FLX.L Regulatory News (FLX)

29 September 2021

FALANX GROUP LIMITED

("Falanx "or the "Company" or the "Group")

 Annual results for the year ended 31 March 2021

Financial Highlights

Results for the year to 31 March 2021 as per trading update announced on 18 August 2021

Post Period Financial Highlights

Operational highlights

Post Period Operational Highlights

Cyber Division

Assynt Division

Mike Read, Chief Executive, said:

"Cyber Protection is no longer a 'nice to have', instead it is an essential part of any business risk discussion. Hackers and criminals are attacking every sector and every size of organisation. With the need for home working, arising from COVID 19, hacking has been made easier and risks have increased, Organisations can no longer avoid investing in protecting themselves. Clearly like other organisations we have experienced some delays in the progress of our business due to COVID-19 but recent growth has been encouraging and it seems as though these are now behind us."

"Our services portfolio is very well positioned to address this exciting opportunity, and this is now feeding through into improving revenues and profits in the core Cyber Security division. Our pipeline of future business is strong both in terms of quantum and quality of opportunities including those from our deepening relationship with N-Able Inc."

"Our separate Assynt division has a solid and growing base of contracts as well as new prospects with some of the world's largest companies, and this is a valuable asset in its own right."

"Given the progress and increasingly favourable cyber-security market trends I am increasingly confident that Falanx's core business is well positioned to deliver significant shareholder value."

(*) Adjusted EBITDA is a non-IFRS headline measure used by management to measure the Group's and individual divisions 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. IFRS16 is excluded so that the underlying rental costs of the premises are reflected in this metric.

Falanx will later today add the report and accounts for the financial year ended 31 March 2021 to its website at www.falanx.com/falanx-group-investor-information in accordance with the electronic communication provisions under its Articles of Association and AIM Rule 20.

Chairman's Statement

I am pleased to present your Company's Annual Report & Accounts for the year ending 31st March 2021.

The financial highlights and performance will be addressed in some detail in the reports of both the Chief Executive and the Chief Financial Officer, so I will confine my comments to the more strategic aspects of our operations.

Certainly, the past 12 months have seen the continued, insidious growth in cyber-related crime and, in particular, the very noticeable emergence of ransomware as a key cyber risk.  The complacency of many companies in the SME sector to recognise their vulnerability to this criminal activity still surprises me and my colleagues; particularly as the past 24 months has seen a very significant and permanent shift towards distributed working patterns which makes cyber-crime more, not less, likely.  All companies, of whatever size, fall prey to this type of crime and it is only through rigorous training of the workforce and the 24/7 monitoring of IT infrastructures that businesses will be able to robustly protect themselves from its calamitous consequences.  Directors of businesses, big and small, public, and private, need to continually satisfy themselves that their IT assets are secure from being compromised.

In our core cyber services division, this was a year of two halves, with customer spending in the initial six-month period clearly disrupted by the impact of COVID-19. The second half witnessed a gradual and sustained recovery in business activity such that the core cyber division since the year end, moved into profitability at an adjusted EBITDA level. In part, this has been accomplished through rigorous cost control as well as the introduction of Triarii, our new sophisticated and flexible cyber protection platform which is delivering better customer results along with margin efficiencies.  It also reflects the growing importance of our strategic channel partners, N-able based in the USA, and Trustmarque based in the UK.  Both relationships allow us to reach into a sizeable community of customers and managed service providers around the globe, many of whom do not have access to the advanced cyber protection capabilities that are delivered by Triarii.  We look forward to deepening these key relationships over the forthcoming months and years.

Turning to our Business Intelligence division, Falanx Assynt, activity for the year was less volatile than Cyber, but still felt the impact of COVID-19 in terms of business development and organic growth.  Assynt is a business with substantial recurring revenues with some of the world's largest and globally active technology companies.  These relationships are steady and deepening and, again, we are seeing some encouraging signs of growth coming from them as business activity around the world begins to recover to pre-pandemic levels.  We were proud that in August 2021, the Company achieved the distinction of being rated by Chambers in the top 2021 global providers of strategic corporate intelligence.  This is a distinction that reflects the quality of the team of analysts that has been assembled in the Company and we look forward to continuing steady improvement in the business.

We announced in September that in August we received support from Boost & Co which has become our debt stakeholder, supporting our organic growth with working capital and providing us with some acquisition funding should we identify any suitable opportunities.

We believe that the business world is steadily emerging from the bunker into which it retreated during the pandemic.  This process is not occurring in an even manner around the world and some geographies still remain stubbornly inward looking.  However, and in many ways lamentably, the cyber war between criminals and corporates continues to escalate and the stakes are getting higher.  For this reason, we believe that Falanx is well-positioned and has an important role to play in diminishing the ever-evolving threat of cyber-crime.

As ever, we express our thanks to all our employees who have showed resilience, determination, and flexibility in helping your company weather the COVID-19 storm and position us for what we expect to be a busy future. 

Approved by the Board on 28 September 2021 and signed on its behalf by

A Hambro

Non-Executive Chairman

Chief Executive Officer's Statement

Falanx is a provider of Cyber Security and Strategic Intelligence services to over 470 customers worldwide. Customers include Managed Service Providers ("MSPs"), IT providers, governments, large multinationals and small to medium enterprises (SMEs). Our services are sold via two independent business units supported by a common corporate services team

Falanx Cyber Defence ("FCD")

Our Cyber division has two business lines: Offensive (Professional Services, including Penetration Testing) and Defensive (a range of managed services) which are sold either through our partners or directly by our sales teams. These generate high quality repeat and recurring revenues, and our strategy is to grow these by delivering services which are highly relevant to customer needs in the post pandemic, digital world, and its dramatically increasing cyber security threats. These are already showing that they can generate value for shareholders.

