Star Equity Holdings, Inc. quarterly report, Q2 FY2020

Business context and reporting period

This is Hudson Global, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2020, filed August 5, 2020. The filing describes a global recruitment process outsourcing business operating in the Americas, Asia Pacific, and Europe. The request metadata names Star Equity Holdings, Inc.; that does not match the registrant identified in the filing and should be verified.

Financial performance and liquidity

Amounts below are in U.S. dollars; financial statement figures are rounded to millions unless otherwise noted.

  • Quarter revenue: $24.6 million, down 7.0% from $26.4 million. Management said the decline was 3.0% on a constant-currency basis. RPO recruitment revenue fell 22.2% to $8.9 million, while contracting revenue rose 6.8% to $15.7 million.
  • Quarter earnings: Operating loss was $0.9 million versus $0.8 million; net loss was $0.8 million versus $0.9 million. Loss per share was $0.27 versus $0.29. Adjusted net revenue, a company-defined measure net of direct contracting costs and reimbursed expenses, fell 23.4% to $8.9 million.
  • First-half revenue: $48.7 million, up 14.3% from $42.6 million; management reported 19.2% growth on a constant-currency basis. Contracting revenue increased to $30.0 million from $21.3 million, while RPO recruitment revenue decreased to $18.7 million from $21.3 million.
  • First-half earnings: Operating loss was $1.4 million versus $2.8 million; net loss was $1.3 million versus $2.8 million, including a $0.1 million discontinued-operations loss in 2019. Loss per share was $0.43 versus $0.88. Adjusted net revenue decreased 11.1% to $18.7 million.
  • Cash flow: First-half operating cash use was $0.9 million, compared with $7.7 million in 2019. Investing cash use was $0.01 million; financing cash use was $0.9 million. Cash, cash equivalents, and restricted cash declined $1.8 million to $29.9 million.
  • Balance sheet and debt: At June 30, cash and cash equivalents were $29.5 million, current assets $43.3 million, current liabilities $10.5 million, and total assets $44.7 million. The company recorded a $1.3 million PPP loan as debt ($0.6 million short-term and $0.7 million long-term). No amounts were drawn on its Australian invoice-finance facility.
  • Other metrics: Consolidated EBITDA loss, a non-GAAP measure, was $0.5 million for Q2 and $1.0 million for the first half, improving from $0.9 million and $2.9 million, respectively. First-half income tax expense was $0.4 million despite a pre-tax loss of $0.9 million.

Material changes versus prior comparable periods

  • Q2 reported revenue declined, principally as lower RPO recruitment revenue in the U.S. and U.K. outweighed growth in Australian contracting. First-half revenue rose because of contracting growth, particularly a new Australian contract, while adjusted net revenue fell.
  • Asia Pacific revenue growth was strong, but its adjusted net revenue as a percentage of revenue declined to 26% from 31% in Q2 and to 26% from 39% for the first half, reflecting a higher mix of lower-margin contracting work.
  • SG&A and non-operating expenses decreased, supported by cost reductions and lower corporate costs. The prior-year comparison also included $0.5 million of former CFO severance expense.
  • In March 2020, the company repurchased 259,331 shares for approximately $2.2 million. Total stockholders’ equity declined to $32.4 million from $36.0 million at year-end 2019.

Outlook, risks, contingencies, and unusual items

  • Management said COVID-19’s effects remained uncertain: some clients instituted hiring freezes, in-person interview limitations affected business, and currency weakness reduced reported results. The company cautioned that interim results may not indicate full-year performance.
  • The company received a $1.3 million PPP loan and intended to apply for forgiveness in Q3 2020; forgiveness was not assured. It also reported $0.3 million of foreign government assistance in Q2, included in other income.
  • Management believed available liquidity was sufficient for at least the next 12 months and expected 2020 capital expenditures below $0.5 million. It reported access to an additional A$4 million under the Australian facility.
  • Ordinary-course legal and regulatory matters were disclosed; reserves were zero, and management did not expect pending matters to have a material adverse effect. Unrecognized tax benefits were $0.6 million, with a possible reduction of up to $0.2 million over the next 12 months.
  • Approximately 90% of first-half revenue came from outside the U.S., exposing results to foreign-currency movements. The company also cited risks including economic conditions, client termination rights, recurring operating losses and negative cash flows, collections, and retention of key personnel.
  • A stockholder rights plan intended to protect tax attributes generally restricts unapproved ownership of 4.99% or more. It was scheduled to expire October 15, 2021, subject to earlier termination provisions.

Most important facts to verify

  1. Confirm the intended issuer: the filing is for Hudson Global, Inc. (HSON), not Star Equity Holdings, Inc.
  2. Review subsequent developments in COVID-19 impacts, hiring demand, and the Australian contracting engagement.
  3. Check the status and outcome of the PPP loan forgiveness application and related loan balance.
  4. Assess whether operating cash flow, losses, and the company’s liquidity outlook changed after June 30, 2020.
  5. Verify currency exposure, tax-contingency developments, and the continued status of the rights plan and share repurchase authorization.