10-Q



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549  

 
FORM 10-Q 

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2015
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission file number: 000-50129 

HUDSON GLOBAL, INC.
(Exact name of registrant as specified in its charter)  

DELAWARE
 
59-3547281
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
 
1325 Avenue of the Americas, New York, NY 10019
(Address of principal executive offices) (Zip Code)
(212) 351-7300
(Registrant’s telephone number, including area code) 

  
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x    No   o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x     No  o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer", "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 

Large accelerated filer
o
 
Accelerated filer
x
Non-accelerated filer
o
 
Smaller reporting company
o
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Outstanding on September 30, 2015
Common Stock - $0.001 par value
 
34,570,026



HUDSON GLOBAL, INC.
INDEX


 
 
Page
 
 
Item 1.
 
 
Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) - Three and Nine Months Ended September 30, 2015 and 2014
 
Condensed Consolidated Balance Sheets – September 30, 2015 and December 31, 2014
 
Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2015 and 2014
 
Condensed Consolidated Statement of Changes in Stockholders’ Equity – Nine Months Ended September 30, 2015
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 



PART I – FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Revenue
$
110,028

 
$
149,278

 
$
357,088

 
$
444,515

Direct costs
64,883

 
93,591

 
213,817

 
274,927

Gross margin
45,145

 
55,687

 
143,271

 
169,588

Operating expenses:
 
 
 
 
 
 
 
Selling, general and administrative expenses
45,565

 
58,539

 
151,281

 
174,672

Depreciation and amortization
955

 
1,467

 
3,040

 
4,242

Business reorganization expenses and impairment of long-lived assets
2,264

 
794

 
5,667

 
2,026

Total operating expenses
48,784

 
60,800

 
159,988

 
180,940

Gain (loss) on sale and exit of businesses
(187
)
 

 
19,818

 

Operating income (loss)
(3,826
)
 
(5,113
)
 
3,101

 
(11,352
)
Non-operating income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
(93
)
 
(192
)
 
(542
)
 
(533
)
Other income (expense), net
242

 
176

 
215

 
(325
)
Income (loss) from continuing operations before provision for income taxes
(3,677
)
 
(5,129
)
 
2,774

 
(12,210
)
Provision for (benefit from) income taxes from continuing operations
(1,648
)
 
(558
)
 
(1,317
)
 
37

Income (loss) from continuing operations
(2,029
)
 
(4,571
)
 
4,091

 
(12,247
)
Income (loss) from discontinued operations, net of income taxes
(55
)
 
(2,448
)
 
864

 
(3,690
)
Net income (loss)
$
(2,084
)
 
$
(7,019
)
 
$
4,955

 
$
(15,937
)
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share from continuing operations
$
(0.06
)
 
$
(0.14
)
 
$
0.12

 
$
(0.38
)
Basic and diluted earnings (loss) per share from discontinued operations
$

 
$
(0.07
)
 
$
0.03

 
$
(0.11
)
Basic and diluted earnings (loss) per share
$
(0.06
)
 
$
(0.21
)
 
$
0.15

 
$
(0.49
)
Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
34,687

 
32,910

 
33,784

 
32,769

Diluted
34,687

 
32,910

 
33,795

 
32,769


See accompanying notes to condensed consolidated financial statements.


- 1 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
(unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2014
 
2015
 
2014
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(2,084
)
 
$
(7,019
)
 
$
4,955

 
$
(15,937
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of income taxes
(1,876
)
 
(3,386
)
 
(3,447
)
 
(1,356
)
Pension liability adjustment
(5
)
 
5

 
(24
)
 
(20
)
Total other comprehensive income (loss), net of income taxes
(1,881
)
 
(3,381
)
 
(3,471
)
 
(1,376
)
Comprehensive income (loss)
$
(3,965
)
 
$
(10,400
)
 
$
1,484

 
$
(17,313
)

See accompanying notes to condensed consolidated financial statements.

HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
September 30,
2015
 
December 31,
2014
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
36,361

 
$
33,989

Accounts receivable, less allowance for doubtful accounts of $915 and $986 respectively
65,721

 
74,079

Prepaid and other
7,102

 
9,604

Current assets of discontinued operations
161

 
1,249

Total current assets
109,345

 
118,921

Property and equipment, net
7,807

 
9,840

Deferred tax assets, non-current
6,806

 
5,648

Other assets, non-current
4,460

 
5,263

Total assets
$
128,418

 
$
139,672

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
4,521

 
$
6,371

Accrued expenses and other current liabilities
42,118

 
54,065

Short-term borrowings
34

 

Accrued business reorganization expenses
4,321

 
3,169

Current liabilities of discontinued operations
2,025

 
3,512

Total current liabilities
53,019

 
67,117

Deferred rent and tenant improvement contributions
4,465

 
5,899

Income tax payable, non-current
2,330

 
2,397

Other non-current liabilities
4,539

 
5,002

Total liabilities
64,353

 
80,415

Commitments and contingencies


 


Stockholders' equity:
 

 
 

Preferred stock, $0.001 par value, 10,000 shares authorized; none issued or outstanding

 

Common stock, $0.001 par value, 100,000 shares authorized; issued 34,951 and 33,671 shares, respectively
34

 
34

Additional paid-in capital
480,546

 
476,689

Accumulated deficit
(425,661
)
 
(430,616
)
Accumulated other comprehensive income, net of applicable tax
10,142

 
13,613

Treasury stock, 381 and 129 shares, respectively, at cost
(996
)
 
(463
)
Total stockholders' equity
64,065

 
59,257

Total liabilities and stockholders' equity
$
128,418

 
$
139,672

 
See accompanying notes to condensed consolidated financial statements.
 



- 2 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Nine Months Ended September 30,
 
2015
 
2014
Cash flows from operating activities:
 

 
 

Net income (loss)
$
4,955

 
$
(15,937
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
3,040

 
4,512

Provision for (recovery of) doubtful accounts
227

 
127

Provision for (benefit from) deferred income taxes
(1,628
)
 
(11
)
Stock-based compensation
3,961

 
907

Gain on sale and exit of businesses
(21,228
)
 

Other, net
218

 
318

Changes in assets and liabilities:
 
 
 
Decrease (increase) in accounts receivable
(4,451
)
 
(10,736
)
Decrease (increase) in prepaid and other assets
3,028

 
1,032

Increase (decrease) in accounts payable, accrued expenses and other liabilities
(7,197
)
 
(681
)
Increase (decrease) in accrued business reorganization expenses
923

 
(235
)
Net cash used in operating activities
(18,152
)
 
(20,704
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(2,384
)
 
(4,289
)
Proceeds from sale of consolidated subsidiary, net of cash sold
7,894

 

Proceeds from sale of assets, net of disposal costs
16,815

 

Net cash provided by (used in) investing activities
22,325

 
(4,289
)
Cash flows from financing activities:
 

 
 

Borrowings under credit agreements
110,412

 
85,642

Repayments under credit agreements
(110,268
)
 
(77,692
)
Payment of deferred financing costs

 
(454
)
Repayment of capital lease obligations
(24
)
 
(361
)
Purchase of treasury stock
(712
)
 

Purchase of restricted stock from employees
(239
)
 
(122
)
Net cash provided by (used in) financing activities
(831
)
 
7,013

Effect of exchange rates on cash and cash equivalents
(970
)
 
(645
)
Net increase (decrease) in cash and cash equivalents
2,372

 
(18,625
)
Cash and cash equivalents, beginning of the period
33,989

 
37,378

Cash and cash equivalents, end of the period
$
36,361

 
$
18,753

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
143

 
$
344

Cash (refunds) payments during the period for income taxes, net of refunds
$
13

 
$
933

 
See accompanying notes to condensed consolidated financial statements. 
 



