Through this self-service evaluation tool, customers can
understand their weaknesses and see recommendations as to what they can do to
improve their posture, all in a matter of minutes.
Sales performance
Our sales performance in FY22 was achieved with a smaller team than in
previous years, and despite this, sales orders were broadly similar at £3.3m
(2021: £3.4m). Individual sales productivity increased by over 15%, and
average spend per customer grew by 5%. In total, the Company received 369
(2021: 384) individual sales orders from 205 customers (2021: 225) out of a
wider active client base of around 400. This includes 45 new clients won in
the year. We have increased the number of clients who have been using both
Offensive and Defensive services, and this remains an opportunity for
significant further contract wins for monthly recurring revenue ("MRR")
generation. The team was expanded towards the end of the financial year, and
this is discussed below in the sales execution strategy.
Operational performance
Following the development of our XDR / MDR service ("Triarii") last year, we
migrated our client base to it from previous platforms during the first half
of FY22. This, combined with a stronger sales performance and much improved
utilisation levels, enabled our cyber security business to record an adjusted
EBITDA profit in the first half of FY22 following a loss in FY21. Since then
(and as a result of the proven baseline profitability model for cyber) we are
carrying out our planned investment in the cyber business.
The SOC experienced some managed churn during the year, typically from older
contracts which required on-premises solutions as opposed to our cloud-based
strategy. This technology consolidation enabled both a much more efficient
service and a greatly enhanced client experience. We have now moved to a
predominantly cloud-first environment, and we continue to develop our offering
as the market evolves. We are now both well aligned with the market and able
to push ahead with our high growth plans.
Cyber security growth strategy
The solid base that we have built for future growth is fully supported by the
financial resources generated from the disposal of Assynt in October 2021 and
the facility provided by BOOST&Co. This has allowed us to invest in the
high growth phase, with significant additional resources across the business,
but particularly in sales and marketing. Our goal is to more than double the
size of our business organically, and we have adopted the strategies set out
below to achieve this goal.
Sales execution strategy
We have operated two functional sales areas - the pre-existing team as
Business as Usual ("BAU"), which is predominantly direct business, and a new
team assembled under the Net New Names ("NNN") designation. This team is
dedicated to winning new clients via both channel and direct models and their
key task is to grow our Defensive SOC services leading to enhanced MRR. Nicola
Hartland, an established cyber security entrepreneur, joined us towards the
end of the financial year, to lead the NNN team and they have been solidly
building an incremental pipeline of opportunities.
Our Partner Engagement Model has been restructured with the objective of
generating regular deal flow across the mix of our Tier 1 and Tier 2 partners.
Tier 1 partners generally require a higher level of attention, and our aim is
to target £1m business per annum from each such client, limited to six
overall. Tier 2 partners provide us with similar sales opportunities, but
these are likely to be smaller in volume. We are actively trialling the use of
co-funded resources within partners to demonstrate their commitment to
expanding Falanx, thereby creating a larger and more diverse sales team
dedicated to selling Falanx services. Through this restructured partnering
model, we are no longer dependent on a single channel opportunity to drive our
growth, instead spreading that opportunity across a broader network.
NNN's focus on partners is specifically to grow MRR from SOC and associated
services with an approximate 75% / 25% emphasis on Defensive (SOC & MRR)
versus Offensive (i.e., Penetration Testing) services - almost the exact
opposite (and therefore complementary) to our BAU team.
The use of f:CEL as an on-ramp tool, as well as a revenue opportunity in
itself, is being well received for its completeness, ease of use and
digestible output and recommendations. We have begun development of f:CEL
'2.0', in which we will bring together all customer feedback from engagements
so far. This will create an even more complete product and compelling use-case
across a variety of industry sectors, including insurance and IT services and
the sale of our cyber security offerings through channel partners.
As we focus in on our core offerings (SOC and PT), we have chosen to exit from
any low-margin, non-core legacy consulting contracts and we expect to replace
their margins from further SOC sales.
Service Innovation Strategy
As a service business, we focus on service innovation and delivery excellence
and not on the development of proprietary technology. This allows us to use
the most appropriate technology to deliver for our clients, whilst not
carrying the development overhead. This means that we can invest in client
delivery as opposed to developing solutions which are already provided by
(often much larger) technology companies. We will develop functionality in
certain niche areas (for example f:CEL), although this is built on standard
technologies. As we are technology agnostic, we can explore additional managed
services with new, strategic partnerships as well as opportunities to generate
significant returns.
We are further expanding our services portfolio based on customer demand and
feedback to drive incremental revenues. This includes the previously announced
Continuous Vulnerability Scanning ("CVS") service and the Retained Incident
Response ("R-IR") services. These complement our ad-hoc IR service and provide
SLAs and guarantee our availability to support our customers when an incident
occurs.
Our targeted MRR growth is planned to move the SOC to being cash generative on
a stand-alone basis, and this will improve our overall margins. Our SOC
currently has the necessary infrastructure (typically with a fixed cost), and
therefore significant operational leverage, and we expect incremental sales to
further improve performance. We are looking to make further automation
investments aimed at improved client delivery and margin improvement.
As a knowledge-based business, we continue to attract and retain experienced
and expert resources across all functions of the business. All attracted by
the attractive growth opportunities in front of us as well as our excellent
culture which offers support, training and career progression opportunities to
people with much sought-after skills.
Post Period update
The NNN team is now established and consequently the overall cyber sales
pipeline is now building on a weekly basis, and it is already at a record
value of £6.0m (£4.1m on 1 April 2022). This also represents growth of 46%
in the current financial year, and very significantly the pipeline is now 66%
MRR compared to 40% in April 2022 (and 17% in April 2021). Our team has a high
energy level and a strong execution focus and as well as building new
partnerships, our existing relationships have been revitalised and expanded.
Sales orders for our core services in the first five months of FY23 were 18%
ahead of the same period in FY22. This includes five new MDR deals which we
sold, with a total minimum contract value of over £0.2m, with the potential
for significant expansion and extension beyond this. Three of these MDR deals
were signed in August 2022 when we also signed up two new Tier 1 partners.
Furthermore, we have also won our first four clients for CVS and also sold
more than 1000 f:CEL licenses.
Outlook
Our previous investment in Triarii has transformed our customer delivery in
the SOC. We have a highly relevant set of services which are well aligned to
client needs in a growing market. Our focus is now on growing market share,
and we are achieving this through indirect and direct routes. Since Falanx
became a pure play cyber business in October 2021, we have invested in an
expanded sales and marketing capability, and this is now starting to deliver
results. We have new partners on board and they are already generating sales
from a strong pipeline of potential business. Our penetration testing
business remains strong, and we have a growing customer base of around 400
organisations, which provides us with a good basis for cross selling of MRR
generating services. With the conversion of this pipeline, which is now
underway, and the planned cessation of certain spends incurred in the first
half of FY23, we expect an improving financial performance in the second half
of FY23.
Falanx is now firmly in growth mode, and our objective, which we are confident
we will achieve, is to generate very significant, organic growth over the
coming months and years. We are well financed and expect our existing
financial resources to be sufficient to see us through to profitability.
Approved by the Board on 28 September 2022 and signed on its behalf by
M D
Read
Chief Executive Officer
Chief Financial Officer's Report
Financial Review Continuing Operations
Revenue
Group revenues increased by 14% to £3.54m (2021: £3.12m). This was partly
due to the recovery from the COVID-19 period and the consequential significant
increase in professional services revenues which benefitted from much stronger
utilisation levels. Recurring revenues from monitoring contracts were
consistent with the prior year at £0.86m. Contract wins for monitoring
business increased towards the end of FY22, with monthly recurring revenues
growing by approximately 25% across FY22. This was despite a deliberate move
away from legacy 'on premises' contracts serviced under the previous
monitoring platforms to an all-cloud delivery on Triarii.
The pipeline of potential sales increased from £2.8m in August 2021, to
£4.1m at the start of April 2022 and is now approximately £6.0m. The
pipeline is the total contract value of all current sales prospects with a
potential to close in the current financial year.
Cost of sales
This comprises of both people cost related to the delivery of customer
services related to penetration testing, SOC monitoring and consultancy, as
well as external software licencing and data services related to their
delivery.
