Business context and reporting period
This Form 10-Q covers the quarter ended March 31, 2020. The filing registrant is Recruiter.com Group, Inc.; the request metadata names Nixxy, Inc., so the company identity should be verified. Recruiter.com operates a recruiting and hiring platform and staffing, placement, career, and marketing services. Results include the staffing assets acquired from Genesys Talent on March 31, 2019; therefore, the reported year-over-year comparison is not like-for-like.
Key financial results and position
| Metric | Q1 2020 / March 31, 2020 | Prior comparable period / December 31, 2019 |
|---|---|---|
| Revenue | $2.313 million | $163,302 in Q1 2019 |
| Gross profit and margin | $561,927; 24.2% | $163,302; no comparable cost of revenue reported |
| Operating loss | $(1.855) million | $(306,380) in Q1 2019 |
| Net loss | $(2.483) million; $(0.59) per basic and diluted share | $(382,322) net loss in Q1 2019 |
| Operating cash flow | $(93,227) | $(45,532) in Q1 2019 |
| Cash | $301,533 | $306,252 at December 31, 2019 |
| Current assets / current liabilities | $1.280 million / $5.043 million | $1.314 million / $5.547 million at December 31, 2019 |
| Total liabilities / stockholders’ equity | $5.236 million / $1.033 million | $5.765 million / $715,356 at December 31, 2019 |
Revenue increased $2.150 million, or 1,316%, primarily from the acquired staffing business; management attributed approximately $2.210 million of Q1 2020 revenue to those assets. Cost of revenue was $1.751 million, including $655,384 in related-party costs. Operating expenses were $2.416 million, including $870,722 of stock-based compensation and $159,173 of intangible amortization. Other expense included a $565,088 noncash loss from revaluing warrant derivatives. Adjusted EBITDA, a non-GAAP measure, was a loss of $761,628 versus a loss of $228,592 in Q1 2019.
At quarter-end, the company had $98,816 of term loans, a $308,836 net liability for sale of future revenues, and $180,778 in receivables advances. The $91,300 availability under two credit lines was suspended in 2020. The current-liability excess over current assets was approximately $3.763 million. The filing states that substantial doubt existed about the company’s ability to continue as a going concern and that available cash was insufficient for anticipated operations over the next 12 months.
Material changes and notable items
- Common shares outstanding increased from 3,619,658 at December 31, 2019 to 4,623,582 at March 31, 2020, primarily reflecting conversions of preferred stock. The filing reports 4,852,508 common shares outstanding as of June 24, 2020.
- Accrued expenses fell from $2.276 million to $338,305, in part after Series D preferred shares valued at $1.930 million were issued in exchange for penalty waivers. $308,893 of penalties related to certain Series E and F holders remained accrued; the company warned that material demands could require it to cease operations.
- Available-for-sale securities declined to $11,025 from $44,766 at year-end, with a $18,786 recognized loss during the quarter.
- The company reported that a 2019 acquisition makes the prior-year reported revenue base an incomplete comparison; its pro forma Q1 2019 revenue assuming the acquisition at the start of that quarter was $1.965 million.
- Subsequent to quarter-end, the company reported $398,545 in Paycheck Protection Program loans and a May–June convertible debenture and warrant financing with $2.625 million gross proceeds before expenses. As of June 23, it reported approximately $1.980 million of cash, but said it still lacked capital to meet working-capital needs for the next 12 months.
Outlook, risks and controls
Management expected revenue to decline in Q2 2020 because of COVID-19, and said near-term losses might increase. It expected recruiting demand to improve in the second half of 2020 as clients resumed hiring, but emphasized that this was uncertain and not guaranteed. The company reduced some executive compensation by approximately 20%, curtailed marketing and other expenses, and said it might restore certain expenses in Q3 if conditions warranted. It also offered its recruiter training program free after quarter-end.
The company expected to rely on further debt or equity financing and could not assure that funding would be available on acceptable terms or at all; equity financing could dilute shareholders. The post-quarter debentures carry 8% annual interest, mature in May 2021 subject to a possible extension, are convertible at $1.60 per share, and are secured by company assets subject to existing liens. Default provisions include potential acceleration at 130% of principal plus accrued amounts. The filing also describes COVID-19 impacts, customer concentration (two customers represented 51% of Q1 revenue), reliance on related parties for staffing/payroll and software, and related-party payables of $1.166 million, principally owed to Icon.
Management concluded disclosure controls were ineffective because of unremediated material weaknesses, including insufficient staffing for segregation of duties and insufficient independent directors for appropriate board committees. No material legal proceedings were reported. The filing was delayed amid the pandemic and delayed completion of the 2019 annual audit.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Recruiter.com Group, Inc., not Nixxy, Inc.
- Review the going-concern warning, cash runway, financing needs, and the company’s ability to raise additional capital.
- Check the terms, security, covenants, conversion and warrant dilution, and default consequences of the post-quarter financing.
- Assess the sustainability of acquired-business revenue, COVID-related client demand, customer concentration, and the reported gross margin.
- Verify remaining preferred-stock penalties, related-party balances and arrangements, and progress in remediating material control weaknesses.