TIDMFLX
RNS Number : 8875M
Falanx Group Limited
19 September 2019
19 September 2019
FALANX GROUP LIMITED
("Falanx", the "Group" or the "Company")
Annual results for the year ended 31 March 2019
Falanx Group Limited (AIM: FLX), the global cyber security and
intelligence services provider, is pleased to announce its audited
results for the year-ended 31 March 2019.
Financial highlights
-- Revenues increased 73% to GBP5.2m (2018: GBP3.0m)
-- Gross margin increased significantly to 44% (2018: 31%)
driven by favourable revenue mix and strong services
utilisation
-- Contribution from monthly recurring revenue represented
56% of revenue (2018: 62%) with the lower % being attributable
to strong growth in professional services. The monthly
recurring revenue run rate at 31 March 2019 was GBP0.24m
(2018: GBP0.19m) and monitoring recurring revenues grew
by 91% to GBP1.0m (2018: GBP0.52m)
-- Adjusted EBITDA loss reduced by 25% to GBP1.2m (2018:
GBP1.6m), reported loss GBP1.9m (2018: GBP2.4m)
-- GBP3.2m future contracted revenues (2018: GBP2.3m) of
which GBP1.1m (2018: GBP0.7m) was deferred income
-- Debt free with cash balances of GBP2.4m (2018: GBP0.9m)
following successful institutional share subscription
in November 2018
-- Loss per share reduced by 53% to 0.58p (2018: 1.24p)
-- Shareholders' funds GBP7.6m (2018: GBP5.3m)
Operational highlights
-- Strong performance from our core business, Falanx Cyber
buoyed by the successful integration and contribution
of First Base acquisition
-- Strategic partnership with SolarWinds continues to develop
with Falanx appointed as the first Threat Monitoring
Service Provider ("TMSP") for the UK, continental Europe
and South Africa
-- Falanx Intelligence (Assynt) shifted efforts from one-off
sales to high-quality recurring revenue income
-- Increased customer base by over 10% to 400
-- Management team strengthened and well placed for next
stage of growth
Post period highlights
-- Trading to the end of July 2019 in line with management's
expectations with professional services in Cyber growing
by 10% compared with prior year
-- New premises in Reading secured as part of planned Cyber
expansion and current investment program largely complete
-- Successful delivery of Cloud security service with our
in-house developed CASB (Cloud Application Security Broker)
capability
-- Strong pipeline of business in each division from new
name and existing accounts
-- 50% growth in the Managed Service Providers ("MSPs")
channel since the start of the current year
* 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, share based
payment charges, depreciation, amortisation, impairment charges and
exceptional items.
Mike Read, Chief Executive, said:
"This has been a very busy period for Falanx with a number of
operational improvements made and a renewed focus on channelling
our efforts towards the most profitable sales opportunities. We
have seen strong organic growth across the core areas of our
business, and we see growth continuing into the current financial
year. We anticipate the SolarWinds partnership to start to bring
benefits in the second half of the current financial year as they
rollout their product.
The Board has set out its strategy of driving top line growth
and reducing costs as it targets cashflow breakeven. We are
confident of achieving this goal in the near term as our sales
pipeline continues to grow with our enhanced cyber security
offering. As a result, the Board views the future with
optimism.
There is no doubt that the cyber security market is growing
rapidly so it is essential that we focus our efforts on the best
near term situations as we seek to increase shareholder value."
The Company will post its report and accounts for the financial
year ended 31 March 2019 together with its notice of AGM in the
coming few days and these will be available to download from
www.falanx.com, in accordance with AIM Rule 20.
Enquiries:
Falanx Group Limited Via IFC
Alex Hambro Chairman
Mike Read CEO
Ian Selby CFO
Stifel Nicolaus Europe Limited,
Nomad and Joint Broker
Fred Walsh / Alex Price / Neil Shah + 44 (0) 207 710 7600
Turner Pope International Limited,
Joint Broker
James Pope / Ben Turner +44 (0) 203 621 4120
IFC Advisory Ltd
Financial PR & IR
Graham Herring / Miles Nolan / Zach
Cohen +44 (0) 203 934 663
About Falanx
Falanx Group Limited, is a global intelligence and cyber defence
provider working with blue chip and government clients. For more
information: http://www.falanx.com/
Chairman's statement
I am delighted to be writing to you as the recently appointed
Chairman of Falanx. I joined the Group on 28 March 2019, but I have
known the team for some time longer. I was impressed with the
unique opportunity Falanx has available due to its relationship
with SolarWinds and the Threat Monitor Service Provider (TMSP)
program. The program allows Falanx to leverage its own security
services through the scale of its international technology partner
and immense MSP channel. This places Falanx in a strong position to
take advantage of the obvious growth opportunities within the cyber
security sector and was one of the reasons I decided to join.
Prior to any anticipated revenue growth as a consequence of the
TMSP program, in the reporting period ending March 2019, I am
pleased to report overall revenues increased by 73%, to a record
GBP5.2m (2018: GBP3.0m). This has been achieved by a useful
contribution from acquisitions as well as securing a number of new
client wins which is testimony to the service we provide our
clients. Of particular note is our second half performance which
recorded a 39% increase in revenues to GBP3.0m and I am pleased to
report that momentum has continued in the current financial year.
Against our strong sales and margin performance we have reported a
reduction in adjusted EBITDA losses to GBP1.2m (2018: GBP1.6m
loss).
We were delighted to secure additional funding of GBP4.155m
(before expenses) in a well-supported institutional placing which
has strengthened our balance sheet and will help support our future
growth plans. Our balance sheet is much stronger with GBP7.6m
(2018: GBP5.3m) of shareholders' funds of which GBP2.4m (2018:
GBP0.9m) was cash.
Group strategy and corporate governance
Following the successful transition of both divisions during the
year, we saw some significant client wins in Intelligence and Cyber
sales as well as a strong contribution from the First Base and
Securestorm acquisitions. This year we expect this success will act
as the foundations for the Group to drive momentum and achieve
further top line revenue growth. I am confident that, with
continued focus on addressing high-growth market sectors, we can
achieve sustainable profitability and enhance shareholder
returns.
As the Group increases its scale and we continue to monitor
levels of best practice, strengthening our corporate governance has
been an area of focus. To this end, we reviewed our advisers,
leading to a change of nominated adviser to Stifel (from Spark
Advisory) and a change of Auditors, BDO LLP (from Kingston Smith
LLP). We would like to express our thanks to both outgoing firms
for their services and support over the years.
Outlook statement
As I mentioned above, I was drawn to Falanx partly by the
opportunity its relationship with SolarWinds creates and partly by
its strong services capabilities and robust organic growth in this
reporting period. I have no doubt that a partner of SolarWinds
stature would not have entertained Falanx as the inaugural TMSP for
UK, Europe and South Africa, had it not been impressed with the
breadth and quality of service which has underpinned our organic
growth over this period.
In parallel to growth opportunities we continue to monitor and
respond to technological changes. As our customers transition data
and infrastructure away from traditional on premises solutions to
the Cloud, we are developing and adapting our services and
technology in order to maximise the full potential of our in-house
technology development work, which has received positive industry
and potential customer feedback from both the UK and US.
Although we look to automate as much as possible with the
support of our technology developments, we are predominantly a
people-based organisation, dependent on highly skilled and
well-motivated staff. We recruit and retain great people by
offering an excellent working environment with competitive salaries
and benefits as well as share participation incentives. I would
like to thank the management and staff for their continued resolve
to achieve success in our pursuit of market leadership in cyber
defence.
The Board is confident that the investment programme in the
first half of the year is starting to produce positive results
which will be reflected in the second half of the year. Our drive
to achieve cashflow breakeven is the Board's primary objective and
we are confident of reaching this goal in the near term. In
addition, our thanks go to our loyal shareholders, for providing
the funding and support to facilitate the ongoing delivery of our
objectives.
Approved by the Board on 18 September 2019 and signed on its
behalf by
A Hambro
Chairman
Chief Executive Officer's Report
Introduction
Falanx Group Limited is a provider of Cyber Security and
Strategic Intelligence services across many geographies, to over
400 customers ranging from Government, large enterprises to the SME
market. The operations of the business are supported by Falanx
Technology who together with third parties provide the underpinning
technology for our teams.
Falanx Cyber
Our core division recorded a much stronger performance in both
revenue and EBITDA performance than in the prior year (see note 4).
