Falanx Group Limited (LON:FLX), the global cyber security and intelligence services provider, is pleased to announce its unaudited preliminary results for the year ended 31 March 2020.
Financial highlights
Results for the year to 31 March 2020 as per trading update 28 September 2020
· Revenues increased 12% to £5.85m (2019: £5.21m)
· Contribution from monthly recurring revenues consistent with 2019 at 56% of total revenues, with an overall increase of circa £0.3m in recognitions, attributable to strong growth and long-term recurring contracts
· The monthly recurring revenue run rate at 31 March 2020 was £0.26m (2019: £0.24m)
· Large scale rollout of Assynt recurring revenue contracts fuelled its revenue growth of 30% to 2.14m (2019: £1.64m)
· H2 gross margins increased to 43% from 32% following operational restructuring in the Cyber division. Overall gross margins were 38% (2019: 44%)
· New operational structure in the second half of the year greatly benefited the Cyber division improving divisional gross margins from 30% to 45%
· Majority of infrastructure investment programme completed in the first half of the year resulting greatly reduced spend in the second half
· Adjusted EBITDA* loss £1.56m (2019: £1.25m) following investment in sales and marketing program in the first 6 months
· Overall loss £2.88m (2019: £1.83m)
· Loss per share 0.72p (2019: 0.58p)
· Shareholders’ funds £4.97m (2019: £7.63m)
Operational highlights
· Furnace platform spun out December 2019 reducing cash spend by c£40,000 per month
· In March 2020 the Company moved to a ‘virtual structure’ fully able to support clients in a COVID-19 environment. All staff safe and protected
Post period highlights
· Monthly Cyber services customer orders now back to pre COVID-19 levels
· Sales pipeline is now stronger and opportunities starting to progress including uptake of new cyber service offerings
· The move to an online world with remote working post COVID-19 will increase cyber risk and a resultant increase in the demand for protective cyber security services.
· New Cyber Security monitoring service (Triarii) launched August 2020, major new reseller into UK government sector appointed, contracts won and generating revenue
· Cyber Security monitoring service expanded to include endpoint detection, creating a strong margin and volume growth opportunity into smaller SMEs
· Joined SolarWinds TAP programme, Falanx now well positioned with Triarii to address their global base of over 22,000 MSPs
· Assynt division profitable with strong pipeline of new recurring revenue opportunities with some of the world’s largest companies
· Total spend** in the six months to 30 September 2020 circa 30% lower than the same period in 2019, two offices closed with physical presence now at the Reading Security Operations Centre (“SOC”)
· Balance sheet strengthened following £1.25m equity fundraising completed 29 September 2020 and remains debt free
· Stifel appointed sole broker
· Cash of £1.33m at 1 October 2020, following receipt of initial tranche of net proceeds from fundraising, sufficient cash for organic operations, normal working capital profile
* Adjusted EBITDA is a non-IFRS 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 highlighted items.
** Total spend is the total operating costs, cost of sales, capital expenditure and any highlighted costs.
Mike Read, Falanx Group Chief Executive, said:
“In the second half of the year under review the streamlined business was growing well, and we were on target to achieve profitability. Clearly the impact of COVID-19 has created some delays, but we have seen a strong resurgence in orders in the Cyber division since August as organisations need to deal with an increasing cyber security risk, and orders are now very close to pre pandemic levels. Our new cyber security monitoring service Triarii is getting positive customer uptake in the UK and US, and it is now part of the SolarWinds global TAP program with its access to over 22,000 Managed Service Providers (“MSPs”) globally. The Assynt division is profitable and has a solid basis of contracts as well as new prospects with the world’s largest companies. We continue to tightly control our costs as we push to profitability and we are optimistic about the future”
Chairman’s Statement
During the period under review and, indeed, subsequent to the financial year end in March 2020, your company has had to develop and adapt to the unprecedented times we are living in today. The past 12 months have seen the Cyber Security and Intelligence market evolve rapidly with the need for our cyber audit and monitoring services being paramount in the protection of data and potential security breaches. Ironically, the more distributed working environment engendered by COVID-19 working practices has increased the threat of cyber vulnerability at a time when many companies have forced to cut back their operating expense budgets in order to ensure they are well resourced to ride out the uncertain business environment. We have been working hard to educate the SME business community that the need for cyber testing and protection is increasing rather than diminishing and I believe that message is beginning to gain traction.
