Substanial changes in the company since my initial small investment lead me to question what I am holding now. Since my purchase the company has:

- Made an acquistion with a script at a low valuation

- Essentially done a merger with another company and essentially will pay out all the current cash on the balance sheet to the owners of that company

- Had legal action taken against them due to a company they have done business with going into liquidation and people seeking to recover money

- Recently been caught underpaying superannuation and ATO requesting backpayment

All of this sort of leaves me wondering why I got caught up in this in the first place. Now the current price may represent good value (Managment have even bought shares recently at higher prices) but honestly at this point I have no idea. 

One of my portfolio rules that I like to stick to is if an investment falls under 2.5% I have to either increase my stake or sell it. I have no faith in my ability to value this company any longer and hence I have made an exit.

• Positive net cash from operating activities for FY21 (Barely)

• $6.4M cash and cash equivalents at end of June quarter v $1.3M at previous quarter (most of which they picked up from and have to pay out to the owners of the last acquistion)

• Skill Hire acquisition completed in month of June 2021 and integration progressing well (true and maybe?)

• Hunter Executive integration successfully completed in Q4FY21 (true)

• Increased job orders across all operating States

• Strong tailwinds in key operating sectors

Thoughts:

I like the last couple of points I think that strong commodity prices are likely a tail wind but I'm not sure buying mining companies may be a better way to play this than a labour hire company for them. Net position likely still in debt. Post all these acquistions very hard to predict upcoming 12 months probably only good for speculating really. Still margin maybe a little better on heaps of revenue I will hold my very small position at this point but expect nothing and am overall unconvinced there's value at the current market cap although that may be the very reason that there is.

Full annoucement here.

GO2 ACQUIRES LEADING EMPLOYMENT SERVICES PROVIDER, SKILL HIRE AUTRALIA PTY LTD

- Skill Hire delivers both Government funded and fee-for-service workplace training and education in the form of pre-employment programs, traineeships and apprenticeships, and fee-for-service recruitment and labour hire services to a large client base in Western Australia and South Australia;

- Skill Hire reported unaudited revenue of $23 million and EBITDA of $1.6 million for the half year to 31 December 2020

-Funded by the issue of new shares to the Skill Hire vendors matching GO2’s current issued capital, and the cash consideration component to be paid from Skill Hire’s pre-acquisition cash balance. Shares to be issued as part of the transaction, in addition to GO2’s founders’ shares, will be subject to escrow with periods ranging from 12 to 24 months;

Thoughts:

- If you double the earnings but also double the share count you really are relying on efficiency dividends which mostly (in my experience) do not materialise.

- The company is a much bigger entity now. I can see that there may be benefits to this and potential cost savings which are very important to low margin businesses.

- Pretty neutral on this, makes valuing the company a lot harder because it introduces a whole heap more uncertainty. 

- If you annualise the numbers (doubt that is the right thing to do) you get a 70mil revenue company with 4 mil in ebitda (probably the wrong metric for earnings) trading for a market cap of ~15mil. 

- Volitility + low share price + high share count, might provide an opportunity to pick up more shares at an even more attractive valuation.

Announcement can be found here.

GO2 have been served with legal proceedings commenced in the Federal Court of Australia in relation to an alleged unfair preference claim relating to payments made to it by VCS Civil and Mining Pty Ltd (“VCS”) (in liquidation)(“Proceedings”). The Proceedings allege that, in receiving payments prior to VCS being placed into administration, GO2 received payments in preference to other unsecured creditors. The amount is for $510,375.81

One of the risks of doing business with small financially fragile mining companies I suppose. 

Acquisition of Perth based recruitment company, Hunter Executive Search Consultants.

100% of acquisition consideration in the form of GO2 shares to the Vendors, escrowed up to September 2022. Owners to remain in place in key management positions to continue to grow the business.

Hunter is a leading Australian recruitment company specialising in permanent and contract placements for the Executive, Engineering, Resources, Environment and Water industries. 

Given rationale:

- Cross sell opportunities: White collar workers in addition to GO2's blue collar business

- Back office synergies 

- $3.3 million p.a. with "strong" profit margins which will improve GO2 margins.

Price

(3 x FY21 profit) - $900,000

In shares calculated as follows

if the 7 Day VWAP is less than 3 cents, the deemed issue price per Consideration Share of the Initial Scrip Consideration will be 3 cents per Consideration Share (being 30,000,000 fully paid ordinary shares); alternatively if the 7 Day VWAP is greater than 5 cents, the deemed issue price per Consideration Share of the Initial Scrip Consideration will be 5 cents per Consideration Share being 18,000,000 fully paid ordinary shares

The Deferred Calculation Date will follow the release of GO2 Annual Report for the year ended 30 June 2021.

Thoughts: A lot of moving parts but essentially bought this business for 3 x operating profit. Sometimes with these really small acquisitions there are legitimate backoffice synergies. I like that the owners are staying on. I dont hate it.

Full announcment here.

The GO2 people

FY20: $34 million in revenue, $3 million in positive cash flow, $6.9Million market cap

GO2 has two business divisions. Recruitment services for the construction, infrastructure and mining industries and training services and qualifications targeted at the same markets.

Initially IPOing in 2017 at 20 cents a share they have been on a fairly steady downwards trajectory since then and now are sitting at $4.7 cents per share and a $6.9 million dollar market cap (24/10/2020).

In 2019 they attempted to acquire a training provider to increase their vertical integration this however failed and it and the associated capital raise was abandoned. After this fairly disastrous venture management has stated they are looking to focus on the core business and have managed to improve the margin and balance sheet over the last twelve months.

Balance sheet

At last report GO2 had around $3.5 million in debt and $1.2 million in cash

Things to like:

Interestingly they have managed positive cashflow for the last four quarters. This cash has been used to primarily sure up the balance sheet.

Founder led and high insider ownership with the two founders holding around 20% of the equity each.

Tailwinds likely in the post COVID economic recovery with infrastructure spending and potentially for strong commodity prices supporting the mining industry.

Things to be aware of:

They still seem to have M&A aspirations which I think would probably be value destructive and the wrong move unless there was a particularly compelling opportunity.

The debt of about $3.5 million.

It’s not a great business with a low margin (this can sometimes be a good thing as is discourages competition)

Obviously a tiny nanocap so very illiquid.

Turnarounds seldom turn.

I think from my brief skimming over the company it seems to have suffered from trying to do too much and grow too quickly without the shareholder support it needed. It does look like it has managed to stabilise its financials somewhat and has the potential for a turnaround. As it is from such a low base the upside could be significant. However I definitely wouldn’t rule this out of being a zero although I have to admit at the moment at least they seem to be making money.