Star Equity Holdings, Inc. annual report, FY2022

Filing identity and reporting period

Important: The supplied filing is Hudson Global, Inc.’s Form 10-K, not a filing for Star Equity Holdings, Inc. It reports the fiscal year ended December 31, 2022; it is not a standalone fourth-quarter report. The summary below reflects the filing’s stated issuer, Hudson Global (NASDAQ: HSON).

Business context

Hudson provides recruitment process outsourcing (RPO), permanent recruitment, contracting, and related talent solutions. It operates in 14 countries across the Americas, Asia Pacific, and Europe. In 2022, Asia Pacific generated 58.8% of revenue, the Americas 25.7%, and Europe 15.5%. RPO recruitment contributed $97.7 million of revenue and contracting $103.2 million.

Hudson completed its acquisition of India-based Hunt & Badge Consulting (HnB) in August 2022. It acquired Karani in October 2021, expanding recruitment delivery capacity in India and the Philippines.

Financial results and liquidity

Revenue rose 19% as reported; management cited 27% growth on a constant-currency basis. Adjusted net revenue—revenue less direct contracting costs and reimbursed expenses—was about 49% of revenue, versus about 40% in 2021. Operating margin was about 4.6%, versus 2.6%; net margin was about 3.5%, versus 1.9%. EBITDA is a non-GAAP measure and should not be treated as a substitute for GAAP income measures.

Cash provided by operations improved by $7.0 million year over year. Investing used $1.3 million, primarily including $0.8 million paid for HnB; financing used $2.0 million, including $1.1 million of stock repurchases and acquisition-related payments. Year-end unrestricted cash was $27.1 million. The company reported a $1.25 million short-term acquisition note payable; no borrowings were outstanding under its Australian receivables facility, which provides borrowing capacity up to AUD 4 million. Operating lease obligations totaled about $0.7 million. Management said liquidity was sufficient for at least the next 12 months and expected 2023 capital expenditures, including lease obligations, of less than $1 million.

Material changes versus 2021

• Reported revenue increased $31.7 million, with growth principally driven by the Americas and the Karani acquisition. On a constant-currency basis, RPO recruitment revenue increased $34.4 million and contracting revenue increased $8.4 million.
• SG&A and non-operating expenses rose to $88.5 million from $63.2 million; as a share of revenue, they increased to 44% from 38%. Management attributed the increase mainly to higher staff costs, including investment in personnel, as well as higher marketing and travel costs.
• Operating cash flow increased, while investing cash outflow declined from 2021, when the Karani acquisition required $6.0 million in cash.
• A contracting customer that represented 27% of 2021 revenue ended its agreement in early 2022. The filing says the loss did not have a material adverse impact in 2022.
• In 2022, Hudson repurchased 32,615 shares for $1.1 million. No fourth-quarter repurchases were reported.

Outlook, risks, and unusual items

• Management expected market conditions to remain challenging into 2023. It cited inflation, higher interest rates, weaker labor demand in some markets, customer reductions or cancellations, and continuing geopolitical and COVID-related uncertainty. The filing provides no numerical revenue or earnings guidance.
• Customer concentration is substantial: the top 25 clients generated more than 75% of 2022 revenue, and two customers together represented 50%. One customer represented at least 20% of year-end accounts receivable. Contracts may be terminated or reduced on short notice.
• Hudson disclosed a material weakness in revenue-recognition controls involving whether the company was principal or agent for a discretionary customer bonus. The error understated revenue and direct contracting costs and reimbursed expenses by $5.762 million in the interim periods ended June 30 and September 30, 2022. The company stated that the error did not affect those periods’ net income, balance sheet, or cash flows, and said it intended to amend the affected quarterly reports. Management reported that disclosure controls and internal control over financial reporting were not effective at year-end and described planned remediation.
• The auditor issued an unqualified opinion on the consolidated financial statements, but did not attest to internal control effectiveness. The filing identifies realizability of deferred tax assets as a critical audit matter. Hudson recorded a $185.4 million valuation allowance against deferred tax assets; management concluded U.S. deferred tax assets were more likely than not not realizable. Certain U.S. capital loss carryforwards and NOLs were scheduled to expire in 2023, and NOL use may be limited by tax rules.
• HnB contributed $69,000 of revenue and a $21,000 net loss in 2022. Its acquisition included potential earn-out payments of up to $350,000, with a $150,000 estimated liability at year-end. The company recorded no legal reserves and said pending matters were not expected to have a material adverse effect.
• Foreign exchange is a notable exposure: approximately 76% of revenue was earned outside the United States, and 2022 foreign currency translation reduced comprehensive income by $1.6 million.

Important facts for investors to verify

• Confirm issuer identity: this source is Hudson Global, Inc. (HSON), not Star Equity Holdings, Inc.
• Review the amendments to the affected 2022 quarterly reports and the status and testing results of the revenue-recognition control remediation.
• Assess customer concentration, retention, and the effect of the lost contracting customer, including whether revenue growth continues in a weaker hiring environment.
• Reconcile reported growth with constant-currency trends and monitor expense growth, segment margins, and the company’s non-GAAP EBITDA presentation.
• Check cash generation, working-capital movements, acquisition-related payments and earn-outs, and the status of the Karani note and Australian credit facility.
• Evaluate tax-asset realizability, the 2023 expiration and Section 382 limitations on tax attributes, and the potential effect on future tax expense or cash taxes.