- 3 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common stock
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Treasury
stock
 
Total
 
Shares
 
Value
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
33,542

 
$
34

 
$
476,689

 
$
(430,616
)
 
$
13,613

 
$
(463
)
 
$
59,257

Net income (loss)

 

 

 
4,955

 

 

 
4,955

Other comprehensive income (loss), currency translation adjustments, net of applicable tax

 

 

 

 
(3,447
)
 

 
(3,447
)
Other comprehensive income (loss), pension liability adjustment

 

 

 

 
(24
)
 

 
(24
)
Purchase of treasury stock
(262
)
 

 

 


 


 
(712
)
 
(712
)
Purchase of restricted stock from employees
(106
)
 

 


 

 

 
(239
)
 
(239
)
Issuance of shares for 401(k) plan contribution
116

 

 
(104
)
 

 

 
418

 
314

Stock-based compensation
1,280

 


 
3,961

 

 

 

 
3,961

Balance at September 30, 2015
34,570

 
$
34

 
$
480,546

 
$
(425,661
)
 
$
10,142

 
$
(996
)
 
$
64,065

 
See accompanying notes to condensed consolidated financial statements.

- 4 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)


NOTE 1 – BASIS OF PRESENTATION
These interim unaudited condensed consolidated financial statements have been prepared in accordance with United States of America ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q and should be read in conjunction with the consolidated financial statements and related notes of Hudson Global, Inc. and its subsidiaries (the "Company") filed in its Annual Report on Form 10-K for the year ended December 31, 2014.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of operating revenues and expenses. These estimates are based on management’s knowledge and judgments. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the Company’s financial position, results of operations and cash flows at the dates and for the periods presented have been included. The results of operations for interim periods are not necessarily indicative of the results of operations for the full year. The Condensed Consolidated Financial Statements include the accounts of the Company and all of its wholly-owned and majority-owned subsidiaries. All significant intra-entity balances and transactions between and among the Company and its subsidiaries have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current year presentation for discontinued operations. See Note 5 for further details regarding the discontinued operations reclassification.

NOTE 2 – DESCRIPTION OF BUSINESS
The Company is comprised of the operations, assets and liabilities of the three Hudson regional businesses of Hudson Americas, Hudson Asia Pacific, and Hudson Europe ("Hudson regional businesses" or "Hudson"). The Company provides specialized professional-level recruitment and related talent solutions. The Company’s core service offerings include Permanent Recruitment, Temporary Contracting, Recruitment Process Outsourcing ("RPO") and Talent Management Solutions.
The Company operates in 12 countries with three reportable geographic business segments: Hudson Americas, Hudson Asia Pacific, and Hudson Europe. See Note 18 for further details regarding the reportable segments.
Corporate expenses are reported separately from the reportable segments and pertain to certain functions, such as executive management, corporate governance, human resources, accounting, tax, marketing, information technology and treasury. A portion of these expenses are attributed to the reportable segments for providing the above services to them and have been allocated to the segments as management service fees and are included in the segments’ non-operating other income (expense).

The Company’s core service offerings include those services described below.
Permanent Recruitment: Offered on both a retained and contingent basis, Hudson’s Permanent Recruitment services leverage its consultants, psychologists and other professionals in the development and delivery of its proprietary methods to identify, select and engage the best-fit talent for critical client roles.
Temporary Contracting: In Temporary Contracting, Hudson provides a range of project management, interim management and professional contract staffing services. These services draw upon a combination of specialized recruiting and project management competencies to deliver a wide range of solutions. Hudson-employed professionals - either individually or as a team - are placed with client organizations for a defined period of time based on a client's specific business need.

- 5 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

RPO: Hudson RPO delivers both permanent recruitment and temporary contracting outsourced recruitment solutions tailored to the individual needs of primarily mid-to-large-cap multinational companies. Hudson RPO's delivery teams utilize state-of-the-art recruitment process methodologies and project management expertise in their flexible, turnkey solutions to meet clients' ongoing business needs. Hudson RPO services include complete recruitment outsourcing, project-based outsourcing, contingent workforce solutions and recruitment consulting.
Talent Management Solutions: Featuring embedded proprietary talent assessment and selection methodologies, Hudson’s Talent Management capability encompasses services such as talent assessment (utilizing a variety of competency, attitude and experiential testing), interview training, executive coaching, employee development and outplacement.

NOTE 3 – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In April 2015, the FASB issued Accounting Standards Update ("ASU") No. 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement" ("ASU 2015-05"), which provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new guidance does not change the accounting for a customer’s accounting for service contracts. ASU 2015-05 is effective for interim and annual reporting periods beginning after December 15, 2015. The Company does not believe the impact of its pending adoption of ASU 2015-05 on the Company's consolidated financial statements will be material.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs" ("ASU 2015-03"), which amends the current presentation of debt issuance costs in the financial statements. ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts, instead of as an asset. The amendments are to be applied retrospectively and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015, but early adoption is permitted. The Company does not believe the impact of its pending adoption of ASU 2015-03 on the Company's consolidated financial statements will be material.
In August 2014, the FASB issued ASU No. 2014-15, "Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern" ("ASU 2014-15"), to provide guidance on management’s responsibility to evaluate whether there is substantial doubt about a company’s ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 also provides guidance for related footnote disclosures. ASU 2014-15 is effective for the Company beginning on January 1, 2016 with early adoption permitted. The Company does not believe the impact of its pending adoption of ASU 2014-15 on the Company's consolidated financial statements will be material.
In June 2014, the FASB issued ASU No. 2014-12, "Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period" ("ASU 2014-12"). ASU 2014-12 requires that a performance target that affects vesting and could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in Accounting Standards Codification ("ASC") 718, "Compensation - Stock Compensation," as it relates to such awards. ASU 2014-12 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015 with early adoption permitted using either of two methods: (i) prospective to all awards granted or modified after the effective date or (ii) retrospective to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter, with the cumulative effect of applying ASU 2014-12 as an adjustment to the opening retained earnings balance as of the beginning of the earliest annual period presented in the financial statements. Accordingly, the standard is effective for the Company beginning on January 1, 2016. The Company does not believe the impact of its pending adoption of ASU 2014-12 on the Company's consolidated financial statements will be material.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)." This ASU is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In July 2015, the FASB amended the effective date of this ASU to fiscal years beginning after December 15, 2017 and early adoption is permitted only for fiscal years beginning after December 15, 2016. Accordingly, we plan to adopt this ASU on January 1, 2018. Companies may use either a full retrospective or a modified retrospective approach

- 6 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

to adopt this ASU. The Company is currently evaluating the impact that adopting ASU 2014-09 will have on the Company's financial condition, results of operations, and disclosures.
In April 2014, the FASB issued ASU No. 2014-08, “Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity” (“ASU 2014-08”). ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. ASU 2014-08 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2014. Accordingly, the standard was effective for the Company beginning on January 1, 2015. The Company has adopted ASU 2014-08. In the second and third quarter of 2015, the Company divested and exited certain businesses. Under the new guidance, the exited businesses did not reach the thresholds required to qualify as discontinued operations and, as a result, the operations remain within the Company's continuing operations for all periods presented.
There are no other recently issued accounting pronouncements that have had, or that the Company believes will have, a material impact on the Company's consolidated financial statements.

