Falanx Group recovers strongly from COVID-19 impacts


Falanx Group Limited (LON:FLX), the global cyber security and intelligence services provider, has announced its interim results for the six months ended 30th September 2020.  

Financial Highlights for six months to 30th September 2020

Interim results are in line with the statement made in the preliminary results for the year ended 31 March 2020. These were announced on 30 October 2020
Revenue £2.46m (2019: £2.64m). COVID-19 weakness in the Cyber division at the start of the period, but financial performance strongly recovered in September 2020 onwards
Recurring revenues were £1.59m (2019: £1.50m) representing 65% of revenues (2019: 57%)
August and September cyber penetration testing sales orders showed a very strong recovery, now ahead of pre COVID-19 levels of circa £200,000 per month
Gross margins were 28% (2019: 32%) following impact of COVID-19 on professional services staff utilisation in the first few months of the period
Total spend** in the six months to 30 September 2020 circa 30% lower than the same period in 2019, two offices closed with physical presence now at the Reading Security Operations Centre (“SOC”)
32% reduction in adjusted EBITDA* loss of £0.63m (2019: £0.93m)
Loss per share reduced by 12% to 0.34p (2019: 0.39p)
Cash of £1.33m on 1 October 2020, following receipt of initial tranche of net proceeds from fundraising, sufficient cash for organic operations, normal working capital profile (2019: £0.7m on 30 September)

Operational Highlights six months to 30 September 2020

Assynt the strategic intelligence division traded profitably solely on recurring revenues, with a strong pipeline of business from new and existing customers including global names
Sales pipeline strengthened and opportunities are starting to progress including uptake of new cyber service offerings
The accelerating move to remote working has increased cyber risk and hence a resultant increase in the demand for our protective cyber security services
New Cyber Security monitoring service (“Triarii”) launched August 2020 with a major new reseller to address the UK Government sector appointed, contracts won and generating revenue
Security monitoring service expanded to include endpoint detection, creating a strong margin and volume growth opportunity into smaller SMEs

Post Period Highlights

Completion of the September £1.25m fundraising including new and existing institutional investors and director/PDMR participation
In the Cyber Division the penetration testing orders have continued to show growth along with further sales of new monitoring recurring revenue service (Triarii).
Joined SolarWinds TAP programme, Falanx now well positioned with Triarii to address their global base of over 22,000 MSPs
Much improved financial performance across the Group since period end, with increasing margins and revenues.

* Adjusted EBITDA is a non-IFRS headline measure used by management to measure the Group’s performance and is based on operating profit before the impact of financing costs, IFRS16, share based payment charges, depreciation, amortisation, impairment charges and highlighted items

** Total spend is the total operating costs, cost of sales, capital expenditure and any highlighted costs

Mike Read, Chief Executive Officer of Falanx Group, commented:

“The Group has recovered strongly from the worst of the COVID-19 impacts and we are now beginning to see a much improving financial performance, and this, combined with the £1.25m fundraising at the end of September, puts us in a much stronger financial position.  We are pleased with the progress made on developing our channels to market, particularly with the commencement of the TAP programme in October 2020 with SolarWinds MSP, which we expect to benefit our new Triarii Cyber monitoring service.  We are addressing a high growth cyber security market, and this combined with a solid and improving performance by our Assynt division means that we are optimistic about the future”

Chairman’s Statement

This period has clearly been impacted by the COVID19 pandemic and disrupted our previous growth trajectory, particularly in Cyber services.  We responded early, protected our team and customers and improved financial position, not least through the September fundraise. Our order book for cyber services began to recover significantly in July, and order levels are now ahead of pre pandemic levels. Consequently, we have seen a much-improved financial performance from September onwards.  Our relationship with Solar Winds and successful customer adoption of Triarii, our new cyber monitoring service positions us well for future growth as we address the increasing cyber and political risks faced by organisations on a global basis.

Business Review

Cyber Division

In the six months to 30 September 2020 the cyber division recorded revenues of circa £1.4m (2019: £1.7m). Orders for penetration testing, which had been most affected by COVID-19 related delays, recovered strongly from the start of August 2020 onwards as clients recommenced projects and expanded their programmes around the move to an online economy. Since then, orders from penetration testing have been running at approximately £0.2m per month, which was the average run rate before the onset of the pandemic, compared to the lower level between April and July 2020. This uplift in orders resulted in a much-improved financial performance of the division in September. This trend has continued into the second half of the year and order levels in November 2020 for penetration testing services have shown further growth.