Gross margins
These strongly recovered in the year to 41% from 33% in FY21. This reflected
much improved professional services utilisation following the end of COVID-19,
and the benefits of moving to a single monitoring platform with lower external
licence fees.
Operating costs
£'000 31 March 2022 31 March 2021
Gross margin 1,443 1,017
Underlying operating costs* (2,715) (2,367)
Adjusted EBITDA loss (1,272) (1,350)
*Analysed as
Sales and distribution 1,706 1,463
Corporate 1,009 904
2,715 2,367
Underlying operating costs, were £2.71m (2021: £2.37m). The prior year
benefitted by approximately £0.2m from COVID-19 related cost reductions
(including salary sacrifice schemes and furlough), and the balance of the
increase arose from investment in sales expansion post the disposal of Assynt
in October 2021. Average headcount was 51 (2021: 55).
Share option charges
Share option charges were £0.02m (2021: £0.18m) with the comparative period
reflecting the issue of share options under the COVID-19 salary sacrifice
scheme.
Adjusting income items
As in previous years, highlighted items to credit adjustment on rental costs
to exclude the impact of IFRS 16 on the Reading lease of £108,000 (2021:
£108,000), with the prior year reflecting some restructuring which was mainly
as a result of COVID-19.
Adjusted EBITDA
Adjusted EBITDA loss for the year was £1.27m
(2021: £1.35m) after adjusting for the items highlighted above. Overall
reported EBITDA loss (excluding share option charges) was £1.16m (2021:
£1.34m) after adjusting for highlighted income.
Depreciation, amortisation, and impairment
This charge was £0.6m (2021: £1.9m). Customer intangible amortisation was
slightly reduced to £0.25m (2021: £0.29m) following the completion of the
amortisation of Securestorm. The impairment of goodwill (£0.13m) related to
that acquisition of Securestorm being impaired in full, and the prior period
reflected the £1.44m impairment of the investment in Furnace Technologies
which was spun out of Falanx in December 2019. The amortisation of the right
of use asset represents IFRS16 charges arising from the Reading office lease
and was £108,000 in each year.
Operating loss
The operating loss reduced to £1.78m (2021: £3.45m) with £1.44m of the
reduction arising from the impairment of Furnace which was reflected in the
previous year.
Financing costs
Net financing costs were £0.2m (2021: £0.03m) of which £0.17m represented
interest payments (including amortised costs) on the £2.5m loan drawn down
between August and October 2021, with the remainder representing financing
costs associated with IFRS 16: Leases.
Discontinued operations
On 6 October 2021 the Group disposed of the Assynt strategic intelligence
division to focus on growing the cyber security division. The division
recorded revenues of approximately £1.03m during the period (2021: £2.12m)
and an adjusted EBTIDA loss of approximately £0.05m (2021: profit £0.10m).
The purchaser was an organisation backed by US private equity investors. The
terms of the transaction were an enterprise value of £4.6m payable in cash,
adjusted for approximately £0.5m of working capital (mainly related to
deferred incomes). Of this £0.35m is held in escrow until October 2022, and
as of the date of this report the board is not expecting any claim against
this. Overall, following advisory transaction costs including contingent
success related items based on value achieved, the transaction produced a
profit of £3.46m.
Result for the year
The overall result for the year was a profit of £1.48m (2021: loss £3.55m)
due to the gain on the disposal of Assynt. Earnings per share were 0.28p
(2021: loss 0.77p). The loss per share from continuing operations was 0.37p
(2021: 0.75p).
Statement of Financial Position
Non-current assets
Goodwill arising on the acquisitions of Falanx Cyber Defence, First Base and
Securestorm was £1.72m (2021: £1.85m) with the difference relating to the
impairment of the entire balance of £0.13m related to Securestorm due to its
small customer base and non-core nature of consultancy services.
Customer relationships from First Base were carried at a total of £1.42m
(2021: £1.68m) with the reduction mainly arising from the 10-year straight
line amortisation of this asset. The Group's non-current assets also include
the future value of the five-year lease (commenced July 2019) of the Reading
premises of £0.25m (2021: £0.35m). A creditor of £0.15m (2021: £0.25m) is
carried to reflect future liabilities and £0.10m (2021: £0.09m) are included
in current liabilities. Fixed assets which include furniture, plant and
equipment were £0.10m (2021: £0.16m).
Working capital
Trade receivables fell from £0.68m to £0.52m with the prior period
reflecting Assynt balances. Cash collections were strong, and average debtor
days for that division were 31 vs 47, and no bad debts were experienced in the
year.
Other debtors (including prepayments) increased to £0.67m (2021: £0.39m) due
to the £0.35m held in escrow till October 2022 relating to the disposal of
Assynt.
Trade and other payables fell to £0.80m (2021: £1.59m) mainly due to the
repayment of £0.62m HMRC deferred payments from the prior year in response to
COVID-19 as well as the impact of the disposal of Assynt. HMRC is fully in
terms on all liabilities, both current and agreed deferred payment plans, with
only trivial amounts remaining outstanding on the latter.
Contract liabilities (deferred incomes) fell from £1.11m to £0.53m due to
the disposal of the Assynt, which had a high level of advance payments from
larger customers which were received before the year ended 31 March 2021.
Contract liabilities in the ongoing cyber security business increased from
£0.46m to £0.53m reflecting the growth in business volumes.
Non-current liabilities
Between August 2021 and October 2021, the Group drew down a loan of £2.5m
from BOOST&Co. The principal terms of the loan are:
· 11% interest rate, secured over Group's assets fixed and floating
charge
· Amortisation commencing over 4 years from October 2022
· No covenants or equity components
It is recorded at amortised cost under IFRS, and this increased the overall
non-current liabilities from £0.31m to £2.25m.
Capital structure
During the year approximately 0.5m employee share options were exercised and
consequently there were approximately 526m shares in issue at 31 March 2022.
No other equity issues took place during the year.
Following the general meeting held in February 2021 and the reduction in the
share premium account, a special non distributable reserve (the "2022
Liabilities Reserve") was credited with £1.0m. This is expected to be
released back into retained losses in December 2022.
Overall, on 31 March 2022 the Company had approximately 76.7m (2021: 83.9m)
employee share options and warrants outstanding representing approximately 14%
of the issued capital.
The Group continues to rationalise legal entity structure to best align it
with the current opportunity as well as to reduce costs and streamline tax
management. The Group's incorporation status as a BVI entity is a legacy of
its pre 2013 IPO business plan and the Board will review moving it to a UK
status at an appropriate time, considering the significant professional fees
which would be associated with such a change. The Group's memorandum and
articles of association were revised in March 2019 to align with UK
incorporated entities more closely. The Group is fully resident and registered
in the UK from a tax perspective. Since the disposal of Assynt, the Group only
operates through two main legal entitles as opposed to seven before, including
four overseas companies.
Total equity
The profit on the disposal of Assynt enabled the total equity position to
increase to £4.35m (2021: £2.73m).
Statement of cash flows
Cash balances were significantly strengthened to £3.48m (2021: £0.55m) by
the disposal of Assynt for cash and the drawdown of the loan from BOOST&Co
referenced above. This enabled a return to a normalised working capital
position following the COVID-19 period and the repayment of HMRC liabilities.
Overall cash performance remains closely correlated to operational EBITDA.
Post Balance Sheet Events
On 22 June 2022, the Company signed a deed of variation for the lease for the
premises in Reading. The lease was varied to delete the break option and
reduce the principal rent by 50% for the period from 1 August 2022 to 31 July
2023.
