Annual results for the year ended 31 March 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
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Revenues increased 73% to £5.2m (2018: £3.0m) |
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Gross margin increased significantly to 44% (2018: 31%) driven by favourable revenue mix and strong services utilisation
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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 £0.24m (2018: £0.19m) and monitoring recurring revenues grew by 91% to £1.0m (2018: £0.52m)
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Adjusted EBITDA loss reduced by 25% to £1.2m (2018: £1.6m), reported loss £1.9m (2018: £2.4m) |
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£3.2m future contracted revenues (2018: £2.3m) of which £1.1m (2018: £0.7m) was deferred income |
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Debt free with cash balances of £2.4m (2018: £0.9m) following successful institutional share subscription in November 2018
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Loss per share reduced by 53% to 0.58p (2018: 1.24p) |
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Shareholders' funds £7.6m (2018: £5.3m) |
Operational highlights
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Strong performance from our core business, Falanx Cyber buoyed by the successful integration and contribution of First Base acquisition
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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
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Falanx Intelligence (Assynt) shifted efforts from one-off sales to high-quality recurring revenue income
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Increased customer base by over 10% to 400
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Management team strengthened and well placed for next stage of growth
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Post period highlights
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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
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New premises in Reading secured as part of planned Cyber expansion and current investment program largely complete
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Successful delivery of Cloud security service with our in-house developed CASB (Cloud Application Security Broker) capability
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Strong pipeline of business in each division from new name and existing accounts |
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50% growth in the Managed Service Providers ("MSPs") channel since the start of the current year
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* 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:
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Falanx Group Limited Alex Hambro Chairman Mike Read CEO Ian Selby CFO
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Via IFC |
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Stifel Nicolaus Europe Limited, Nomad and Joint Broker Fred Walsh / Alex Price / Neil Shah
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+ 44 (0) 207 710 7600 |
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Turner Pope International Limited, Joint Broker James Pope / Ben Turner
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+44 (0) 203 621 4120
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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 £5.2m (2018: £3.0m). 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 £3.0m 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 £1.2m (2018: £1.6m loss).
We were delighted to secure additional funding of £4.155m (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 £7.6m (2018: £5.3m) of shareholders' funds of which £2.4m (2018: £0.9m) 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 £3.57m 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 £0.05m (2018: loss £0.87m) 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 £1.64m (2017/18: £1.89m) was generated with an adjusted EBITDA loss of £0.05m (2017/18: profit £0.25m. 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 £0.1m 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 3rd 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 £5.2m (2018: £3.0m). Revenues in the second half of the year were approximately £3.03m 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 £0.97m was recorded. At the end of the period monthly recurring revenues across the Group stood at approximately £240,000 per month (2018: £190,000). 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 £3.2m of future revenue (2018: £2.3m) under contract including deferred income of £1.1m (2018: 0.7m).
We have added (through acquisition and organic efforts) several larger accounts (typically spending more than £0.1m 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 £2.5m to £3.5m 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 £0.18m (2018: £0.53m) mainly represented certain restructuring costs post acquisition and transaction related fees. Share option charge were £0.06m (2018: £0.05m). These are detailed in notes 5 and 12 to these accounts.
EBITDA
Adjusted EBITDA loss for the year was £1.2m (2018: £1.6m) after adjusting for the items highlighted above. Headline reported EBITDA loss was £1.5m (2018: £2.2m).
Depreciation and amortisation
Depreciation and amortisation was £0.37m (2018: £0.30m) and largely (£0.28m) 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 £4,257 (2018: £2,900) and arose from bank overdrafts operated in the year.
Taxation Charge
The Group recorded a non cash deferred taxation credit of £0.5m (2018: £nil) 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 £1.8m (2018: £2.0m) 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 £0.4m (2018: £0.5m) 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 £0.13m (2018: £0.07m) 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 £0.46m of customer assets from the acquisition of First Base was reclassified as goodwill and this was reflected in opening balances. A further £0.5m 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 £1.2m from £0.9m 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 3rd 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 £1.1m (2018: £0.7m) on greater volume of advanced billings to customers in both divisions. This accounted for most of the increase in current liabilities which increased from £2.13m to £2.43m 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 £100,000 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 £4.155m gross (£3.977m 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 £7.6m (2018: £5.3m).
Statement of Cash Flows
During the year the Group raised £3.977m net by the issue of new shares in November 2018. A net working capital outflow of £0.35m (2018: inflow £0.01m) 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. £0.46m was used in ongoing investment in technology platforms. Cash balances at 31 March stood at £2.4m (2018: £0.9m).