Lower utilisation levels, as a result of maintaining the fully assembled and skilled delivery teams during the period of the order slippage, reduced gross margins to 27% (2019: 36%). The Cyber division is currently migrating its customer base to Triarii and this has resulted in some additional third party licence fees incurred during the period, but overall, this move is expected to significantly benefit our gross margin going forward.

Costs were kept under tight control and benefitted from a reduction in travel, salary sacrifice, limited use of furlough and rationalisation of premises costs. This allowed the adjusted EBITDA loss to be reduced by 40% to £0.32m (2019: £0.54m).

Focus has been on keeping staff safe, and the division has made very limited use of furlough programmes, with all staff back in work. Management chose to keep the skilled workforce in place in anticipation of recovery, and whilst this affected the short-term financial performance in this period, the validity of this strategy was demonstrated by being able to service customer projects following the major upturn in sales from July onwards.

The division has also been able to return limited numbers of staff to the Reading SOC office, which is now the only operating premises lease in the Group, offering staff a choice between home working and an office environment.

The division has invested in a new cyber monitoring service (“Triarii”) using best-in-class third party technologies. Triarii offers class-leading performance and is well aligned to customer and market needs.  In August 2020 we announced a significant sale of Triarii to UK public sector clients achieved through a partner who is a major supplier to the UK Government, and we are expanding this partnership to include adjacent services as well as further customer reach to deliver against a much larger revenue opportunity. The migration of pre-existing customers onto Triarii is underway and we expect to migrate the entire user base over the next few months, thereby reducing our software licence cost of sale significantly which will improve our gross margin.

The move to remote working opens up inevitable cyber security risks for organisations and we have positioned our offerings to address this growing market opportunity. Whilst orders and revenues were lower at the start of the year than those pre COVID-19 as clients were in disaster recovery mode, orders have since recovered strongly from July onwards and this began to flow through to revenues and margins in September. 

Our Solar Winds program gained momentum in the period under review and Falanx won its first cyber sale for our Triarii monitoring service in the US working in close conjunction with them following a rapid sales cycle.  Recent high profile cyber-attacks in the US underline the need for monitoring and defensive measures against an increasing cyber threat. With Triarii monitoring service, our professional services capabilities and with our partnerships we are well positioned to help our customers address this threat.  

Assynt Division

Divisional revenues grew by 14% to £1.06m (2019: £0.93m) due to larger recurring revenue contracts for embedded analysts with global corporations. This helped gross margins increase to 28% (2019: 19%). Approximately 96% of revenues were recurring.  Costs were kept firmly under control with reductions in premises and certain marketing spends. The division recorded an adjusted EBITDA profit of £0.06m (2019: loss £0.01m) and became profitable solely on recurring revenues.  

The division has a strong pipeline of recurring revenue opportunities as well as an increasing demand for consulting projects.  We are deepening our relationships with existing customers who see its services increasingly as an essential part of their risk management strategies. Whilst inevitable budgetary constraints can affect some of our client interactions, Assynt is encountering an increasing recognition that growing level of global geopolitical instability on multiple fronts – from the fall-out from COVID-19 to US-China relations – has underscored the need for forward looking companies to understand the underlying risk drivers to their international operations.  The client base is strong and includes some of the world’s largest technology, consulting and communications companies. Our reputation with these clients is growing and management is looking for further penetration into existing customers and major renewals, as well as winning new names, frequently on the back of referrals from existing clients.  Focus is on driving further sales of both embedded analysts as well as online subscriptions to our Assynt report.

In response to this, the provision of considered and predictive analysis in our Assynt Report subscription service has been expanded beyond covering just the 40 leading emerging market economies to now include wider thematic issues in our new “Global Themes” series. This covers subjects such as the global trade and economy, environmental issues, Islamist extremism, state cyber threats and great power politics. These and the series of reports on the political and economic ramifications of COVID-19, has been well received by clients. The value of the embedded analyst service is also being increasingly recognised as a means to integrate Assynt’s geopolitical understanding and business-focused analytical expertise into our host client’s operational capabilities without requiring headcount signoff in the client.

The Assynt team has been very successfully working on a virtual basis since March 2020. The existing business model whereby two thirds of our staff already worked in third party offices as embedded analysts, made the transition to remote working due to lockdown easy to implement. The decision not to renew our London office lease on expiry in June 2020 was thus a clear-cut opportunity for cost saving with no loss of efficiency in the short term. Starting FY 2022, with the predicted reduction in COVID-19 related restrictions, we will look again at a London presence.

