Corero Network Regulatory News (CNS)

7 September 2011

Corero Network Security plc (AIM: CNS)

("Corero", the "Group" or the "Company")

Interim results for the six month period ended 30 June 2011

Corero Network Security plc, the AIM listed network security and business software provider, announces its half yearly report for the six month period ended 30 June 2011.

Financial Highlights:

·; Revenues of £4.6 million (H1 2010: revenue £1.4 million)

·; Operating profit* of £138,000 (H1 2010: £306,000)

·; Adjusted loss before tax of £51,000** (H1 2010: profit before tax £48,000)

·; Loss per share 2.05p (H1 2010: earnings per share 1.38p)

·; Strong cash position of £5.3 million at 30 June 2011 (30 June 2010: £621,000)

* before depreciation, amortisation, exceptional costs and financing

** excluding exceptional acquisition and restructuring costs and amortisation of acquired intangible assets

Operating Highlights:

·; Acquired Top Layer Networks since rebranded Corero Network Security ("CNS")

·; Group holding company renamed Corero Network Security plc

·; Launch of industry first network-layer and application-layer DDoS defence system

·; CNS management reshaped and sales teams recruited across Europe and Asia

·; Since acquisition CNS secured 40 new customers

·; Corero Business Systems ("CBS") performed strongly; 114 academy contracts won

Jens Montanana, Corero Chairman said: "The first six months of 2011 have been transformational for Corero with the acquisition of Top Layer and successful integration of that business coupled with the continuing growth of Corero Business Systems.

"The network security market is forecast to grow strongly, fuelled by an escalating number of cyber crime attacks, associated economic disruption and costs, and increasing security compliance and business continuity requirements. Corero is well placed to capitalise on this market trend with an increasing pipeline of opportunities.

"The increased investment in CNS and CBS in the second half of 2011 will create businesses with greater scale and better longer term profitable growth. The benefit of this investment in CNS marketing, sales and product development, the launch of the DDoS defence product, and accelerating revenue growth from CBS, is expected to be seen in the second half of 2011 and 2012."

Enquiries:

About Corero Network Security

Corero Network Security is an international network security business, and innovator in Intrusion Prevention Systems and leader in DDoS defence solutions.

Corero Business Systems serves the education and business sectors in the UK by delivering powerful, dynamic modular accounting and business management software and services.

Overview

The first six months of 2011 have been transformational for Corero with the acquisition of Top Layer Networks, Inc. ("Top Layer") which closed on 2 March 2011 and successful integration of that business coupled with the continuing growth of Corero Business Systems. Top Layer was rebranded "Corero Network Security" in June 2011.

On 29 June 2011, Corero plc was renamed Corero Network Security plc in order that the Company name is more closely aligned to its principal trading subsidiary.

In the six months to 30 June 2011 the Group reported revenues of £4,587,000 (H1 2010: £1,384,000) and operating profit before depreciation, amortisation, exceptional costs and financing of £138,000 (H1 2010: profit £306,000).

Corero Network Security

Corero's acquisition of Top Layer marked the first step in the Company's strategy to build a network security technology business focused on delivering software and hardware solutions to mid-market commercial and enterprise customers and telecommunication service providers, through international channels.

In the period since the acquisition closed, a number of important milestones have been achieved:

·; Launch of DDoS Defence System ('DDS'), an industry first network-layer and application-layer Distributed Denial of Service ('DDoS') defence product (which prevents malicious attacks causing damaging business interruption)

·; Management team reshaped with the appointment of a General Manager and CFO (who was appointed Chief Executive Officer of the CNS subsidiary on 18 July 2011) and the recruitment of a Vice President of Engineering, Chief Marketing Officer, and VP of Finance

·; Sales teams recruited in France, Italy, Malaysia, Germany, Spain and Taiwan (the latter covering Taiwan, Hong Kong and China)

·; The rebranding of Top Layer to "Corero Network Security"

CNS reported revenue of £2,696,000 and an operating lossbefore depreciation, amortisation, exceptional costs and financing of £80,000 in the period since the 2 March 2011 acquisition date. 

CNS sales order intake in the period post the Top Layer acquisition was $5.0 million (£3.0 million). The benefit of investment in marketing and sales is expected to be seen in the six months to 31 December 2011.