Financial Performance

The division recorded revenues of £3.12m (2020: £3.71m) for the year to 31 March 2021. As referenced in our interim results, the reduced revenues were due to delays in sales and deliveries in the first few months of the financial year as COVID-19 impacted. Sales orders during this period were circa £0.1m per month compared to c£0.2m per month before COVID-19. These recovered strongly in the second half of the year when the division recorded much higher revenues. Revenues from our new cyber security Extended Detection and Response ("XDR") solution ("Triarii") also commenced in the second half and these helped the recovery, complementing our traditional ability to provide Managed Detection and Response (MDR) services through value-added capabilities.

Gross margins were 33% (2020: 38%) with the fall being due to a) low utilisation of professional services staff during the worst of COVID-19 which reduced gross margin to 27% in the first six months; combined with b) temporary additional technology platform costs in the second half of the year whilst migrating existing clients onto the new Triarii MDR platform. We chose to fully maintain our highly skilled and cohesive workforce in anticipation of a rebound, so that the division could capitalise on renewed growth post the immediate disruption of COVID-19. This proved to be an excellent decision. Gross margins improved to 37% in the second half of the year as utilisation improved. The Triarii customer migration program has subsequently been completed and gross margins are expected to further improve significantly in the year to 31 March 2022. Furthermore, in some cases the migration has led to existing customers electing to expand their coverage beyond MDR to Triarii XDR with the extended protection afforded by our Detection in Depth philosophy.

Underlying operational & cash-based costs (including premises, sales and marketing and administration) were under tight control and were reduced by 20% to £1.46m (2020: £1.82m). This was achieved through closure of premises, lower travel, salary sacrifices, lower discretionary spend and some limited support from the furlough scheme. Despite a lower cost base, we maintained our exceptionally high level of customer service across all services.

Overall, the adjusted loss was £0.44m (2020: £0.41m) with there being a much-improved performance in the second half of the year, and March 2021 being one of the strongest months in the division's history.

Operational Review

The financial year commenced just after the start of the COVID-19 pandemic. Our investment in cloud-based infrastructure meant that we were able to quickly and seamlessly move to a remote operating model and ensured continuity of operations. We rapidly adjusted our model to ensure continuity of service for our customers and were also able to make significant savings in costs - including savings on premises costs as well as a significantly reduced spend on travel and living. We focussed our efforts on looking after our customers and staff during this difficult period and have no doubt that this contributed to the recovery in the second half of the year. There were delays in sales cycles and the ability of customers to receive some of our services, but this improved significantly in the second half of the year.

The move to a remote working world massively increased the risk of a cyber-attack for virtually every business, large or small. This heightened risk greatly increased demand for cyber security services once the initial disruption of the crisis was stabilised. In the period we have signed over 40 entirely new customers and this has helped both MDR and Professional services. Orders rebounded swiftly in the second half leading to the much-improved financial performance described above, despite there being some ongoing disruption from the lack of access to client premises for certain projects.

Total orders for the period were £3.5m (2020: £3.4m) and increased despite lower orders in the first half of the year which was impacted by COVID-19. They comprised circa £2.3m of Professional Services and £1.2m Managed Services.

MDR and Security Operations Centre ("SOC") services

Our move away from legacy MDR platforms to current and leading technologies has resulted in a vastly improved range of capabilities. This further supports our 'mantra' of being able to provide affordable cyber protection to businesses of all sizes, large and small. Our Triarii philosophy of 'Detection in Depth' has been well received and we continue to expand the number of touchpoints we monitor in an IT estate to ensure that, wherever an attack may initiate, we have the best chance possible of detecting it before it does harm to a business. Our product set now includes:

1. Triarii XDR (based on the Elastic platform)

2. Triarii XDR (based on Microsoft Azure Sentinel)

3. Triarii Lite (MDR for smaller businesses)

4. Managed Endpoint Detection and Response (M-EDR)

5. Managed EDR (N-Able EDR)

Consequently, we can deliver enterprise-grade protection to the masses at an affordable price-point, protecting people around the clock, 24/7/365 via our SOC in Reading.

Our Triarii technologies have also expanded our market reach to include cloud, hybrid and on-premise infrastructures, distributed / remote workforces and organisations heavily invested in Microsoft Azure.

Professional Services

Falanx Cyber now offers an extended portfolio of professional cyber security services. We offer a wide range of ethical offensive services designed to simulate real-word cyber criminals and, in doing so, enable us to identify weaknesses in clients' defences and advise them as to how they can better protect themselves and their assets. These services range from specific penetration testing services through to social engineering techniques (such as phishing and red teaming inter alia) which can then be integrated into tailored security awareness training. We continue to serve customers in a diverse range of sectors including Government, Finance, Legal, Insurance, Retail, IT and Telecoms. This service line continues to benefit from a high level of repeat business and expansions and extensions of customer commitments.