I R Selby
Chief Financial Officer
Key Performance Indicators for continuing operations
Performance Indicator Description Why measured 2022 2021 Comment
Group revenue - £'m Changes in total revenue compared to prior year Revenue growth gives a quantified indication of the rate at which the Group's £3.54 £3.12 Recovery in professional services revenues since Covid 19
business activity is expanding over time
Gross margin Percentage of total revenue retained by the Group after direct costs deduction Provides an indication of sales profitability and proportion of revenue 40.7% 32.6% Stronger professional services utilisation and single cyber security
available to cover other running costs monitoring platform
Adjusted EBITDA - £'m A management measure of profits adjusted for non-underlying items such as Underlying performance of business operations £(1.27) £(1.35) Investment in sales expansion in the year offset by greater revenues
restructuring, and acquisition related and excluding the impact of IFRS 16
Cash conversion Operational cash flow / EBITDA Measures the ability of the Group to convert profit into cash and correlation 81% 29% Move to a normal working capital profile since the end of Covid 19
between EBITDA and cash performance
Recurring revenue % Recurring revenue lines / total revenue Shows visibility of recurring revenue growth rate 31% 35% Growth in professional services revenues in year lowered mix
Monthly recurring revenue ("MRR") - £'m Revenue from the provision of monitoring and similar services on a recurring Shows predictable monthly metrics to track progress against objective of £0.08 £0.06 Contract wins
basis in the final month of each financial year. becoming profitable solely on recurring revenue
Number of customers ordering Number of customers invoiced over the preceding 12 months Measure of customer concentration (includes acquired customer base) 205 225 Total live client base of approximately 400 ordering customers
Headcount Average headcount during the year Shows average number of employees in the year 51 55
Contract liabilities (deferred income) - £'m Contracted and invoiced revenue yet to be recognised (deferred income) Shows visibility into invoiced amounts to be recognised in future periods £0.53 £0.46 Growth in business and deal timing.
Consolidated income statement
for the year ended 31 March 2022
2022 2021
Note £ £
Revenue 4 3,542,308 3,119,724
Cost of sales (2,099,732) (2,102,787)
Gross profit 1,442,576 1,016,937
Administrative expenses (3,220,878) (4,472,095)
Operating loss 6 (1,778,302) (3,455,158)
Analysis of operating loss
Operating loss (1,778,302) (3,455,158)
Share option expense 17,839 173,636
Depreciation and amortisation 465,417 503,895
Impairment of goodwill 130,347 -
Impairment of Furnace equity and debt investments - 1,440,000
Highlighted income 5.1 (107,285) (12,893)
Adjusted EBITDA loss 5.2 (1,271,984) (1,350,520)
Finance income 104 4
Finance expense (201,568) (32,574)
Finance expense - net (201,464) (32,570)
Loss before income tax (1,979,766) (3,487,728)
Income tax credit 7 8,479 -
Loss for the year from continuing operations (1,971,287) (3,487,728)
Discontinued operations
Profit / (Loss) for the year from discontinued operations 8 3,455,869 (64,212)
Profit / (Loss) for the year 1,484,582 (3,551,940)
Loss per share from continuing operations
Basic loss per share 9 (0.37) p (0.75) p
Diluted loss per share 9 (0.37) p (0.75) p
Consolidated statement of comprehensive income
for the year ended 31 March 2022
2022 2021
£ £
Profit / (Loss) for the year 1,484,582 (3,551,940)
Other comprehensive income:
Re-translation of foreign subsidiaries - 5,403
Exchange differences recycled to the income statement on disposal of business 109,030 -
Other comprehensive income for the year, net of tax 109,030 5,403
Total comprehensive income for the year 1,593,612 (3,546,537)
Attributable to:
Owners of the parent 1,593,612 (3,546,537)
Total comprehensive income for the year 1,593,612 (3,546,537)
Items in the statement above are disclosed net of tax. The income tax relating
to each component of other comprehensive income is disclosed in note 7.
Consolidated statement of financial position
as at 31 March 2022
2022 2021
Note £ £
Assets
Non-current assets
Property, plant and equipment 104,352 155,831
Intangible assets 3,262,662 3,702,840
Right of use asset 254,290 363,271
3,621,304 4,221,942
Current assets
Trade and other receivables 1,192,220 1,076,216
Cash and cash equivalents 3,483,063 545,321
4,675,283 1,621,537
Total assets 8,296,587 5,843,479
Equity
Capital and reserves attributable to equity holders of the Company
Share capital 4,043,194 4,033,161
Translation reserve - (107,777)
Shares based payment reserve 703,151 747,243
2022 liabilities reserve 1,000,000 1,000,000
Accumulated losses (1,397,476) (2,943,989)
Total equity 4,348,869 2,728,638
Liabilities
Non-current liabilities
Deferred tax liability - 9,529
Lease liability 149,691 252,874
Borrowings 10 2,094,739 42,129
Other payables - 5,409
2,244,430 309,941
Current liabilities
Trade and other payables 804,908 1,592,715
Contract liabilities 4 529,496 1,108,317
Lease liability 103,182 95,997
Borrowings 10 265,702 7,871
1,703,288 2,804,900
Total liabilities 3,947,718 3,114,841
Total equity and liabilities 8,296,587 5,843,479
Consolidated statement of changes in equity
for the year ended 31 March 2022
Share Accumulated Translation Share based 2022
Note capital losses Reserve payment reserve Liabilities reserve Total
£ £ £ £ £
Balance at 1 April 2020 17,903,427 (13,408,080) (113,180) 587,325 - 4,969,492
Loss for the year - (3,551,940) - - - (3,551,940)
Re-translation of foreign subsidiaries - - 5,403 - - 5,403
Transactions with owners:
Capital reconstruction (15,000,000) 14,000,000 - - 1,000,000 -
Issue of share capital 1,247,600 - - - - 1,247,600
Costs of issue of share capital (117,866) - - - - (117,866)
Share based payment charge - - - 175,949 - 175,949
Forfeited share options reversed through reserves - 16,031 - (16,031) - -
Balance at 31 March 2021 4,033,161 (2,943,989) (107,777) 747,243 1,000,000 2,728,638
Profit for the year - 1,484,582 - - - 1,484,582
Re-translation of foreign subsidiaries - - (1,253) - - (1,253)
Exchange differences recycled to the income statement on disposal of business - - 109,030 - - 109,030
Transactions with owners:
Issue of share capital 10,033 - - - - 10,033
Share based payment charge - - - 17,839 - 17,839
Forfeited share options reversed through reserves - 61,931 - (61,931) - -
Balance as at 31 March 2022 4,043,194 (1,397,476) - 703,151 1,000,000 4,348,869
The share capital account represents the amount subscribed for share capital,
net of share issue expenses. Share issue expenses comprise the costs in
respect of the issue by the Company of new shares.
Retained earnings represents the cumulative earnings of the Group attributable
to the owners of the parent.
The translation reserve represents the cumulative movement in the translation
of foreign subsidiaries into the presentation currency.
The share option and warrant reserve represents the cumulative share option
and warrant charges.
Consolidated cash flow statement
for the year ended 31 March 2022
2022 2021
Note £ £
Cash flows from operating activities
Profit / (loss) before tax 1,475,052 (3,551,940)
Adjustments for:
Depreciation 64,275 75,753
Amortisation and impairment of intangibles 305,538 348,748
Amortisation of right of use assets 108,982 108,981
Impairment of goodwill 130,347 -
Impairment of investment and receivable in Furnace - 1,440,000
Share based payment 17,839 175,949
Gain on disposal of subsidiaries 8 (3,498,102) -
Amortisation of borrowing costs 23,659 -
Net finance expense recognised in profit or loss 178,081 32,569
(1,194,329) (1,369,940)
Changes in working capital:
(Increase) / Decrease in trade and other receivables (290,025) 1,093,419
Decrease in trade, contract liabilities and other payables (749,745) (126,756)
Cash used in operations (2,234,099) (403,277)
Interest paid (9,745) (3,774)
Net cash used in continued operating activities (2,243,844) (407,051)
Cash flows from investing activities
Interest received 104 4
Acquisition of property, plant and equipment (13,315) (36,161)
Expenditure on development cost - (157,779)
Proceeds on disposal of subsidiaries, net of cash disposed 3,163,674 -
Net cash generated from / (used in) investing activities 3,150,463 (193,936)
Cash flows from financing activities
Repayment of lease liabilities (95,998) (89,313)
Interest on lease interest (22,114) (28,799)
Proceeds from borrowings 2,500,000 50,000
Repayment of borrowings (7,906) -
Loan transaction costs (205,347) -
Interest paid on borrowings (146,291) -
Proceeds from issue of shares 10,033 1,247,600
Costs of share issuance - (117,866)
Net cash generated from financing activities 2,032,377 1,061,623
Net increase in cash equivalents 2,938,996 460,636
Cash and cash equivalents at beginning of year 545,321 79,282
Foreign exchange (losses)/gains on cash and cash equivalents (1,254) 5,403
Cash and cash equivalents at end of year 3,483,063 545,321
Notes to the consolidated financial statements
for the year ended 31 March 2022
1. General information
Falanx Group Limited (the "Company" or "Falanx") and its subsidiaries
(together the "Group") operate in the cyber security market.