This was due to the acquisition of First Base (acquired 23 March
2018), increased contract momentum and stronger professional
services utilisation. Revenues grew by 222% to GBP3.57m and the
final 6 months were 46% greater than H1. Gross margins were 49%
(2018: 21%) and this was attributable to business mix and stronger
professional services performance. The division invested in sales
and marketing expansion as well as infrastructure investment in the
second half of the year to support growth plans such as SolarWinds
which is expected to start benefiting in the year ended 31 March
2020. Overall adjusted divisional EBITDA was GBP0.05m (2018: loss
GBP0.87m) and the division was profitable on a similar basis in the
second half of the year, reversing similar losses in the first half
of the year.
Falanx Cyber now offers an extended portfolio of professional
cyber security services, complementing our MDR (Managed Detection
and Response) service, through the successful integration of First
Base and Securestorm, acquired in March and July 2018 respectively.
These acquisitions have provided an additional customer base across
a diverse range of sectors including Government, Finance, Legal,
Insurance, Retail, IT and Telecoms.
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 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 most significant addition to this growing 'Channel' model is
the strategic partnership with SolarWinds (NYSE: SWI), a leading
provider of powerful and affordable IT infrastructure management
software, which was announced on 19 September 2018. SolarWinds
appointment of Falanx as the first TMSP across Europe and South
Africa creates the opportunity to access SolarWinds' MSP customers.
SolarWinds' customer managers introduce Falanx as a preferred
security provider, offering managed services support to its Threat
Monitoring Service program, along with the Falanx Cyber portfolio
of security services. In turn, each MSP can leverage the SolarWinds
technology and Falanx services into their own client base. This
multiplying effect offers Falanx Cyber access to a very significant
market place of pre-qualified consumers.
SolarWinds has engaged with the three inaugural TMSP's, of which
Falanx Cyber is one, requesting feedback into the development and
product specification of the SolarWinds Threat Monitor product.
This preparatory work has been focused on creating a highly
scalable platform and seeding this 'mass market' opportunity with
education programmes and disruptive pricing. The significant
marketing power of SolarWinds will be applied to fully launch the
product with the support of the TMSP's in the second half of our
current financial year.
The combination of strong and growing demand for the Falanx
Cyber portfolio of services, market pull of the MSP 'Channel' model
and the unique opportunity offered by SolarWinds, indicate another
year of high growth ahead. In 2019, the division had overall
organic growth of 10% although our key service line of monthly
recurring monitoring grew by over 90%. 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, Falanx Cyber has further invested in
people, processes and infrastructure to expand capacity and
maximise the revenue growth opportunities of the current year and
beyond.
Falanx Intelligence (Assynt)
Our strategic Intelligence business unit, Falanx Assynt,
provides market-leading geopolitical reporting and analysis on
major emerging markets to global corporate customers. The two
principal business lines are now the subscription-based Assynt
Report service and the Embedded Analyst business.
Revenue and EBITDA reduced in H1 as a consequence of remodeling
and investing in the business to move away from historic 'spot'
revenues and toward a greater proportion of high-quality recurring
revenue. In 2018/19, the two recurring revenue product lines
represented 85% (2017/18: 72%) of total Intelligence revenues. The
remaining 15% of revenues were from one-off Business Intelligence
("BI") and Strategic Intelligence consulting projects. These
're-balancing' measures ensured a return to growth in H2, with
revenues growing by 32% compared with H1. For the full period
2018/19, revenue of GBP1.64m (2017/18: GBP1.89m) was generated with
an adjusted EBITDA loss of GBP0.05m (2017/18: profit GBP0.25m. The
second half turnaround led to a much-improved monthly recurring
revenue performance and was achieved after a planned increase in
cost base to build expansion capability to support future growth
and the division was profitable at an adjusted EBITDA level in the
second half of the year.
The first half of the year was focused on consolidation and
investment, including the first serious reformulation and upgrade
of our flagship product, the Assynt Report, for ten years. We
invested over GBP0.1m in the creation of our proprietary, customer
focused, online portal. This has replaced the previous email-based
distribution system which had reached 'end of life', while at the
same time much improving customer experience, product presentation,
ease of consumption and opportunity to scale service. Feedback from
existing customers has been overwhelmingly positive, with the
increased sophistication and presentation of the product, including
the introduction of maps and graphics, generating great interest
among new clients. The introduction of the new Assynt Report Mobile
App in June 2019 will further improve the accessibility of our
product to subscribing customers.
For our Assynt Report subscriber base of global corporates (many
of which are headquartered outside of the UK), we have produced
over 1,200 reports analysing events in 37 countries, including
specialist analysis of international jihadist trends. Our overall
international business grew by 20%. Over the course of the year we
have expanded our country coverage to include regular reports on
three additional countries in sub-Saharan Africa and Latin America.
We plan to expand our Africa coverage further during the current
financial year.
The reputation and demand of the Embedded Analyst service, aimed
firmly at the FTSE-100 and NASDAQ-100 market, continued to grow
strongly, with three existing clients seeking additional capacity
and strong interest from new clients, particularly in the USA. As a
result, the total number of embedded analysts increased by 40% over
the course of the financial year, with additional positions
scheduled to come on stream in late 2019. This includes a major new
contract with one of the largest global (US-based) technology
companies, which has an annual revenue potential to make it the
Division's largest. This illustrates our growing reputation and has
led to discussions ongoing with other similar organisations.
In addition to our increased focus on high quality recurring
revenue via the Assynt Report and Embedded Analysts, we are now
focusing on Strategic Intelligence projects which are more clearly
aligned with our core geopolitical analysis and emerging market
expertise. This has enabled us to pitch at a higher price point and
increase share of the 'value-add' components of projects with
in-house resources, further improving traditionally high levels of
customer retention and account expansion.
The Assynt business has a robust platform for growth over the
next three years and the significant client wins since the start of
2019 provide strong validation for this being a separate division
and a valuable asset
Falanx Technologies
Our technology development organisation continues to develop
proprietary and innovative technology and integrate 3(rd) party
technologies to support Falanx Cyber business lines MDR (formally
known in Falanx as MidGARD) and professional services (Penetration
Testing, Awareness and Consultancy).
Our strategic technology development program has shifted away
from traditional 'on-premise' engineering, toward customers and
applications that have embraced high growth and in particular,
public Cloud such as Amazon Web Services, Microsoft Azure and
Google Cloud Platform. A few years ago, only a small percentage of
customers were considering public Cloud as a viable alternative to
the traditional data infrastructure offerings from vendors such as
Oracle, HPE Vertica and IBM, or on-premise solutions offered by
their local data centre vendor. However, the landscape has now
changed dramatically, and we are therefore focused on enabling
Falanx Cyber to secure our customers in the Cloud.
As a result of this focus, the Falanx Technologies team have
successfully developed our own proprietary CASB (Cloud Access
Security Broker) capability. This functionality is required as many
traditional network security monitoring tools are not 'Cloud
Native' and therefore require additional third party software to
bridge the gap to cloud hosted applications such as SalesForce,
Office 365 and Sage. The development of our own capability is a
significant resource, allowing Falanx Cyber secure its customers as
they transition to the Cloud.
These technologies allow users to significantly reduce cost,
increase security and gain greater insight to their security 'Big
Data' assets. We are evaluating strategies to maximise the full
potential of our development work, which could have uses beyond
traditional security. It has already been evaluated by industry
experts and the feedback has been positive and is currently being
evaluated by US based organisations as an alternative to some of
their existing infrastructure.
Approved by the Board on 18 September 2019 and signed on its
behalf by
M D Read
Chief Executive Officer
Chief Financial Officer's report
Revenue
Group revenues grew by 73% to GBP5.2m (2018: GBP3.0m). Revenues
in the second half of the year were approximately GBP3.03m and
represented growth of 39% compared with the first 6 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 which followed the integration of First Base (which was
acquired 23 March 2018). Assynt recorded stronger BI revenues in
the second half and began to benefit from large recurring
subscription and embedded analyst contracts which began to deliver
at the end of the year.
The business has continued to benefit from a strong element
generated from the recurring contracts in each division, and
overall this was 56% (2018: 62%). Whilst the proportion fell, this
was due to a much improved services performance, an overall an
increase of circa GBP0.97m was recorded. At the end of the period
monthly recurring revenues across the Group stood at approximately
GBP240,000 per month (2018: GBP190,000). The majority of the growth
was from monitoring contracts and managed Cyber services in line
with the Board's strategy of moving to higher quality revenues. At
the period end the Group had approximately GBP3.2m of future
revenue (2018: GBP2.3m) under contract including deferred income of
GBP1.1m (2018: 0.7m).