NOTE 4 – DIVESTITURES

Hudson Information Technology (US) business (the "US IT business")

On June 15, 2015, the Company completed the sale (the "US IT Business Sale") of substantially all of the assets (excluding working capital) of its US IT business to Mastech, Inc. (the "Purchaser"). The completion of the US IT Business Sale was effective June 14, 2015. The US IT Business Sale was pursuant to an Asset Purchase Agreement, dated as of May 8, 2015, by and among the Company, Hudson Global Resources Management, Inc., a wholly owned subsidiary of the Company, and the Purchaser. At the closing of the Sale, the Company received from the Purchaser pursuant to the Agreement the purchase price of $16,977 in cash. The US IT business pre-tax loss in accordance with ASC No. 205 "Reporting Discontinued Operations" ("ASC 205") for the three and nine months ended September 30, 2015 was $0 and $130, respectively compared to a pre-tax profit of $711 and $1,889 for the same periods in 2014.

On the US IT Business Sale, for the nine months ended September 30, 2015 the Company recognized a pre-tax gain of $15,918, net of closing and other direct transaction costs. Income tax on the gain was $11. For U.S. Federal income tax purposes, the gain is offset in full by net operating loss carryforwards. For state and local income tax purposes, the gain is mostly offset by net operating loss carryforwards. As the divestiture did not meet the requirements for classification as discontinued operations, the gain on sale is presented as a component of income (loss) from operations.

Netherlands business

On April 7, 2015, the Company's Board of Directors authorized management to divest the Company's Netherlands business within its Hudson Europe Segment. As such, the Company determined the Netherlands business had met the criteria for assets held for sale in accordance ASC 205 as of April 9, 2015.

On May 7, 2015, the Company entered into a Share Purchase Agreement and completed the sale (the "Netherlands Business Sale") of its Netherlands business, to InterBalance Group B.V., effective April 30, 2015, in a management buyout for $9,029 which included cash retained of $1,135. As a result, for the nine months ended September 30, 2015 the Company recognized a gain of $2,841 on the divestiture of the Netherlands Business Sale, which included $2,799 of non-cash accumulated foreign currency translation losses. Income tax on the gain was $0 because the gain is exempt from Netherlands tax. As the divestiture did not meet the requirements for classification as discontinued operations, the gain on sale is presented as a component of income (loss) from operations. The Netherlands pre-tax profit in accordance with ASC 205 for the three and nine months ended September 30, 2015 was $0 and $373, respectively, compared to a pre-tax profit of $328 and $1,138 for the same periods in 2014.

Exit of Businesses in Central and Eastern Europe

In February 2015, the Company's Board of Directors approved the exit of operations in certain countries within Central and Eastern Europe (Ukraine, Czech Republic and Slovakia). During the quarter ended June 30, 2015, the Company deemed the liquidation of its Central and Eastern Europe businesses to be substantially complete. As such, under ASC 830,

- 7 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

"Foreign Currency Matters," for the three and nine months ended September 30, 2015 the Company transferred $4 and $1,190 of accumulated foreign currency translation gains from accumulated other comprehensive income to the statement of operations within gain on sale and exit of businesses.

Luxembourg

In March 2015, the Company's management approved the exit of operations in Luxembourg. In the third quarter of 2015, the Company deemed the liquidation of its Luxembourg business to be substantially complete. As such, under ASC 830, "Foreign Currency Matters," for the three and nine months ended September 30, 2015 the Company transferred $131 of accumulated foreign currency translation losses from accumulated other comprehensive income to the statement of operations within gain on on sale and exit of businesses.


NOTE 5 –DISCONTINUED OPERATIONS

Effective November 9, 2014, the Company completed the sale of substantially all of the assets and certain liabilities of its Legal eDiscovery business in the U.S. and United Kingdom ("U.K.") to Document Technologies, LLC and DTI of London Limited. In addition, in 2014, the Company ceased operations in Sweden, which was included within the Hudson Europe segment. The Company concluded that the divestiture of the Legal eDiscovery business and the cessation of operations in Sweden meet the criteria for discontinued operations set forth in ASC 205. The Company reclassified its discontinued operations for all periods presented and has excluded the results of its discontinued operations from continuing operations and from segment results for all periods presented.

The carrying amounts of the classes of assets and liabilities from the Legal eDiscovery business and Sweden operations included in discontinued operations were as follows:

 
 
September 30, 2015
 
December 31, 2014
 
 
eDiscovery
 
Sweden
 
Total
 
eDiscovery
 
Sweden
 
Total
Total assets
 
$
96

 
$
65

 
$
161

 
$
1,156

 
$
93

 
$
1,249

Total liabilities
 
$
1,978

 
$
47

 
$
2,025

 
$
3,297

 
$
215

 
$
3,512


Reported results for the discontinued operations by period were as follows:

 
 
Three Months Ended September 30, 2015
 
Three Months Ended September 30, 2014
 
 
eDiscovery
 
Sweden
 
Total
 
eDiscovery
 
Sweden
 
Total
Revenue
 
$

 
$
11

 
$
11

 
$
13,812

 
$
214

 
$
14,026

Gross margin
 
124

 
11

 
135

 
2,007

 
55

 
2,062

Reorganization expenses
 
155

 

 
155

 
555

 
408

 
963

Operating income (loss), excluding gain (loss) from sale of business
 
(98
)
 
1

 
(97
)
 
(1,957
)
 
(713
)
 
(2,670
)
Other non-operating income (loss), including interest
 

 

 

 
(2
)
 
(11
)
 
(13
)
Gain (loss) from sale and liquidation of discontinued operations (1)
 
44

 
(2
)
 
42

 

 

 

Income (loss) from discontinued operations before income taxes
 
(54
)
 
(1
)
 
(55
)
 
(1,959
)
 
(724
)
 
(2,683
)
Provision (benefit) for income taxes
 

 

 

 
(235
)
 

 
(235
)
Income (loss) from discontinued operations
 
$
(54
)
 
$
(1
)
 
$
(55
)
 
$
(1,724
)
 
$
(724
)
 
$
(2,448
)


- 8 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
 
Nine Months Ended September 30, 2015
 
Nine Months Ended September 30, 2014
 
 
eDiscovery
 
Sweden
 
Total
 
eDiscovery
 
Sweden
 
Total
Revenue
 
$
(1
)
 
$
17

 
$
16

 
$
46,513

 
$
1,502

 
$
48,015

Gross margin
 
21

 
17

 
38

 
7,647

 
855

 
8,502

Reorganization expenses
 
511

 
(29
)
 
482

 
555

 
408

 
963

Operating income (loss), excluding gain (loss) from sale of business
 
(593
)
 
18

 
(575
)
 
(2,452
)
 
(1,088
)
 
(3,540
)
Other non-operating income (loss), including interest
 
(8
)
 

 
(8
)
 
(8
)
 
(32
)
 
(40
)
Gain (loss) from sale and liquidation of discontinued operations (1)
 
138

 
1,272

 
1,410

 

 

 

Income (loss) from discontinued operations before income taxes
 
(463
)
 
1,290

 
827

 
(2,460
)
 
(1,120
)
 
(3,580
)
Provision (benefit) for income taxes
 
(37
)
 

 
(37
)
 
110

 

 
110

Income (loss) from discontinued operations
 
$
(426
)
 
$
1,290

 
$
864

 
$
(2,570
)
 
$
(1,120
)
 
$
(3,690
)

(1) During the quarter ended June 30, 2015, the Company deemed the liquidation of its Sweden business to be substantially complete. As such under ASC 830, "Foreign Currency Matters," for the three and nine months ended September 30, 2015, the Company transferred the amount of the foreign entity's accumulated foreign currency translation gains and losses from accumulated other comprehensive income to income (loss) from discontinued operations.


