Falanx Group Ltd (LON:FLX), the AIM listed provider of cyber security services, has announced its interim results for the six months ended 30 September 2022.
Financial Highlights for six months to 30 September 2022
| • | Orders for our core services were £1.89m (2021: £1.62m) representing growth of 17%. |
| • | Core Service Revenues held at £1.8m (2021: £1.8m), despite the exit from an onerous non-core contract worth £250k per annum |
| • | Group adjusted EBITDA* loss £1.12m (2021: £0.39m) following investment in sales expansion |
| • | Cash balances at 30 September 2022 £1.96m (2021: £0.51m), normal working capital position |
| • | Loss per share 0.28p (2021: 0.14p) from continuing operations |
| • | Shareholders’ funds £2.87m (2021: £2.0m) |
Operational highlights
| • | Strong growth in pipeline combined with an increased proportion of MDR opportunities |
| • | Growth in both order volume and customer count in the period |
| • | Two new Tier 1 channel partners signed up and the revitalisation of existing partners |
| • | Launch of two new entry-level defensive MRR services in R-IR and CVS already delivering revenue. |
| • | Expansion of the EDR portfolio to include additional market-leading software vendors |
| • | Ongoing development of f:CEL 2.0 |
Post Period Events
| • | Final £345,000 of cash consideration from the sale of Assynt in October 2021 was received early October 2022 |
| • | Order growth of +44% for core orders in October and November 2022 compared to the same period in 2021 |
| • | Gross margin improved to 42% (H1 FY23 36% and FY22 40%) |
| • | William Kilmer and Rick Flood joined the board as NED and Executive directors respectively |
* Adjusted EBITDA is a non-IFRS headline measure used by management to measure the Group’s performance and is based on operating profit before the impact of financing costs, IFRS16, share based payment charges, depreciation, amortisation, impairment charges and highlighted items
Alex Hambro, (Non-executive Chairman) of Falanx Group, commented:
“In the nine weeks since I last wrote to you, I am pleased to announce further progress in sales with good order growth compared to last year. The drivers to spending on cyber security are ever increasing, and we look forward to growth in this year and next year. Our focus is to get to sustainable profitability within our existing resources and we are planning on achieving this by both recurring revenue growth and cost management. I am delighted to have welcomed William Kilmer to the Group who joined us as a NED in October and his wealth of experience in cyber security is already making an impact.”
Business Review
In the Period to September 2022, orders for our core services were £1.89m (2021: £1.62m), representing growth of 17%. The majority of this growth came from increased sales of our defensive services, all of which generate Monthly Recurring Revenues (“MRR”). As outlined previously, the growth of our MRR revenues is key to our strategy. Total orders for these MRR services grew by over 100% in the Period.
During the Period, we exited a legacy consulting contract (which had the potential to become onerous) at an agreed break point and the growth in MRR sales has more than offset this revenue reduction with higher quality revenues and better long-term margins. Overall, across our core services, we have transacted with a greater number of customers than in the previous year.
Our target market is primarily SMEs and we focus our MRR service offerings on organisations which employ between 50 and 1,000 staff. Cyber security threats are ever growing, and against an increasingly difficult social and economic backdrop, criminal activity is increasing. Cyber security insurance providers are now significantly increasing premiums as well as applying increased conditionality, which can include mandating use of cyber security services, as a condition of cover. The need to protect a business’ assets against cyber-attacks is even more imperative now than ever before.
Consequently, we have evolved our service offerings to best address our target market and protect those SMEs from cyber-attack, whatever their insured status may be. To best address this, we have progressively introduced additional defensive MRR services with lower entry price points in addition to our existing Managed Detection and Response (MDR) and Managed-Endpoint Detection and Response (M-EDR) services (both of which support multiple leading enterprise-grade security vendor solutions). Retained Incident Response (“R-IR”) and Continuous Vulnerability Scanning (“CVS”) were introduced in the summer of 2022, and we are seeing that customers are increasingly understanding the need for both services – a rapid response service in the case of a breach (R-IR) and continually scanning networks with CVS throughout the year as well as the Pen Tests run annually. Consequently, we have a growing pipeline of opportunities in these service lines since their launch and this has already translated into sales to six customers – most of which are existing Pen Test customers. As customers mature and evolve, full MDR will become more relevant to their organisation.