We have added (through acquisition and organic efforts) several
larger accounts (typically spending more than GBP0.1m per annum)
and this, combined with our much expanded customer base with around
340 customers invoiced by us in the year, has reduced our customer
concentration profile significantly with no single customer
accounting for more than 6% of revenue.
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).
Gross margin
The Group's gross margin was 44% (2018: 31%). Each division
experienced margin improvement as a result of favourable revenue
mix with a significantly increased contribution from high margin
recurring revenues, as well as improved utilisation of professional
services staff. This grew overall gross margin from 36% in the
first 6 months to approximately 49% in the second half.
Operational and cash based costs
Administrative expenses excluding depreciation and amortisation
and exceptional costs increased from GBP2.5m to GBP3.5m as the
Group grew its infrastructure and headcount to support growth.
Average headcount in the year was 72 (2018: 51) reflecting the
impact of acquisitions in 2018 and 2019. Both divisions expanded
their sales and marketing capacity in support of growth plans, and
the results for 2019 included a full year of management costs at
both divisional and Group levels.
Exceptional costs
Exceptional costs were GBP0.18m (2018: GBP0.53m) mainly
represented certain restructuring costs post acquisition and
transaction related fees. Share option charge were GBP0.06m (2018:
GBP0.05m). These are detailed in notes 5 and 12 to these
accounts.
EBITDA
Adjusted EBITDA loss for the year was GBP1.2m (2018: GBP1.6m)
after adjusting for the items highlighted above. Headline reported
EBITDA loss was GBP1.5m (2018: GBP2.2m).
Depreciation and amortisation
Depreciation and amortisation was GBP0.37m (2018: GBP0.30m) and
largely (GBP0.28m) represented amortisation of the intangible
assets arising on the purchase of First Base in March 2018 and
Securestorm in July 2018 where the customer base is amortised over
10 years and 3 years respectively on a straight-line basis. The
remainder arose from depreciation of plant and equipment and
software assets. The prior period represented software licences for
the Cyber division purchased in 2014 and 2015. The remainder
represented usual amortisation charges around the Company's
assets.
Financing costs
Financing costs were GBP4,257 (2018: GBP2,900) and arose from
bank overdrafts operated in the year.
Taxation Charge
The Group recorded a non cash deferred taxation credit of
GBP0.5m (2018: GBPnil) arising from revaluation of customer bases
from acquired organisations. The corresponding amount has been
treated as goodwill.
Result for the year
The Group's operating loss was reduced by 10% to GBP1.8m (2018:
GBP2.0m) and this was attributable to revenue growth, higher
margins and less restructuring. Loss per share fell by 53% to 0.58p
(2018: 1.24p).
Non-current assets
The Group continued to invest in technology during the year and
a further GBP0.4m (2018: GBP0.5m) of development costs were
capitalised in support of monitoring technology development of
Project Furnace in the technology division. Spend on tangible and
intangible fixed assets was GBP0.13m (2018: GBP0.07m) primarily on
technology and infrastructure costs. The intangible assets from the
customer base of First Base and Securestorm are amortised over a
period of 10 years and 3 years respectively from date of
acquisition (March 2018 and July 2018). This customer base has
continued to grow during the year and experiences little churn. The
intangible assets created from R&D investment in Project
Furnace has been reviewed against likely expected cash flows. As
referenced in the Falanx Cyber Technology section of the Chief
Executive Officer's report this ongoing development work has
initial market interest.
The intangible assets arising from acquisition such as Goodwill
and Customer bases were tested for impairment in the line with the
Group's policy and no adjustment to carrying value was required,
although GBP0.46m of customer assets from the acquisition of First
Base was reclassified as goodwill and this was reflected in opening
balances. A further GBP0.5m of goodwill arose from deferred tax
adjustments related to the acquisition of acquired customer bases,
the majority of which arose in the prior year and this is described
further below.
The Company continues to review optimal routes to market for
this in conjunction with its advisors. The Company continues to
invest in its corporate infrastructure and particularly its
technology estate to ensure it is optimised for growth plans and
risk management.
Working capital
Amounts due from customers, net of bad debt provision increased
to GBP1.2m from GBP0.9m due to greater business volumes and timing
of certain billings. Overall debtor days fell from 65 to 47 and
showed the strong cash performance and record of collection. Other
debtors increased, caused by slightly higher contract assets
(accrued income) which was billed early in the new financial year
and from the prepayment of certain 3(rd) party licence fees which
has previously been paid on a monthly basis. 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 two years were only
0.07% of revenue.
Contract liabilities (deferred income) increased to GBP1.1m
(2018: GBP0.7m) on greater volume of advanced billings to customers
in both divisions. This accounted for most of the increase in
current liabilities which increased from GBP2.13m to GBP2.43m with
a reduction in certain liabilities which were recorded in the March
2018 balance sheet. Creditors were within payment terms at the
March 2019 balance sheet date.
Capital structure
The Company issued the following shares during the period:
On 16 July 2018 the company issued 2,222,222 ordinary shares at
a price of 4.5p each to the vendors of Securestorm Limited as
consideration of GBP100,000 for the acquisition of its entire share
capital. On 14 November 2018 the Company issued 138,499,999
ordinary shares at a price of 3.0p each to institutional investors
raising GBP4.155m gross (GBP3.977m net) after deducting commission
and transaction related costs.
At the 31 March 2019 the Company had 400,401,185 ordinary shares
of nil nominal value in issue. The Company also had 41,061,251
warrants outstanding at 31 March 2019 and full details are in note
20 to these financial statements. Approximately 26m of these
warrants lapsed in May 2019. On 27 March 2019 the company varied
its memorandum and articles of association and introduced a
threshold of 1p below which shares cannot be issued without
shareholder permission.
At the year-end shareholders' funds stood at GBP7.6m (2018:
GBP5.3m).
Statement of Cash Flows
During the year the Group raised GBP3.977m net by the issue of
new shares in November 2018. A net working capital outflow of
GBP0.35m (2018: inflow GBP0.01m) arose from the settlement of
certain liabilities outstanding at the end of 2018 and also from
the liabilities inherited from the acquisition of Securestorm
Limited in July 2018. Operational cash flow remains closely aligned
with EBITDA performance, and has averaged at circa 90% over the
last 2 years with variations arising from short term timing issues.
GBP0.46m was used in ongoing investment in technology platforms.
Cash balances at 31 March stood at GBP2.4m (2018: GBP0.9m).
Restatement of Prior Year Results
GBP0.08m of foreign exchange losses were recorded as a charge
against operating losses in the year ended 31 March 2018 and has
been reclassified as Other Comprehensive Income. A deferred tax
asset arising from the revaluation (under IFRS 3) of the customer
base intangible acquired with First Base Technologies LLP in March
2018 resulted in a credit against corporation tax of GBP0.47m.
GBP0.46m of intangible assets previously capitalised as customer
base related on the same acquisition were reclassified as goodwill.
Consequently, loss per share reduced from 1.56p to 1.24p per share
for the year ended 31 March 2018.
Post balance sheet events
In July 2019 the Company entered into a lease for premises in
Reading. This will form the basis of the operations of Falanx Cyber
which will be moving its operations from Birmingham to Reading in
August 2019. This was done after an extensive review of the optimal
position to locate the Cyber Security Operations Centre (SOC) from
an access to relevant skills perspective and to help the overall
expansion of the business. This premises will be operationally
leveraged for maximum utilisation. The net impact of the lease is
expected to add an additional GBP0.1m to cash operating costs per
annum and will be accounted for under IFRS 16.