The Company is a public limited company which is listed on the AIM Market of
the London Stock Exchange and is incorporated and domiciled in the British
Virgin Islands. The address of its registered office is PO Box 173, Kingston
Chambers, Road Town, Tortola, British Virgin Islands. The UK registered office
The Blade, Abbey Square, Reading, RG1 3BE.
2. Summary of significant accounting policies
The principal accounting policies applied in the preparation of these
consolidated financial statements are set out below. These policies have been
applied consistently to all the years presented unless otherwise stated.
2.1 Basis of preparation
These consolidated financial statements have been prepared in accordance with
UK adopted International Accounting Standards. The functional and
presentational currency for the financial statements is Sterling. The
financial statements have been prepared under the historical cost convention,
as modified by financial assets and financial liabilities at fair value
through profit or loss.
The preparation of financial statements in conformity with IFRS requires the
use of certain critical accounting estimates. It also requires management to
exercise its judgement in the process of applying the Group's accounting
policies. The areas involving a higher degree of judgement or complexity, or
areas where assumptions and estimates are significant to the consolidated
financial statements are disclosed in note 3.
2.1.1 Going concern
The Financial Statements have been prepared on a going concern basis which the
Directors consider to be appropriate for the following reasons.
The Group made a loss from continuing operations in the year ended 31 March
2022 of £1.98m (2021: £3.45m) in the year of which £1.27m (2021: £1.35m)
relates to the Adjusted EBITDA performance of the business, which most closely
correlates to its underlying cash performance. Cash balances as at 31 March
2022 stood at £3.5m and these were seen by the Board as sufficient to achieve
break even and cash generation on its organic plans. The Group's significant
investment in sales and marketing expansion from the start of 2022 has built a
strong pipeline of business, and these have now recently begun to deliver
significant contract wins, particularly for recurring monitoring revenues.
This provides the board with further confidence in its projections. During the
year ended 31 March 2022, approximately £0.62m of HMRC legacy COVID-19
related liabilities were paid down, and the small remaining balance of circa
£70,000 was fully repaid under the agreed payment plan by August 2022. HMRC
are fully in terms. The Group expects to receive the final £0.345m of cash
consideration, which has been held in escrow, from the disposal of Assynt in
October 2021 in October 2022. £1.5m of the cash balance was reserved for use
on acquisitions, but this can be used for reasonable non acquisitive purposes,
with BOOST&Co's consent, such consent not to be unreasonably withheld or
delayed. The Group's base case scenario does not require the use of this cash.
The Group's current strategy, reflecting recent low equity valuations, is for
organic growth to be a priority as the Group believes that it can generate
greater shareholder returns than potentially dilutive acquisitions, and
therefore the Board expects that, should it be required, then this consent
will be forthcoming. The monthly repayment of the BOOST&Co £2.5m loan
commences in October 2022 and is reflected in detailed forecasts which
demonstrate that this repayment obligation will be met in full and on
schedule.
Should the Group not achieve its revenue and growth targets, the Board
routinely prepares alternative stress test scenarios to deal with lower
performance and any ensuing shortfall in working capital. This model assumes
that cost reductions mainly around overheads and discretionary expansion spend
would be curtailed as well as certain investment spends. Other measures could
involve the disposal of assets. Furthermore, the Group could seek, as in
previous years, the support of investors (debt or equity). Based upon the
above the Directors have a reasonable expectation that the Group has adequate
working capital for the twelve months following the date of signing these
accounts. For this reason, they continue to adopt the going concern basis
in preparing the financial statements.
2.1.2 New and Revised Standards
Standards in effect in 2022 and 2023
There are a number of standards, amendments to standards, and interpretations
which have been issued by the IASB that are effective in future accounting
periods that the group has decided not to adopt early.
The following amendments are effective for the period beginning 1 January
2022:
- Onerous Contracts - Cost of Fulfilling a Contract (Amendments to
IAS 37);
- Property, Plant and Equipment: Proceeds before Intended Use
(Amendments to IAS 16);
- Annual Improvements to IFRS Standards 2018-2020 (Amendments to
IFRS 1, IFRS 9, IFRS 16 and IAS 41); and
- References to Conceptual Framework (Amendments to IFRS 3).
The following amendments are effective for periods beginning on or after 1
January 2023:
- Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS
Practice Statement 2);
- Definition of Accounting Estimates (Amendments to IAS 8); and
- Deferred Tax Related to Assets and Liabilities arising from a
Single Transaction (Amendments to IAS 12).
The Group does not expect any of the amendments issued by the IASB, but not
yet effective, to have a material impact on the Group.
2.1.3 Alternative performance measures (APM)
In the reporting of financial information, the Directors have adopted the APM
"Adjusted EBITDA" (APMs were previously termed 'Non-GAAP measures'), which is
not defined or specified under International Financial Reporting Standards
(IFRS). This is a key metric which the Board uses to assess the performance of
the Group and its divisions as it reflects the costs. Rental costs are
charged against this measure as they are largely under the control of the
division and correlate closely with cash performance.
This measure is not defined by IFRS and therefore may not be directly
comparable with other companies' APMS, including those in the Group's
industry.
APMs should be considered in addition to, and are not intended to be a
substitute for, or superior to, IFRS measurements.
Purpose
The Directors believe that this APM assists in providing additional useful
information on the underlying trends, performance and position of the Group.
This APM is also used to enhance the comparability of information between
reporting periods and business units, by adjusting for non-recurring or
uncontrollable factors which affect IFRS measures, to aid the user in
understanding the Group's performance. Furthermore, the use of EBITDA means a
closer correlation with the cash performance of the business. Consequently,
APMs are used by the Directors and management for performance analysis,
planning, reporting and incentive setting purposes and this remains consistent
with the prior year.
The key APM that the Group has focused on is as follows:
Adjusted EBITDA: This is the headline measure used by management to measure
the Group's performance and is based on operating profit before the impact of
financing costs, IFRS16, share based payment charges, depreciation,
amortisation, impairment charges and other highlighted items. Highlighted
items (note 5.1) relate to certain costs that derive from events or
transactions that fall within the normal activities of the Group but which,
individually or, if of a similar type, in aggregate, are excluded by virtue of
their size and nature in order to reflect management's view of the performance
of the Group.
2.2 Consolidation
Subsidiaries
Subsidiary undertakings are entities that are controlled by the Company. The
definition of control involves three elements: power over the investee;
exposure or rights to variable returns and the ability to use the power over
the investee to affect the amount of the investor's returns. The Group
generally obtains power through voting rights. Subsidiaries are consolidated
from the date at which the Group obtains the relevant level of control and are
treated as disposed of, and so de-consolidated from the date at which that
control ceases.
The acquisition method of accounting is used for all business combinations. On
acquisition, the cost is measured at the aggregate of their fair values at the
date of exchange, of assets given, liabilities incurred or assumed, and equity
instruments issued by the Group in exchange for control of the acquire. Any
costs directly attributable to the business combination are expensed as
incurred. The acquiree's identifiable assets, liabilities and contingent
liabilities that meet the conditions for recognition under IFRS 3 (Revised),
"Business Combinations" are recognised at fair values at the acquisition date.
Goodwill represents the excess of the consideration transferred, the amount of
any non-controlling interest in the acquiree and the acquisition date fair
value of any previous equity interest in the acquiree over the fair value of
the Group's share of the identifiable net assets acquired is recorded as
goodwill. If, after reassessment, the Group's interest in the net fair value
of the acquiree's identifiable assets, liabilities and contingent liabilities
exceeds the cost of the business combination, the difference is recognised
directly in profit or loss. Any subsequent adjustment to reflect changes in
consideration arising from contingent consideration amendments are recognised
in profit or loss.