- 9 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 6 – REVENUE, DIRECT COSTS AND GROSS MARGIN
 The Company’s revenue, direct costs and gross margin were as follows: 
 
Three Months Ended September 30, 2015
 
Temporary Contracting
 
 Permanent Recruitment
 
Other
 
Total
Revenue
$
70,810

 
$
30,263

 
$
8,955

 
$
110,028

Direct costs (1)
61,562

 
867

 
2,454

 
64,883

Gross margin
$
9,248

 
$
29,396

 
$
6,501

 
$
45,145

 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2014
 
Temporary Contracting
 
 Permanent Recruitment
 
Other
 
Total
Revenue
$
106,981

 
$
31,713

 
$
10,584

 
$
149,278

Direct costs (1)
90,594

 
736

 
2,261

 
93,591

Gross margin
$
16,387

 
$
30,977

 
$
8,323

 
$
55,687


 
Nine Months Ended September 30, 2015
 
Temporary Contracting
 
 Permanent Recruitment
 
Other
 
Total
Revenue
$
237,778

 
$
90,242

 
$
29,068

 
$
357,088

Direct costs (1)
204,279

 
2,049

 
7,489

 
213,817

Gross margin
$
33,499

 
$
88,193

 
$
21,579

 
$
143,271

 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2014
 
Temporary Contracting
 
 Permanent Recruitment
 
Other
 
Total
Revenue
$
312,591

 
$
96,134

 
$
35,790

 
$
444,515

Direct costs (1)
264,982

 
1,893

 
8,052

 
274,927

Gross margin
$
47,609

 
$
94,241

 
$
27,738

 
$
169,588



(1)
Direct costs in Temporary Contracting include the direct staffing costs of salaries, payroll taxes, employee benefits, travel expenses, rent and insurance costs for the Company’s contractors and reimbursed out-of-pocket expenses and other direct costs. Other than reimbursed out-of-pocket expenses, there are no other direct costs associated with the Permanent Recruitment and Other category. Gross margin represents revenue less direct costs. The region where services are provided, the mix of contracting and permanent recruitment, and the functional nature of the staffing services provided can affect gross margin. The salaries, commissions, payroll taxes and employee benefits related to recruitment professionals are included under the caption "Selling, general and administrative expenses" in the Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss).


- 10 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 7 – STOCK-BASED COMPENSATION
Incentive Compensation Plan
The Company maintains the Hudson Global, Inc. 2009 Incentive Stock and Awards Plan, as amended and restated April 26, 2012 (the “ISAP”), pursuant to which it can issue equity-based compensation incentives to eligible participants. The ISAP permits the granting of stock options, restricted stock, restricted stock units, and other types of equity-based awards. The Compensation Committee of the Company’s Board of Directors (the “Compensation Committee”) will establish such conditions as it deems appropriate on the granting or vesting of stock options, restricted stock, restricted stock units and other types of equity-based awards. Vesting accelerates upon the occurrence of events that involve or may result in a change of control. The Company grants primarily restricted stock to its employees, although the Company has recently also granted restricted stock units to certain of its employees. A restricted stock unit is equivalent to one share of the Company’s common stock and is payable only in common stock of the Company issued under the ISAP.
The Compensation Committee administers the ISAP and may designate any of the following as a participant under the ISAP: any officer or other employee of the Company or its affiliates or individuals engaged to become an officer or employee; consultants or other independent contractors who provide services to the Company or its affiliates; and non-employee directors of the Company. As of September 30, 2015, there were 1,041,534 shares of the Company’s common stock available for future issuance under the ISAP.

The Company’s stock plan agreements provide that a change in control of the Company will occur if, among other things, individuals who were directors as of the date of the agreement and any new director whose appointment or election was approved or recommended by a vote of at least two-thirds of the directors then in office who were either directors on the date of the agreement or whose appointment or election was previously so approved or recommended (each, a “continuing director”) cease to constitute a majority of the Company’s directors. A change in control occurred as of the Company's 2015 annual meeting of stockholders on June 15, 2015 under these agreements because continuing directors ceased to constitute a majority of the Company's directors. As a result, certain equity awards vested resulting in an accelerated stock-based compensation expense of $2,541 for the nine months ended September 30, 2015.
A summary of the quantity and vesting conditions for stock-based awards granted to the Company's employees for the nine months ended September 30, 2015 was as follows:
Vesting conditions
 
Number of Shares of Restricted Stock Granted
 
Number of Restricted Stock Units Granted
 
Total
Performance and service conditions (1)
 
590,100

 
105,400

 
695,500

Vest 100% 18 months after the grant date with service conditions only
 
150,000

 

 
150,000

Vest 100% 18 months after the grant date with market and service conditions (2)
 
350,000

 

 
350,000

Immediately vested
 
400

 
100

 
500

Total shares of stock award granted
 
1,090,500

 
105,500

 
1,196,000


(1)
As a result of the June 15, 2015 change in control event all unvested grants of restricted stock and restricted stock units became fully vested.

(2)
At the end of the Performance Period, the restricted stock subject to market condition may vest, in whole or in part, based on the Company's maximum 30-trading-day volume-weighted average common stock price during the period from May 18, 2015 to November 13, 2016 (the "Average Share Price") as compared to specified share price targets. If the Company's Average Share Price is less than $3.50, none of the restricted stock shall vest. Twenty-five percent of the restricted stock shall vest if the Company's Average Share Price equals $3.50. Fifty percent of the restricted stock shall vest if the Company's Average Share Price equals $4.25. Seventy-five percent of the restricted stock shall vest if the Company's Average Share Price equals $5.00. One hundred percent of the restricted stock shall vest if the Company's Average Share Price is greater than or equal to $6.00. For Average Share Price results between two share

- 11 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

price targets, the percent of Restricted Stock vested shall be determined using linear interpolation. 
The Company also maintains the Director Deferred Share Plan (the "Director Plan") pursuant to which it can issue restricted stock units to its non-employee directors. A restricted stock unit is equivalent to one share of the Company’s common stock and is payable only in common stock issued under the ISAP upon a director ceasing service as a member of the Board of Directors of the Company. The restricted stock units vest immediately upon grant and are credited to each of the non-employee director's retirement accounts under the Director Plan. During the nine months ended September 30, 2015, the Company granted 244,242 restricted stock units to its non-employee directors pursuant to the Director Plan.
For the three and nine months ended September 30, 2015 and 2014, the Company’s stock-based compensation expense related to stock options, restricted stock and restricted stock units was as follows: 

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Stock options
 
$

 
$

 
$

 
$
85

Restricted stock
 
138

 
93

 
2,998

 
567

Restricted stock units
 
65

 
12

 
963

 
255

Total
 
$
203

 
$
105

 
$
3,961

 
$
907

 
Stock Options
As of September 30, 2015, the Company had no unrecognized stock-based compensation expense related to outstanding unvested stock options.
Changes in the Company’s stock options for the nine months ended September 30, 2015 and 2014 were as follows: 

 
Nine Months Ended September 30,
 
2015
 
2014
 
Number of
Options
 
Weighted
Average
Exercise Price
per Share
 
Number of
Options
 
Weighted
Average
Exercise Price
per Share
Options outstanding at January 1,
756,800

 
$
8.78

 
800,350

 
$
9.15

Expired/forfeited
(133,300
)
 
13.78

 
(43,550
)
 
15.50

Options outstanding at September 30,
623,500

 
7.72

 
756,800

 
8.78

Options exercisable at September 30,
623,500

 
$
7.72

 
756,800

 
$
8.78


Restricted Stock
As of September 30, 2015, the Company had approximately $478 of unrecognized stock-based compensation expense related to outstanding unvested restricted stock. The Company expects to recognize that cost over a weighted average service period of 1.12 years.
Changes in the Company’s restricted stock for the nine months ended September 30, 2015 and 2014 were as follows:
 

- 12 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
Nine Months Ended September 30,
 
2015
 
2014
 
Number of
Shares of
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
 
Number of
Shares of
Restricted
Stock
 
Weighted
Average
Grant Date
Fair Value
Unvested restricted stock at January 1,
803,999

 
$
3.00

 
997,802

 
$
3.00

Granted
1,090,500

 
2.12

 
6,400

 
3.80

Vested
(1,204,798
)
 
2.90

 
(172,284
)
 
5.27

Forfeited
(189,701
)
 
3.14

 
(448,687
)
 
2.31

Unvested restricted stock at September 30,
500,000

 
$
1.27

 
383,231

 
$
2.80


Restricted Stock Units
As of September 30, 2015, the Company had no unrecognized stock-based compensation expense related to outstanding unvested restricted stock units.
Changes in the Company’s restricted stock units for the nine months ended September 30, 2015 and 2014 were as follows:
 
Nine Months Ended September 30,
 
2015
 
2014
 
Number of
Restricted
Stock Units
 
Weighted
Average
Grant-Date
Fair Value
 
Number of
Restricted
Stock Units
 
Weighted
Average
Grant-Date
Fair Value
Unvested restricted stock units at January 1,
119,940

 
$
3.57

 
115,869

 
$
3.65

Granted
349,742

 
2.47

 
50,259

 
3.88

Vested
(427,182
)
 
2.71

 
(82,022
)
 
4.18

Forfeited
(42,500
)
 
3.21

 
(48,160
)
 
2.42

Unvested restricted stock units at September 30,

 
$

 
35,946

 
$
4.40

 
Defined Contribution Plan and Employer-matching contributions
The Company maintains the Hudson Global, Inc. 401(k) Savings Plan (the "401(k) plan"). The 401(k) plan allows eligible employees to contribute up to 15% of their earnings to the 401(k) plan. The Company has the discretion to match employees’ contributions up to 3% of the employees' earnings through a contribution of the Company’s common stock to the 401(k) plan. Vesting of the Company’s contribution occurs over a five-year period. For the three and nine months ended September 30, 2015 and 2014, the Company’s current year expenses and contributions to satisfy the prior years’ employer-matching liability for the 401(k) plan were as follows:

- 13 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
($ in thousands, except otherwise stated)
2015
 
2014
 
2015
 
2014
Expense recognized for the 401(k) plan
$
32

 
$
112

 
$
159

 
$
431

Contributions to satisfy prior years' employer-matching liability
 
 
 

 
 

 
 

Number of shares of the Company's common stock issued (in thousands)

 

 
116

 
118

Market value per share of the Company's common stock on contribution date (in dollars)
$

 
$

 
$
2.71

 
$
3.65

Non-cash contribution made for employer matching liability
$

 
$

 
$
314

 
$
430


NOTE 8 – INCOME TAXES
Under ASC 270, "Interim Reporting", and ASC 740-270, "Income Taxes – Intra Period Tax Allocation", the Company is required to adjust its effective tax rate for each quarter to be consistent with the estimated annual effective tax rate. Jurisdictions with a projected loss for the full year where no tax benefit can be recognized are excluded from the calculation of the estimated annual effective tax rate. Applying the provisions of ASC 270 and ASC 740-270 could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
Effective Tax Rate
The benefit from income taxes for the nine months ended September 30, 2015 was $1,317 on a pre-tax income from continuing operations of $2,774, compared to a provision for income taxes of $37 on pre-tax loss from continuing operations of $12,210 for the same period in 2014. The Company’s effective income tax rate was negative 47.5% and negative 0.3% for the nine months ended September 30, 2015 and 2014, respectively. For the nine months ended September 30, 2015, the effective tax rate differed from the U.S. Federal statutory rate of 35% due to the utilization of US tax losses not previously recognized as tax benefits to offset gain on sale of business, foreign tax exemptions applicable to gains on sale and exit of businesses, the release of deferred tax valuation allowance in China as a result of improved profitability in 2014 and 2015, the inability of the Company to recognize tax benefits on losses until positive earnings are achieved in the U.S. and certain other foreign jurisdictions, non-deductible expenses, and variations from the U.S. tax rate in foreign jurisdictions. For the nine months ended September 30, 2014, the effective tax rate differed from the U.S. Federal statutory rate of 35% due primarily to the Company's inability to benefit from losses in the U.S. and certain foreign jurisdictions.
Uncertain Tax Positions 
As of September 30, 2015 and December 31, 2014, the Company had $2,330 and $2,397, respectively, of unrecognized tax benefits, including interest and penalties, which if recognized in the future, would lower the Company’s annual effective income tax rate. Accrued interest and penalties were $555 and $554 as of September 30, 2015 and December 31, 2014, respectively. Estimated interest and penalties are classified as part of the provision for income taxes in the Company’s Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss) and totaled to a provision of $53 and a benefit of $165 for the nine months ended September 30, 2015 and 2014, respectively.
In many cases, the Company’s unrecognized tax benefits are related to tax years that remain subject to examination by the relevant tax authorities. Tax years with net operating losses ("NOLs") remain open until such losses expire or until the statutes of limitations for those years when the NOLs are used expire. As of September 30, 2015, the Company's open tax

- 14 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

years, which remain subject to examination by the relevant tax authorities, were principally as follows:
 
 
Year
Earliest tax years which remain subject to examination by the relevant tax authorities:
 
 
U.S. Federal
 
2012
Majority of U.S. state and local jurisdictions
 
2011
United Kingdom
 
2013
Australia
 
2011
Majority of other non-U.S. jurisdictions
 
2009
The Company believes that its tax reserves are adequate for all years that remain subject to examination or are currently under examination.
Based on information available as of September 30, 2015, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in the range of $300 to $600 over the next 12 months as a result of projected resolutions of global tax examinations and controversies and potential expirations of the applicable statutes of limitations.

NOTE 9 – EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing the Company’s net income (loss) by the weighted average number of shares outstanding during the period. When the effects are not anti-dilutive, diluted earnings (loss) per share is computed by dividing the Company’s net income (loss) by the weighted average number of shares outstanding and the impact of all dilutive potential common shares, primarily stock options "in-the-money", unvested restricted stock and unvested restricted stock units. The dilutive impact of stock options, unvested restricted stock, and unvested restricted stock units is determined by applying the “treasury stock” method. Performance-based restricted stock awards are included in the computation of diluted earnings per share only to the extent that the underlying performance conditions: (i) are satisfied prior to the end of the reporting period; or (ii) would be satisfied if the end of the reporting period were the end of the related performance period and the result would be dilutive under the treasury stock method. Stock awards subject to vesting or exercisability based on the achievement of market conditions are included in the computation of diluted earnings per share only when the market conditions are met.
A reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share calculations for the three and nine months ended September 30, 2015 and 2014 were as follows:


- 15 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Earnings (loss) per share ("EPS"):
 
 

 
 

 
 

 
 

EPS - basic and diluted:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(0.06
)
 
$
(0.14
)
 
$
0.12

 
$
(0.38
)
Income (loss) from discontinued operations
 

 
(0.07
)
 
0.03

 
(0.11
)
Net income (loss)
 
$
(0.06
)
 
$
(0.21
)
 
$
0.15

 
$
(0.49
)
EPS numerator - basic and diluted:
 
 

 
 

 
 

 
 
Income (loss) from continuing operations
 
$
(2,029
)
 
$
(4,571
)
 
$
4,091

 
$
(12,247
)
Income (loss) from discontinued operations
 
(55
)
 
(2,448
)
 
864

 
(3,690
)
Net income (loss)
 
$
(2,084
)
 
$
(7,019
)
 
$
4,955

 
$
(15,937
)
EPS denominator (in thousands):
 
 

 
 

 
 

 
 
Weighted average common stock outstanding - basic
 
34,687

 
32,910

 
33,784

 
32,769

Common stock equivalents: stock options and other stock-based awards (a)
 

 

 
11

 

Weighted average number of common stock outstanding - diluted
 
34,687

 
32,910

 
33,795

 
32,769


(a)
For the periods in which net losses are presented, the diluted weighted average number of shares of common stock outstanding did not differ from the basic weighted average number of shares of common stock outstanding because the effects of any potential common stock equivalents (see Note 7 for further details on outstanding stock options, unvested restricted stock units and unvested restricted stock) were anti-dilutive and therefore not included in the calculation of the denominator of dilutive earnings per share.
The weighted average number of shares outstanding used in the computation of diluted net income (loss) per share for the three and nine months ended September 30, 2015 and 2014 did not include the effect of the following potentially outstanding shares of common stock because the effect would have been anti-dilutive:
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2015
 
2014
 
2015
 
2014
Unvested restricted stock
 
150,000

 
383,231

 

 
383,231

Unvested restricted stock units
 

 
35,946

 

 
35,946

Stock options
 
623,500

 
756,800

 
623,500

 
756,800

Total
 
773,500

 
1,175,977

 
623,500

 
1,175,977


NOTE 10 – RESTRICTED CASH
A summary of the Company’s restricted cash included in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 was as follows: 
 
September 30,
2015
 
December 31,
2014
Included under the caption "Prepaid and other":
 

 
 

Client guarantees
$
77

 
$
52

Other
114

 
123

Total amount under the caption "Prepaid and other"
$
191

 
$
175

Included under the caption "Other assets":
 

 
 

Collateral accounts
$
228

 
$
618

Rental deposits
493

 
802

Total amount under the caption "Other assets"
$
721

 
$
1,420

Total restricted cash
$
912

 
$
1,595


Collateral accounts primarily include deposits held under a collateral trust agreement, which supports the Company’s workers’ compensation policy. The rental deposits with banks include amounts held as guarantees for the rent on the Company’s offices in the Americas and rental deposits from subtenants in the U.K. Client guarantees were held in banks in Belgium as deposits for various client projects.

NOTE 11 – PROPERTY AND EQUIPMENT, NET
As of September 30, 2015 and December 31, 2014, property and equipment, net, was as follows:

 
September 30,
2015
 
December 31,
2014
Computer equipment
$
5,982

 
$
8,806

Furniture and equipment
3,116

 
5,352

Capitalized software costs
17,437

 
25,228

Leasehold improvements
15,170

 
21,368

 
41,705

 
60,754

Less: accumulated depreciation and amortization
33,898

 
50,914

Property and equipment, net
$
7,807

 
$
9,840


The Company had expenditures of approximately $992 and $1,006 for acquired property and equipment, mainly consisting of software, furnitures and fixtures and leasehold improvements, which had not been placed in service as of September 30, 2015 and December 31, 2014, respectively. Depreciation expense is not recorded for such assets until they are placed in service.

- 16 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

Non-Cash Capital Expenditures
The Company has acquired certain computer equipment under capital lease agreements. The current portion of the capital lease obligations are included under the caption “Accrued expenses and other current liabilities” in the Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 and the non-current portion of the capital lease obligations are included under the caption “Other non-current liabilities” in the Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014. A summary of the Company’s equipment acquired under capital lease agreements were as follows:

 
September 30,
2015
 
December 31,
2014
Capital lease obligation, current
$
59

 
$
77

Capital lease obligation, non-current
$
240

 
$
348


During the nine months ended September 30, 2015 and 2014, the Company acquired $0 and $557, respectively, of property and equipment under capital lease agreements in Australia. Capital expenditures for the nine months ended September 30, 2015 and 2014 included $0 and $2,137, respectively, of landlord-funded tenant improvements for the Company's leased properties in Perth and Melbourne, Australia.

NOTE 12 – GOODWILL
The following is a summary of the changes in the carrying value of the Company’s goodwill, which was included under the caption "Other Assets" in the accompanying Condensed Consolidated Balance Sheets, as of September 30, 2015 and December 31, 2014. The goodwill related to the earn-out payment made in 2010 for the Company’s 2007 acquisition of the businesses of Tong Zhi (Beijing) Consulting Service Ltd and Guangzhou Dong Li Consulting Service Ltd.
 
Carrying Value
 
2015
Goodwill, January 1,
$
2,028

Currency translation
(49
)
Goodwill, September 30,
$
1,979



- 17 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 13 – BUSINESS REORGANIZATION EXPENSES

The Company initiated and executed certain strategic actions requiring business reorganization expenses ("2015 Exit Plan"). Business exit costs associated with the 2015 Exit Plan primarily consisted of employee termination benefits, lease termination payments and costs for elimination of contracts for certain discontinued services and locations.

The Board previously approved other reorganization plans in 2014 (“Previous Plans”) to streamline the Company’s support operations and included actions to reduce support functions to match them to the scale of the business, to exit underutilized properties and to eliminate contracts for certain discontinued services. These actions resulted in costs for lease termination payments, employee termination benefits and contract cancellations.

For the nine months ended September 30, 2015, restructuring charges associated with these initiatives primarily included employee separation costs for 62 positions in Europe and the Americas and lease termination payments for rationalized offices in the U.S. and Europe under the 2015 Exit Plan and Previous Plans. In the third quarter of 2015, the Company exited operations in Ireland recording a restructuring charges for lease termination payments and employee termination benefits. Business reorganization expenses for the three and nine months ended September 30, 2015 and 2014 by plan were as follows:
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Previous Plans
 
$
1,596

 
$
794

 
$
3,752

 
$
2,026

2015 Exit Plan
 
668

 

 
1,830

 

Total reorganization expenses in continuing operations
 
$
2,264

 
$
794

 
$
5,582

 
$
2,026

 
The following table contains amounts for Changes in Estimate, Additional Charges, and Payments related to Previous Plans that were incurred or recovered during the nine months ended September 30, 2015. The amounts in the “Changes in Estimate” and “Additional Charges” columns are classified as business reorganization expenses in the Company’s Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss). Amounts in the “Payments” column represent primarily the cash payments associated with the Previous Plans. Changes in the accrued business reorganization expenses for the nine months ended September 30, 2015 were as follows:
 
For The Nine Months Ended September 30, 2015
December 31,
2014
 
Changes in
Estimate
 
Additional
Charges
 
Payments
 
September 30,
2015
Lease termination payments
$
1,992

 
$
466

 
$
2,116

 
$
(1,238
)
 
$
3,336

Employee termination benefits
1,772

 

 
2,153

 
(2,301
)
 
1,624

Other associated costs

 

 
847

 
(661
)
 
186

Total
$
3,764

 
$
466

 
$
5,116

 
$
(4,200
)
 
$
5,146

 

- 18 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 14 – COMMITMENTS AND CONTINGENCIES
Consulting, Employment and Non-compete Agreements
The Company has entered into various consulting and employment agreements with certain key members of management. These agreements generally (i) are one year in length, (ii) contain restrictive covenants, (iii) under certain circumstances, provide for compensation and, subject to providing the Company with a release, severance payments, and (iv) are automatically renewed annually unless either party gives sufficient notice of termination.
Litigation and Complaints 
The Company is subject, from time to time, to various claims, lawsuits, contracts disputes and other complaints from, for example, clients, candidates, suppliers, landlords for both leased and subleased properties, former and current employees, and regulators or tax authorities arising in the ordinary course of business. The Company routinely monitors claims such as these, and records provisions for losses when the claim becomes probable and the amount due is estimable. Although the outcome of these claims cannot be determined, the Company believes that the final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or liquidity.
For matters that have reached the threshold of probable and estimable, the Company has established reserves for legal, regulatory and other contingent liabilities. The Company’s reserves were $156 and $376 as of September 30, 2015 and December 31, 2014, respectively.

Potential Costs Associated with Termination

The Company has incurred compensation and benefits obligations to its former Chairman and Chief Executive Officer, Manuel Marquez, under his employment agreement in connection with the Company providing Mr. Marquez notice of non-renewal of his employment agreement, which is treated as a termination of his employment without cause. The Company has accrued $665 as of September 30, 2015 in connection with compensation and benefits Mr. Marquez is entitled to upon a termination without cause. Mr. Marquez does not agree with this treatment of compensation and benefits under his employment agreement and, on August 13, 2015, filed an arbitration claim against the Company for additional amounts of up to approximately $2,000. The Company does not agree with Mr. Marquez’s interpretation of the employment agreement and intends to vigorously defend against such claim for additional amounts.
Asset Retirement Obligations 
The Company has certain asset retirement obligations that are primarily the result of legal obligations for the removal of leasehold improvements and restoration of premises to their original condition upon termination of leases. The asset retirement obligations are included under the caption “Other non-current liabilities” in the Condensed Consolidated Balance Sheets. The Company’s asset retirement obligations that are included in the Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 were as follows:
 
September 30,
2015
 
December 31,
2014
Total asset retirement obligations
$
2,165

 
$
2,461


- 19 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 15 – CREDIT AGREEMENTS

Receivables Finance Agreement with Lloyds Bank Commercial Finance Limited and Lloyds Bank PLC

On August 1, 2014, the Company’s U.K. subsidiary (“U.K. Borrower”) entered into a receivables finance agreement for an asset-based lending funding facility (the “Lloyds Agreement”) with Lloyds Bank PLC and Lloyds Bank Commercial Finance Limited (together, “Lloyds”). The Lloyds Agreement provides the U.K. Borrower with the ability to borrow up to $22,694 (£15,000). Extensions of credit are based on a percentage of the eligible accounts receivable less required reserves from the Company's U.K. operations. The initial term is two years with renewal periods every three months thereafter. Borrowings under this facility are secured by substantially all of the assets of the U.K. Borrower.

The credit facility under the Lloyds Agreement contains two tranches. The first tranche is a revolving facility based on the billed temporary contracting and permanent recruitment activities in the U.K. operation ("Lloyds Tranche A"). The borrowing limit of Lloyds Tranche A is $18,155 (£12,000) based on 83% of eligible billed temporary contracting and permanent recruitment receivables. The second tranche is a revolving facility that is based on the unbilled work-in-progress (as defined under the receivables finance agreement) activities in the Company's U.K. operations ("Lloyds Tranche B"). The borrowing limit of Lloyds Tranche B is $4,539 (£3,000) based on 75% of eligible work-in-progress from temporary contracting and 25% of eligible work-in-progress from permanent recruitment activities. For both tranches, borrowings may be made with an interest rate based on a base rate as determined by Lloyds Bank PLC, based on the Bank of England base rate, plus 1.75%.

The Lloyds Agreement contains various restrictions and covenants including (1) that true credit note dilution may not exceed 5%, measured at audit on a regular basis; (2) debt turn may not exceed 55 days over a three month rolling period; (3) dividends by the U.K. Borrower to the Company are restricted to the value of post-tax profits; and (4) at the end of each month, there must be a minimum excess availability of $3,026 (£2,000).
The details of the Lloyds Agreement as of September 30, 2015 were as follows:
 
 
September 30,
2015
Borrowing capacity
 
$
9,118

Less: outstanding borrowing
 

Additional borrowing availability
 
$
9,118

Interest rates on outstanding borrowing
 
2.25
%

The Company was in compliance with all financial covenants under the Lloyds Agreement as of September 30, 2015.

Loan and Security Agreement with Siena Lending Group LLC

Upon the sale of US IT business, the Company exercised its right to terminate its loan and security agreement with Siena Lending Group LLC ("Siena"). The Company paid Siena a termination fee of $161 recognized as a reduction to the gain on sale of the US IT business and $417 of cash to secure an outstanding letter of credit for a real estate lease. Siena will return the restricted cash to the Company once the outstanding letter of credit is returned to Siena.
Credit Agreement with Westpac Banking Corporation 

On November 29, 2011, certain Australian and New Zealand subsidiaries of the Company entered into a facility agreement with Westpac Banking Corporation and Westpac New Zealand Limited (collectively, "Westpac"). On December 19, 2013, the Company and certain of its Australian and New Zealand subsidiaries entered into a Deed of Variation to the facility agreement to amend certain terms and conditions of the facility agreement. On December 2, 2014, the Company and certain Australian and New Zealand subsidiaries entered into a Third Deed of Variation to amend certain terms and conditions of the facility agreement (as amended, the "Westpac Facility Agreement").
The Westpac Facility Agreement provides three tranches: (1) an invoice discounting facility of up to $7,018 (AUD10,000) ("Tranche A") for an Australian subsidiary of the Company, the availability under which facility is based on an agreed percentage of eligible accounts receivable; (2) an overdraft facility of up to $1,280 (NZD2,000) ("Tranche B") for a New

- 20 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

Zealand subsidiary of the Company; and (3) a financial guarantee facility of up to $3,509 (AUD5,000) ("Tranche C") for the Australian subsidiary.
The Westpac Facility Agreement does not have a stated maturity date and can be terminated by Westpac upon 90 days written notice. Borrowings under Tranche A may be made with an interest rate based on the Invoice Finance 30-day Bank Bill Rate (as defined in the Westpac Facility Agreement) plus a margin of 1.10%. Borrowings under Tranche B may be made with an interest rate based on the Commercial Lending Rate (as defined in the Westpac Facility Agreement) plus a margin of 1.83%. Each of Tranche A and Tranche B bears a fee, payable monthly, equal to 1.50% and 0.96%, respectively, of the size of Westpac’s commitment under such tranche. Borrowings under Tranche C may be made incurring a fee equal to 2.10% of the face value of the financial guarantee requested. Amounts owing under the Westpac Facility Agreement are secured by substantially all of the assets of the Australian subsidiary, its Australian parent company and the New Zealand subsidiary (collectively, the "Obligors") and certain of their subsidiaries.
The details of the Westpac Facility Agreement as of September 30, 2015 were as follows:
 
 
September 30,
2015
Tranche A:
 
Borrowing capacity
$
7,018

Less: outstanding borrowing
(34
)
Additional borrowing availability
$
6,984

Interest rates on outstanding borrowing
4.19
%
Tranche B:
 
Borrowing capacity
$
1,280

Less: outstanding borrowing

Additional borrowing availability
$
1,280

Interest rates on outstanding borrowing
7.78
%
Tranche C:
 
Financial guarantee capacity
$
3,509

Less: outstanding financial guarantee requested
(2,157
)
Additional availability for financial guarantee
$
1,352

Interest rates on financial guarantee requested
2.10
%
 
The Westpac Facility Agreement contains various restrictions and covenants applicable to the Obligors and certain of their subsidiaries, including: (a) a requirement that the Obligors maintain (1) a minimum Tangible Net Worth (as defined in the Westpac Facility Agreement) as of the last day of each calendar quarter of not less than the higher of 85% of the Tangible Net Worth as of the last day of the previous calendar year and $12,282 (AUD17,500); (2) a minimum Fixed Charge Coverage Ratio (as defined in the Westpac Facility Agreement) of 1.5x; and (3) a maximum Borrowing Base Ratio (as defined in the Westpac Facility Agreement) as of the last day of each calendar quarter of not more than 0.8; and (b) a limitation on certain intercompany payments with permitted payments outside the Obligor group restricted to a defined amount derived from the net profits of the Obligors and their subsidiaries.

The Company was in compliance with all financial covenants under the Westpac Facility Agreement as of September 30, 2015.
Other Credit Agreements
The Company also has lending arrangements with local banks through its subsidiaries in the Belgium and Singapore. The Belgium subsidiary has a $1,118 (€1,000) overdraft facility. Borrowings under the Belgium arrangement may be made using an interest rate based on the one-month EURIBOR plus a margin, and the interest rate was 2.75% as of September 30, 2015. The lending arrangement in Belgium has no expiration date and can be terminated with a 15-day notice period. In Singapore, the Company’s subsidiary can borrow up to $141 (SGD200) for working capital purposes. Interest on borrowings

- 21 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

under the Singapore overdraft facility is based on the Singapore Prime Rate plus a margin of 1.75%, and it was 6.00% on September 30, 2015. The Singapore overdraft facility expires annually each August, but can be renewed for one year periods at that time. There were no outstanding borrowings under the Belgium and Singapore lending agreements as of September 30, 2015.
The average aggregate monthly outstanding borrowings under the Revolver Agreement, Westpac Facility Agreement and the various credit agreements in Belgium and Singapore were $4,059 for the nine months ended September 30, 2015. The weighted average interest rate on all outstanding borrowings for the nine months ended September 30, 2015 was 3.30%.
The Company continues to use the aforementioned credit to support its ongoing global working capital requirements, capital expenditures and other corporate purposes and to support letters of credit. Letters of credit and bank guarantees are used primarily to support office leases.
 

NOTE 16 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss), net of tax, consisted of the following:
 
 
September 30,
 
December 31,
 
 
2015
 
2014
Foreign currency translation adjustments
 
$
10,038

 
$
13,485

Pension plan obligations
 
104

 
128

Accumulated other comprehensive income (loss)
 
$
10,142

 
$
13,613


As a result of the sale of the Netherlands business and substantially complete liquidation of certain foreign owned entities, the net foreign currency translation loss transferred from accumulated other comprehensive income and included in determining net income (loss) was $169 and $468 for the three and nine months ended September 30, 2015. No such adjustment was recorded in the prior year. See Note 4 and 5 regarding the substantially complete liquidation of certain foreign owned entities and the sale of the Netherlands business.

NOTE 17 – STOCKHOLDERS' EQUITY

On July 30, 2015, the Company announced that its Board of Directors authorized the repurchase of up to $10,000 of the Company's common stock. The Company intends to make purchases from time to time as market conditions warrant. This authorization does not expire. Through September 30, 2015, the Company had repurchased 262,260 shares for a total cost of $712.

- 22 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)

NOTE 18 – SEGMENT AND GEOGRAPHIC DATA
Segment Reporting
The Company operates in three reportable segments: the Hudson regional businesses of Hudson Americas, Hudson Asia Pacific, and Hudson Europe. Corporate expenses are reported separately from the three reportable segments and pertain to certain functions, such as executive management, corporate governance, human resources, accounting, administration, tax and treasury, the majority of which are attributable to and have been allocated to the reportable segments. Segment information is presented in accordance with ASC 280, “Segments Reporting.” This standard is based on a management approach that requires segmentation based upon the Company’s internal organization and disclosure of revenue and certain expenses based upon internal accounting methods. The Company’s financial reporting systems present various data for management to run the business, including internal profit and loss statements prepared on a basis not consistent with U.S. GAAP. Accounts receivable, net and long-lived assets are the only significant assets separated by segment for internal reporting purposes.

- 23 -

Index
HUDSON GLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share amounts)
(unaudited)


 
Hudson
Americas
 
Hudson
Asia Pacific
 
Hudson
Europe
 
Corporate
 
Elimination
 
Total
For The Three Months Ended September 30, 2015
 
 
 
 
 
 
Revenue, from external customers
$
3,735

 
$
55,609

 
$
50,684

 
$

 
$

 
$
110,028

Inter-segment revenue

 

 
123

 

 
(123
)
 

Total revenue
$
3,735

 
$
55,609

 
$
50,807

 
$

 
$
(123
)
 
$
110,028

Gross margin, from external customers
$
3,176

 
$
23,376

 
$
18,593

 
$

 
$

 
$
45,145

Inter-segment gross margin
(3
)
 
(122
)
 
125

 

 

 

Total gross margin
$
3,173

 
$
23,254

 
$
18,718

 
$

 
$

 
$
45,145

Gain on sale and exit of businesses
$
(20
)
 
$

 
$
(167
)
 
$

 
$

 
$
(187
)
Business reorganization expenses (recovery) and impairment of long lived assets expense
$
589

 
$
336

 
$
1,278

 
$
61

 
$

 
$
2,264

EBITDA (loss) (a)
$
(1,029
)
 
$
1,680

 
$
(2,094
)
 
$
(1,186
)
 
$

 
$
(2,629
)
Depreciation and amortization
383

 
333

 
171

 
68

 

 
955

Intercompany interest income (expense), net

 

 
(125
)
 
125

 

 

Interest income (expense), net

 
(68
)
 
(20
)
 
(5
)
 

 
(93
)
Income (loss) from continuing operations before income taxes
$
(1,412
)
 
$
1,279

 
$
(2,410
)
 
$
(1,134
)
 
$

 
$
(3,677
)
 
 
 
 
 
 
 
 
 
 
 
 
For The Nine Months Ended September 30, 2015
 
 
 
 
 
 
 
 
Revenue, from external customers
$
24,896

 
$
166,123

 
$
166,069

 
$

 
$

 
$
357,088

Inter-segment revenue

 

 
369

 

 
(369
)
 

Total revenue
$
24,896

 
$
166,123

 
$
166,438

 
$

 
$
(369
)
 
$
357,088

Gross margin, from external customers
$
12,876

 
$
68,073

 
$
62,322

 
$

 
$

 
$
143,271

Inter-segment gross margin
(10
)
 
(361
)
 
371

 

 

 

Total gross margin
$
12,866

 
$
67,712


$
62,693


$


$

 
$
143,271

Gain on sale and exit of businesses
$
15,918

 
$

 
$
3,900

 
$

 
$

 
$
19,818

Business reorganization expenses (recovery) and impairment of long lived assets expense
$
1,006

 
$
669

 
$
2,678

 
$
1,314

 
$

 
$
5,667

EBITDA (loss) (a)
$
12,788

 
$
1,852

 
$
(798
)
 
$
(7,486
)
 
$

 
$
6,356

Depreciation and amortization
591

 
1,576

 
618

 
255

 

 
3,040

Intercompany interest income (expense), net

 

 
(394
)
 
394

 

 

Interest income (expense), net
(346
)
 
(152
)
 
(35
)
 
(9
)
 

 
(542
)
Income (loss) from continuing operations before income taxes
$
11,851

 
$
124

 
$
(1,845
)
 
$
(7,356
)
 
$

 
$
2,774

 
 
 
 
 
 
 
 
 
 
 
 
As of September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable, net
$
3,876

 
$
28,317

 
$
33,528

 
$

 
$

 
$
65,721

Long-lived assets, net of accumulated depreciation and amortization
$
64

 
$
7,010

 
$
1,969

 
$
749