Approved by the Board on 18 September 2019 and signed on its
behalf by
I R Selby
Chief Finance Officer
Key Performance Indicators
Performance Description Why measured 2019 2018 Comment
Indicator
Group revenue Changes in total Revenue growth GBP5.2 GBP3.0 Increase of 73%
- GBP'm revenue compared gives a quantified attributable to
to prior year indication of increased revenue
the rate at in the Cyber division,
which the Group's with 39% growth
business activity in the second half
is expanding of the year compared
over time to the first half
of the year
Provides an Improved margin
indication of due revenue mix
sales profitability and better utilisation
Percentage of total and proportion in professional
revenue retained of revenue available services following
by the Group after to cover other acquisition and
Gross margin direct costs deduction running costs 44% 31% integration
EBITDA A measure of profits Offers a clearer GBP(1.5) GBP(2.2) Increase in revenue
- GBP'm excluding non-cash reflection of and reduced costs
items such as the ability
depreciation to generate
and amortisation cash
Adjusted A measure of profits Underlying performance GBP(1.2) GBP(1.6) Much reduced
EBITDA adjusted for of business restructuring
- GBP'm non-underlying operations charges and acquisition
items such as related costs
restructuring
and acquisition
related
Measures the
ability of the A close correlation
business to between trading
Operational cash convert profit performance and
Cash conversion flow / EBITDA into cash 132% 96% cash generation/usage.
Reduction in %
due to significant
growth in non-recurring
professional services
Shows visibility revenue, although
Recurring of recurring an underlying increase
revenue Recurring revenue revenue growth of circa GBP0.97m
% lines / total revenue rate 56% 62% recorded
Contracted Binding commitments Shows visibility GBP3.2 GBP2.3 Greater levels
revenue from customers into contracted of advance customer
- GBP'm for future revenues revenues underpinning commitments including
future revenue advance payments
forecasts (contract liabilities)
Monthly Revenue from the Shows predictable GBP0.24 GBP0.19 Increase in revenue
recurring provision of services monthly metrics from protective
revenue on a recurring to track progress monitoring and
- GBP'm basis against objective consulting in the
of becoming Cyber division
profitable solely and embed service
on recurring in the Intelligence
revenue division
Growth of 2.4%
Measure of customer largely attributable
Number Number of customers concentration to increased customer
of Invoiced invoiced over the (includes acquired base of the Cyber
customers preceding 12 months customer base) 340 332 division
Increase in operations
Shows average staff to deliver
Average headcount number of employees future revenue
Headcount during the year in the year 72 51 commitments
Contract Contracted and Shows visibility GBP1.1 GBP0.7 Increase due to
liabilities invoiced revenue into invoiced growth in the Cyber
(deferred yet to be recognised amounts to be division and contract
income) (deferred income) recognised in value increases
- GBP'm future periods in Assynt
----------------- ------------------------- ------------------------ --------- --------- ------------------------
Consolidated Income Statement
For the year ended 31 March 2019
Restated
2019 2018
Note GBP GBP
------------------------------- ----- ------------ ------------
Revenue 3 5,212,136 3,020,935
Cost of sales (2,924,210) (2,079,891)
------------------------------- ----- ------------ ------------
Gross profit 2,287,926 941,044
Administrative expenses (4,144,508) (3,406,009)
------------------------------- ----- ------------ ------------
Operating loss (1,856,582) (2,464,965)
Analysis of operating loss
Operating loss (1,856,582) (2,464,965)
Share option expense 60,715 48,763
Depreciation and amortisation 369,071 298,138
Exceptional costs 4.1 180,921 528,563
Adjusted EBITDA loss 4.2 (1,245,875) (1,589,501)
------------------------------- ----- ------------ ------------
Finance income 1,526 633
Finance costs (4,257) (2,900)
------------------------------- ----- ------------ ------------
Finance costs - net (2,731) (2,267)
Loss before income tax (1,859,313) (2,467,232)
Income tax credit 5 28,442 474,798
------------------------------- ----- ------------ ------------
Loss for the year (1,830,871) (1,992,434)
Earnings per share
Basic earnings per share 6 (0.58)p (1.24)p
Diluted earnings per share 6 (0.58)p (1.24)p
------------------------------- ----- ------------ ------------
Consolidated statement of comprehensive income
For the year ended 31 March 2019
Restated
2019 2018
Note GBP GBP
---------------------------------------------- ----- ------------ ------------
Loss for the year (1,830,871) (1,992,434)
Other comprehensive income:
Re-translation of foreign subsidiaries 9 3,053 (74,609)
---------------------------------------------- ----- ------------ ------------
Other comprehensive income for the year, net
of tax 3,053 (74,609)
---------------------------------------------- ----- ------------ ------------
Total comprehensive income for the year (1,827,818) (2,067,043)
---------------------------------------------- ----- ------------ ------------
Attributable to:
Owners of the parent (1,827,818) (2,067,043)
Total comprehensive income for the year (1,827,818) (2,067,043)
---------------------------------------------- ----- ------------ ------------
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 5.
Results for 2018 have been restated, refer to note 10 for the
prior year adjustment.
Consolidated statement of financial position
As at 31 March 2019
Restated
2019 2018
Note GBP GBP
--------------------------------------------- ----- ------------- ------------
Assets
Non-current assets
Property, plant and equipment 111,852 132,544
Intangible assets 7 5,386,573 4,930,371
5,498,425 5,062,915
--------------------------------------------- ----- ------------- ------------
Current assets
Inventories 3,828 4,382
Trade and other receivables 2,112,097 1,467,434
Cash and cash equivalents 2,443,686 914,961
--------------------------------------------- ----- ------------- ------------
4,559,611 2,386,777
--------------------------------------------- ----- ------------- ------------
Total assets 10,058,036 7,449,692
--------------------------------------------- ----- ------------- ------------
Equity
Capital and reserves attributable to equity
holders of the Company
Share capital 17,903,427 13,868,734
Translation reserve (108,580) (111,633)
Shares option and warrant reserve 358,959 255,483
Retained earnings (10,526,752) (8,695,881)
--------------------------------------------- ----- ------------- ------------
Total equity 7,627,054 5,316,703
--------------------------------------------- ----- ------------- ------------
Liabilities
Non-current liabilities
Deferred tax liability 7,593 9,529
--------------------------------------------- ----- ------------- ------------
7,593 9,529
--------------------------------------------- ----- ------------- ------------
Current liabilities
Trade and other payables 1,313,558 1,374,981
Contract liabilities 3 1,109,831 748,479
--------------------------------------------- ----- ------------- ------------
2,423,389 2,123,460
--------------------------------------------- ----- ------------- ------------
Total liabilities 2,430,982 2,132,989
--------------------------------------------- ----- ------------- ------------
Total equity and liabilities 10,058,036 7,449,692
--------------------------------------------- ----- ------------- ------------
Consolidated statement of changes in equity
For the year ended 31 March 2019
Share Retained Translation Share option
and
Note capital earnings reserve warrant reserve Total
GBP GBP GBP GBP GBP
--------------------------- ------ ----------- ------------- ------------ ---------------- ------------
Balance at 1 April 2017
restated 7,410,507 (6,703,447) (37,024) 196,606 866,642
Loss for the year - (1,992,434) - - (1,992,434)
Re-translation of foreign
subsidiaries - - (74,609) - (74,609)
Transactions with owners:
Issue of share capital 6,783,438 - - - 6,783,438
Costs of issue of share
capital (325,211) - - - (325,211)
Share based payment
charge - - - 58,877 58,877
Balance at 31 March
2018 13,868,734 (8,695,881) (111,633) 255,483 5,316,703
------------------------------------ ----------- ------------- ------------ ---------------- ------------
Loss for the year - (1,830,871) - - (1,830,871)
Re-translation of foreign
subsidiaries - - 3,053 - 3,053
Transactions with owners:
Issue of share capital 4,255,000 - - - 4,255,000
Costs of issue of share
capital (220,307) - - - (220,307)
Share based payment
charge - - - 103,476 103,476
------------------------------------ ----------- ------------- ------------ ---------------- ------------
Balance as at 31 March
2019 17,903,427 (10,526,752) (108,580) 358,959 7,627,054
------------------------------------ ----------- ------------- ------------ ---------------- ------------
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 2019
Restated
2019 2018
Note GBP GBP
----------------------------------------------------- ------ ------------ --------------
Cash flows from operating activities
Loss before tax (1,859,313) (2,467,232)
Adjustments for:
Depreciation 75,526 65,430
Amortisation and impairment 293,546 232,708
Share based payment 60,715 81,263
Loss on disposal of property, plant and equipment - 1,026
Net finance cost recognised in profit or
loss 2,731 2,267
(1,426,795) (2,084,538)
------------------------------------------------------------ ------------ --------------
Changes in working capital:
Decrease in inventories 554 4,118
Increase in trade and other receivables (588,755) (741,701)
Increase in trade and other payables 98,006 755,156
------------------------------------------------------------- ------------ --------------
Cash used in operations (1,916,990) (2,066,965)
Interest paid (4,257) (2,900)
------------------------------------------------------------- ------------ --------------
Net cash used in operating activities (1,921,247) (2,069,865)
------------------------------------------------------------- ------------ --------------
Cash flows from investing activities
Interest received 1,526 633
Acquisition of property, plant and equipment (51,251) (67,694)
Disposal of property, plant and equipment - 150
Expenditure on development cost (461,008) (499,179)
Acquisition of subsidiaries net of cash acquired (19,803) (3,160,483)
Net cash used in investing activities (530,536) (3,726,573)
------------------------------------------------------------- ------------ --------------
Cash flows from financing activities
Proceeds from issue of shares 4,155,000 6,617,500
Costs of share issuance (177,545) (325,212)
Net cash generated from financing activities 3,977,455 6,292,288
------------------------------------------------------------- ------------ --------------
Net increase in cash equivalents 1,525,672 495,850
Cash and cash equivalents at beginning of
year 914,961 430,459
Foreign exchange gains on cash and cash equivalents 3,053 11,348
------------------------------------------------------------- ------------ --------------
Cash and cash equivalents at end of year 2,443,686 914,961
------------------------------------------------------------- ------------ --------------
Notes to the consolidated financial statements
For the year ended 31 March 2019
1. General information
Falanx Group Limited (the "Company" or "Falanx") and its
subsidiaries (together the "Group") operate in the cyber security
and intelligence markets. 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 is Five Kings House, 1 Queen Street Place, London, EC4R
1QS.