In the period since the acquisition, CNS secured 40 new customers including material orders from BWIN (one of the world's largest on-line gaming companies), City of Baltimore, a leading national newspaper in the US, and Bridgepoint Education (an on-line & campus based Higher Education provider). In addition, material upgrade and renewal orders were secured from existing customers including a leading national insurer and Party Gaming (which was acquired by BWIN).

Corero Business Systems

Revenues increased by 37% in the first half of 2011 to £1,891,000 (H1 2010: £1,384,000). CBS' sales order intake in the six month period ended 30 June 2011 was £2.5 million (compared to £1.5 million in the same period in 2010).

CBS reported an operating profit before depreciation, amortisation, exceptional costs and financing in the six months to 30 June 2011 of £620,000 (H1 2010: £481,000).

Key achievements in the first half of 2011 include:

·; Continued success in the education Academy market winning contracts from 114 academies (H1 2010: 17, FY 2010: 70) underlying a strong position in this growth market with c. 30% market share

·; Two new contract wins with sixth form colleges in the period for Resource EMS, CBS' Learner Management Information System ('MIS'). After evaluating a number of alternative MIS systems, Resource EMS was selected by these two colleges to meet their financial and business requirements.

·; Strategic partnership with the Schools Partnership Trust, a leading 'multi academy' group and one of only four organisations nationally to be awarded 'Accredited Schools Group Status', to supply Resource Financials to all of their schools

·; Strengthening of the management team by appointment of HR manager to aid expansion

·; Launch of new web site to focus on key products and sectors

·; Launch of Resource Financials v7, CBS' next generation financial software solution. The new version, initially aimed at colleges, incorporates a number of enhancements including an improved user interface, extended general ledger coding and budgeting, a completely revamped reporting engine with support for multiple output scenarios, closer integration with MS Office and a dynamic hierarchy manager for more in-depth analysis and reporting.

The education sector in the UK offers CBS an excellent opportunity for growth, particularly in light of the significant increase in the demand for schools to convert to Academies. Over the coming year, CBS will make further investment to drive growth, enhance the service offering and increase market share.

Financial Review

In the six months to 30 June 2011, the Group reported revenues of £4,587,000 (H1 2010: £1,384,000) and operating profit before depreciation, amortisation, exceptional costs and financing of £138,000 (H1 2010: profit £306,000).

CNS revenues were £2,696,000 in the period since the 2 March 2011 acquisition closing date. CNS reported an operating loss before depreciation, amortisation, exceptional costs and financing of £80,000 in the period.

CBS revenues were £1,891,000 (H1 2010: £1,384,000). CBS reported an operating profit before depreciation, amortisation, exceptional costs and financing of £620,000 (H1 2010: £481,000).

Central costs before depreciation, amortisation, exceptional costs and financing were £402,000 (H1 2010: £175,000).

The Group operating profit before depreciation, amortisation, exceptional costs and financing was £138,000 (H1 2010: profit £306,000) and loss before taxation was £849,000 (H1 2010: profit £48,000). The Group reported a loss per share of 2.05p (H1 2010: earnings per share 1.38p).

The Company changed the presentation of the Statement of Comprehensive Income in the period in line with best practice and other software companies. Note 5 sets out the presentation of the Statement of Comprehensive Income on the basis adopted in prior years and a reconciliation of the 2011 loss before tax to the presentation format adopted in prior years.

In the period, the Company changed its accounting policy for cost of sales to include all direct costs associated with revenue generation, including services delivery and support costs. The cost of sales reported for the six month period to 30 June 2011 has been determined based on the new policy and the comparatives for the six months to 30 June 2010 and year ended 31 December 2010 restated in accordance with the new policy.

The Group had cash balances of £5.3 million at 30 June 2011 (2010: £621,000). Net cash from operating activities was (£1,059,000) (H1 2010: £241,000).