The almost daily announcements by companies, both big and small, that they have fallen victim to some form of cyber-crime, whether by data theft or system ransom, bears testimony to the gulf in understanding between those whose fiduciary duty it is to protect their corporate assets and those who are out to steal them. At the moment, we believe the threat actors have the upper hand due, in part, to the embedded complacency of directors about the extent of the cyber risk and vulnerability that exists within their organisations.
We are pleased to report that in the past financial year overall revenues have organically increased by 12% to £5.85m (2019: £5.12m), this was largely attributable to the increased performance shown in H2. Both divisions were making steady progress before the Coronavirus outbreak, demonstrating the Company was heading in the right direction and reconfirming the strategy adopted by the Board.
The structure of Falanx has been adjusted to streamline the operations of the Company. As announced in December 2019, the sale of the technology platform known as Furnace was completed. This reduced our cash expenditure requirements freeing us to progress our core Cyber Services and Business Intelligence businesses and provide a solid foundation for the Group to progress. Falanx Assynt, the Group’s strategic intelligence division, has seen consistent progression due to its strong recurring revenue contracts with global companies. This has allowed the division to develop rapidly and move towards an even greater more recurring revenue model.
Group Strategy
After a positive end to the financial year, we were faced with the potential consequences of COVID-19. With the escalation of the pandemic, the Board responded quickly by implementing certain measures allowing operations to continue servicing our clients.
One measure introduced was all employees being encouraged to work remotely. This was possible due to the technical infrastructure and our processes and protocols which have resulted in negligible interruption to service provision. As announced on 31 March 2020, the Group had also implemented certain measures designed to strengthen the Company’s balance sheet and expected cash performance. One of these measures included voluntary salary sacrifices by the directors, certain senior managers and staff.
Last month we announced that we secured an important contract for the provision of cyber security services to one of the major suppliers of services to the UK public sector. Whilst client confidentiality restricts the naming of this customer, we are delighted that such a significant customer has chosen to adopt our services and we hope to conclude similar sized deals in the future. The contract to supply our new integrated cyber technology platform, Triarii, to several UK public sector organisations has been progressing well and is gaining traction within that market.
We are pleased that the SolarWinds partnership announced in September 2018 has rapidly regained momentum in recent months. They have actively supported sales of our new cyber monitoring platform Triarii into the US and we have just been appointed to their TAP program which gives us access to their 22,000 MSP clients globally.
Corporate Governance
The Board sets out to deliver the highest standards of corporate governance and has remained abreast of developing governance standards. We have continued to prioritise a safe working environment for our staff across all locations and have improved the quality of safety across the business. During COVID-19 we have been focussing on our employees mental as well as physical health.
Outlook
This past year has witnessed the significant commercial impact of a global pandemic which has affected all businesses worldwide. Falanx has not been immune from this. However, whilst order levels for certain of our professional services were much reduced in the first few months of the pandemic, they have now recovered and are running at approximately double their levels in the first quarter. The need for organisations to spend on Cyber protection is rising in line with the apparent uncertainty in the world and the ever-increasing technical capabilities and resources of the cyber threat agents. At the same time the need for timely information on geopolitical risk has increased the need for Falanx’s business intelligence products which allow organisations operating in overseas markets to be kept up-to-date and informed. The increase in the spread of the COVID-19, will continue to push the working environment away form centralised offices and out into the home environment thereby putting businesses at higher risk from cyber-attacks providing a consequent requirement for enhanced and vigilant protection. Our new platform Triarii and our continuing strategic relationship with SolarWinds significantly underpins our capability in this growing market.