In addition, we have expanded our network of channel partners in the last few months. Some of these are starting to generate significant interest which has already translated into sales. We are focusing on a limited number of Tier 1 channel partners where we invest time and resources and are selecting them based on their experience, reputation, and their addressable market.
Post Period Update
Following on from the increase in MRR orders in the six months to 30 September 2022, combined with our rapidly growing pipeline of MRR opportunities, we have restructured our sales team to maximise our ability to achieve our MRR sales targets in the coming months. The sales team is now a single organisation split into two focused sales groups – PenTest (Attack) and MRR (Defend). They target new customers as well as cross selling into our base which is now has over 400 clients. This allows increased dedicated and experienced resources to focus on the more complex (and arguably more valuable) sales of MRR services, whilst allowing the penetration testing services team to focus on their own strong pipeline of business which typically has a shorter lead time. Early results are promising, with aggregate orders for core services across October and November 2022 growing by 44% compared to the same period in 2021.
Outside of our pipeline, we have several large-scale opportunities advancing with major global technology providers (both new and existing relationships) to partner as part of their Cyber go-to-market plans. As ever these opportunities could be transformational for Falanx, and we look forward to updating on these as they progress.
Financial Performance
Total revenues were £1.8m (2021: £1.8m). Within this, monthly recurring revenues from monitoring services increased by 29% to £0.49m (2021: £0.38m) offsetting a small reduction in professional services, the majority of which came from our exit from a non-core legacy contract referenced previously.
Gross margin decreased to 36% (2021: 40%) due to expansion costs and some price increases. Rectification actions were carried out, and in recent months gross margins have recovered back to ahead of FY22 levels. The Group expects to be able to manage these cost factors to protect gross margins going forward. Underlying operating costs were £1.76m (2021: £1.10m) with the increase arising from investment in sales and marketing expansion. Consequently, the adjusted EBITDA loss was £1.1m (2021: £0.39m).
Depreciation and amortisation charges were £0.22m (2021: £0.25m), with the vast majority being the routine amortisation (straight line basis over a 10 year period) of the customer base acquired in March 2018, as well as property lease costs related to IFRS16.
Interest payable was £0.17m (2021: £0.04m) and was mainly comprised of interest (including amortised costs) on the Boost loan of £2.5m drawn down in October 2021 as the IFRS 16 element lease payments for the Reading office.
The loss from continuing operations was to £1.48m (2021: £0.71m). The loss per share (both on a basic and fully diluted basis) from continuing operations was 0.28p (2021: 0.13p).
Consolidated Statements of Financial Position & Cash Flow
Intangible assets were £3.1m (2021: £3.5m) and principally comprised of the acquired customers base and associated goodwill. The £0.13m goodwill arising from the acquisition of Securestorm Limited was fully impaired in the year ended 31 March 2022.
Trade and other debtors stood at £1.21m (2021: £0.93m) with the increase being due to the final £0.345m of the cash consideration from the disposal of Assynt in October 2021 (which was held in escrow for 12 months) until it was paid in early October 2022. Cash receipts were strong, with no incidence of bad debt being recorded, and debtor days stood at 40 (2021: 42). Trade and other payables reduced to £0.62m (2021: £1.29m) due to the repayment of HMRC COVID-19 backlog which took place in H2 FY22. Deferred incomes increased to £0.53m (2021: £0.39m) due to greater business volumes and overall, the Group had a normal working capital profile at 30 September 2022.
Net cash outflow from operations was £1.30m (2021: £0.88m) and included the final £0.07m payment of the HMRC COVID-19 backlog. Cash balances as at 30 September 2022 were £1.96m (2021: £0.51m) and overall shareholders’ funds were £2.87m (2021: £2.0m).
Events after the reporting Period
On 7 October 2022 the final £0.35 million of the Assynt disposal cash consideration held escrow account against was released to the Group.
