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Falanx – another itty bitty acquisition don’t impress me or Shania much ...but

By HotStockRockets | Friday 20 July 2018

Disclosure: Financial Investigative Media Limited, which is not owned by Tom Winnifrith but by a trust for his dependants, owns shares in companies mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

The management of Falanx (FLX) are nice guys but do themselves no favours. Issuing, albeit small amounts, of shares at rock bottom process for small itty bitty acquisitions is rarely a strategy that is value accretive. Delaying your results does not impress anyone although the company has a plausible excuse. Doing a major placing at 4.5p when not long before your shares were 9p really f**ks off we loyal shareholders. Suffice to say, the statement accompanying those results in a couple of week’s time is going to have to be pretty hot.

The latest deal is the purchase of Cyber Security consultancy Secure Storm for £100,000 in shares. This consultancy was set up in 2017 following a “restructuring” of previous businesses owned by the vendors. In the year to June 30th 2017, we are told, that sales were £700,000. But hang on when was this business established? One assumes this refers to proforma sales of the previous businesses, and operating profits were just £30,000 with year end net assets of only £20,000. But in the 11 months to May 31 2018 it achieved sales of just £500,000 and an operating loss of £150,000. So net liabilities – mostly unpaid tax – were £130,000.

In other words it was insolvent. So why the hell is Falanx paying a cent for an insolvent business? Why, when all it wants is the people?  The answer, of course, is that it is a tax efficient way of buying the loyalty of Securestorm boss Tony Richards but it is an almighty golden hello to a man who has clearly fucked it up. We'd be keen to know why Richards had to do that "restructure" in 2017. Was that another fuck up too? And of course those net liabilities taken on means Falanx is really paying £100,000 in shares and £130,000 in cash.

We are told that trading has improved of late: The majority of losses were incurred before December 2017. These have since been eliminated by customer contract wins and cost reductions. In recent months Securestorm has been at break even with a strengthening pipeline of business. Well let’s hope so. We are also told: Securestorm will be immediately integrated into Falanx's Cyber division, its professional staff including its founder Tony Richards will be transferred over and will utilise existing Falanx infrastructure. This is expected to drive synergies around cost sharing, revenue enhancement and utilisation improvement. Again let’s hope so.

But as a final kick in the gonads for we shareholders we are told that "Falanx has a share option scheme to align the interests of staff with those of shareholders". Fuck you Falanx. Fuck you again. Do not treat us like total idiots.

We shareholders put in hard cash and hope that the shares go up. Option holders a) get paid salaries thanks to the cash we have stumped up and b) can exercise options IF the shares go up so for them any share price gains are risk free. If senior staff really want to be aligned with we long suffering shareholders they will invest vast sums in buying shares as soon as FY numbers are out. What do you not understand Falanx about options being a one way bet?

Anyhow, 4.25 million options are being issued of which Tony from Secure-shit-storm gets 2 million. The strike is 5p with 25% vesting when the share price reaches 7.5p, 25% when it is 10p and the rest at 12.5p. Whatever. As you might have gathered this RNS has annoyed us greatly. But…

At 4.25p bid, the market cap is £11 million. This is a company which – we are lead to believe – will be doing a PTP of £3 million by the year to March 31 2020 and given that we are now less than 20 months away from that being the current year, the shares look incredibly cheap. It is on that basis, despite the fact that this deal looks a shite waste of space and the fact that whoever wrote this patronising nonsense on options deserves to have his face smashed, the stance remains buy.

This article first appeared on HotStockRockets - to catch the next red hot share tip from the HotStockRockets team for just £5 click HERE

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