Routes to Market

To accelerate growth beyond the confines of traditional direct sales and cross-selling opportunities between service lines, Falanx Cyber utilises a 'Channel' model, providing security services via its growing network of MSP partners. These IT outsourcing organisations have a longstanding and trusted status with their customers for the provision of essential business IT functions and, as such, they are natural partners for Falanx Cyber and a significant extension of our market reach. 

The spinout of N-able (formerly SolarWinds MSP) into a separately traded public company, N-able, Inc ("N-able"), completed in July 2021. A key strategy of N-able is to empower and protect its 25,000 MSP customers (and over 500,000 end users) with cybersecurity products and services, and the Company believes that it is very well positioned to address this market. Falanx has already been working increasingly closely with N-able to develop this opportunity and broaden services and routes to market, and we expect to feel the benefit of this in the second half of the current financial year.

Current Year Update

Falanx Cyber Defence has had a strong performance since the start of the new financial year. The division is profitable at an adjusted EBITDA level, it has high levels of customer orders and is growing its Monthly Recurring Revenue ("MRR") base with the SOC services described above. The sales pipeline is strong across our channels including N-Able and TrustMarque as well as for the direct sales team. This is being driven by even greater cyber security threats and organisations needing to address these with urgency.

We have launched our new cyber evaluation model targeting all businesses, from the largest to the smallest. In summary, everyone needs to understand how an attacker might view their business form the outside, thereby gaining an understanding of the likelihood of being attacked. Our recently launched, affordable assessment service, Falanx Cyber Exposure Level ("f:CEL"), provides, objectively, exactly that understanding.

The division won its largest ever contract in April 2021 worth £1.0m over a three-year period. This is from an existing global financial services customer and is for the provision of Penetration Testing services. We continue to have positive discussions with the client and believe there is the opportunity for further growth.

Overall sales orders for penetration testing were more than £0.25m (excluding the above £1m contract) per month for the first 7 months of this calendar year compared to £0.15m in the first 7 months of the last Financial Year. This has been converted into revenue based on high levels of utilisation in our highly motivated and expert team.  

The migration from legacy platforms to Triarii is now complete and this now delivers a much greater capability to our customers. Furthermore, this reduces our external software licence costs. This is resulting in further improved gross margins and overall financial performance.

We now have a strong cyber security business which is well positioned to address this exciting market opportunity and its powerful drivers, in the move to a digital world. Our services are well aligned against the growing market opportunity. Furthermore, customer demand has grown significantly compared with the pre pandemic environment. The combination of strong and growing demand for the Falanx Cyber portfolio of services, the market pull of the MSP 'Channel' model, the accelerating opportunity offered by N-Able and other strategic channel partners, combined with the Triarii XDR service, gives our core division strong growth potential which is already generating returns.

Falanx Assynt

Our strategic Intelligence business unit, Falanx Assynt, provides market-leading geopolitical reporting and analysis focused on key major emerging markets and overarching global themes. Its client base includes some of the largest and most recognised global corporate names. Assynt's two principal business lines are the provision of subscription-based Assynt Reports and the provision of embedded analysts into clients. These are supplemented by an Intelligence Consulting practice which provides tailored reports to address specific client requirements.

Financial Review

Annual revenues for the year were £2.12m (2020: £2.14m). Certain projects were put on hold during the COVID-19 pandemic, and this held back planned revenue growth as corporates did less travel and held back on activities in emerging markets. Our highly resilient revenue model which is circa 95% monthly recurring enabled us to mitigate any revenue retrenchment. We had invested c£0.15m in further central analyst capacity to support planned sales of report subscriptions and business intelligence consulting assignments but these were delayed due to COVID-19. Consequently, gross margin was reduced to 26% (2020: 38%). Operating overheads were reduced by c40% to £0.47m by the closure of premises and reduced travel arising from COVID-19 as well as lower marketing and hiring costs. Overall adjusted EBITDA increased to £0.1m (2020: break-even).

Operational Review

Our plans for further expansion for the year were put on hold as the critical focus became the need to match our client's priorities and in some cases the need to retrench. This has resulted in some customer churn in both the Assynt Report and embedded analyst business lines. Notwithstanding that, revenues overall held up well and are now back on track. The pandemic most affected our consulting revenues, due to a decrease in client interest in projects in emerging markets at a time of uncertainty.

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 key geopolitical events in 40 countries, including specialist analysis of international jihadist trends. Over the course of the year, we have expanded our reporting to address significant global themes falling out from the COVID-19 pandemic. These have been very well received by our clients.

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 impact on efficiency.

The value of the embedded analyst service continues to be recognised by clients 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. All our most critical clients have demonstrated the value we deliver by maintaining or increasing their spend with Assynt despite COVID-19 pressures. In particular, a £1.2m three-year contract won in January 2021, with one of the world's largest technology companies has been further expanded in the financial year to 31 March 2022, with a requirement for embedded analysts in EU territories. This will be serviced from the Group's newly formed subsidiary in Ireland and is expected to generate revenues of c£1.0m over the next three years. We believe that there is further significant potential for growth in this service.

Since the close of this period, Falanx Assynt has once again been recognised by Chambers & Partners, listed in their 2021 rankings as one of only five firms in their band one, top tier, of global Geopolitical Risk providers. Charles Hollis, the Managing Director of Assynt, was also rated among the top five individual practitioners globally.

Future Prospects

The Assynt division has a strong pipeline of new business, and a growing contract base which will allow it to generate increasing returns.