Inter-company transactions, balances and unrealised gains on transactions
between group companies are eliminated. Unrealised losses are also eliminated.
Accounting policies of subsidiaries have been adjusted where necessary to
ensure consistency with the policies adopted by the Group. All subsidiaries
are wholly owned by the Group.
2.3 Segmental reporting
In accordance with IFRS 8, segmental information is presented based on the way
in which financial information is reported internally to the chief operating
decision maker. The Group's internal financial reporting is organised along
product and service lines and therefore segmental information has been
presented about business segments. A business segment is a group of assets and
operations engaged in providing products and services that are subject to
risks and returns which are different from those of other business segments.
2.4 Revenue recognition
Revenue comprises the fair value of the consideration received or receivable
for the sale of goods and services in the ordinary course of the Group's
activities. Revenue is shown net of value-added tax, returns, rebates and
discounts and after eliminating sales within the Group.
The Group recognises revenue when the amount of revenue can be reliably
measured, it is probable that future economic benefits will flow to the entity
and when specific criteria have been met for each of the Group's activities.
Revenue is recognised on the following bases:
Class of revenue Recognition criteria
Subscription fees straight line basis over the life of the
contract
Managed services straight line basis over the life
of the contract
Consultancy on delivery of
service to customers
Vulnerability assessment on delivery of service to customers
Revenue is recognised as the client receives the benefit of the services
provided under a commercial contract, in an amount that reflects the
consideration to which the provider expects to be entitled for the transfer of
the goods or services.
Performance obligations and timing of revenue recognition
Revenue from the provision of professional services such as penetration
testing, consultancy and strategic intelligence assignments are recognised as
services are rendered, based on the contracted daily billing rate and the
number of days delivered during the period. Revenue from pre-paid contracts
are deferred in the statement of financial position and recognised on
utilisation of service by the client.
Revenue from cyber monitoring contracts (including installation), intelligence
embedded analyst and report subscriptions includes advance payments made by
the customer is deferred (as a contract liability) and is then subsequently
recognised on a straight-line basis over the term of the contract. Where they
are billed periodically in a monthly in arrears basis, revenues are recognised
at that point.
Contracts values are typically fixed price and the pricing level is based on
management experience of pricing adequate mark up of prime cost. Where
additional services need to be delivered outside of the contract a time and
materials basis based on day rates is used.
Determining the transaction price
The Group's revenue is derived from fixed price contracts and therefore the
amount of revenues to be earned from each contract is determined by reference
to those fixed prices. Costs of obtaining long-term contracts and costs of
associated sales commissions are prepaid and amortised over the terms of the
contract on a straight-line basis. Commissions paid to sale staff for work in
obtaining the Prepaid Consultancy are recognised in the month of invoice. The
timing and any conditionality for the payment of commissions is governed under
the then applicable sales incentive plan.
Revenues are exclusive of applicable sales taxes and are net of any trade
discounts. There are no financing components in any of our revenue streams.
Contract Assets (accrued incomes) balance were £27,100 (2021: £63,692) and
is included in notes and the change compared to the previous year was due to
short term timing differences. Contract Liabilities (deferred incomes) balance
of £529,496 (2021: £1,108,317). Included in the Contract Liabilities at the
31 March 2022 were approximately £29,981 (2021: £121,327) residual balance
from prior year. All Contract Assets at the 2022-year end arose towards the
end of the period. All contract assets have short cash conversion periods and
all assets at the year-end have since been monetised.
The Board considers that the information in note 4 adequately depicts how the
nature, amount, timing and uncertainty of revenue and cash flow are affected
by economic factors.
2.5 Taxation
The tax expense for the year represents the total of current taxation and
deferred taxation. The charge in respect of current taxation is based on the
estimated taxable profit for the year. Taxable profit for the year is based on
the profit as shown in the income statement, as adjusted for items of income
or expenditure which are not deductible or chargeable for tax purposes. The
current tax liability for the year is calculated using tax rates which have
either been enacted or substantively enacted at the reporting date.
Deferred tax is provided in full, using the liability method on temporary
differences arising between the tax base of assets and liabilities and their
carrying values in the financial statements. Deferred tax is not accounted for
if it arises from initial recognition of an asset or liability in a
transaction other than a business combination that, at the time of the
transaction, affects neither accounting nor taxable profit or loss. Deferred
tax is determined using tax rates which have been enacted or substantively
enacted at the reporting date and are expected to apply when the related
deferred tax asset is realised, or the deferred income tax liability is
settled.
Deferred tax assets are recognised for all deductible temporary differences,
carry forward of tax assets and unutilised tax losses, to the extent that it
is probable that taxable profits will be available against which the
deductible temporary differences, and the carrying forward of tax assets and
unutilised tax losses can be utilised.
The carrying amount of deferred tax assets is reviewed at each reporting date
and adjusted to the extent that it is no longer probable that sufficient
taxable profits will be available to allow all or part of the deferred tax
assets to be utilised. Conversely, previously unrecognised deferred tax assets
are recognised to the extent that it is probable that sufficient taxable
profit will be available to allow all or part of the deferred tax asset to be
utilised.
Deferred tax assets and liabilities are measured at the tax rates that are
expected to apply to the year when the asset is realised or the liability is
settled, based on tax rates and tax laws that have been enacted or
substantively enacted at the statement of financial position date.
2.6 Foreign Currency
The Company has determined Sterling as its functional currency, as this is the
currency of the economic environment in which the Company predominantly
operates.
Transactions in currencies other than Sterling are recorded at the rates of
exchange prevailing on the dates of the transactions. At each reporting date,
the monetary assets and liabilities that are denominated in foreign currencies
are retranslated at the rates prevailing on the reporting date. Non-monetary
assets and liabilities are carried at fair value that are denominated in
foreign currencies are translated at the rates prevailing at the date when the
fair value was determined. Gains and losses arising on exchange are included
in profit or loss.
Foreign currency differences arising on retranslation are recognised in profit
or loss.
In the case of foreign entities, the financial statements of the Group's
overseas operations are translated as follows on consolidation: assets and
liabilities, at exchange rates ruling on reporting date, income and expense
items at the average rate of exchange for the period and equity at exchange
rates ruling on the dates of the transactions. Exchange differences arising
are classified as equity and transferred to a separate translation reserve.
Such translation differences are recognised in profit or loss in the period in
which the operation is disposed of. Foreign exchange gains and losses arising
from monetary item receivable from or payable to a foreign operation, the
settlement of which is neither planned nor likely within the foreseeable
future, are considered to form part of net investment in a foreign operation
and are recognised directly in equity.
Goodwill and fair value adjustments arising on the acquisition of a foreign
entity are treated as assets and liabilities of the foreign entity and
translated at the closing rate.
Foreign currency gains and losses are reported on a net basis.
2.7 Property, plant and equipment
All property, plant and equipment are stated at historical cost less
depreciation. Historical cost includes expenditure that is directly
attributable to the acquisition of the items.
All assets are depreciated in order to write off the costs, less anticipated
residual values of the assets over their useful economic lives on a
straight-line basis as follows:
• Fixtures and fittings: 5 years
• Computer equipment: 3 years
• Leasehold: 5 years
2.8 Intangible assets
Acquired intangible assets are shown at historical cost. Acquired intangible
assets have a finite useful life and are carried at cost, less accumulated
amortisation over the finite useful life. All charges in the year are shown in
the income statement in administrative expenses.
Goodwill
Goodwill arising on acquisition is stated at cost. Goodwill is not amortised,
but subject to an annual test for impairment. Impairment testing is performed
by the Directors. Where impairment is identified, it is charged to the income
statement in that period.
Software and brand licences
Acquired software and brand licences are shown at historical cost. Software
and brand licences have a finite useful life and are carried at cost less
accumulated amortisation. Amortisation is calculated using the straight-line
method to allocate the cost of software and brand licences over the period of
the licence. The brand and software licences have been fully amortised in
previous accounting periods.
Research and development
Research expenditure is charged to the income statement in the year incurred.