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 International Financial Reporting Standards
("IFRS") as adopted by the European Union and International
Financial Reporting Interpretations Committee ("IFRIC")
interpretations. 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
the revaluation of available for sale financial assets, 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 Group made losses of GBP1.8m (2018: GBP2.0m) in the year of
which GBP1.2m (2018: GBP1.6m) relates to the Adjusted EBITDA
performance of the business. Cash balances as at 31 March 2019
stood at GBP2.4m and these were seen by the Board as sufficient to
achieve break even and cash generation on its organic plans. Should
the group not achieve its revenue and growth targets the Board
routinely prepares alternative stress test scenarios to deal with
lower growth and any ensuing shortfall in working capital. This
assumes that cost reductions and discretionary expansion spend
would be curtailed as well as cessation of certain investment
spends. Other measures could involve the disposal of assets or
business units. Furthermore, the Group could seek, as in previous
years, the support of investors and Directors (debt or equity) and
has received offers of invoice discounting facilities should it
want them.
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 2019
The following IFRS and IFRIC Interpretations have been issued
and have been applied by the Group in preparing these financial
statements:
-- IFRS 9, 'Financial Instruments'
-- IFRS 15, 'Revenue from Contracts with Customers'
-- IFRS 2 Amendments, 'Classification and Measurement of Share-based Payment Transactions'
-- IFRIC 22, 'Foreign currency transactions and advance consideration'
The Company intends to adopt these Standards and Interpretations
when they become effective, rather than adopt them early.
-- IFRS 16, 'Leases'
-- IFRIC 23, 'Uncertainty over income tax treatments'
The Directors do not expect that the adoption of the Standards
listed above will have a material impact on the Group in future
periods except that IFRS 16 is a significant change to lessee
accounting and all leases will require balance sheet recognition of
a liability and a right-of-use asset except short term leases and
leases of low value assets. The lease estate of the Group is small
and only short-term leases were outstanding at the balance sheet
date.
A number of IFRS and IFRIC interpretations are also currently in
issue which are not relevant for the Group's activities and which
have not therefore been adopted in preparing these financial
statements.
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 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, share based payment charges,
depreciation, amortisation, impairment charges and exceptional
items. Exceptional items 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
de-consolidated from the date at which 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
The Group has adopted application of IFRS 15 "Revenue from
contracts with customers" from 1 April 2018, applying the
cumulative catchup method of transition. The core principle is that
revenue should only be 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 balance sheet and recognised on utilisation of service by the
client. This treatment was used in prior years. There has been no
change in recognition compared to the previous policy.
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. This is consistent with
prior years.
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 GBP197,230 (2018:
GBP59,887) and is included in prepayments and accrued income (note
18). Contract Liabilities (deferred incomes) balance of
GBP1,109,831 (2018: GBP748,479). Included in the Contract
Liabilities at the 31 March 2019 were approximately GBP154,000
residual balance from prior year. All Contract Assets at the 2019
year end arose towards the end of the period.
The Group has used the cumulative catchup transitional approach
and no adjustment has been required. 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 ae 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
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.
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
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 Inventories
Inventories mainly comprises finished goods which is stated at
the lower of cost and net realisable value. Cost is based on
purchase price and net realisable value is based on estimated
selling price less disposal costs.
2.11 Financial instruments
Financial Instruments IFRS 9 'Financial instruments' replaces
IAS 39 'Financial instruments: Recognition and Measurement' with
the exception of macro hedge accounting. The standard is effective
for accounting periods beginning on or after 1st January 2018. The
standard covers three elements:
-- Classification and measurement: Changes to a more
principle-based approach to classify financial assets as either
held at amortised cost, fair value through other comprehensive
income (FVOCI) or fair value through profit or loss, dependant on
the business model and cash flow characteristics of the financial
asset;
-- Impairment: Moves to an impairment model based on expected credit losses;
-- Hedge accounting: The IFRS 9 hedge accounting requirements
are designed to allow hedge accounting to be more closely aligned
with the Group's underlying risk management. A new International
Accounting Standard Board (IASB) project is in progress to develop
an approach to better reflect dynamic risk management in entities'
financial statements.
The Group has applied IFRS 9 for the first time in the year
ended 31 March 2019, in replacement of IAS 39. The Group applied
the simplified method of the expected credit loss model when
calculating impairment losses on its financial assets measured at
amortised cost, such as trade receivables. This resulted in greater
judgement due to the need to factor in forward-looking information
when estimating the appropriate amount to provisions.
In applying IFRS 9 the Group considered the probability of a
default occurring over the contractual life of its trade
receivables balances on initial recognition of those assets. The
Group has reviewed its historic bad debt rate as 0.07% based on the
total bad debt expense recorded by the Group since 1 April 2017 to
31 March 2019 compared to the aggregate of invoices issued (net of
VAT and credit notes). The Group has not restated comparatives on
adoption of IFRS 9 as there has been no material impact and the
provision calculated under the expected loss model is not
significantly different. Due to this there has been no adjustment
recorded in respect of the IFRS 9 transition in opening equity at 1
April 2018.
The classification of certain financial instruments was also
affected on initial application of IFRS 9. Financial assets
previously categorised as Loan and receivables under IAS 39 are now
classified as Amortised cost.
(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 47 at 31 March 2019 (2018: 65)
-- 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.
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.
2.12 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.
2.13 Reserves
The consolidated financial statements include the following
reserves: translation reserve, share option reserve and retained
earnings. Premiums paid on the issue of share capital, less any
costs relating to these, are posted to the share capital account as
referenced above.
2.14 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.
2.15 Leases
Leases where the risks and rewards of ownership are retained by
the lessor are classified as operating leases. Payments made under
operating leases, net of any incentives received from the lessor,
are charged to the income statement on a straight-line basis over
the term of the lease. IFRS 16 has not been implemented in this
reporting period as the Company's lease portfolio is small and
short term (less than 12 months).
Rental income received under operating leases is credited to the
income statement on a straight-line basis over the lease term.
2.16 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.
2.17 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.
2.18 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. 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 business segments. The categorisation of business activities
into segments is analysed per division to be consistent with the
views of the chief operating decision maker, as highlighted in the
Chief Executive Officer's report. The segmental analysis of the
Group's business is derived from its principal activities as set
out below. 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 other segment consists of the parent company's
administrative operation.