Our Teams

Across both Business Units the teams have adjusted to the new working from home environment and have continued to provide a very high level of support to our customers and suppliers. - I and the Board want to thank them.

Approved by the Board on [28 September 2021] and signed on its behalf by

M D Read

Chief Executive Officer

Chief Financial Officer's Statement

Revenue 

Group revenues fell by 10% to £5.24m (2020: £5.85m), mainly due to the COVID-19 period in the first six months, which largely affected the Cyber division. Revenues in the second half of the year were approximately £2.8m and this represented growth of c25% compared with the first six months and utilisation improved as clients resumed delayed projects. Sales order values for professional services such as penetration testing significantly grew in the second half and on average were c£0.22m per month which was ahead of the average level before the onset of the crisis.

The business has continued to benefit from a strong element generated from the recurring contracts in each division, and overall, this was constant at 55% (2020: 56%). At the end of the period monthly recurring revenues across the Group stood at approximately £0.25m per month (2020: £0.26m). Our future order book of work remained strong with an order book £2.7m (2020: £2.7m) as well as deferred incomes (contract liabilities) of £1.1m (2020: £1.2m). This order book increased substantially post the year end with a total of £2.0m of future revenues being won under multi-year framework agreements with large global customers in each division.

During the year we added over 40 new cyber accounts (including several larger accounts) as well as significantly expanding our existing clients spend on cyber security services. Our churn in acquired customer bases has been low and as an example, the churn for First Base (acquired March 2018) has been less than 1% although the overall business has grown by circa 15% per annum (excluding the short-term impact of COVID-19). The Assynt division has a different customer profile to the Cyber division with approximately 75% of its clients being international and approximately 90% of them paying in advance with an average advance period of seven months.

Overall, our number of customers invoiced was 292 (2020: 284) and overall, the company dealt with circa 470 (2020: 440) customers.

Cost of sales 

Cost of sales represents cost items which vary more closely as a function of sales demand and therefore revenues. The Intelligence division's cost base is largely employment costs for full time and external consultants who produce intelligence reports for customers as well as certain database access licences. The Cyber division costs include the team who deliver the monitoring and professional services, external licence fees for technology platform and its support (some of which are fixed and some of which are variable) as well as certain consultants for delivery of specific client assignments.

Gross margin 

The Group's gross margin was 30% (2020: 38%). The reduction was mainly due to:

Operational and cash-based costs 

Administrative expenses excluding depreciation, impairment and amortisation and highlighted costs decreased by 25% to £2.84m from £3.78m due to the tight control of spend around marketing, travel, headcount, and premises reduction. Average headcount (including cost of sales) in the year was 84 (2020: 81) with the increase arising from higher levels of professional services staff.

Highlighted costs

Highlighted costs were £0.11m (2020: £0.32m) mainly represented the expense of closing premises in London and Sussex during summer 2020. Restructuring costs included certain corporate development professional fees around specific projects. Rental costs are normalised to exclude the impact of IFRS 16 on the Reading lease (commenced July 19), reducing the overall adjustment by £107,000 (2020: £76,000).

Share Option Charges

Share option charges were £0.18m (2020: £0.23m) and mainly arose from options granted in April 2020 as part of a voluntary salary sacrifice scheme by the staff and directors.

EBITDA

Adjusted EBITDA loss for the year was £1.26m (2020: £1.56m) after adjusting for the items highlighted above. Overall reported EBITDA loss (excluding share option charges) was £1.37m (2020: £1.89m).

Depreciation, amortisation, and impairment

The investment of £1.44m in Furnace Technologies Ltd ("Furnace"), which was spun out of the Group in December 2019, was fully impaired due to inherent objective valuation uncertainties arising from to its early nature and lack of external financing to support the carrying value. Furnace has made some initial sales and is currently seeking external investment and Falanx will review its carrying value accordingly. Falanx's forward business plans do not have any dependency of Furnace's financial performance and Falanx has no obligation to provide further financial support.

Depreciation of fixed assets was £76,000 (2020: £87,000), and a further IFRS 16 amortisation charge of £109,000 (2020: £77,000) was recorded in respect of the right of use asset related to the Reading lease acquired in July 2019. A consistent £0.29m charge arose from the amortisation of acquired customer base intangible assets from First Base (ten-year amortisation period, straight line basis, acquired March 2018) and Securestorm Limited (three-year amortisation period, straight line basis, acquired July 2018).

Financing costs 

Net financing costs were £33,000 (2020: £24,000) and mainly arose from IFRS 16 treatment of the Reading office lease which commenced in July 2019.

Result for the year 

Due to the non-cash impairment of Furnace the loss increased from £2.88m to £3.55m and loss per share increased to 0.77p from 0.72p.

Non-current assets 

Goodwill arising on the acquisitions of Falanx Cyber Defence, First Base and Securestorm remained at £1.85m and no impairment was deemed necessary. As referenced above the investment in Furnace was fully impaired during the year and was carried at £nil (2020: £1.44m). Customer relationships from First Base and Securestorm were carried at a total of £1.68m (2020: £1.97m) with the reduction arising from straight line amortisation referred to above. The Group's non-current assets also include the future value of the lease of the Reading premises of £0.36m (2020: £0.47m) which commenced in July 2019. A creditor of £0.35m (2020: £0.44m) is carried to reflect future liabilities and £0.09m (2020: £0.09m) are included in current liabilities. Fixed assets which include furniture plant and equipment were £0.16m (2020: £0.20m).

