Business context and reporting period
This is Hudson Global, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2019—not a filing identified as Star Equity Holdings, Inc. The company focused on recruitment process outsourcing (RPO) after selling its Recruitment and Talent Management businesses in March 2018. Unless stated otherwise, amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $26.4m | $17.0m | $42.6m | $33.2m |
| Gross profit | $11.7m | $10.8m | $21.1m | $21.0m |
| Gross margin | 44.1% | 63.5% | 49.4% | 63.1% |
| Operating loss | $(0.8)m | $(1.3)m | $(2.8)m | $(3.9)m |
| Net income (loss) | $(0.9)m | $(1.4)m | $(2.8)m | $9.4m |
| EBITDA loss from continuing operations (non-GAAP) | $(0.9)m | $(1.3)m | $(2.9)m | $(4.0)m |
Q2 RPO contracting revenue rose to $14.7m from $5.3m, while RPO recruitment revenue was approximately flat at $11.7m. Contracting’s lower gross contribution drove the sharp decline in consolidated gross margin despite higher revenue. For the six months, operating cash used was $7.7m versus $18.2m in the prior year; investing activities used $0.1m, and financing activities used $4.3m, including share repurchases. Cash, cash equivalents and restricted cash were $29.1m at June 30, down from $41.1m at year-end 2018.
Total assets were $46.1m and total liabilities $12.1m. The filing reports no outstanding long-term debt; the Australian subsidiary’s invoice-finance facility had no borrowings and offered up to A$4m. Current liabilities were $9.6m. Management said liquidity was sufficient for at least 12 months and expected full-year capital expenditures below $0.5m.
Material changes versus the prior comparable period
- Q2 reported revenue increased 55.2%; management cited a 59.7% increase on a constant-currency basis, principally from Australian RPO contracting and growth across segments. Six-month reported revenue increased 28.2%.
- Gross profit rose only 7.9% in Q2 and 0.5% for the half-year, as contracting revenue carries substantial direct staffing costs. Constant-currency gross profit growth was higher, partly reflecting foreign-exchange effects.
- Q2 net loss narrowed, but the six-month comparison shifted from $9.4m net income to a $2.8m loss. The 2018 result included $13.6m of after-tax income from discontinued operations, including a gain on the RTM business sales.
- Reported operating cash use improved year over year, which management attributed mainly to more favorable working-capital comparisons after the 2018 divestitures.
Outlook, commentary, risks and unusual items
No specific revenue or earnings guidance is provided. Management described market performance as mixed, is investing in RPO people, technology and sales capability, and is pursuing support-cost efficiencies. It noted global growth uncertainty, Brexit-related currency volatility, and an inability to predict the effects of economic and political developments on demand. Approximately 72% of first-half gross profit came from outside the U.S., exposing results to foreign-exchange movements.
- Risks highlighted include recurring operating losses and negative cash flow, client termination, competition, collection of receivables, retention of key personnel, international operations and currency movements, and the ability to use tax-loss carryforwards.
- The company recorded $0.485m of compensation expense related to its CFO’s departure; the former CFO was to provide consulting services through December 2019, compensated in shares.
- The company completed a 1-for-10 reverse stock split effective June 10, 2019. It also repurchased shares, including a 2019 tender offer that cost $3.7m plus fees, and reported $4.3m of total cash used for share repurchases in the first half.
- A stockholder rights plan is intended to protect tax-loss carryforwards by discouraging ownership changes. Unrecognized tax benefits, including interest and penalties, were $2.084m at June 30; the company said a decrease of up to $0.2m over the next 12 months was reasonably possible.
- Management reported no probable-and-estimable legal reserves and believed pending matters would not materially harm financial condition, results or liquidity. It also said disclosure controls were effective at June 30, 2019.
Important facts for investors to verify
- Confirm the issuer: the supplied filing is for Hudson Global, Inc. (NASDAQ: HSON), not Star Equity Holdings, Inc.
- Assess whether the large increase in RPO contracting revenue can be sustained and whether it can improve its low gross contribution and consolidated margins.
- Monitor operating cash burn, receivable growth and the decline in cash; compare actual liquidity with management’s 12-month assessment.
- Separate ongoing RPO performance from the prior-year discontinued-operation sale gain when evaluating earnings trends.
- Review currency exposure, tax-loss utilization and the ownership restrictions in the rights plan, as well as the effects of the reverse split and repurchases on share counts.