Reportable segments
The reportable segment results for the year ended 31 March 2019
are as follows:
Other
Intelligence Cyber segment Total
GBP GBP GBP GBP
Assynt report 1,402,196 - - 1,402,196
Professional services 238,765 2,567,845 - 2,806,610
Monitoring managed services - 1,003,330 - 1,003,330
------------------------------------ ------------- ---------- ------------ ------------
Revenues from external customers 1,640,961 3,571,175 - 5,212,136
------------------------------------ ------------- ---------- ------------ ------------
Gross Margin 548,966 1,738,960 - 2,287,926
Segment Reported EBITDA (54,706) (88,250) (1,344,555) (1,487,511)
Share option expense 5,766 13,221 41,728 60,715
Exceptional costs (Note 4) - 128,997 51,924 180,921
Segment Adjusted EBITDA (48,940) 53,968 (1,250,903) (1,245,875)
------------------------------------ ------------- ---------- ------------ ------------
Finance costs-net (827) (2,134) 230 (2,731)
Depreciation and amortisation (16,103) (309,995) (42,973) (369,071)
Segment profit/(loss) for the year (71,636) (400,379) (1,387,297) (1,859,313)
------------------------------------ ------------- ---------- ------------ ------------
The reportable segment results for the year ended 31 March 2018
are as follows:
Other
Intelligence Cyber segment Total
GBP GBP GBP GBP
------------------------------------ ------------- ------------ -------------------- ------------
Assynt report 1,363,797 - - 1,363,797
Professional services 530,934 585,827 - 1,116,761
Monitoring managed services - 523,377 - 523,377
Other - - 17,000 17,000
------------------------------------ ------------- ------------ -------------------- ------------
Revenues from external customers 1,894,731 1,109,204 17,000 3,020,935
------------------------------------ ------------- ------------ -------------------- ------------
Gross margin 708,304 215,740 17,000 941,044
Segment Reported EBITDA 216,214 (999,501) (1,383,540) (2,166,827)
Share option expense 6,850 17,276 24,637 48,763
Exceptional costs (Note 4) 35,000 91,228 402,335 528,563
Segment Adjusted EBITDA 258,064 (890,997) (956,568) (1,589,501)
------------------------------------ ------------- ------------ -------------------- ------------
Finance costs-net (2,668) 25 376 (2,267)
Depreciation and amortisation (12,153) (282,977) (3,008) (298,138)
Segment profit/(loss) for the year 201,393 (1,282,453) (1,386,172) (2,467,232)
------------------------------------ ------------- ------------ -------------------- ------------
Segment assets consist primarily of property, plant and
equipment, intangible assets, inventories, trade and other
receivables and cash and cash equivalents. Unallocated assets
comprise deferred tax assets, available for sale financial 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 and liabilities as at 31 March 2019 and capital
expenditure for the year then ended are as follows:
Other
Intelligence Cyber segment Total
GBP GBP GBP GBP
---------------------------------- ------------- ---------- ---------- ----------
Contract assets 63,528 133,702 - 197,230
Other assets 2,085,245 5,252,009 2,039,553 9,376,807
Contract liabilities (deferred
income) 679,068 430,763 - 1,109,831
Other liabilities 267,139 665,231 388,781 1,321,151
Capital expenditure - Tangible 2,203 54,480 - 56,683
Capital expenditure - Intangible 76,265 673,483 - 749,748
---------------------------------- ------------- ---------- ---------- ----------
Segment assets and liabilities as at 31 March 2018 and capital
expenditure for the year then ended are as follows:
Other
Intelligence Cyber segment Total
GBP GBP GBP GBP
---------------------------------- ------------- ---------- ---------- ----------
Contract assets 37,037 22,850 - 59,887
Other assets 827,476 5,088,773 1,007,442 6,923,691
Contract liabilities (deferred
income) 398,211 350,268 - 748,479
Other liabilities 243,641 562,265 578,604 1,384,510
Capital expenditure - Tangible 14,640 38,644 14,410 67,694
Capital expenditure - Intangible - 4,382,982 - 4,382,982
---------------------------------- ------------- ---------- ---------- ----------
Geographical information
The Group's business segments operate in six geographical areas,
although all are managed on a worldwide basis from the Group's head
office 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 allocated based on
the physical location of the asset.
Revenue by geographical location 2019 2018
GBP GBP
---------------------------------- ---------- ----------
United Kingdom 4,301,738 2,265,734
Europe 448,169 273,130
Australasia 78,948 131,459
United States 289,195 272,203
Middle East 86,208 70,924
Other countries 7,878 7,495
---------------------------------- ---------- ----------
5,212,136 3,020,945
---------------------------------- ---------- ----------
Non-current assets 2019 2018
GBP GBP
-------------------- ---------- ----------
United Kingdom 5,014,425 4,596,801
5,014,425 4,596,801
-------------------- ---------- ----------
Major customers
No customer contributed 10% or more to the Group's revenue in
2019 (2018: 2). The highest individual customer contributed c6% of
revenues.
Contract Assets (accrued incomes) balances were GBP197,230
(2018: GBP59,887) and are included in prepayments and accrued
income (note 18). Included in the Contract Liabilities (deferred
incomes) at the 31 March 2019 were approximately GBP154,000
residual balance from prior year. All Contract Assets at the 2019
yearend arose towards the end of the period.
Contract Contract Contract Contract
Assets Assets Liabilities Liabilities
2019 2018 2019 2018
GBP GBP GBP GBP
------------------------------------------- --------- --------- ------------ ------------
At 1 April 59,887 45,238 (748,479) (432,827)
Transfers in the year from contract
assets to trade receivables (59,887) (45,238) - -
Transfers from contract liabilities
to revenue in the year - - 663,643 408,751
Amount recognised as revenue in the
year not yet invoiced 197,230 59,887 - -
Amount invoiced in advance not recognised
as revenue in the year - - (1,024,995) (724,403)
------------------------------------------- --------- --------- ------------ ------------
At 31 March 197,230 59,887 (1,109,831) 748,479
------------------------------------------- --------- --------- ------------ ------------
4. Exceptional 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.
4.1 Exceptional costs
2019 2018
GBP GBP
---------------------------- ---- -------- --------
Acquisition costs a) 16,024 201,532
Restructuring costs b) 164,897 300,150
Cloud business development e) - 26,881
---------------------------- ---- -------- --------
180,921 528,563
--------------------------------- -------- --------
a) Acquisition costs
Advisory and introduction costs incurred on acquisition of
subsidiaries not capitalised.
b) Restructuring costs
Cost of restructuring the key management including severance
payment and transition costs for integration of acquired subsidiary
(First Base).
c) Cloud business development
Costs incurred in business development for a cloud business.
This initiative was however discontinued in the year to 31 March
2018 as the Directors identified it as not viable in the long
term.
4.2 Adjusted EBITDA
Restated
2019 2018
GBP GBP
------------------------------- ------------ ------------
Operating loss (1,856,582) (2,464,965)
Depreciation and amortisation 369,071 298,138
------------------------------- ------------ ------------
EBITDA (1,487,511) (2,166,827)
Share option expense 60,715 48,763
Exceptional costs (note 5.1) 180,921 528,563
------------------------------- ------------ ------------
Adjusted EBITDA (1,245,875) (1,589,501)
------------------------------- ------------ ------------
A credit of GBP74,609 arising from foreign exchange translation
movements on foreign subsidiaries was originally reported as an
adjustment against EBITDA in the year ended 31 March 2018. This has
been reclassified to other comprehensive income.
5. Income tax expense
2019 2018
GBP GBP
Current tax
Current tax on loss for the year - -
Over provision in prior year 1,494 (18,798)
---------------------------------- --------- ----------
Total current tax 1,494 (18,798)
---------------------------------- --------- ----------
Deferred tax
Deferred tax credit for the year (29,936) (456,000)
---------------------------------- --------- ----------
Total deferred tax (29,936) (456,000)
---------------------------------- --------- ----------
Income tax credit (28,442) (474,798)
---------------------------------- --------- ----------
The parent Company is resident in the UK for tax purposes
together with certain subsidiaries. Other subsidiaries are resident
in foreign tax jurisdictions, however no group company currently
has taxable profits.
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 2019, a
deferred tax asset has not been recognised (2018: GBPnil).
Accumulated tax losses (subject to HMRC) agreement stood at
approximately GBP10.9m (2018: GBP9.2m).
The tax charge for the year is different from the standard rate
of corporation tax in the United Kingdom of 19% (2018: 19%). The
difference can be reconciled as follows:
2019 2018
GBP GBP
------------------------------------------------ ------------ ------------
Loss before tax (1,859,313) (2,467,232)
------------------------------------------------ ------------ ------------
Tax calculated at the applicable rate based on
the loss for the year 19% (2018: 19%) (353,269) (468,774)
Tax effects of:
Creation of tax losses 278,064 410,400
Expenses not deductible for tax purposes 21,535 39,369
Accelerated capital allowances 53,670 19,005
Current tax on loss for the year - -
------------------------------------------------ ------------ ------------
6. Basic and diluted earnings per share
Basic earnings per share is calculated by dividing the
profit/(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.