Outlook

The network security market is forecast to continue to grow strongly, fuelled by escalating cyber crime attacks, the economic disruption and associated costs as cyber attacks multiply, and increasing security compliance and business continuity requirements. In order to capitalise on this opportunity, CNS expects to accelerate its investment in sales, marketing and product development. The investment is planned to be mainly headcount and would see the number of CNS employees increase from 54 at 30 June 2011 to approximately 80 by 31 December 2011. Consequently, CNS will see an increase in its second half operating costs of $2.5 million (£1.6 million) compared to the first half of 2011. The benefit of this increased investment and the launch of the DDoS defence product, which will be available in October 2011, is expected to be seen in the second half of 2011 and into 2012.

The Academy market in which CBS operates is expected to continue to grow, encouraged by government support. Like CNS, CBS intends to capitalise on the opportunity in its marketplace by accelerating investment mainly in headcount in the second six months of the year and into 2012 to drive revenue growth, enhance its service offering and increase market share. Consequently, CBS expects to increase the number of employees from 40 at 30 June 2011 to approximately 60 by 31 December 2011. The strong order intake in the six months to 30 June 2011 is expected to result in revenue growth in the second six months of the year.

The Board believes this investment in CNS and CBS will create businesses with greater scale and better longer-term profitable growth. Full year Group operating profit (before depreciation, amortisation, exceptional costs and financing) is expected to be in line with market expectations.

The Board remains confident in the Company's prospects.

Consolidated Interim Statement of Comprehensive Income

For the six months ended 30 June 2011

* restated for change in cost of sales accounting policy as set out in note 1

The unaudited Statement of Comprehensive Income as at 30 June 2011 split between continuing and acquired operations is set out on page 7.

Basic and diluted earnings/(loss) per share

* restated to include options issued which were dilutive, previously not reported as such.

 Consolidated Interim Statement of Comprehensive Income

For the six months ended 30 June 2011

Consolidated Interim Statement of Financial Position

As at 30 June 2011

Consolidated Interim Statement of Cash Flow

For the six months ended 30 June 2011

Consolidated Statement of Changes in Shareholders' Equity

For six months ended 30 June 2011

Notes to the interim financial statements

1. General information and basis of preparation

The consolidated interim financial statements have been prepared in accordance with the AIM Rules for Companies and in accordance with International Financial Reporting Standard (IFRS) IAS 34 Interim Financial Reporting.

The interim financial statements have not been audited or reviewed pursuant to guidance issued by the Auditing Practices Board and do not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006. They do not include all of the information required for full annual financial statements and should be read in conjunction with the consolidated financial statements of the Group for the year ended 31 December 2010.

Corero's consolidated interim financial statements are presented in Pounds Sterling (£), which is also the functional currency of the parent company.

The financial information for the year ended 31 December 2010 has been derived from the published statutory accounts as amended to reflect the change in presentation of the Comprehensive Statement of Income in line with best practice and other software companies and the change in the accounting policy for cost of sales. A copy of the full accounts for that period, on which the auditors issued an unqualified report, has been delivered to the Registrar of Companies.

Apart from the change in the accounting policy for cost of sales to include all direct costs associated with revenue generation, including services delivery and support costs, these interim financial statements have been prepared in accordance with the accounting policies applied in the financial statements for the year ended 31 December 2010. They have been prepared under the historical cost convention except for the valuation of financial instruments. The financial statements have been prepared on a going concern basis as the Directors believe that the current sales prospects combined with existing working capital resources should ensure that Corero has adequate working capital to service its existing business for the foreseeable future. The directors have made this assessment based on internal forecasts and cash flow projections.

These consolidated interim financial statements were approved by the Board on 6 September 2011 and approved for issue on 7 September 2011.

2. Segment reporting

Business segments

The Group is managed according to two business units: Corero Network Security and Corero Business Systems. These divisions are the basis on which the Group reports its primary segment information. The principal activity of Corero Network Security is the design, development and delivery of network security products. The principal activity of Corero Business Systems is the design, development and delivery of accounting and management information software to the academy, school, further education and commercial markets.

There are no inter-segment sales. Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Unallocated assets and liabilities comprise items such as cash and cash equivalents, taxation, accruals, prepayments and borrowings.