Working capital

Amounts due from customers (including contract assets), was £0.75m (2020: £1.5m) with the reduction due to certain larger customer payments being made earlier than in the previous year. Collections since the year end have been normal and no incidence of bad debt has been recorded since the previous annual report. Overall debtor days fell from 66 to 28 days due to higher cash collections before the end of the year. Prepayments were again reduced due renegotiated supplier contracts being in place with lower levels of advance payments. Other receivables included c£0.11m of R&D tax credits which were received in full after the year end. The Group continued to have a very low incidence of delayed and/or non-payment of debts by customers and our average losses over the last three years were only 0.06% of revenue. Taxes payable increased due to the payment plan negotiated with HMRC in July 2020 in response to COVID-19. A deferred payment plan was agreed with HMRC to reschedule up to £0.64m of payroll taxes outstanding at 30 June 2020 over 2 years as well as taking advantage of published time to pay plans on VAT. The group is fully in compliance with these plans.

Contract liabilities (deferred income) were £1.11m (2020: £1.23m) with the difference being due to the timing of certain advance customer billings.

Capital structure 

On 29 September 2020 Falanx announced the completion of a fundraising exercise for £1.25m by issuance of 125,000,000 new ordinary shares of nil nominal value and at 31 March 2021 there were 525,401,185 (2020: 400,401,185) shares of nil par value in issue.

In February 2021 the Company received shareholder permission to carry out a capital reconstruction exercise to support an application for a UK government loan which required retained losses to be less than fifty percent of issued capital and as a result £14.0m of the credit balance on share premium was used to reduce the accumulated losses and a further £1.0m was transferred to a special non distributable reserve (the "2022 Liabilities Reserve") in respect of certain longer term liabilities, and the balance on this will transfer to accumulated losses on 31 December 2022

On 21 April 2020 approximately 33 million (6.3% of the issued capital) new share options and warrants were issued to staff and directors in exchange for salary reductions for the six months to 30 September 2020. These options were priced at 1p each and have a life of 10 years from the date of grant. Staff and directors waived approximately 25.7m options and a further 9m lapsed in June 2020.

Overall, at 31 March 2021 the Company had approximately 73.3m employee options outstanding representing c14% of the issued capital. The average option price was c2.7p (2020: 4.6p).

The Group continues to rationalise legal entity structure to best align it with the current opportunity as well as to reduce costs and streamline tax management. The Groups incorporation status as a BVI entity is a legacy of its pre 2013 IPO business plan and the Board will review moving it to a UK status at an appropriate time, taking into account the significant professional fees which would be associated with such a change. The Group's memorandum and articles of association were revised in March 2019 to align with UK incorporated entities more closely. The Group is fully resident and registered in the UK from a tax perspective. The Group has streamlined its subsidiary structure to reduce the number of active legal entities and to align structures more effectively within the divisions.

At the year-end shareholders' funds stood at £2.73m (2020: £4.97m). 

Statement of Cash Flows 

The Company consumed £0.40m (2020: £1.67m) of cash in operations in the year. The deferral of certain HMRC liabilities under COVID 19 helped reduce outflow by circa £0.5m and a strong collections performance further helped cash working capital performance resulting in an improvement of £0.69m cash inflow from debtors to £0.97m (2020: £0.27m). When adjusted for the net impact of HMRC deferrals and payments under premises leases, operational cash out flow was circa 75% of EBITDA (2020: 80%) which is similar to historic performance.

£1.25m of shares were issued in September 2020 as part of the Company's response to COVID-19 and this resulted in net proceeds of c£1.13m Closing cash balances at 31 March 2021 were £0.55m (2020: £0.08m). A governmental "Bounce Back Loan" of £50,000 was received by a subsidiary in May 2020.

Post Balance Sheet Events

Trading performance for the four months to 31 July is set out below (from unaudited management accounts)

Cyber Security Division:

Assynt Strategic Intelligence Division

Central costs are higher than the previous year which reflected the COVID-19 salary sacrifice scheme.

On 18 August 2021 the Group announced a five-year Growth Loan facility with BOOST&Co the key terms of which are

- Initial £1m loan secured over the Group's assets, expected to increase to £2.5m to fund acquisitions & investment programmes

- Annual interest of 11%, and straight-line amortisation of the loan commencing after 12 months

- The loan carries a 3% early prepayment fee on the then amount outstanding

The proceeds of the Loan will enable the Group to make earnings enhancing acquisitions to strengthen its core Cyber division, as well as supporting the Group's overall organic growth plans. 

I R Selby

Chief Financial Officer

Key Performance Indicators

Consolidated income statement

for the year ended 31 March 2021

Consolidated statement of financial position

as at 31 March 2021

Consolidated statement of changes in equity

for the year ended 31 March 2021

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.

Accumulated losses represents the cumulative losses 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 based payment reserve represents the cumulative share option and warrant charges.

The 2022 Liabilities reserve is a special non distributable reserve in respect of certain longer term liabilities including HMRC COVID -19 deferral and rental liabilities on the Reading office. The balance on this account will transfer to accumulated losses on 31 December 2022. This reserve was created as part of the capital variation in completed in February 2021.

Consolidated cash flow statement

for the year ended 31 March 2021

Notes to the consolidated financial statements

for the year ended 31 March 2021

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 The Blade, Abbey Square, Reading, RG1 3BE.