Development costs that are directly attributable to the design and testing of
identifiable and unique software products controlled by the Group are
recognised as intangible assets when the following criteria are met:
· it is technically feasible to complete the
software so that it will be available for use;
· management intends to complete the software
product and use or sell it;
· it can be demonstrated how the software product will generate
probable future economic benefits;
· adequate technical, financial and other resources to complete the
development and to use or sell the software product are available; and
· the expenditure attributable to the software product during its
development can be reliably measured.
Other development expenditures that do not meet these criteria are charged to
the income statement in the year incurred. Development costs recognised as
assets are amortised over their estimated useful life, which does not exceed 5
years.
Government tax credits available on eligible Research and Development
expenditure ('R&D Tax Credits') and not reclaimable through other means
are recognised in income and treated as a government grant.
Customer relationships
Customer relationships are amortised over the period expected to benefit as
follows:
· First Base: 10 years
· Securestorm: 3 years (fully amortised in the year
ended 31 March 2022)
2.9 Impairment of non-financial assets
Assets that are subject to depreciation or amortisation are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. A review for indicators of impairment
is performed annually. An impairment loss is recognised for the amount by
which the asset's carrying amount exceeds its recoverable amount. The
recoverable amount is the higher of an asset's fair value less costs to sell
and value in use. Any impairment charge is recognised in the income statement
in the year in which it occurs. When an impairment loss, other than an
impairment loss on goodwill, subsequently reverses due to a change in the
original estimate, the carrying amount of the asset is increased to the
revised estimate of its recoverable amount, up to the carrying amount that
would have resulted, net of depreciation, had no impairment loss been
recognised for the asset in prior years.
2.10 Financial instruments
The Group applies a simplified method of the expected credit loss model when
calculating impairment losses on its financial assets which are measured at
amortised cost such as trade receivables, other debtors and prepayments. This
resulted in greater judgement due to the need to factor in forward-looking
information when estimating the appropriate amount to provisions
(a) Financial Assets
The Group's Financial Assets include Cash and Cash Equivalents, Trade
Receivables and Other Receivables.
· Initial Recognition and Measurement: Financial
Assets are classified as amortised cost and initially measured at fair value.
· Subsequent Measurement: Financial assets are
subsequently measured at amortised cost, using the effective interest method,
less impairment. Interest is recognised by applying the effective interest
method, except for short-term receivables when the recognition of interest
would be immaterial. The company only offers short periods of credit to its
customers and recorded average debtor days of 31 at 31 March 2022 (2021: 47)
· Derecognition of Financial Assets: The Company
derecognises a Financial Asset only when the contractual rights to the cash
flows from the asset expire, or it transfers the Financial Asset and
substantially all the risks and rewards of ownership of the asset to another
entity.
(b) Financial Liabilities and Equity Instruments
The Group's Financial Liabilities include Trade Payables, Accruals and Other
Payables. Financial Liabilities are classified at amortised cost.
(c) Investments
Investments not in subsidiary undertakings are carried at fair value through
profit and loss.
Classification as Debt or Equity. Financial Liabilities and Equity Instruments
issued by the Company are classified according to the substance of the
contractual arrangements entered into and the definitions of a Financial
Liability and an Equity Instrument.
2.11 Share capital
Ordinary shares (of nil par value) in the Company are classified as equity. By
definition all amounts arising from the issue of these shares are attributable
to Share Capital as are any directly attributable (including any warrants
issued as commissions) to issue of new shares are shown in equity as a
deduction to the share capital account. The Company does not maintain a
separate share premium account.
2.12 Reserves
The consolidated financial statements include the following reserves:
translation reserve, share option reserve, 2022 Liabilities reserve and
accumulated losses. Premiums paid on the issue of share capital, less any
costs relating to these, are posted to the share capital account as referenced
above.
2.13 Trade payables
Trade payables are obligations to pay for goods and services that have been
acquired in the ordinary course of business from suppliers. Accounts payable
are classified as current liabilities if payment is due within one year or
less. If not, they are presented as non-current liabilities.
Trade payables are recognised initially at fair value and are subsequently
measured at amortised cost using the effective interest method. As the payment
period of trade payables is short, future cash payments are not discounted as
the effect is not material.
2.14 Leases
When entering into a contract the Group assesses whether or not a lease
exists. A lease exists if a contract conveys a right to control the use of an
identified asset under a period of time in exchange for consideration. Leases
of low value items and short-term leases (leases of less than 12 months at the
commencement date) are charged to the profit or loss on a straight-line basis
over the lease term in administrative expenses.
The Group recognises right-of-use assets at cost and lease liabilities on the
statement of financial position at the lease commencement date based on the
present value of future lease payments. The right-of-use assets are amortised
on a straight-line basis over the length of the lease term. The lease
liabilities are recognised at amortised cost using the effective interest rate
method. Discount rates used reflect the incremental borrowing rate specific to
the lease.
2.15 Pensions
The Company operates a defined contribution pension scheme under which fixed
contributions are payable. Pension costs charged to the income statement
represent amounts payable to the scheme during the year.
2.16 Share-based payments
The cost of share-based payment arrangements, which occur when employees
receive shares or share options, is recognised in the income statement over
the period over which the shares or share options vest.
The expense is calculated based on the value of the awards made, as required
by IFRS 2, 'Share-based payment'. The fair value of the awards is calculated
by using the Black-Scholes and Monte Carlo option pricing models taking into
account the expected life of the awards, the expected volatility of the return
on the underlying share price, vesting criteria, the market value of the
shares, the strike price of the awards and the risk-free rate of return. The
charge to the income statement is adjusted for the effect of service
conditions and non-market performance conditions such that it is based on the
number of awards expected to vest. Where vesting is dependent on market-based
performance conditions, the likelihood of the conditions being achieved is
adjusted for in the initial valuation and the charge to the income statement
is not, therefore, adjusted so long as all other conditions are met.
Where an award is granted with no vesting conditions, the full value of the
award is recognised immediately in the income statement.
2.17 Provisions
Provisions are recognised in the statement of financial position where there
is a legal or constructive obligation to transfer economic benefits as a
result of a past event. Provisions are discounted using a rate which reflects
the effect of the time value of money and the risks specific to the
obligation, where the effect of discounting is material.
Provisions are measured at the present value of expenditures expected to be
required to settle the obligation using a pre-tax rate that reflects current
market assessments of the time, value of money and the risks specific to the
obligation. The increase in provision due to the passage of time is recognised
as interest expense.
3. Critical accounting estimates and judgements
The preparation of the Group financial statements in conformity with IFRSs as
applied in accordance with the provisions of the Companies Act 2006 requires
the use of certain critical accounting estimates. It also requires management
to exercise its judgement in the process of applying the Group's accounting
policies. Estimates and judgements are continually evaluated and are based on
historical experience and other factors, including expectations of future
events that are believed to be reasonable under the present circumstances. The
areas involving a higher degree of judgement or complexity, or areas where
assumptions and estimates are significant to the Group financial statements
are disclosed below.
Judgements:
Investment in Furnace Technologies Limited
The investment agreement in Furnace Technologies Limited has allocated Falanx
Group Limited 20% of its equity. It is considered a financial as opposed to an
operational investment as Falanx does not have the right to appoint a board
member and plays no part in its operations or policymaking. There is no
ongoing obligation to provide further investment to Furnace and Furnace has no
part in the business plans of Falanx. There is no interchange of management
personnel and any transactions between the companies are small and are on an
arm's length basis. Consequently, it has not been treated as an associated
company. The investment balance was impaired in full in the year ended 31
March 2021 on the following basis;
· Furnace had not yet generated material revenues
· Furnace had not received external funding at the
date of the 2021 report which would allow an objective measure of the equity
value which would validate the capital structure and its carrying value.
· Since then, there has been no further development
in Furnace which justify a change in treatment.
Estimates:
Management do not consider there to be significant accounting estimates in
respect of the year ended 31 March 2022.
Impairment of intangible assets
Management have assessed indicators of impairment and conducted an impairment
review of intangible assets. They have made judgements as to the likelihood of
them generating future cash flows, the period over which those cash flows will
be received and the costs which are attributable against them. The recoverable
amount is determined using the value in use calculation. The use of this
method requires the estimation of future cash flows and the selection of a
suitable discount rate in order to calculate the present value of these cash
flows. ``
In support of the assumptions, management use a variety of sources. In
addition, management have undertaken scenario analyses, including a reduction
in sales forecasts, which would not result in the value in use being less than
the carrying value of the cash-generating unit. However, if the business model
is not successful, the carrying value of the intangible assets may be impaired
and may require writing down.