Notes to the interim financial statements

continued

2. Segment reporting (continued) - Statement of Comprehensive Income 

Notes to the interim financial statements

continued

2. Segment reporting (continued) - Statement of Comprehensive Income

Discontinued Operations

Notes to the interim financial statements

continued

2. Segment reporting (continued) - Statement of Financial Position

Notes to the interim financial statements

continued

2. Segment reporting (continued) - Statement of Financial Position

Segmental net assets/(liabilities)

3. Earnings/(loss) per share

Basic earnings/(loss) per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average of ordinary shares outstanding during the period.

Notes to the interim financial statements

continued

3. Earnings/(loss) per share (continued)

Diluted earnings/(loss) per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average of ordinary shares outstanding during the period plus applicable share options.

The CULS were non-dilutive for periods ending 30 June 2010 and 31 December 2011 and the share options were non-dilutive for the period ending 30 June 2010 (therefore the diluted and basic (loss)/earnings per share were the same).

* restated to include options issued which were dilutive, previously not reported as such.

Notes to the interim financial statements

continued

4. Cash flows from operations

Notes to the interim financial statements

continued

5. Statement of comprehensive income - restatement

The statement of comprehensive income below illustrates the statement of comprehensive income prepared on the same basis and applying the cost of sale accounting policy adopted in the 31 December 2010 financial statements.

* holiday pay accrual, capitalisation and amortisation of research and development costs and exceptional costsNotes to the interim financial statements

continued

5. Statement of comprehensive income - restatement (continued)

The statement of comprehensive income below illustrates the statement of comprehensive income for the six month period to 30 June 2011 prepared on the same basis and applying the cost of sale accounting policy adopted in the 31 December 2010 financial statements as shown in the column "Old Basis" and the effect of the new cost of sales accounting policy and reclassification of costs in the statement of comprehensive income as presented in the interim financial statements above shown in the column "New Basis".

Notes to the interim financial statements

continued

6. Goodwill

7. Acquisition

On 2 March 2011, the Company acquired the entire issued share capital of Top Layer which has since been renamed Corero Network Security, Inc.

The aggregate consideration for the acquisition was $15,288,160 satisfied as follows:

·; $6,304,602 by the issue, credited as fully paid, of 9,038,855 new Ordinary shares Corero;

·; $5,000,000 by the issue of loan notes by Top layer. These loan notes bear interest at 8% per annum and are repayable on 2 March 2014;

·; $3,860,000 in cash (of which $500,000 was paid into an escrow account); and

·; Deferred consideration of $123,558, to be satisfied by the issue of 177,145 new Ordinary shares Corero to be issued on 2 September 2012 subject to adjustment for set off against any warranty claims brought by the Company in accordance with the terms of the acquisition agreement.

Notes to the interim financial statements

continued

7. Acquisition (continued)

The assets and liabilities of Top Layer at the date of acquisition were:

The Company's strategy as set out in the Circular to shareholders dated 14 July 2010 is to build a network security technology focused business. The acquisition of Top Layer is the first step in executing the Company's acquisition strategy and provides a core platform on which to build a leading network security business. The goodwill arising from the acquisition includes Top Layer's 12 years of deep domain expertise in security and networking and its proprietary technology offering with a multi-core processing platform to support high performance security applications and scalable architecture. The Company plans to add functionality to the Top Layer platform to broaden its network security offering to deliver revenue growth.

The costs relating to the acquisition of Top Layer (a reverse takeover under the AIM Rules) and associated placing referred to in note 8 below were £551,000, of which £284,000 has been recognised as an expense in the statement of comprehensive income in the six months ended 30 June 2011 and included under Exceptional costs, and £267,000 has been charged to the share premium arising from the issue of the consideration and placing shares.

The revenue and loss of Top Layer since the acquisition date included in the consolidated statement of comprehensive income for the six months to 30 June 2011 is shown in note 2 under the heading Corero Network Security. The consolidated revenue and operating loss before depreciation, amortisation of intangible assets, exceptional costs and financing for the

Notes to the interim financial statements

continued

7. Acquisition (continued)

six months ended 30 June 2011 as though the acquisition date had been effective as of the beginning of the annual reporting period, would have been £3,595,000 and £288,000 respectively.

8. Placing

On 2 March 2011, the Company raised £2.3 million (before costs) by way of a placing of 6,571,429 new ordinary shares at a price of 35p per share.