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") in conformity with the requirements of the UK Companies Act 2006. 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 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 Financial Statements have been prepared on a going concern basis which notwithstanding the loss for the year ended 31 March 21. This basis assumes that the Group will have access to sufficient funding through the realization of assets in the ordinary course of business to enable it to continue to operate for the foreseeable future. the Directors consider the application of going concern to be appropriate for the following reasons.

1. The Group operates in the high growth Cyber Security and Strategic Intelligence markets. The COVID-19 situation has driven the move to an online environment for many aspects of business and this is increasing demand for the Group's services, although clearly a company cannot be immune from any major macroeconomic issues.

2. The Group's financial performance has significantly improved since 1 April 2021, and this continues from the post COVID-19 recovery which commenced in the autumn of 2020.

3. The Cyber Security division is now profitable and expected to remain the case moving forwards at an adjusted EBITDA level compared with losing c£0.45m at an adjusted EBITDA level in the year ended 31 March 2021. This division has a strong backlog of work from orders (including the divisions largest ever order for £1m (over 3 years)) which was won in April 2021. The recurring revenue Triarii cyber security monitoring service has a strong pipeline of business from channels and direct sales, and this is expected to help further support revenue growth. This service has a high incremental margin and can significantly increase divisional performance. Adjusted EBITDA has had a historically very close correlation with cash performance.

4. The Assynt division has signed significant new contract expansions and extensions with a major existing client which should increase its recurring revenues to circa £0.19m per month compared with £0.15m at the start of the year. This should enable it to be profitable on a regular basis without any consulting assignments.

5. Overall, the Group has a high level of recurring revenues, currently more than £0.28m per month, and a high level of repeat business of more than £2.0m per annum. This reduces its exposure to new sales situations. The Group's creditors are broadly in line and the group has a normal working capital position and an agreed payment plan is in place with HMRC and is in terms. The Group has a historically very low incidence of bad debts.

6. Group central costs are lower than in previous years and there is no major requirement for capital expenditure following the disposal of Furnace in the year ended 31 March 2020.

7. The above and the associated business plans and detailed forecasts, enable the directors to believe that the Group's existing cash resources (excluding the drawdown of the £1.5m from the second phase of the loan from BOOST&Co) are sufficient for it to remain a going concern for at least 12 months from the date of these accounts. This analysis has included the repayment of all amounts due under the loan and to HMRC under the COVID-19 deferral plan as well as it to have a normal working capital profile.

8. A stringent stress test scenario as a downgrade to the above has also been prepared. This assumes that there are no further sales of Triarii MRR and no further recurring revenues in the Assynt business beyond the existing contract bases. Furthermore, in this scenario the Group does not adjust its cost based in this scenario. This shows that, with the drawdown of the second tranche of £1.5m of the loan that the Group would still have significant cash balances at 12m from the date of these accounts.

9. Should this stringent stress test scenario not be achieved, then further mitigating actions would be carried out to ensure that the Group remains within its resources, and these would include a reduction of planned capital expenditure, headcount reduction, reducing discretionary spend and sales investment, freezing or reducing pay and cancelling recruitment, and all of these are within the director's control. Further incremental measures could also involve the potential disposal of non-core assets which the Group believes, could generate proceeds which are significant compared to the recent market capitalisation of the Group. Further actions could include seeking further support from existing and new shareholders and debt providers.

Based on the above, the Group expects to have will have sufficient resources to meets its liabilities as they fall due for at least 12 months from the date of these accounts.

2.1.2 New and Revised Standards

Standards in effect in 2021

There are a number of standards, amendments to standards, and interpretations which have been issued by the IASB that are effective in future accounting periods that the group has decided not to adopt early.

The following amendments are effective for the period beginning 1 January 2022:

- Onerous Contracts - Cost of Fulfilling a Contract (Amendments to IAS 37);

- Property, Plant and Equipment: Proceeds before Intended Use (Amendments to IAS 16);

- Annual Improvements to IFRS Standards 2018-2020 (Amendments to IFRS 1, IFRS 9, IFRS 16 and IAS 41); and

- References to Conceptual Framework (Amendments to IFRS 3).

In January 2020, the IASB issued amendments to IAS 1, which clarify the criteria used to determine whether liabilities are classified as current or non-current. These amendments clarify that current or non-current classification is based on whether an entity has a right at the end of the reporting period to defer settlement of the liability for at least twelve months after the reporting period. The amendments also clarify that 'settlement' includes the transfer of cash, goods, services, or equity instruments unless the obligation to transfer equity instruments arises from a conversion feature classified as an equity instrument separately from the liability component of a compound financial instrument. The amendments were originally effective for annual reporting periods beginning on or after 1 January 2022. However, in May 2020, the effective date was deferred to annual reporting periods beginning on or after 1 January 2023.

The Directors do not expect that the adoption of the Standards listed above will have a material impact on the Group in future periods.

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.

2.1.3 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 is a key metric which the Board uses to assess the performance of the Group and its divisions as it reflects the costs. Rental costs are charged against this measure as they are largely under the control of the division and correlate closely with cash performance.

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, IFRS16, share based payment charges, depreciation, amortisation, impairment charges and other highlighted items. Highlighted items (note 5.1) 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:

Revenue is 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.

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.