4. Segmental reporting
As described in note 2, the Directors consider that the Group's internal
financial reporting is organised along product and service lines and,
therefore, segmental information has been presented about the remaining Cyber
Security division business segment only following the disposal of the
strategic intelligence division in October 2021. The information below also
comprises the disclosures required by IFRS 8 in respect of products and
services as the Directors consider that the products and services sold by the
disclosed segments are essentially similar and therefore no additional
disclosure in respect of products and services is required.
The results for the business operating segment for the years ended 31 March
2022 and 31 March 2021 are as follows:
2022 2022 2022 2021 2021 2021
£ £ £ £ £ £
Continuing Discontinued Total Continuing Discontinued Total
Professional services 2,683,204 21,102 2,704,306 2,272,951 108,375 2,381,326
Monitoring managed services 859,104 - 859,104 876,773 - 876,773
Assynt report & embedded analysts - 1,005,191 1,005,191 - 2,016,062 2,016,062
Revenues from external customers 3,542,308 1,026,293 4,568,601 3,119,724 2,124,437 5,244,161
Gross Margin 1,442,576 224,270 1,666,846 1,016,937 559,048 1,575,985
Cyber operating expenses (1,598,143) - (1,598,143) (1,435,957) - (1,435,957)
Corporate operating expenses (1,009,132) - (1,009,132) (918,607) - (918,607)
Segment Reported EBITDA (1,164,699) (29,664) (1,194,363) (1,337,627) (32,312) (1,369,939)
Highlighted costs (Note 5) (107,285) - (107,285) (12,893) 123,247 110,354
Segment Adjusted EBITDA (1,271,984) (29,664) (1,301,648) (1,350,520) 90,935 (1,259,585)
Finance expense-net (201,464) (241) (201,705) (32,570) - (32,570)
Depreciation and amortisation (465,417) (13,378) (478,795) (503,895) (29,587) (533,482)
Impairment of goodwill (130,347) - (130,347) - - -
Impairment of Furnace equity and loan investment - - - (1,440,000) - (1,440,000)
Share option expense (17,839) - (17,839) (173,636) (2,313) (175,949)
Profit on sale of discontinued operations - 3,498,102 3,498,102 - - -
Segment loss before tax for the year (1,979,766) 3,454,819 1,475,053 (3,487,728) (64,212) (3,551,940)
Segment assets consist primarily of property, plant and equipment, intangible
assets, trade and other receivables and cash and cash equivalents. Unallocated
assets comprise deferred tax assets, financial assets held at fair value
through profit or loss and derivatives. Segment liabilities comprise operating
liabilities; liabilities such as deferred taxation, borrowings and derivatives
are not allocated to individual business segments.
Segment assets, liabilities and capital expenditure for the year then ended
are as follows:
2022 2021 2021 2021
Continuing Continuing Discontinued Total
£ £ £ £
Contract assets 27,100 62,141 1,551 63,692
Other assets 8,296,487 5,267,711 374,615 5,642,326
Contract liabilities (deferred income) 529,496 465,000 643,317 1,108,317
Other liabilities 3,418,222 1,617,349 318,175 2,006,524
Capital expenditure - Tangible 13,315 36,161 - 36,161
Capital expenditure - Intangible - 157,780 - 157,780
Geographical information
The Group's business segments operate in five geographical areas, although all
are managed on a worldwide basis from the Group's head office in the United
Kingdom. All non-current assets are in the United Kingdom.
A geographical analysis of revenue and non-current assets is given below.
Revenue is allocated based on location of customer; non-current assets are
based in the United Kingdom.
Revenue by geographical location
2022 2022 2022 2021 2021 2021
Continuing Discontinued Total Continuing Discontinued Total
£ £ £ £ £ £
United Kingdom 2,948,696 572,575 3,521,271 2,788,215 1,129,441 3,917,656
Europe 181,808 112,051 293,859 189,005 338,898 527,903
The Americas 376,539 150,678 527,217 114,104 341,307 455,411
Australasia 35,265 64,029 99,294 28,100 157,800 185,900
Middle East and Africa - 126,960 126,960 - 157,291 157,291
3,542,308 1,026,293 4,568,601 3,119,424 2,124,737 5,244,161
Non-current assets 2022 2021 2021 2021
Continuing Continuing Discontinued Total
£ £ £ £
United Kingdom 3,621,304 4,203,752 18,190 4,221,942
3,621,304 4,203,752 18,190 4,221,942
Major customers
No customer contributed 10% or more to the Group's revenue in 2022 (2021:
nil). The highest individual customer contributed c9% of revenues.
Contract Assets (accrued incomes) balances were £27,100 (2021: £63,992).
Included in the Contract Liabilities (deferred incomes) at the 31 March 2022
were approximately £29,981 (2021: £121,327) residual balance from prior
year. All Contract Assets at the 2022-year end arose towards the end of the
period and were billed and collected in the normal course of business in the
next financial year.
Contract Contract Contract Contract
Assets Assets Liabilities Liabilities
2022 2021 2022 2021
£ £ £ £
At 1 April 63,992 27,747 (1,108,317) (1,237,347)
Transfers in the year from contract assets to trade receivables (63,992) (27,747) - -
Transfers from contract liabilities to revenue in the year - - 842,732 1,116,019
Disposal in the year - - 235,604 -
Amount recognised as revenue in the year not yet invoiced 27,100 63,992 - -
Amount invoiced in advance not recognised as revenue in the year - - (499,515) (986,989)
At 31 March 27,100 63,992 (529,496) (1,108,317)
5. Highlighted costs and Adjusted EBITDA
Operating loss includes the following items which the Directors consider to be
one-off in nature, non-cash expenses or necessary elements of expenditure to
derive future benefits for the Group which have not been capitalised on the
consolidated statement of financial position.
5.1 Highlighted costs / (income)
2022 2021
£ £
Restructuring and other costs a) - (40,738)
Infrastructure upgrade b) - 66,887
Rent c) (107,285) (107,285)
Closed premises d) - 68,243
(107,285) (12,893)
a) Restructuring costs
Cost of corporate development and professional services associated with the
restructuring. This did not include any impact of COVID-19.
b) Infrastructure upgrade
Cost of technology, infrastructure, and upgrade of applications for internal
use and customer delivery.
c) Rent
Re-instatement of accounting charge in respect of rental payments on the
Reading lease not reflected under IFRS 16. The group uses Adjusted EBITDA as a
metric for business unit assessment and this reflects the actual rental
payments, adjusted for rent free periods.
d) Closed premises
Costs including unused rental periods and lease dilapidations related to
London and Sussex premises closed during summer 2020.
5.2 Adjusted EBITDA - continuing
2022 2021
£ £
Operating loss (1,778,302) (3,455,158)
Depreciation and amortisation 465,417 503,895
Impairment of goodwill 130,347 -
Impairment of Furnace equity investment and loan - 1,440,000
Share option expense 17,839 173,636
EBITDA (1,164,699) (1,337,627)
Highlighted costs (note 5.1) (107,285) (12,893)
Adjusted EBITDA (1,271,984) (1,350,520)
6. Operating loss - continuing
Operating loss for the year is stated after charging the following:
2022 2021
£ £
Depreciation of owned property, plant and equipment 63,732 71,585
Amortisation of right of use asset 108,981 108,981
Amortisation and impairment of intangible fixed assets 292,703 323,329
Impairment of goodwill 130,347 -
Impairment of Furnace equity investment and loan - 1,440,000
Operating lease rentals - Land & Buildings 10,865 20,300
Share based payment expense 17,839 173,636
Foreign exchange loss 4,483 2,959
R&D tax credit - (19,894)
7. Income tax expense
2022 2021
£ £
Current tax
Current tax on loss for the year - -
Over provision in prior year - -
Total current tax - -
Deferred tax
Deferred tax (credit)/expense for the year (9,529) -
Total deferred tax (9,529) -
Income tax expense - -
The parent Company is resident in the UK for tax purposes together with all of
its subsidiaries. Other subsidiaries which were resident in foreign tax
jurisdictions were disposed of on the sale of Assynt in October 2021
Potential deferred tax asset
The extent to which deferred tax assets can be recognised is based on an
assessment of the probability of the Group's future taxable income against
which the deferred tax assets can be utilised. This is based on projected
forecasts and budgets which are reviewed by the Directors and judgement is
made as to whether the deferred tax asset can be recognised. At 31 March 2022,
a deferred tax asset has not been recognised (2021: £nil). Accumulated tax
losses (subject to HMRC) agreement stood at approximately £11m (2021:
£13.9m). No asset in respect of these losses has been recognised.
