I expected this to be an article summarising all the research I had done so far about Staffline, concluding that this was a great business which ticked all the investment tick-boxes and was well placed to not only weather but take advantage of likely political headwinds.
However upon reading the auditors’ report from the FY 2018 results, I quickly realised that, for me, the share is completely investable unless / until the senior management has been entirely changed, new management bedded in, and a new culture instilled. For those without the time to read the auditors report (or the stomach – it made me so cross it took me several goes to get through it), and to close off my detailed reporting for the moment, I will summarise it here.
Material uncertainty related to going concern
This was expected (and highlighted in an earlier article of mine). They are entirely reliant on the forbearance of their lenders which is in turn dependent on a successful fundraise within a short period. However things are a little worse than I realised:
The forecasted breaches at 30 September 2019, 31 December 2019 and 31 March 2020 will be addressed through a relaxation of the net debt to underlying profits covenant for those periods, but this is conditional on the successful completion of the below planned equity raise at a minimum value of £30m within a stipulated timeframe.
So even after the fund raise, they still need a relaxation of covenants for the following 3 quarters. I don’t see how this squares with management claims that debt/EDBITDA will be around 2x.
…certain amounts of the funds raised will be held in escrow to cover…NMW liabilities
The banks don’t trust the company.
…doubt…that suitable disclosures have been made in the financial statements…
The auditors don’t trust the accounts.
Our preliminary extended audit procedures identified evidence which raised concerns regarding the completeness of information provided previously by management to us in relation to customer claims and disputes….inspection of emails identified further areas of concern…
So, clearly management lied / withheld information and/or had inadequate systems. Later the auditors detail how an independent legal investigation covering the whole group’s emails was necessary to uncover the truth, and as we know, this resulted in a large increase in liabilities. If complaints from workers and other records had been properly recorded it would not have required recourse to emails.
Given the allegation of non-disclosure of information to us…[we checked]… completeness of disclosures made to us by management of other similar matters… This work identified failures by management to fully disclose to us and to account for certain customer claims and other disputes...The investigation, email inspection and audit identified a number of examples of management of the reported results both in the prior and current years.
This mostly speaks for itself. I understand the word “management” that I bolded is auditor-speak for “manipulated”. Other issues have not been proven to be material, but as we know, these things start small and can be evidence of a management limbering up to commit major fraud.
There were several other claims from the original whistleblower where no evidence was found, but given the lack of cooperation and unreliability of management there can be no certainty evidence won’t come to light later.
The final liability to the group will be addressed in the ongoing review process with HMRC… until the liability is agreed with HMRC and paid later in 2019, there is significant uncertainty and a risk that this liability could be materially different.
Makes it clear that this may not be over.
In this kind of situation investors may doubt the accuracy of historical RNS statements. In this regard I would call to attention some of the earlier estimates of NMR liability. The auditors say that they initially recommended going back 6 years, management and their non-independent legal advice said 3 years, and eventually HMRC insisted on 6 years. If at the time of the earlier RNSes they had advice from the auditors to go back 6 years and they did not seek advice from their Nomad before producing an estimate based on 3 years without further disclosure, then I believe this would be in breach of listing rules.
[Edit: Last paragraph removed]
One thought on “Staffline – Results and Fundraising”
Yet again, I applaud your research. Well done. I have only been reading your blog for a couple of weeks but already can tell you do better research and analysis than most institutional investors I have met.
Are you based in London?