Falanx’s size and capabilities mean we are well positioned to adapt to changes in the industry and is highlighted by our healthy and debt-free balance sheet following the raising of £1.25m in September 2020. This should allow us to weather any ongoing macroeconomic disruption as a result of COVID-19. Our order book is strengthening, cyber order levels are close to pre COVID-19 levels and our sale pipelines are building in terms of quantum and quality. The Company will continue to work towards improving efficiencies and maintaining tight cash control as well as strengthening our client relationships in order to deliver a successful end to the current financial year.
Finally, I would like to take this opportunity to thank our shareholders and everyone at Falanx for their contribution during a volatile year and for their continued hard work in the face of the uncertain business environment.
Approved by the Board on 29 October 2020 and signed on its behalf by
A Hambro
Chairman
Chief Executive Officer’s Report
Falanx Group Limited is a provider of Cyber Security and Strategic Intelligence services to over 440 customers. Customer range from governments and some of the world’s largest companies to SME. These operate as separate divisions and are supported by common corporate services.
Falanx Cyber
Financial Performance
Our core division recorded increased revenues year on year despite the impact of COVID-19 disruption from mid-February 2020. Revenues for the year were £3.71m (2019: £3.57m) representing growth of 4%. Revenues in the second half grew by 17% to £2.0m and this was driven by increased contract momentum from a realigned sales force and also by much improved professional services utilisation from September 2019 onwards as revised operational management structures were put in place. Average monthly divisional revenues were £0.33m in the second half of the year. We were pleased to see the commencement of cross selling of our MDR services into the customer bases acquired with First Base LLP (March 2018) and Secure Storm (July 2018).
Following operational management changes in August 2019 professional services utilsiation increased significantly and consequently gross margins improved to 45% in the second half of the year from 30% in the first half. Overall gross margins were 38% (2019: 49%) with the change being due to service mix, and the weak utilisation in the first half of the year referenced above.
Investment was made in expanding sales and marketing capacity in the year as well as upgrading infrastructure in anticipation of the large-scale rollout of the SolarWinds opportunity which had been expected in the year under review. Consequently, the division generated an adjusted EBITDA loss of £0.41m (2019: profit £0.05m). Improving revenues, a lower operating cost base, and improved gross margins enabled the division to become profitable on a more consistent basis in the second half of the year prior to the onset of COVID in February.
Upgraded Manage Detect Respond (“MDR”) Offering
The division has evolved it’s MDR offering into a new service offering, Triarii which is built upon world-class leading technology solutions. This combined with our highly skilled Security Operations Centre (“SOC”) monitoring team, creates a market-leading offering to compete with all-comers whilst leveraging the development resources of key technology providers. Triarii has also been accepted by SolarWinds as an alternate offering to its own Threat Monitor platform. We have successfully joined the SolarWinds Technology Alliance Partner (“TAP”) Program and can sell Triarii to their entire MSP channel of over 22,000 MSPs globally – as well as a new Managed Service offering supporting those MSPs with deployments of SentinelOne through the SolarWinds channel. We anticipate this now being a low touch and high-volume channel and hope to see the benefit of that over the coming months
As part of the release of Triarii MDR we have also now introduced our own new service for monitoring endpoints such as laptops and desktops. This capability, known as Managed Endpoint Detection and Response (“M-EDR”) can be sold separately, opening up an entire new market for Falanx Cyber, or as an integral part of our Triarii MDR service. Our own M-EDR service is a leading market contender in its own right and further illustrates the strength of our full MDR service.
During the year the division relocated its SOC from Birmingham to Reading to support the expected rollout of SolarWinds opportunities and the expected increase in volumes as the Cyber security market accelerates. This move has enabled a wider talent pool of skilled staff to be reached.
Professional Services
Falanx Cyber now offers an extended portfolio of professional cyber security services, along with our upgraded Triarii MDR (Managed Detection and Response) service. We offer a wide range of ethical offensive services designed to simulate real-word cyber criminals and, in doing so, enable us to identify weaknesses in clients’ defences and advise them as to how they can better protect themselves and their assets. These services range from specific penetration testing services through to social engineering techniques (such as phishing and red teaming inter alia) which can then be integrated into tailored security awareness training. We continue to serve customers in a diverse range of sectors including Government, Finance, Legal, Insurance, Retail, IT and Telecoms.
Route to Market
To accelerate growth beyond the confines of traditional direct sales and cross-selling opportunities between service lines, Falanx Cyber exploits a ‘Channel’ model, providing security services via its growing network of MSP partners. These IT outsourcing organisations have a longstanding and trusted status with their customers for the provision of essential business IT functions, as such they are natural partners for Falanx Cyber and a significant extension of our market reach. The SolarWinds channel remains a significant opportunity along with some recent additional new partners.
The combination of strong and growing demand for the Falanx Cyber portfolio of services, market pull of the MSP ‘Channel’ model, the opportunity still offered by SolarWinds and the transformed service offerings for MDR and M-EDR indicate strong growth potential. In anticipation to that we have launched a completely refreshed website and integrated digital marketing model to better inform visitors of all backgrounds about what we do and how we can help them. Overall the cyber sector is experiencing strong macroeconomic drivers and is forecast to grow significantly over the next few years. To keep pace with this continuing high growth, the division has further invested in people, processes, services and infrastructure to expand capacity and maximise the revenue growth opportunities of the current year and beyond.
COVID-19 impact
Clearly the current financial year has been impacted by the COVID-19 crisis. As referenced previously this began to affect customer buying and project cycles from February 2020 onwards as they moved into precautionary modes. The Cyber division moved to a fully remote model in March 2020 and we have been able to provide the bulk of our services without interruption, although where client site visits are needed these have been disrupted and delayed. All of our staff are safe, we have some very limited use of furlough programmes and we have kept a skilled workforce in place ahead of recovery. We have also been able to return limited numbers of staff to the Reading office in a COVID-safe manner, offering staff a choice between home working and an office environment. We have maintained investment in sales and marketing and of course service innovation in support of Triarii and its new service offerings, and we are pleased that this is now gaining customer and partner adoption. We reviewed our physical infrastructure and have closed a leasehold premise (at very small cost) in Sussex so we can maintain flexibility as the wider office environment remains fluid and now only have the Reading SOC premises on an operating lease.
Cyber trading performance for the six months to 30 September 2020
The move to remote working opens up inevitable cyber security risks for organisations and we have positioned our offerings to address this growing market opportunity, and whilst orders and revenues were lower at the start of the year than those pre COVID-19 as clients were in disaster recovery mode, orders have since recovered strongly from July onwards and this began to flow through to revenues and margins shortly in September. The Cyber security market is expected to grow strongly with the shift to a more digital economy and we expect this to benefit Falanx.
We have just joined the SolarWinds TAP program and this will help us address their 22,000 MSPs globally. This partnership has already delivered revenues and in September, and we have won our first US cyber deal through them. We expect value from this partnership to grow significantly and are actively working on multiple prospects through this relationship for both the provision of Triarii monitoring services (including endpoint detection) as well as for professional services such as penetration testing.
In August we announced a significant sale of Triarii to UK public sector clients achieved through a partner who is a major supplier to the UK government. This partnership is active and is expected to deliver further sales of existing services as well as working with us to address a much larger market opportunity.
We will migrate some of our existing user base onto Triarii over the coming months. This will not only improve our client delivery but to also make our delivery more cost effective with significantly lower overall external licencing fees which will enhance our margins.
In the six months to 30 September 2020 the division recorded revenues of circa £1.4m (2019: £1.7m). Orders for penetration testing which had been most affected by COVID-19 delays recovered strongly from the start of August onwards and since then have been running at approximately £0.2m per month compared to c£0.1m per month at the start of the current financial year. The initial uplift in order volumes has already resulted in a much improved financial performance of the division in September and this trend is expected to continue. This is broadly similar to order levels pre-COVID. Despite reduced revenues arising from COVID-19 delays effective cost management has reduced the adjusted EBITDA loss to c£0.3m (2019: £0.4m).
Falanx Assynt
Our strategic Intelligence business unit, Falanx Assynt, provides market-leading geopolitical reporting and analysis focused on key major emerging markets and overarching global themes. Its client base includes some of the largest and most recognised global corporate names. Assynt’s two principal business lines are the subscription-based Assynt Report service and the Embedded Analyst business. These are supplemented by an Intelligence Consulting practice which provides tailored reports to address specific client requirements.
Annual revenue of £2.14m (2019: £1.64m) was generated, an uplift of 30% on the back of larger recurring revenue contracts rolled out in the second half of the year. Approximately 94% (2019: 85%) of total revenues were from monthly recurring contracts for Assynt report subscriptions and embedded analyst services. The balance of revenues was comprised of specific business intelligence reports. Gross margins consequently improved to 38% (2019: 33%).
Investments in sales and marketing were made in the first half of the year, and this resulted in a positive trading result in the second half of the year. Overall the division reported an EBITDA profit of £0.01m (2019: loss £0.05m), the second half was profitable, and this trend has carried on into the current financial year as set out below.
Over the year we continued to consolidate and build on the significant investment we had put into upgrading our flagship product, the Assynt Report, the previous year, including introducing an App based distribution system. Feedback from customers remains overwhelmingly positive.
For our Assynt Report subscriber base of global corporates (many of which are headquartered outside of the UK), we have produced over 1,300 reports analysing key geopolitical events in 40 countries, including specialist analysis of international jihadist trends. Over the course of the year we have expanded our country coverage to include further counties in sub-Saharan Africa as well as regular reports addressing significant global themes such as the geopolitics of environmental issues, global trade and great power politics. We continue to look for new reporting areas of significant client interest, including Covid related analysis, which we introduced just before the end of the financial year.
The reputation of and demand for the Embedded Analyst service, aimed firmly at the FTSE-100 and NASDAQ-100 market, continued to grow strongly, with two existing clients seeking additional capacity in addition to positions with new clients. As a result, the total number of embedded analysts increased by 25% over the course of the financial year.
In addition to our increased focus on high quality recurring revenue via the Assynt Report and Embedded Analysts, we are continuing to undertake Intelligence Consulting projects which are more clearly aligned with our core geopolitical analysis and emerging market expertise as well as on legal support projects. This has enabled us to pitch at a higher price point and increased share of the ‘value-add’ components of projects with in-house resources, further improving traditionally high levels of customer retention and account expansion.
COVID-19 Impact
So far, the Assynt business has successfully weathered the COVID-19 pandemic. To ensure the safety of our staff we have closed the London office and exited the lease in the new financial year. We have instituted home working with no impact on productivity or output. We have encountered very little customer churn, and all of our major clients have maintained or increased their spend. We have also rigorously controlled costs to ensure profitability and cashflow, and to ensure we have headroom should the economic impact of the pandemic be more sustained or severe than envisaged. Providing clients with analysis of the geopolitical effects of COVID-19 has been a potential opportunity for the Assynt business, and we have capitalised on this with a series of new reports focusing on the impact of the pandemic on key emerging markets and the global political economy.
Assynt trading performance for the six months to 30 September 2020.
Revenues for the six months to 30 September 2020 were circa £1.1m (2019: £0.9m) and the division recorded adjusted EBITDA of circa £0.1m (2019: break even). Recurring revenues were circa 96% of total revenues.
Future Prospects
The Assynt business has a robust platform for growth over the next three years. The significant revenue growth on the previous year resulting from, the increased marketing spends, and the continuing product refinement all provide a strong underpinning for developing the business further as a stand-alone division of Falanx Group.
Approved by the Board on 29 October 2020 and signed on its behalf by
M D Read
Chief Executive Officer
Chief Financial Officer’s Report
Revenue
Group revenues grew by 12% to £5.85m (2019: £5.21m). Revenues in the second half of the year were approximately £3.2m and this represented growth of 22% compared to the first six months. This was as a result of increased contract momentum in each division as well as much stronger professional services delivery and better utilisation of professional services resources in the Cyber division combined with the rollout of large recurring revenue client contracts in Assynt. The business was regularly experiencing monthly revenues in excess of £0.5m in the months before the onset of COVID which impacted from late February onwards due to customer delays caused by crisis management.
The business has continued to benefit from a strong element generated from the recurring contracts in each division, and overall this was constant at 56%. At the end of the period monthly recurring revenues across the Group stood at approximately £0.26m per month (2019: £0.24m). Our future order book of work remained strong with an order book of c£2.7m (2019: £3.2m) as well as deferred incomes (contract liabilities) of £1.2m (2019: £1.1m). Orders had been growing well in the second half of the year, but there were inevitable delays as the COVID-19 pandemic commenced, but since August 2020 order momentum has been regained.
During the year we added over 40 new cyber accounts including several larger accounts as well as significantly expanding existing client spend on professional services. Our churn in acquired customer bases has been low and as an example, the churn for First Base (acquired March 2018) has been less than 1% although the overall business has grown by circa 15% per annum. The Assynt division has a different customer profile to the Cyber division with approximately 75% of its clients being international and approximately 90% of them paying in advance with an average advance period of seven months.
Overall our number of customers invoiced was 284 (2019: 340) with the reduction arising from a move to larger deals from some customers. Overall the company dealt with over 440 (2019: 400) customers.
Cost of sales
Cost of sales represents cost items which vary more closely as a function of sales demand and therefore revenues. The Intelligence division’s cost base is largely employment costs for full time and external consultants who produce intelligence reports for customers as well as certain database access licences. The Cyber division costs include the team who deliver the monitoring and professional services, external licence fees for technology platform and its support (some of which are fixed and some of which are variable) as well as certain consultants for delivery of specific client assignments.
Gross margin
The Group’s gross margin was 38% (2019: 44%). The reduction was mainly due to utilisation issues at the start of the year in the Cyber division, which were resolved in September 2019 by the streamlining of the operational management of that division. Overall gross margins in the second half were 44% compared with 32% in the first six months, with the Cyber division’s gross margin improving from 30 to 45% in the second half.
Operational and cash-based costs
Administrative expenses excluding depreciation and amortisation and highlighted costs increased to £3.8m from £3.5m with most of the increase arising from expansion of sales and marketing costs in the Cyber division. Average headcount in the year was 81 (2019: 72) with a significant proportion of the increase being from additional analysts to support Assynt customer contracts.
Highlighted costs
Highlighted costs were £0.32m (2019: £0.18m) mainly represented certain restructuring and investment in infrastructure which was not capitalised fees. £0.24m related to investment in the cyber security platform Triarii and general corporate infrastructure around IT. Restructuring costs included post acquisition integration costs, legal entity restructure and rationalisation, management changes as well as certain corporate development professional fees around specific projects. Rental costs were normalised to exclude the impact of IFRS16, reducing the overall adjustment by £76,000 and a further credit adjustment of £67,000 was made in respect of the disposal of Furnace.
Share Option Charges
Share option charges increased to £0.23m (2019: £0.06m) with the increase due to the option grant in September 2019. The options were valued on a Monte Carlo basis.
EBITDA
Adjusted EBITDA loss for the year was £1.56m (2019: £1.25m) after adjusting for the items highlighted above. Headline reported EBITDA loss was £1.88m (2019: £1.48m).
Depreciation and amortisation
Depreciation of fixed assets was broadly flat with 2019 at £87,000, and a further IFRS 16 amortisation charge of £77,000 was recorded in respect of the right of use asset related to the Reading lease acquired in July 2019. The remainder of the amortisation charge arose from the amortisation of acquired customer base intangible assets from First Base (ten-year amortisation period, straight line basis, acquired March 2018) and Secure Storm Limited (three-year amortisation period, straight line basis, acquired July 2018). £0.26m of investment in Furnace was impaired (2019: nil).
Financing costs
Net financing costs were £24,000 (2019: £4,000) and mainly arose from the implementation of IFRS 16 and arrangement fees for the invoice discounting facility which were unused in the year and remain unused as at the date of this report.
Result for the year
Due to the investment made in the year, higher noncash charges such as amortisation, impairment and share option charges the loss increased from £1.83m to £2.88m and loss per share increased to 0.72p from 0.58p.
Non-current assets
Investment in Furnace
In December 2019 the group spun out its investment in the Furnace technology platform into a separate entity under the control of John Blamire who left the board at the same time. Falanx has 20% of the equity carried at £0.6m and a loan note of £1.1m for an aggregate investment of £1.7m (compared to an original cost of £1.63m). Consequently, previous development costs were no longer carried. Furnace has won its first sales and is now is actively seeking external investment and is in dialogue with a number of parties and its directors have prepared a three-year business plan. Falanx’s forward business plans do not have any dependency of Furnace’s financial performance and Falanx has no obligation to provide further financial support. A small impairment charge of £0.26m was recorded against this asset.
Goodwill and Customer Intangibles
Goodwill was £1.85m and arose from the acquisitions of First Base in March 2018 and Secure Storm in July 2018. The reduction compared to the previous year arose from £175,000 of goodwill arising from previous acquisitions to Furnace in December 2019 and is now included as part of the investment in Furnace referenced above. Customer relationships from First Base and Secure Storm were carried at a total of £1.97m (2019: £2.26m) with the reduction arising from straight line amortisation referred to above.
The Group’s noncurrent assets include the future value of the lease of the Reading premises of £0.47m (2019: nil) which commenced in July 2019. A creditor of £0.44m is carried to reflect future liabilities (£89,000 of which are current liabilities).
Working capital
Amounts due from customers (including contract assets), net of bad debt provision increased to £1.6m (2019: £1.4m) due to greater business volumes and the timing of certain billings. Collections since the year end have been normal and no incidence of bad debt has been recorded since the previous annual report. Overall debtor days increased from 47 to 66, mainly attributable to large contract billing in March 2020 thereby increasing the debtor position at year end. Prepayments have decreased due to revised billing arrangements for certain expenses. Accrued incomes fell during the year with certain items being billed earlier and are therefore included in the increased amounts due from customers. The Group continued to have a very low incidence of delayed and/or non-payment of debts by customers and our average losses over the last three years were only 0.06% of revenue and no bad debts were experienced in the year under review.
Contract liabilities (deferred income) increased to £1.2m (2019: £1.1m) on greater volume of advanced billings. Trade creditors increased due to the timing of certain supplier invoices. Taxes payable increased due to initial measures to manage cash at the outset of COVID19 in March 2020. Since the year end creditors including HMRC are within agreed terms and this is detailed in below.
Capital structure
The Company did not issue any shares in the year (2019: 138,500,000 ordinary shares) with there being 400,401,185 shares at the start and end of the year. 26,281,250 warrants lapsed during the year which had an average price of 6p. 30 million options over ordinary shares were issued under the EMI (and unapproved but similar to EMI schemes) in September 2019 with a price of 1.92p per share. 5,468,367 options were forfeited during the year primarily as a result of staff changes.
The Group has been rationalising its legal entity structure to best align it with the current opportunity as well as to reduce costs and streamline tax management. The Groups 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 moment, clearly taking into account 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 more closely align with UK incorporated entities. The Group is fully resident and registered in the UK from a tax perspective.
At the year-end shareholders’ funds stood at £5.0m (2019: £7.6m).
Statement of Cash Flows
The Company did not issue any shares in the year and consumed £1.6m of cash in operations (2019: £1.9m). This was supported by a net working capital inflow arising from short term timing differences of £0.3m (2019: outflow £0.4m). Operational cash flow remained closely aligned with EBITDA performance with operating cash outflow being 80% of EBITDA loss (2019: 123%). Over on average over the last four years there is a near 100% correlation between these metrics. The business invested £0.44m in its technology platform (Furnace, which was spun out December 2019) and a further £0.26m in upgrading its infrastructure and the new SOC in Reading.
No shares were issued in the year (2019: £4.15m). Closing cash balances at 31 March 2020 were £0.08m (2019: £2.44m).
Post balance sheet events
As part of its COVID-19 response plans the company undertook the following actions;
· On 21 April 2020 approximately 31 million new share options and warrants were issued to staff and directors in exchange for salary reductions for the six months to 30 September 2020. These options were priced at 1p each and have a life of 10 years from the date of grant. Staff and directors waived approximately 25.7m options and a further 9m lapsed in June 2020. Where options were not at the point of grant qualifying for EMI benefits, they may be cancelled and reissued in the future under similar terms to optimise the overall tax position.
· In July 2020 the premises in Sussex and London were closed following the non-renewal of expired leases. The business moved to remote and home working in March 2020 and the expense of keeping such leases as well as the ongoing office costs were not justified in the new remote working model.
· A deferred payment plan was agreed with HMRC to reschedule up to £0.64m of payroll taxes outstanding at 30 June 2020 over 2 years as well as taking advantage of published time to pay plans on VAT. The group is fully in compliance with these plans.
· On 29 September 2020 Falanx announced the completion of a fundraising exercise for £1.25m by issuance of 125,000,000 new ordinary shares of nil nominal value. Of these £1,125,000 (gross) has been received by the date of the accounts with the remaining £75,000 (7,500,000 shares) intended to be subscribed by the directors and senior managers post the release of these results and them being allowed to participate under the MAR framework. A significant proportion of this fundraising is through long-term EIS & VCT investment and overall it included new and existing institutional investors.
Post Balance Sheet Trading
In the six months ended 30 September 2020 the Group recorded revenues of approximately £2.5m (2019: £2.6m) and a much-reduced adjusted EBITDA loss of £0.6m (2019: £0.9m). Revenues in the cyber division were impacted by reduced professional services demand in the Cyber division in the first few months with the onset of COVID-19, but since the start of August monthly orders for these have increased significantly and are now running at circa £0.2m per month compared to £0.1m per month in the first quarter during the peak of COVID-19. The sales pipeline has strengthened with the launch in August 2020 of the cyber security monitoring platform Triarii and it is winning important sales orders. The current order run rate of orders for these services is very similar to that in the second half of the previous financial year to 31 March 2020 and they are broadly back to the pre COVID-19 run rate. September’s revenues were much stronger following acceleration of client deliveries and the order momentum has continued into October. These levels are ahead of where the Group had conducted its stress testing. Closing cash at 30 September 2020 was £0.2m (2019: £0.7m) but this excluded the proceeds of the fundraising announced on 25 September 2020 which were received alongside the admission of the new shares on 1 October 2020. On that day cash balances stood at circa £1.33m. The Group’s customers are paying normally, and no bad debt has been experienced, furthermore creditors including HMRC are in agreed terms.
I R Selby
Chief Financial Officer