Financial review 

Consolidated Statement of Comprehensive Income

Group revenues fell by 7% to £2.46m (2018: £2.64m). As referenced above this was due to the pandemics impact on the cyber division’s penetration testing business causing a fall of 18% in its revenues, whilst the smaller Assynt division grew by 14%. Overall recurring revenues comprised 65% (2019: 57%) of total revenue, with the percentage increase being driven by both the growth in Assynt recurring revenues and the impact of COVID-19 on repeat penetration testing revenues. Overall gross margins fell to 27% (2019 30%) as a result of services utilisation during COVID-19 in Cyber and also additional short term licence fees around the migration of cyber monitoring customers onto the new Triarri platform.

Underlying operating costs were reduced by 25% to £1.30m (2019: £1.72m). This was achieved through measures introduced in the second half of the previous financial year as well as responses to the COVID-19 pandemic. These responses included closure of premises and exit from leases, reduced professional fees, limited use of the government furlough scheme, the salary sacrifice for options scheme which reduced cash payroll costs by c£30,000 per month between April and September as well as lower spend on travel as a result of the move to home-based working. 

Overall, we expect our current operating cost base and infrastructure to support our revenue growth expectations in the near term.

As a result of these measures on spend reduction, and despite the fall in revenues related to the pandemic, we were able to reduce our adjusted EBITDA loss by 40% to £0.62m (2019: £0.93m). 

Adjusting items comprised certain investment in the new cyber platform Triarii and infrastructure, premises, addition of IFRS 16 costs, closure & realignment. Overall, these fell from to £0.21m (2019: £0.35m). 

Depreciation and amortisation charges were £0.26m (2019: £0.23m) with the increase mainly being due to full period charges for infrastructure investment carried out in the first quarter of the previous financial year.

Share option charges increased to £0.24m (2019: £0.05m) due to the salary sacrifice options issued in April 2020 which were recognised over the vesting period of 6 months. This voluntary scheme was widely adopted by staff, particularly in the Cyber division, which has demonstrated the belief of the wider team in the Falanx’s strategy to address the market opportunity.

Overall, the loss for the period fell to £1.35m (2019: £1.55m) and the loss per share was 0.34p (2019: 0.39p)

Consolidated Statements of Financial Position & Cash Flow

In December 2019 the Group disposed of its investment in the Furnace technology platform and development costs were reclassified (net of a small impairment) to financial investments in it.  Certain fixed asset spends on premises improvements in the 30 September 201 balance sheet were separately analysed as lease assets in the 31 March 2020 balance sheet.

Cash receipts were strong in the period with receipt of large cyclical renewals and R&D tax credits in the first quarter and this reduced the trade debtor balance. Average debtor days were 48 (2019: 47) and no incidence of bad debt has been recorded. This has continued into the second half of the year. The pandemic had, as referenced above, impacted the group’s balance sheet and working capital position by approximately £0.5m. Mitigation measures were put in place with government schemes, the main one being the deferral of approximately £0.72m of HMRC payments under an agreed payment scheme. Approximately £0.19m of these liabilities are due to be paid more than one year from the date of these interims, but will be fully paid by July 2022, and are treated as such, along with the £0.3m payable under premises leases (where a fixed asset of £0.4m has also been recorded as above) as required by IFRS16. The group fully expects to service all these liabilities as they fall due and has been paying current taxation in the usual periodic way. Deferred incomes reduced due to certain timing issues and deliveries of significant orders invoiced at the end of the previous financial year. Our overall capital expenditure was greatly reduced to £0.03m (2019; £0.46m) following the completion of the SOC investment in the previous year and the disposal of Furnace in December 2019.

Cash balances were £0.23m (2019: £0.71m) but this excludes the impact of the fundraising completed on 29 September 2020 and immediately on settlement of this transaction cash balances on 1 October 2020 were £1.33m

On 15 April 2020 the group issued circa 33m options and warrants to staff and directors in response to a voluntary program where they could waive some of their cash remuneration in the six months to 30 September 2020 for share options with an exercise price of 1p each. The Group has a total of circa 38m other incentive options under EMI and unapproved schemes outstanding on 30 September 2020 and these have an average exercise price of c4.2p each.

Overall shareholders’ funds at 30 September 2020 stood at £3.85m (2019: £6.12m)

On 29 September 2020 the group announced the issue of 125,000,000 ordinary shares for gross proceeds of £1.25m. The vast majority was settled on 1 October 2020 with a small balance received in November from certain Directors/PDMRs who were unable to take part in the September placing given MAR close periods. Taking this into account the Group now has approximately 525 million (2019: 400 million) shares in issue. A significant proportion of this fundraising was through long-term EIS & VCT investment and it included new and existing institutional investors. 

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