The tax charge for the year is different from the standard rate of corporation
tax in the United Kingdom of 19% (2021: 19%). The difference can be reconciled
as follows:
2022 2022 2022 2021 2021 2021
Continuing Discontinued Total Continuing Discontinued Total
£ £ £ £ £ £
Profit / (Loss) before tax (1,979,766) 3,454,818 1,475,052 (3,487,728) (64,212 (3,551,940)
Tax calculated at the applicable rate based on the loss for the year 19% (376,155) 656,415 280,260 (662,669) (12,200) (674,869)
(2021: 19%)
Tax effects of:
Expenses not deductible for tax purposes 3,552 72 3,624 306,591 439 307,030
Chargeable gain not taxed - (664,639) (664,639) - - -
Non taxable income (11,043) - (11,043)
Deferred tax not recognised 364,124 7,102 371,226 367,121 11,761 378,882
Current tax on loss for the year (8,479) (1,050) (9,529) - - -
8. Discontinued operations
On 06 October 2021, Falanx announced that it had entered into a formal sale
agreement to dispose of Assynt Strategic Intelligence Division ("Assynt") for
cash consideration of £4.6 million to Cross Atlantic LLC. Assynt, which
represented the entirety of the Assynt operating segment, was classified as a
discontinued operation at that date. Consequently, Assynt has not been
presented as an operating segment in the segment note.
The results of the discontinued operation and the effect of the disposal on
the financial position of the Group were as follows:
Financial performance and cash flow information
Results of the discontinued operations for the period to disposal
2022 2021
Income statement £ £
Revenue 1,026,294 2,124,437
Administrative expenses (1,069,336) (2,188,649)
Operating loss (43,042) (64,212)
Finance costs (241) -
Loss before income tax (43,283) (64,212)
Income tax credit 1,050 -
Loss from discontinued operations before gain on sale (42,233) (64,212)
Profit on sale of discounted operations 3,498,102 -
Profit / (loss) from discontinued operation 3,455,869 (64,212)
2022 2021
Cash flows from/(used in) discontinued operation £ £
Net cash flows from operating activities (388,485) (759,283)
Net cash flows from investing activities - -
Net cash flows from financing activities - -
Net cash flows for the year (388,485) (759,283)
Intra-Group funding and transactions 323,031 841,580
Net cash flows from discontinued operations, net of intercompany (65,454) 82,297
Effect of disposal on the financial position of the Group
2022
Net assets disposed of and the gain on disposal £
Assets of the disposal group
Property, plant & equipment 442
Intangible assets 4,293
Trade and other receivables 174,021
Total assets 178,756
Liabilities of the disposal group
Deferred tax liability
Trade and other payables 201,928
Contract liabilities 420,286
Total liabilities 622,214
Net assets of the disposal group (443,458)
Consideration received in cash and cash equivalents, net of transactions costs 3,163,674
Gain on sale before income tax and reclassifications of FX translation reserve 3,607,132
Exchange differences received to the income statement (109,030)
Gain on sale of discontinued operation 3,498,102
Net cash inflow arising on disposal:
Consideration received in cash and cash equivalents, net of transaction costs 3,163,674
Less cash and cash equivalents disposed of -
3,163,674
9. Basic and diluted earnings per share
Basic loss per share is calculated by dividing the loss attributable to equity
holders of the Company by the weighted average number of ordinary shares in
issue during the year. There are no dilutive share options at present as these
would currently increase the loss per share.
Continuing operations
2022 2021
£ £
Profit / (Loss) for the year attributable to equity holders of the Company 1,484,582 (3,551,940)
Less profit / (loss) from discontinued operations 3,455,869 (64,212)
Loss from continuing operations (1,971,287) (3,487,728)
Total basic and diluted loss per share (pence per share) (0.37) (0.75)
Continuing and discontinued operations
2022 2021
£ £
Profit / (Loss) for the year attributable to equity holders of the Company 1,484,582 (3,551,940)
Total basic and diluted profit / (loss) per share (pence per share) 0.28 (0.77)
Weighted average number of shares used as the denominator
2022 2021
Weighted average number of ordinary shares used as the denominator in the 526,181,678 462,675,158
calculating basic earnings per share
Diluted earnings per share is calculated by adjusting the weighted average
number of ordinary shares in issue to assume the conversion of all dilutive
potential ordinary shares. The Company's dilutive potential ordinary shares
arise from warrants and share options. In respect of the warrants, a
calculation is performed to determine the number of shares that could have
been acquired at fair value, based upon the monetary value of the subscription
rights attached to the outstanding warrants. The number of shares calculated
as above is compared with the number of shares that would have been issued
assuming the exercise of the warrants.
At 31 March 2022, the potentially dilutive ordinary shares were anti-dilutive
because the Group was loss-making. The basic and diluted earnings per share as
presented on the face of the income statement are therefore identical. All
earnings per share figures presented above arise from continuing and total
operations and, therefore, no earnings per share for discontinued operations
is presented.
10.
Borrowings
Falanx Cyber Defence Ltd, a wholly owned subsidiary took out a £50,000
Coronavirus Business Interruption Loan (CBIL) with HSBC. The loan is repayable
in 5 years from June 2021. The loans attract an interest rate of 2.5%. No
arrangement fees were applied by the lender.
On 18 August 2021, the Company announced a 5-year growth loan facility from
BOOST&Co taken via Falanx Cyber Defence Limited (a wholly owned
subsidiary). The full £2.5m was drawn down in 2 tranches, the first of £1m
on 18 August 2021 and the second of £1.5m on 13 October 2021. Annual interest
is 11%, and straight-line amortisation of the loan commencing after 12 months.
The loan carries a 3% early prepayment fee on the then amount outstanding.
2022 2021
£ £
Non-current
Bank loan 32,414 42,129
Term loan 2,062,324 -
2,094,738 42,129
Current
Bank loan 9,715 7,871
Term loan 255,987 -
265,702 7,871
Total Loan liability 2,360,440 50,000
Analysis of loan liability
At 1 April 50,000 -
Loan repayment (7,871) -
Additions 2,500,000 50,000
Loan costs (205,347) -
Amortised transaction cost 23,658 -
At 31 March 2,360,440 50,000
Analysis of gross value of bank loan
Maturity of the bank loan is analysed as follows: 2022 2021
£ £
Within 1 year 265,702 7,871
Later than 1 year and less than 5 years 2,094,738 42,129
At 31 March 2,360,440 50,000
11. Related party transactions
Falanx Group Limited provided head office and management services to
subsidiary companies and supported them with working capital during the year
ended 31 March 2022.
On 18 August 2021, the Company announced a new loan facility from
BOOST&Co, and the facility was arranged by Welbeck Ventures Limited who
received 2% of the loan on completion in respect of advisory fees. Alex Hambro
(Non-Executive Chairman) is also a director of Welbeck Ventures Limited.
12. Events after the reporting period
On 22 June 2022, the Company signed a deed of variation for the lease for the
premises in Reading. The lease was varied to delete the break option and
reduce the principal rent by 50% for the period from 1 August 2022 to 31 July
2023.
The statutory accounts for the year ended 31 March 2022 have not yet been
delivered to the Registrar of Companies. The auditors have reported on them
and their report was unqualified and did not contain a statement, which had
the Company been UK incorporated, would have been required under either
Section 498 (2) or Section 498 (3) of the Companies Act 2006 and did not
include references to any matters to which the auditor drew attention by way
of emphasis. This final results announcement does not constitute statutory
accounts under Section 435 of the companies Act 2006
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