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 £63,692 (2020: £27,747) and is included in prepayments and accrued income (note 19) and the change compared to the previous year was due to short term timing differences. Contract Liabilities (deferred incomes) balance of £1,108,317 (2020: £1,237,347). Included in the Contract Liabilities at the 31 March 2021 were approximately £121,327 (2020: £40,926) residual balance from prior year. All Contract Assets at the 2021 year end arose towards the end of the period. All contract assets have short cash conversion periods and all assets at the year end have since been monetised.

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 are 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. The brand and software licences have been fully amortised in previous accounting periods.

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 Financial instruments

The Group applies a simplified method of the expected credit loss model when calculating impairment losses on its financial assets which are measured at amortised cost such as trade receivables, other debtors and prepayments. This resulted in greater judgement due to the need to factor in forward-looking information when estimating the appropriate amount to provisions

(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 37 at 31 March 2021 (2020: 66)

· 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.

(c) Investments

Investments not in subsidiary undertakings are carried at fair value through profit and loss.

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.

2.11 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.

2.12 Reserves

The consolidated financial statements include the following reserves: translation reserve, share option reserve, 2022 Liabilities reserve and accumulated losses. Premiums paid on the issue of share capital, less any costs relating to these, are posted to the share capital account as referenced above.

2.13 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.

2.14 Leases

When entering into a contract the Group assesses whether or not a lease exists. A lease exists if a contract conveys a right to control the use of an identified asset under a period of time in exchange for consideration. Leases of low value items and short-term leases (leases of less than 12 months at the commencement date) are charged to the profit or loss on a straight-line basis over the lease term in administrative expenses.

The Group recognises right-of-use assets at cost and lease liabilities on the statement of financial position at the lease commencement date based on the present value of future lease payments. The right-of-use assets are amortised on a straight-line basis over the length of the lease term. The lease liabilities are recognised at amortised cost using the effective interest rate method. Discount rates used reflect the incremental borrowing rate specific to the lease.

2.15 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.

2.16 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.

2.17 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. Critical accounting estimates and judgements

The preparation of the Group financial statements in conformity with IFRSs as applied in accordance with the provisions of the Companies Act 2006 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. Estimates and judgements are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the present circumstances. The areas involving a higher degree of judgement or complexity, or areas where assumptions and estimates are significant to the Group financial statements are disclosed below.

Judgements:

Investment in Furnace Technologies Limited

The investment agreement in Furnace Technologies Limited has allocated Falanx Group Limited 20% of its equity. It is considered a financial as opposed to an operational investment as Falanx does not have the right to appoint a board member and plays no part in its operations or policymaking. There is no ongoing obligation to provide further investment to Furnace and Furnace has no part in the business plans of Falanx. There is no interchange of management personnel and any transactions between the companies are small and are on an arm's length basis. Consequently, it has not been treated as an associated company. The investment balance has been impaired in full as at 31 March 2021 on the following basis;

· Furnace had not yet generated material revenues

· Furnace had not received external funding at the date of this report which would allow an objective measure of the equity value which would validate the capital structure and its carrying value.

Estimates:

Management do not consider there to be significant accounting estimates in respect of the year ended 31 March 2021.

Impairment of intangible assets

Management have assessed indicators of impairment and conducted an impairment review of intangible assets. They have made judgements as to the likelihood of them generating future cash flows, the period over which those cash flows will be received and the costs which are attributable against them. The recoverable amount is determined using the value in use calculation. The use of this method requires the estimation of future cash flows and the selection of a suitable discount rate in order to calculate the present value of these cash flows (refer to note 10.2).

In support of the assumptions, management use a variety of sources. In addition, management have undertaken scenario analyses, including a reduction in sales forecasts, which would not result in the value in use being less than the carrying value of the cash-generating unit. However, if the business model is not successful, the carrying value of the intangible assets may be impaired and may require writing down.

4. 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 2021 are as follows:

The reportable segment results for the year ended 31 March 2020 are as follows:

Segment assets consist primarily of property, plant and equipment, intangible assets, trade and other receivables and cash and cash equivalents. Unallocated assets comprise deferred tax 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 2021 and capital expenditure for the year then ended are as follows:

Segment assets and liabilities as at 31 March 2020 and capital expenditure for the year then ended are as follows:

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. All non-current assets are 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.

Major customers

No customer contributed 10% or more to the Group's revenue in 2021 (2020: nil). The highest individual customer contributed c6% of revenues.

Contract Assets (accrued incomes) balances were £63,992 (2020: £27,747). Included in the Contract Liabilities (deferred incomes) at the 31 March 2021 were approximately £80,602 (2020: £40,926) residual balance from prior year. All Contract Assets at the 2021-year end arose towards the end of the period and were billed and collected in the normal course of business in the next financial year.

5. Highlighted 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.

5.1 Highlighted costs

a) Restructuring costs

Cost of corporate development and professional services associated with the restructuring. Prior year cost related to cost of restructuring the key management including severance payment and transition costs for integration of acquired subsidiary (First Base). This did not include any impact of COVID-19.

b) Infrastructure upgrade

Cost of technology, infrastructure, and upgrade of applications for internal use and customer delivery.

c) Rent

Re-instatement of accounting charge in respect of rental payments on the Reading lease not reflected under IFRS 16. The group uses Adjusted EBITDA as a metric for business unit assessment and this reflects the underlying cost of the rental.

d) Gain on furnace operations

Gain on the spin out of furnace IP disposed of in the prior year, as this was spun out in the prior year, the gain on furnace operations is £Nil in the year ended 31 March 2021 and the overall investment in Furnace was fully impaired in the year as per notes 17 & 18 to these accounts

e) Closed premises

Costs including unused rental periods and lease dilapidations related to London and Sussex premises closed during summer 2020.