Restatement of Prior Year Results
£0.08m 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 £0.47m. £0.46m 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 £0.1m 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 Indicator |
Description |
Why measured |
2019 |
2018 |
Comment |
|
Group revenue - £'m |
Changes in total revenue compared to prior year |
Revenue growth gives a quantified indication of the rate at which the Group's business activity is expanding over time |
£5.2
|
£3.0 |
Increase of 73% attributable to increased revenue in the Cyber division, with 39% growth in the second half of the year compared to the first half of the year |
|
Gross margin |
Percentage of total revenue retained by the Group after direct costs deduction |
Provides an indication of sales profitability and proportion of revenue available to cover other running costs |
44% |
31% |
Improved margin due revenue mix and better utilisation in professional services following acquisition and integration |
|
EBITDA - £'m |
A measure of profits excluding non-cash items such as depreciation and amortisation |
Offers a clearer reflection of the ability to generate cash |
£(1.5) |
£(2.2) |
Increase in revenue and reduced costs |
|
Adjusted EBITDA - £'m |
A measure of profits adjusted for non-underlying items such as restructuring and acquisition related |
Underlying performance of business operations |
£(1.2) |
£(1.6) |
Much reduced restructuring charges and acquisition related costs |
|
Cash conversion |
Operational cash flow / EBITDA |
Measures the ability of the business to convert profit into cash |
132% |
96% |
A close correlation between trading performance and cash generation/usage. |
|
Recurring revenue % |
Recurring revenue lines / total revenue |
Shows visibility of recurring revenue growth rate |
56% |
62% |
Reduction in % due to significant growth in non-recurring professional services revenue, although an underlying increase of circa £0.97m recorded
|
|
Contracted revenue - £'m |
Binding commitments from customers for future revenues |
Shows visibility into contracted revenues underpinning future revenue forecasts |
£3.2 |
£2.3 |
Greater levels of advance customer commitments including advance payments (contract liabilities)
|
|
Monthly recurring revenue - £'m |
Revenue from the provision of services on a recurring basis |
Shows predictable monthly metrics to track progress against objective of becoming profitable solely on recurring revenue |
£0.24 |
£0.19 |
Increase in revenue from protective monitoring and consulting in the Cyber division and embed service in the Intelligence division |
|
Number of Invoiced customers |
Number of customers invoiced over the preceding 12 months |
Measure of customer concentration (includes acquired customer base) |
340 |
332 |
Growth of 2.4% largely attributable to increased customer base of the Cyber division |
|
Headcount |
Average headcount during the year |
Shows average number of employees in the year |
72 |
51 |
Increase in operations staff to deliver future revenue commitments |
|
Contract liabilities (deferred income) - £'m |
Contracted and invoiced revenue yet to be recognised (deferred income) |
Shows visibility into invoiced amounts to be recognised in future periods |
£1.1 |
£0.7 |
Increase due to growth in the Cyber division and contract value increases in Assynt |
|
|
|
|
|
|
|
Consolidated Income Statement
For the year ended 31 March 2019
|
|
|
|
Restated |
|
|
|
2019 |
2018 |
|
|
Note |
£ |
£ |
|
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 |
£ |
£ |
|
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 |
£ |
£ |
|
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 |
|
|
|
|
£ |
£ |
£ |
£ |
£ |
|
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 |
£ |
£ |
|
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 £1.8m (2018: £2.0m) in the year of which £1.2m (2018: £1.6m) relates to the Adjusted EBITDA performance of the business. Cash balances as at 31 March 2019 stood at £2.4m 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 £197,230 (2018: £59,887) and is included in prepayments and accrued income (note 18). Contract Liabilities (deferred incomes) balance of £1,109,831 (2018: £748,479). Included in the Contract Liabilities at the 31 March 2019 were approximately £154,000 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 |
|
|
£ |
£ |
£ |
£ |
|
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 |
|
|
£ |
£ |
£ |
£ |
|
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 |
|
|
£ |
£ |
£ |
£ |
|
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 |
|
|
£ |
£ |
£ |
£ |
|
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 |
|
|
£ |
£ |
|
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 |
|
|
£ |
£ |
|
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 £197,230 (2018: £59,887) and are included in prepayments and accrued income (note 18). Included in the Contract Liabilities (deferred incomes) at the 31 March 2019 were approximately £154,000 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 |
|
|
£ |
£ |
£ |
£ |
|
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 |
|
|
|
£ |
£ |
|
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 |
|
|
£ |
£ |
|
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 £74,609 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 |
|
|
£ |
£ |
|
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: £nil). Accumulated tax losses (subject to HMRC) agreement stood at approximately £10.9m (2018: £9.2m).
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 |
|
|
£ |
£ |
|
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 (£) |
(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 and |
Website |
Development |
Customer |
Total |
|
|
|
brand licences |
costs |
costs |
relationships |
|
|
|
£ |
£ |
£ |
£ |
£ |
£ |
|
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 £10.9m of tax losses). This resulted in a reduction in the potential value of the acquired customer base from £2.84m as originally recorded to £2.37m. 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 |
|
|
£ |
£ |
|
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 £0.4m (2018: £0.5m) 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 £0.16m and a goodwill balance of £0.1m. 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 £3,210,114. 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 £10.9m of tax losses). This resulted in a reduction in the potential value of the acquired customer base from £2.84m as originally recorded to £2.37m and the consequent difference of £0.46m 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 |
|
|
£ |
£ |
£ |
|
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 £195,100 and are disclosed within the statement of comprehensive income.
In the period from 24 March 2018 to 31 March 2018, First Base has contributed £33,490 to Group revenues and profit of £3,122 to the Group's comprehensive income. If the acquisition had occurred on 1 April 2017, Group revenue would have increased by circa £1.9 million and Group EBITDA for the period would have increased by circa £0.6 million.
The net cash sum expended on acquisition in the year ended 31 March 2018 is as follows:
|
|
|
£ |
|
Cash paid as consideration on acquisition |
|
3,000,000 |
|
Less cash acquired at acquisition |
|
(139,567) |
|
Net cash movement |
|
2,860,433 |
The remaining £200,000 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 £10,114 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 £100,000 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 £67,071 net loss and £250,421 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 £0.1 million and Group EBITDA for the period would have reduced by circa £30k.
Unaudited management accounts for the 12 months to 30 June 2018 show revenues of £543,898 and an operating loss of £153,192. Tangible assets, current assets and current liabilities were £369, £81,259 and £208,866 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 |
|
|
£ |
£ |
£ |
|
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 £16,024 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 £0.46m to £2.38m with the £0.46m 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 £10.9m 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 £74,609 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 £0.1m 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.
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