Recruiter.com Group, Inc. — Q3 2019 Form 10-Q
Entity note: The request identifies Nixxy, Inc., but the supplied filing is for Recruiter.com Group, Inc. (formerly Truli Technologies, Inc.). The filing covers the quarter and nine months ended September 30, 2019; it was signed November 14, 2019. Financial statements are unaudited.
Business context and reporting period
Recruiter.com operates recruiting, staffing, career-training, and marketing services. In March 2019, it completed a merger with Pre-Merger Recruiter.com, accounted for as a reverse recapitalization, and acquired staffing-related assets from Genesys for $8.6 million in Series F preferred stock. The filing’s reported results include the Genesys assets from March 31, 2019; the major transactions and integration activity make comparisons with 2018 less like-for-like. The company also effected a 1-for-80 reverse stock split in August 2019.
Financial highlights
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2019 | $1.946 million | $4.082 million |
| Revenue, 2018 | $158,706 | $687,538 |
| Gross profit, 2019 | $453,939 | $1.128 million |
| Operating loss, 2019 | $(1.951) million | $(4.448) million |
| Net loss, 2019 | $(1.028) million | $(3.690) million |
| Net loss attributable to shareholders, 2019 | $(1.028) million | $(3.800) million |
| Cash used in operations, 2019 | Not separately provided | $(603,384) |
Revenue rose 1,126% in Q3 and 494% for the nine-month period, principally due to the Genesys acquisition. Q3 gross margin was approximately 23%; nine-month gross margin was approximately 28%. The 2018 statements recorded no cost of revenue, so those periods’ reported gross profit equaled revenue.
Q3 other income included a $951,271 noncash gain from remeasurement of warrant derivative liabilities. For the nine months, the corresponding gain was $968,898; it partly offset operating losses. Nine-month stock-based compensation was $2.980 million, including $752,500 for shares transferred to employees and consultants by existing stockholders.
Liquidity, debt, and balance sheet
- At September 30, cash was $675,735; current assets were $1.580 million and current liabilities were $3.001 million, implying a working-capital deficit of approximately $1.422 million.
- Total liabilities were $3.245 million. Loans payable were $110,059, including $25,521 current; operating lease liabilities totaled $232,366. The company reported a $781,748 warrant derivative liability.
- Cash increased by $661,583 over the nine months, mainly reflecting $1.211 million of financing cash flow, including preferred-stock proceeds and a preferred-stock purchase deposit. Operating activities used $603,384.
- Management reported approximately $502,000 cash as of November 13, 2019, and said available cash would not fund anticipated operations for the next 12 months.
Material changes, outlook, and risks
- Management concluded that substantial doubt existed about the company’s ability to continue as a going concern. It expected to need additional financing during the remainder of 2019 and anticipated further equity and/or debt issuance; no assurance of financing or positive cash flow was given. Failure to obtain capital could force reductions in development or cessation of operations, and financing could dilute existing holders.
- The Genesys acquisition contributed approximately $1.824 million of Q3 revenue and $3.665 million of nine-month revenue. Management cited integration, sales and marketing improvements, and added account-management capacity as priorities. It announced a Recruiter Teams product in September and a partnership with Geometric Results on October 2; expected benefits were forward-looking, not guaranteed.
- Reported nine-month results were a net loss of $3.690 million. Supplemental pro forma results assuming the Genesys acquisition had occurred at the start of the period showed revenue of $5.883 million and a net loss of $4.360 million for 2019; the filing cautions that pro forma results are not necessarily indicative.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses in internal control. The company identified a revenue-presentation error involving a customer acquired from Genesys, amended its prior Q2 2019 Form 10-Q, and said it was implementing corrective procedures. Controls for acquired businesses had not yet been integrated or tested.
- Revenue and receivables were concentrated: three customers represented 57% of nine-month revenue and 47% of September 30 accounts receivable. Related-party activity included staffing/payroll services, administrative charges, software development, and a Genesys finder’s fee; amounts owed to Icon were $844,485.
- Marketable securities had a September 30 fair value of $85,360 after $119,854 of recognized losses over the nine months. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Confirm the filing issuer: the supplied 10-Q is for Recruiter.com Group, Inc., not Nixxy, Inc.
- Review the company’s subsequent financing, cash runway, and ability to meet obligations, given the going-concern warning and working-capital deficit.
- Assess the conversion, voting, adjustment, and potential dilution terms of outstanding preferred stock, warrants, and other equity awards; the filing lists 19.4 million potentially dilutive securities excluded from diluted EPS as anti-dilutive.
- Track remediation of the revenue-recognition control weakness and integration of Genesys and Pre-Merger Recruiter.com accounting controls.
- Verify final acquisition valuations: the $8.521 million intangible-asset allocation was provisional, and amortization had not yet begun pending completion of valuations.
- Evaluate customer concentration, related-party arrangements, and collection of receivables, including the substantial payable to Icon.