5.2 Adjusted EBITDA

6. Operating loss

Operating loss for the year is stated after charging the following:

7. Income tax expense

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 2021, a deferred tax asset has not been recognised (2020: £nil). Accumulated tax losses (subject to HMRC) agreement stood at approximately £13.9m (2020: £12.9m). No asset in respect of these losses has been recognised.

The tax charge for the year is different from the standard rate of corporation tax in the United Kingdom of 19% (2020: 19%). The difference can be reconciled as follows:

8. Disposal of IP

9. Basic and diluted earnings per share

Basic loss per share is calculated by dividing the 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.

Weighted average number of shares used as the denominator

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 2021, 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.

10. Intangible assets

10.1 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.

The Directors have undertaken an impairment review of the goodwill at the reporting date relating to the acquisition of Falanx Cyber Defence Limited, the trade and assets of First Base Technologies LLP and Securestorm Limited, all of which were amalgamated into Falanx Cyber Defence Limited in the prior year in order to streamline operations.

Analysis of goodwill allocated to the 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 used in the valuation technique.

The cash generating unit's value in use has been assessed using the following assumptions:

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. This testing indicates that NPV will be less than carrying value if a discount rate in excess of 24% is used.

The estimated recoverable amount of the CGU exceeded its carrying amount (including developments costs and customer relationship intangibles) by £7.5m (2020: £2.4m)

Following the impairment review the Directors do not consider that the carrying value of goodwill detailed above is impaired at the reporting date.

10.2 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. These customer assets are valued on a value in use basis. 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 the 0.82% average annual attrition rate since acquisition in March 2018. Associated cash outflows have been based on historically achieved margins. The net cash flows are discounted at a rate of 15% which the Directors consider is commensurate with the risks associated with capturing returns from customer relationships and reflects the group's WACC including the impact of the loan drawn down in August 2021. This is further described in note 3 to these accounts.

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.

Whilst certain sales orders received by the business fell in the first few months of the financial year ended 31 March 2021 this is due to the ongoing COVID-19 situation. Orders fell between March 2020 and July 2020 but have since recovered strongly (with orders from new and existing customers) and are now ahead of the levels pre COVID-19. 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. 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. This assumes that post the COVID-19 scenario Cyber revenues return to their previous growth rate of c15%.

Growth rate (long term economic average) 1.5% (achieved growth rate c15%)

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 the main customer is under a multi-year contract which has recently renewed in July 2021) 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. An analysis has been conducted which shows that the NPV of the customer bases commences to fall below the carrying value when a discount rate of 24% is used.

11. Right of use assets

This asset relates to the Reading office lease, refer to note 26.

12. Investments with fair value through profit and loss

On 19 December 2019, the Group disposed of the business and assets of Furnace. The total consideration received was £1,700,000, which included the issue and allotment of 20% of the share capital in Furnace Technologies, the buyer's company. The equity value at completion was £600,000. In April 2020 Furnace Technologies received an external equity investment of £30,000 at the same valuation.

The Group are satisfied that it does not have a significant influence over Furnace Technologies and have recognised the shareholding as a financial asset. At the reporting date, the Group continued to hold 20% in Furnace Technologies. Due to the early-stage nature and lack of external investment to Furnace it has not been possible to form an objective view as to the carrying value of this investment due to uncertainty as to its ability to make repayment without external investment and revenue growth having been achieved. The equity which was previously recorded at £0.34m has therefore been fully provided for in the year ended 31 March 2021. The Company

will continue to review this assets performance and may increase its carrying value at a point when Furnace has either commenced significant revenue generation or has received external investment.

13. Loan Receivable

On 19 December 2019, the Board disposed of the business and assets of Furnace. The total consideration received was £1,700,000, partly funded by the way of an unsecured loan note for £1,100,000 to Furnace Technologies Ltd, the buyer. As referenced in note 17 above, it has not been possible to form an objective view as to the carrying value of this asset due to uncertainty as to its ability to make repayment without external investment and revenue growth having been achieved. The loan note has therefore been fully provided for. The Company will continue to review this assets performance and may increase its carrying value at a point when Furnace has either commenced significant revenue generation or has received external investment.

14. Lease liability

Nature of leasing activities

The Group at the date of this report only has one property lease and this is for the Reading office which is now the Group's registered office.

Lease terms are negotiated on an individual basis and contains separate terms and conditions.

Lease liability at year end

15. Related party transactions

Falanx Group Limited provided head office and management services to subsidiary companies and supported them with working capital during the year ended 31 March 2021 and in total advanced £Nil (2020: £0.6m) to its subsidiaries, all of which are wholly owned.

On 30 October 2020, following the release of the annual report for 31 March 2020, and as part of the placing announced on 29 September 2020 certain members of the Board of Directors and senior management subscribed for a total of £75,000 resulting in the issue of 7,500,000 new ordinary shares in the Company. This intention was announced on 29 September 2020, and they all participated on the same terms as other shareholders who invested at this point. 

Director subscriptions

The following members of the Board of Directors and senior management subscribed for shares in the Company in the amounts set out in the table below: