FLX.L Regulatory News (FLX)

Falanx Group Limited

("Falanx" or "the Company")

INTERIM RESULTS for the Six Months to 30 September 2018

Falanx Group Ltd ("Falanx", AIM: FLX), the global cybersecurity and intelligence provider, is pleased to announce its interim results for the six months ended 30 September 2018.

Highlights

· Group revenues increased 51% to £2.2m (2017: £1.4m) and gross margin increased to 36% (2017: 27%)

· 198% increase in Cyber division revenues to £1.4m (2017: £0.47m)

· Underlying EBITDA £0.71m loss (2017: £0.85m loss), reported £0.97m loss (2017: £1.0m loss)

· Recurring revenues remain strong and grew by 41% to £1.2m and provide a strong underpinning for the Group

Operational Highlights

· Sales force strengthened and delivering high levels of new revenue opportunities for the Group

· First Base now fully integrated and value of order levels are c20% ahead of last year

· SecureStorm, acquired on 16 July 2018, recently secured a significant £0.6m renewal contract from a high-profile UK Government department

 Post Period Highlights

· In parallel with the transformational deal with SolarWinds MSP and leveraging the Threat Monitor Service Provider (TMSP) platform, we are pleased to announce a new client contract worth £60,000 for the provision of monitoring services over a three-year period which has annual payments in advance

· Our strategic intelligence business, Falanx Assynt, has recently secured a three year £0.2m+ contract with a major European oil & gas Company

· Post period end Falanx has won 14 further new logo contracts across the Group

· Tendering opportunities for new business are currently at record levels

Mike Read, Chairman and Chief Executive Officer of Falanx, commented:

"The ever-growing threats which Cyber-attacks pose are becoming more prevalent, providing an increasing opportunity for Falanx. We have worked very hard to strengthen the management team and improve our routes to market - the result of this is bearing fruit.

We are extremely excited by the opportunity which our SolarWinds partnership creates and, though this has led to an increased investment in resource, we are highly confident the opportunity for Falanx is significant.

Recurring revenues continue to be a major focus for Falanx and our pipeline of new business is at record levels. As we continue to develop our suite of Cyber Security solutions, we view the future for Falanx and our loyal shareholders with considerable confidence." 

Enquiries:

About Falanx

Falanx Group Limited, is a global intelligence and cyber defence provider working with blue chip and government clients. It operates the MidGARD cyber monitoring platform for corporate and governmental customers which utilises a combination of proprietary and third-party processes and technologies. For more information: http://www.falanx.com/

MAR

This announcement contains inside information for purposes of Article 7 of Regulation (EU) No 596/2014

Introduction

Falanx Group Limited ("Falanx" or "the Company" or "the Group") has made good progress in the six-month period to 30 September 2018. Its chosen markets of Cyber Security and Strategic Intelligence are both underpinned by strong macroeconomic drivers fueling growth. Falanx has been structuring itself to address this growth opportunity and to create a growing and predictable stream of high margin revenues. This is being done by aligning both sales-forces on subscription and repeat business; we have gained traction in these over the period. We have expanded our customer base through organic growth and acquisitions, our Cyber Security division, which has a successful indirect sales model of addressing customers through Managed Services Providers ("MSPs"), has now partnered with SolarWinds, a leading provider of powerful and affordable IT infrastructure management software, to address its UK and South African markets.

Cyber Security (Professional Services)

The Company has made good progress in the six months to 30 September 2018. The focus of operations has been the integration of the acquisition of the trade and assets of First Base LLP ("First Base"), which joined the group on 23 March 2018. We now have a single professional 'Cyber Services' operation and common infrastructure to deliver our testing, consulting and training lines of service to customers. As a result of fully integrating the business into the Group there was some impact on staff utilisation, with a consequent impact on revenue in the period. This has since recovered and the business is performing in-line with management's expectations.

We are pleased to report First Base order levels have remained strong and are approximately 20% ahead of those in the previous year. This has resulted in a high backlog and order book which adds to our future visibility. First Base has signed 55 new name customers in the period, reflecting a significant shift since the acquisition towards winning new logo (a new customer to the Group) business, facilitating future cross-selling of all services and in particular the MidGARD monitoring service. First Base continues to experience low customer churn and has also signed multiple framework agreements to provide services to large national and international organisations. In total we have seen 77 new logos in H1 across the Cyber business including 4 new MidGARD managed service monitoring contracts.

The Company acquired SecureStorm Limited ("SecureStorm") on 16 July 2018, a Cyber Security consultancy delivering specific services into its governmental and corporate customer base. We are pleased that shortly after acquisition it secured a £0.6m renewal of an existing contract, spread over 2 years, from a high-profile UK government department. SecureStorm has been fully integrated and cost synergies are underway, as well as the generation of further cross selling opportunities including our MidGARD monitoring service. SecureStorm has added the benefit of exclusive and commercially advantageous reseller deals with 'Best in Class' security software vendors, deployable in a managed services environment to the Group; this represents an additional upside opportunity. SecureStorm has been recently re-accredited as a National Cyber Security Centre approved supplier, reaffirming its access to UK Government cyber requirements.

Cyber Security (Monitoring)

Monitoring Sales have grown, and several new clients have been secured. The monthly recurring revenue stood at c£90,000 at 30 September 2018 (2017: £35,000) marking an increase year on year of 157% and a growth of £35,000 from the start of the period. We have a strong pipeline of business, including certain major opportunities, which if successful will more than double the current base. A key tenet of our acquisition strategy is to cross sell monitoring services into our acquired customers; opportunities for such cross selling are enhanced through both recently acquired customer bases.

A major milestone is the achievement of the SolarWinds partnership which was secured in September 2018. We have worked closely with SolarWinds throughout 2018 to help develop a programme which will enable Falanx to reach a dramatically larger customer base than it would achieve via direct sales. Whilst this has involved significant management, technical and sales resources, we believe the potential future value of this relationship far exceeds the current size of the overall business.

Our strategy is to offer a fully managed monitoring and response service from our SOC ("Security Operations Centre") to three market tiers:

1. Small to Medium sized businesses will now be serviced by the 'Threat Monitor', SolarWinds ® Threat Monitor™, an automated solution that is designed to reduce the complexity of threat detection; 

2. Medium to Large sized businesses and Government departments, are serviced using certain tools which are specifically relevant to their organisations through our MidGARD managed SOC service;

3. Enterprise sized organisations are serviced on the original SIEM solution which 'Threat Monitor' is based upon, provided by our relationship with SolarWinds. This solution is predominantly offered as an alternative to on-premise solutions for large organisations that have their own internal security team but who wish to outsource the SOC operations and focus on value-added security activities through their own staff. 

For tiers 1 and 2 we offer a fully managed service which includes UK Government compliant rule sets, detection protocols, threat hunting, reporting, and response using our own tools and skills in our dedicated SOC. 

Enterprise clients, with their own security team, can leverage the SolarWinds enterprise solution and make use of our managed SOC services to assist with 'load balancing' their internal resources. An example of this is a top 20 UK Law firm which has recently built a security team around an outsourced Falanx SOC service to support them rather than developing their own internal capability.

Assynt

The focus of our strategic intelligence business unit is to move to a high margin recurring revenue model from sales of the subscription-based Assynt Report, complemented by specific business intelligence projects. Assynt Report recurring revenues, including revenues from our embedded analyst business, have historically been about two thirds of the business by revenue. They have grown by 10% during the period. Over the same period, we have expanded our country coverage by 10%, producing regular analysis on forty countries and issues for 44 clients, predominantly global corporates headquartered outside the UK. Business Intelligence revenues, which are project driven and can be inherently volatile, were weak in the first quarter of the year but have regained momentum in the second quarter. The Assynt business has recently become profitable based purely on recurring revenues.

This focus of the restructured sales and delivery team has been to move to a web portal content publishing system as opposed to the distribution of individual files, upgrading our client interface and introducing new features and greater usability. The new portal was launched at the start of October 2018 and has been well received by customers. In October 2018 Assynt won a £0.2m+ order for the delivery of strategic intelligence services over a three-year period to a major European oil and gas company and has a growing pipeline of potential customers.

Falanx Technologies

Falanx continues to invest in its proprietary technologies to reduce costs, increase the capacity of our service delivery capabilities and to create potential incremental opportunities.  

Post Period End

Since the start of October 2018, we have won 14 further new logo contracts across both divisions, 11 being within Cyber.  We are developing sales of SolarWinds products alongside Falanx services and have signed our first managed SOC Support Service contract. We have presented to the large community of SolarWinds MSP customers at several events over recent months, including Arizona in the USA as well as more recently, the SolarWinds EMEA Roadshows in the UK and South Africa.

Outlook

The SolarWinds opportunity is transformational for Falanx both in terms of customer capture and potential financial returns. Over the next few months, there will be a necessary expansion in the deployment of our resources to meet the expected increase in activity. Whilst revenues for the first half, although well ahead of the same period last year, have been slightly lower than our original internal expectations due to reasons outlined above. We have regained strong momentum in our existing business activities during the second half. With the addition of the SolarWinds opportunity, the Directors expect this growth to be maintained into the next financial year. 

FALANX GROUP LIMITED

CHIEF FINANCIAL OFFICER'S REPORT

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Revenue

Group revenues grew by 57% to £2.2m (2018: £1.4m). Growth came from the Cyber division which grew from £0.47m to £1.41m underpinned by further sales of monitoring contracts and therefore the growth of the recurring contract base. Revenues benefitted from the acquisition of First Base (acquired 23 March 2018) and SecureStorm (acquired 16 July 2018) which added to professional services. Post-acquisition integration took place during the period required some resources, resulting in a shortfall of circa £0.2m of delivery of professional services revenues. This has now been completed and utilisation of professional services staff has increased significantly in recent months. This trend is expected to continue. Recurring and managed services revenues were £1.29m (2017: £0.91m) and accounted for 59% of overall revenues (2017: 63%). The reduction in the overall proportion was due to a larger professional services element in Cyber.

The Assynt business has focused on transitioning to a revenue model more heavily aligned to recurring revenues from the Assynt Report. Business Intelligence revenues are client project driven and arise on a less predictable basis and a shortfall in these mainly at the start of the period of circa £0.2m adversely affected revenues which were reduced by 25% to £0.71m. The profitability of the Assynt business has been based purely on recurring revenues.

Our contract base of monthly recurring and managed services revenues increased in the last 6 months from £0.19m to c£0.25m due to growth in monitoring contract wins and the acquisition of SecureStorm and its managed services contracts.

Gross Margins

Gross margin improved to 36% (2017: 27%). Better utilisation and much higher monitoring revenues increased gross margins in Cyber to 42% (2017: 4%); the slippage in BI revenues in Assynt reduced its utilisation and its gross margins fell to 25% (2017: 36%).

Costs

Administrative expenses excluding depreciation and amortisation and non-underlying items increased from £1.23m to £1.50m. This was largely due to £0.35m increase in costs arising from acquired businesses which was offset by a reduction of c£0.1m in group costs. Depreciation and amortisation increased to £0.18m (2017: £0.12m) due to the commencement of amortisation of intangibles arising on the acquisition of the trade and assets of First Base over a ten-year period. Non-underlying items of £0.08m comprised acquisition fees and some restructuring around acquisition integration. Average headcount following the impact of acquisitions increased from 48 to 62.

Adjusted EBITDA and Result for the Period

Due to the slippage in BI consulting revenues in Assynt referenced above, EBITDA in that division fell from £0.18m to approximately breakeven. The Cyber division, due to a larger revenue base, reported a much-improved performance with losses reduced from £0.55m to £0.12m. Underlying EBITDA loss for the period was £0.71m (2017: £0.85m) after adjusting for the items highlighted above. The overall loss was £0.97m (2017: £1.01m). Loss per share was 0.37 pence (2017: 0.67pence).

Statement of Financial Position

Non-Current Assets

Intangible assets increased from £1.14m to £4.8m. £3.3 m of this arose from the acquisitions of First Base and SecureStorm and the remainder was mainly due to ongoing development of our own technology and corporate infrastructure.

Working Capital

Trade and other receivables increased to £1.18m (2017: £0.58m) resulting from advance invoicing in Assynt and the acquired businesses (First Base and SecureStorm) in addition to increased prepayment of key operating costs. Current liabilities (excluding deferred income) were £1.15m (2017: £0.98m). Deferred income was £1.09m (2017: £0.34m). The increase of 220% was due to the acquisition of First Base in March 2018 and a higher level of advance invoicing in Assynt.

At the year-end shareholders' funds stood at £3.9m (2017: £1.9m) and there were 261,901,186 shares in issue (2017: 157,290,075).

Statement of Cash Flows

There was a favourable movement in working capital over the period arising from advance payments by customers in both divisions. This reduced operational cash outflow to £0.53m (2017: £1.01m) representing 67% of EBITDA (2017: 114%), an improvement by the business. A further £0.27m (2017: £0.38m) was spent on investing activities with a greater proportion on development of our own technologies.

FALANX GROUP LIMITED 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOMEFOR THE SIX MONTHS PERIOD ENDED 30 SEPTEMBER 2018

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FALANX GROUP LIMITED 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2018

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FALANX GROUP LIMITED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

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FALANX GROUP LIMITED

CONSOLIDATED CASH FLOW STATEMENT FOR THE PERIOD ENDED 30 SEPTEMBER 2018

FALANX GROUP LIMITED

NOTES TO INTERIM FINANCIAL STATEMENTS FOR THE PERIOD ENDED 30 SEPTEMBER 2018

1. General information

Falanx (the "Company") and its subsidiaries (together the "Group") operate in the security and intelligence markets. The Company is a public limited company which is listed on AIM on the London Stock Exchange and is incorporated and domiciled in the British Virgin Islands. The address of its registered office is PO Box 173, Road Town, Tortola, British Virgin Islands.

2. Basis of preparation

These interim statements have been prepared on a basis consistent with International Financial Reporting Standards (IFRS). They do not contain all of the information required for full financial statements and should be read in conjunction with the consolidated financial statements of the Group as at and for the year ended 31 March 2017. These interim financial statements do not constitute statutory accounts within the meaning of the Companies Act.

The interim financial information have not been reviewed nor audited by the auditors. The interim financial information was approved by the Board of Directors on • November 2018. The information for the year ended 31 March 2018 is extracted from the statutory financial statements for that year which have been reported on by the Group's auditors and delivered to the Registrar of Companies. The audit report was unqualified.

The accounting policies applied by the Group in these interim financial statements are the same as those applied by the Group in its consolidated financial statements for the year ended and as at 31 March 2018. The interim report is the responsibility of, and has been, approved by the Directors. The Directors are responsible for preparing the interim financial statements in accordance with the AIM rules for Companies.

Going Concern

Whilst the Group was loss making in the period, the impact of recent contract wins, certain cost reductions and further expected contract wins means that the Board expects to reduce these losses. The Group is currently operating within its bank facilities and other facilities are available to the Group (of up to £0.75m) to meet its current plans including the commencement of the Solar Winds project.

In assessing whether the going concern assumption is appropriate, the Directors consider all relevant available information about the next twelve months following the signing of these interim statements. The Directors have prepared detailed profit and cash flow forecasts for the next 12 months which the Directors consider to be conservative. This scenario assumes lower growth in revenues than the core plan as well as reductions in parts of the cost base. Should these stress test scenario targets not be met and a shortfall in working capital identified, the Directors have a range of other options. These include further operating cost and platform investment reductions and facilities such as invoice discounting. The Group could seek, as in previous years, the support of investors and directors (debt or equity).

Based upon the above the Directors have a reasonable expectation that the Group has adequate working capital for the twelve months following the date of signing these accounts. For this reason, they continue to adopt the going concern basis in preparing the financial statements

3. Critical accounting estimates and judgements

The preparation of financial information in accordance with generally accepted accounting practice, in the case of the Group being IFRS as adopted by the European Union, requires the Directors to make estimates and judgements that affect the reported amount of assets, liabilities, income and expenditure and the disclosures made in the financial statements. Such estimates and judgements must be continually evaluated based on historical experience and other factors, including expectations of future events.

The significant judgements made by management in applying the Group's accounting policies were the same as those applied in the last annual financial statements for the year ended 31 March 2018.

4. Segmental reporting

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 segmental analysis of the Group's business was 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 below and overleaf is made up of the parent company's administrative operation.

Reportable segments

The reportable segment results for the period ended 30 September 2018 are as follows:

The reportable segment results for the period ended 30 September 2017 are as follows:

Segment assets and liabilities as at 30 September 2018 and capital expenditure for the period then ended are as follows:

Segment assets and liabilities as at 30 September 2017 and capital expenditure for the period then ended are as follows:

5. Earnings per share

Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted average number of ordinary shares in issue during the year.

As at 30 September 2018, the potentially dilutive ordinary shares arising under options and warrants were anti-dilutive because the Group was loss-making.