Restated
2019 2018
---------------------------------------------------- ------------ ------------
Earnings attributable to equity holders of the
Company (GBP) (1,830,371) (1,992,434)
Weighted average number of ordinary shares in
issue 313,614,123 161,299,740
---------------------------------------------------- ------------ ------------
Basic and diluted loss per share (pence per share) (0.58) (1.24)
---------------------------------------------------- ------------ ------------
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 2019, 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. The prior year was restated from 1.56p per share as
detailed in note 31.
7. Intangible assets
Goodwill Software Website Development Customer Total
and
brand licences costs costs relationships
GBP GBP GBP GBP GBP GBP
----------------------- ---------- --------------- -------- ------------ -------------- ----------
Cost
At 1 April 2018 1,021992 916,301 - 652,145 2,915,000 5,505,438
IFRS 3 re-measurement
(note 28) 926,199 (460,085) 466,114
Additions 130,347 - 83,599 377,409 158,393 749,748
At 31 March 2019 2,078,538 916,301 83,599 1,029,554 2,613,308 6,721,300
Amortisation and
impairment
At 1 April 2018 53,438 912,743 - - 75,000 1,041,181
Amortisation charge
for year - 3,558 9,382 - 280,606 293,546
Impairment in the - - - - - -
year
At 31 March 2019 53,438 916,301 9,382 - 355,606 1,334,727
----------------------- ---------- --------------- -------- ------------ -------------- ----------
Net book value
At 31 March 2019 2,025,100 - 74,217 1,029,554 2,257,702 5,386,573
----------------------- ---------- --------------- -------- ------------ -------------- ----------
At 1 April 2017 434,188 916,301 - 152,967 75,000 1,578,456
Additions 587,804 - - 499,178 2,840,000 3,926,982
At 31 March 2018 1,021,992 916,301 - 652,145 2,915,000 5,505,438
Amortisation and
impairment
At 1 April 2017 - 740,973 - - 67,500 808,473
Amortisation charge
for year - 171,770 - - 7,500 179,270
Impairment in the
year 53,438 - - - - 53,438
At 31 March 2018 53,438 912,743 - - 75,000 1,041,181
--------------------- ---------- -------- -------- ---------- ----------
Net book value at
31 March 2018 968,554 3,558 - 652,145 2,840,000 4,464,257
--------------------- ---------- -------- -------- ---------- ----------
7.1 Goodwill
As detailed in note 2.8 to the consolidated financial
statements, the Directors test goodwill annually for impairment by
calculating the value in use of each cash generating unit using
discounted cash flow techniques and comparing it to the carrying
amount of goodwill.
As allowed under IFRS 3, the allocation of the fair value of the
purchase consideration across the tangible and intangible assets
acquired on 23 March 2018 was reassessed within 12 months of
purchase. The main changes were around the discount rate used which
was increased from 12.75% to 15.00% and also adjustments made to
reflect the value of an assembled workforce and full tax charges
(ignoring the Group's GBP10.9m of tax losses). This resulted in a
reduction in the potential value of the acquired customer base from
GBP2.84m as originally recorded to GBP2.37m. This is shown as an
adjustment on opening balances in the tabular note above
The Directors have undertaken an impairment review of the
goodwill at the reporting date relating to the acquisition of
Falanx Cyber Defence Limited, Cloudified Limited, the trade and
assets of First Base Technologies LLP and Securestorm Limited.
Goodwill on acquisition of Falanx Cyber Defence, the trade and
assets of First Base Technologies LLP and Securestorm Limited,
relates to the professional services line of business brought in to
enhance the Cyber division's service offering. As of 1 April 2019,
the operations of all the entities have been amalgamated into
Falanx Cyber Defence Limited to streamline operations.
The purchase of Cloudified Limited led to the development of the
Group's technology platform Project Furnace.
Analysis of development cost and goodwill allocated to the Cyber
segment:
2019 2018
GBP GBP
-------------------------------------- ---------- ----------
Project Furnace 1,203,920 826,511
Professional cyber security services 1,850,734 1,720,387
Total 3,054,654 2,546,898
-------------------------------------- ---------- ----------
a) Recoverability of development costs - Project Furnace
The intangible asset created from the R&D investment in
Project Furnace represents monitoring technology which is expected
to begin contributing to the cyber segment's cash flows in the next
2 years including possible spin out programmes. The development
costs and the associated goodwill have been included in the
carrying amount of the segment which is compared to its estimated
recoverable amount described in (b) below. No impairment was
required.
b) Other elements of Cyber Segment
The recoverable amount of the CGU is based on fair value less
costs of disposal estimated using discontinued cash flows. The
measurement was categorised as Level 3 on the inputs sued in the
valuation technique.
The cash generating unit's value in use has been assessed using
the following assumptions:
Discount rate 15% 12.75%
Average forecast EBITDA growth next 5 years 7% 8%
Growth rate 5-10 years 10% 10%
In determining value in use, the Directors have prepared
financial and business forecasts. These forecasts indicate growth
rates that increase by various rates throughout the 10-year
forecast period (excluding any periods beyond this). The discount
rate applied is an estimate based on industry weighted average cost
of capital.
Goodwill of First Base has been evaluated by reviewing similar
inputs save for growth scenario reflecting current growth rates of
10% over the 10-year horizon to reflect overall growth in the asset
from new customers, and then comparing the excess of the NPV of
future cash flows to the overall intangible including the customer
relationships asset.
The estimated recoverable amount of the CGU exceeded its
carrying amount (including developments costs and customer
relationship intangibles) by GBP0.4m (2018: GBP0.5m) The Directors
have prepared a sensitivity analysis which shows that scenarios
including:
-- an increase in the discount rate from 15% to 26%
-- a reversal of a growth rate of +10% to a net shrinkage of
-1%. Recent Cyber security industry statistics indicated growth
rates of 10-15% CAGR being expected
-- a fall in expected net EBTIDA contribution from 35% of revenues to 24% of revenues
would result in the value in use falling below the carrying
value but do not consider these likely so no adjustment is
reflected.
Following the impairment review the Directors do not consider
that the carrying value of goodwill detailed above is impaired at
the reporting date.
7.2 Customer relationships
The customer relationships intangible assets arise on the
acquisition of subsidiaries when accounted for as a business
combination and relate to the expected value to be derived from
contracted and non-contractual relationships. The value placed on
the contractual customer relationships, as per the third party
valuation carried out, is based on the expected cash revenue
inflows over the estimated remaining life of each existing
contract. The value placed on the non-contractual customer
relationships is based on past revenue performance by virtue of the
customer relationships; but using an average attrition rate over
the period since 2015. Associated cash outflows have been based on
historically achieved margins. The net cash flows are discounted at
a rate of 15% (2018: 12.75%) which the Directors consider is
commensurate with the risks associated with capturing returns from
customer relationships.
The Directors consider that the period expected to benefit in
respect of the customer relationships acquired with the trade and
assets of First Base Technologies LLP is ten years. The Directors
consider that the period expected to benefit in respect of the
customer relationships acquired with Securestorm Limited is three
years as it is a smaller and newer business than First Base and has
a significant level of customer concentration.
Overall the business has grown with orders in the first quarter
of the current financial year (3 months to 30 June 2019) being
approximately 10% greater than the same period in 2018, which in
turn was greater than 2017. This growth has been reflected in the
overall assessment of the intangibles (both goodwill and customer
list) and more than supports their carrying values against a range
of sensitivity tests carried out around expected growth rates and
discount rates (ranging between 15% and 26%). The following other
sensitivities have been applied to the determination of the value
of the customer base. This was carried out by a multi period excess
earnings model and was based on a 10-year horizon.
Growth rate (long term economic average) 1.5%
EBITDA Margin 24.0 - 35.0%
Return on Workforce 1.81%
Tax Rate 17-19%
A similar analysis has been carried out on the intangibles
arising from the purchase of Securestorm Limited in July 2018. This
has generated a customer intangible of GBP0.16m and a goodwill
balance of GBP0.1m. The customer base will be amortised on a
straight-line basis over a period of 3 years due to high customer
concentration (although this is under a multi-year contract) and
relatively short existence (founded 2014).
Similar tests to those performed on the First Base intangibles
have been applied to the intangibles arising from this transaction
and no impairment of goodwill has been identified.
8. Business combinations
Assets of First Base Technologies LLP
On 23 March 2018 the Group completed the acquisition of the
business and assets of First Base Technologies LLP for a total
consideration of GBP3,210,114. The trade and assets of First Base
Technologies LLP, a business operating in the cyber security sector
were then transferred to a newly incorporated subsidiary First Base
Technologies (London) Limited, to increase the scale of the cyber
division business. As a result of the acquisition, the Group is
expected to increase its presence in the cyber security market and
achieve cross selling in the enlarged Group. It also expects to
reduce certain costs through economies of scale.
As allowed under IFRS 3, the allocation of the fair value of the
purchase consideration across the tangible and intangible assets
acquired on 23 March 2018 was reassessed within 12 months of
purchase. The main changes were around the discount rate used which
was increased from 12.75% to 15.00% and also adjustments made to
reflect the value of an assembled workforce and full tax charges
(ignoring the Group's GBP10.9m of tax losses). This resulted in a
reduction in the potential value of the acquired customer base from
GBP2.84m as originally recorded to GBP2.37m and the consequent
difference of GBP0.46m has been treated as a prior year adjustment
as explained in note 7.
The following table summarises the fair value of assets
acquired, and liabilities assumed at the acquisition Date:
Fair value
Book value adjustment Fair value
GBP GBP GBP
------------------------------------------- ----------- ----------- -----------
Intangible asset - customer relationships 2,379,915 2,379,915
Cash and cash equivalents 139,567 - 139,567
Other receivables 86,947 - 86,947
Deferred tax liability - (456,000) (456,000)
Trade and other payables (226,514) - (226,514)
Total provisional fair value - 1,923,915 1,923,915
------------------------------------------- ----------- ----------- -----------
Consideration 3,210,114
------------------------------------------- ----------- ----------- -----------
Goodwill 1,286,199
------------------------------------------- ----------- ----------- -----------
The provisional fair values include recognition of an intangible
asset related customer relationships, which will be amortised over
a 10-year period on a straight-line basis. A discount rate of
12.75% has been used in this analysis.
No trade receivables were acquired on acquisition.
Deferred tax has been calculated on the value of the intangible
assets acquired at a corporation tax rate of 17.8%, which is the
effective tax rate over the amortisation period, and a
corresponding amount recognised as goodwill. The amount recognised
as goodwill will not be deductible for tax purposes.
Acquisition costs totalled GBP195,100 and are disclosed within
the statement of comprehensive income.
In the period from 24 March 2018 to 31 March 2018, First Base
has contributed GBP33,490 to Group revenues and profit of GBP3,122
to the Group's comprehensive income. If the acquisition had
occurred on 1 April 2017, Group revenue would have increased by
circa GBP1.9 million and Group EBITDA for the period would have
increased by circa GBP0.6 million.
The net cash sum expended on acquisition in the year ended 31
March 2018 is as follows:
GBP
------------------------------------------- ----------
Cash paid as consideration on acquisition 3,000,000
Less cash acquired at acquisition (139,567)
-------------------------------------------- ----------
Net cash movement 2,860,433
-------------------------------------------- ----------
The remaining GBP200,000 of cash consideration was settled in
April 2018 and was included as a liability in the Statement of
Financial Position at 31 March 2018.
The Sellers of the business and assets of First Base
Technologies LLP were granted 800,000 warrants on 23 March 2018 to
subscribe for shares at an exercise price of 4.5 pence per share.
They will vest equally at intervals of 12, 24, and 36 months from
the date of grant. The warrants have been fair valued at GBP10,114
using the Black Scholes method with the value included in the total
consideration. The credit is reflected in the share option
reserve.
Securestorm Limited
On 17 July 2018 the Company acquired 100% of the issued share
capital of Securestorm Limited, a cyber security consultancy
business. The consideration of GBP100,000 was satisfied by the
issuance of 2,222,222 Falanx new ordinary shares at 4.5 pence each.
The integration of Securestorm is expected to generate enhanced
revenue opportunity and cost synergies. The business contributed
GBP67,071 net loss and GBP250,421 revenue to the Group for the
period from 17 July 2018 to 31 March 2019. Securestorm was fully
integrated within the Cyber division in the year ended 31 March
2019. If the acquisition had occurred on 1 April 2018, Group
revenue would have increased by circa GBP0.1 million and Group
EBITDA for the period would have reduced by circa GBP30k.
Unaudited management accounts for the 12 months to 30 June 2018
show revenues of GBP543,898 and an operating loss of GBP153,192.
Tangible assets, current assets and current liabilities were
GBP369, GBP81,259 and GBP208,866 at 30 June 2018 respectively. The
current liabilities are mainly due to HMRC where a deferred payment
scheme has been agreed and is in place. The majority of losses were
incurred before December 2017. These have since been eliminated by
customer contract wins and cost reductions. In recent months
Securestorm has been at break even with a strengthening pipeline of
business.
The following table summarises the fair value of assets
acquired, and liabilities assumed at the acquisition date.
Fair value
Book value adjustment Fair value
GBP GBP GBP
------------------------------------------- ----------- ----------- -----------
Intangible asset - customer relationships 158,393 158,393
Tangible assets 3,583 - 3,583
Cash and cash equivalents (19,801) - (19,801)
Trade and other receivables 55,908 - 55,908
Deferred tax liability - (28,000) (28,000)
Trade and other payables (200,430) - (200,430)
Total provisional fair value - 130,393 (30,347)
------------------------------------------- ----------- ----------- -----------
Consideration - all in shares 100,000
------------------------------------------- ----------- ----------- -----------
Goodwill 130,347
------------------------------------------- ----------- ----------- -----------
The provisional fair values include recognition of an intangible
asset related customer relationships, which will be amortised over
a 3-year period on a straight-line basis. A discount rate of 15%
has been used in this analysis.
Deferred tax has been calculated on the value of the intangible
assets acquired at a corporation tax rate of 17.8%, which is the
effective tax rate over the amortisation period, which has an
impact of increasing goodwill. The amount recognised as goodwill
will not be deductible for tax purposes.
Acquisition related costs of GBP16,024 have been charged to
administrative expenses in the consolidated income statement for
the year ended 31 March 2019.
A review of the purchase price allocation for the business and
assets of First Base Technologies LLP (incorporated in 2010 and
acquired by Falanx on 23 March 2018) was carried out during the
year and the original carrying value of the acquired customer base
asset was reduced by GBP0.46m to GBP2.38m with the GBP0.46m being
reclassified as goodwill. This adjustment is reflected in notes 14,
28 and 31 to these accounts and has been classified as a prior year
adjustment. The valuation exercise was carried out by an external
(and independent of the Company) valuation team. Tax rates of 19%
were used (although the company has tax losses of circa GBP10.9m
subject to HMRC agreement) and no deferred tax element has been
reflected in these financial statements.
9. Prior year adjustments
Foreign exchange losses on Group assets of GBP74,609 were
recorded as a charge against operating losses in the year ended 31
March 2018. These were subsequently reclassed against other
comprehensive income. This has consequently reduced the loss per
share from 1.56p to 1.24p per share for that period.
10. Events after the reporting period
New Office Lease
On 21 June 2019 the Company entered into a lease for premises in
Reading. This will form the basis of the operations of Falanx Cyber
which will be moving its operations from Birmingham to Reading in
August 2019. This was done after an extensive review of the optimal
position to locate the SOC from an access to relevant skills
perspective and to help the overall expansion of the business. This
premises will be operationally leveraged for maximum utilisation.
The net impact of the lease is expected to add an additional
GBP0.1m to operating costs per annum and will be accounted for
under IFRS16.
Lapse of warrants
26,281,250 warrants with a price of 6 pence lapsed between 4 May
2019 and 10 May 2019.
The financial information for the year ended 31 March 2018 is
derived from the statutory accounts for that year which have been
delivered to the Registrar of Companies. The auditors reported on
those accounts and their report was unqualified and did not contain
a statement 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.
The statutory accounts for the year ended 31 March 2019 have not
yet been delivered to the Registrar of Companies. The auditors have
the auditors reported on them and their report was unqualified and
did not contain a statement 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.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR DMGMLZRZGLZZ
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