Document



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 June 30, 2018
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, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. 

Large accelerated filer
o
 
Accelerated filer
o
Non-accelerated filer
o
(do not check if a smaller reporting company)
Smaller reporting company
x
 
 
 
Emerging growth company
o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 June 30, 2018
Common Stock - $0.001 par value
 
32,030,932



HUDSON GLOBAL, INC.
INDEX


 
 
Page
 
 
Item 1.
 
 
 
 
 
 
 
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 STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited) 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$
17,015

 
$
14,517

 
$
33,230

 
$
28,472

Direct costs
6,214

 
3,812

 
12,275

 
7,765

Gross margin
10,801

 
10,705

 
20,955

 
20,707

Operating expenses:
 
 
 
 
 
 
 
Salaries and related
9,303

 
9,099

 
19,662

 
17,552

Other selling, general and administrative
2,755

 
1,995

 
5,208

 
3,872

Depreciation and amortization
2

 
79

 
2

 
160

Business reorganization

 
1

 

 
(113
)
Operating income (loss)
(1,259
)
 
(469
)
 
(3,917
)
 
(764
)
Non-operating income (expense):
 
 
 
 
 
 
 
Interest income (expense), net
60

 
(4
)
 
60

 
(4
)
Other income (expense), net
(45
)
 
(15
)
 
(112
)
 
(53
)
Income (loss) from continuing operations before provision for income taxes
(1,244
)
 
(488
)
 
(3,969
)
 
(821
)
Provision for income taxes from continuing operations
109

 
246

 
281

 
392

Income (loss) from continuing operations
(1,353
)
 
(734
)
 
(4,250
)
 
(1,213
)
Income (loss) from discontinued operations, net of income taxes
(11
)
 
1,960

 
13,607

 
1,125

Net income (loss)
$
(1,364
)
 
$
1,226

 
$
9,357

 
$
(88
)
Basic and diluted earnings (loss) per share:
 
 
 
 
 
 
 
Basic and diluted earnings (loss) per share from continuing operations
$
(0.04
)
 
$
(0.02
)
 
$
(0.13
)
 
$
(0.04
)
Basic and diluted earnings (loss) per share from discontinued operations

 
0.06

 
0.42

 
0.04

Basic and diluted earnings (loss) per share
$
(0.04
)
 
$
0.04

 
$
0.29

 
$

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
32,277

 
32,048

 
32,212

 
32,104

Diluted
32,277

 
32,048

 
32,212

 
32,104


See accompanying notes to condensed consolidated financial statements.



- 1 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME (LOSS)
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Comprehensive income (loss):
 
 
 
 
 
 
 
Net income (loss)
$
(1,364
)
 
$
1,226

 
$
9,357

 
$
(88
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment, net of applicable income taxes
(429
)
 
1,221

 
(96
)
 
2,620

Pension liability adjustment, net of income taxes

 
5

 

 
4

Reclassification of currency translation adjustment included in income (loss) from discontinued operations, net of income taxes

 

 
(10,819
)
 

Reclassification of pension liability adjustment included in income (loss) from discontinued operation, net of income taxes

 

 
(38
)
 

Total other comprehensive income (loss), net of income taxes
(429
)
 
1,226

 
(10,953
)
 
2,624

Comprehensive income (loss)
$
(1,793
)
 
$
2,452

 
$
(1,596
)
 
$
2,536


See accompanying notes to condensed consolidated financial statements.

- 2 -




HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
June 30,
2018
 
December 31,
2017
ASSETS
 

 
 

Current assets:
 

 
 

Cash and cash equivalents
$
38,641

 
$
5,580

Accounts receivable, less allowance for doubtful accounts of $52 and $69, respectively
14,201

 
11,545

Prepaid and other
1,010

 
388

Current assets of discontinued operations

 
79,530

Total current assets
53,852

 
97,043

Property and equipment, net
5

 
1

Deferred tax assets, non-current
292

 
324

Other assets, non-current
373

 
371

Non-current assets of discontinued operations

 
13,901

Total assets
$
54,522

 
$
111,640

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

Current liabilities:
 

 
 

Accounts payable
$
806

 
$
1,193

Accrued expenses and other current liabilities
8,901

 
7,259

Current liabilities of discontinued operations
366

 
51,952

Total current liabilities
10,073

 
60,404

Income tax payable, non-current
1,978

 
1,682

Other non-current liabilities
578

 
192

Non-current liabilities of discontinued operations

 
6,210

Total liabilities
12,629

 
68,488

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 36,110 and 34,959 shares, respectively
34

 
34

Additional paid-in capital
484,432

 
483,558

Accumulated deficit
(434,062
)
 
(443,419
)
Accumulated other comprehensive income, net of applicable tax
(244
)
 
10,709

Treasury stock, 4,079 and 3,800 shares, respectively, at cost
(8,267
)
 
(7,730
)
Total stockholders' equity
41,893

 
43,152

Total liabilities and stockholders' equity
$
54,522

 
$
111,640

 
See accompanying notes to condensed consolidated financial statements.
 



- 3 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 

 
 

Net income (loss)
$
9,357

 
$
(88
)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 

 
 

Depreciation and amortization
682

 
1,353

Provision for (recovery of) doubtful accounts
30

 
33

Provision for (benefit from) deferred income taxes
219

 
34

Stock-based compensation
874

 
708

Gain on sale of consolidated subsidiaries
(14,032
)
 

Changes in assets and liabilities, net of effect of dispositions:
 
 
 
Decrease (increase) in accounts receivable
(9,451
)
 
(9,828
)
Decrease (increase) in prepaid and other assets
(582
)
 
(1,080
)
Increase (decrease) in accounts payable, accrued expenses and other liabilities
(4,844
)
 
5,195

Increase (decrease) in accrued business reorganization
(502
)
 
(1,087
)
Net cash used in operating activities
(18,249
)
 
(4,760
)
Cash flows from investing activities:
 

 
 

Capital expenditures
(284
)
 
(425
)
Proceeds from sale of consolidated subsidiaries, net of cash and restricted cash sold
27,967

 

Net cash provided by (used in) investing activities
27,683

 
(425
)
Cash flows from financing activities:
 

 
 

Borrowings under credit agreements
59,647

 
77,256

Repayments under credit agreements
(51,682
)
 
(78,923
)
Repayment of capital lease obligations
(27
)
 
(50
)
Purchase of treasury stock
(3
)
 
(522
)
Purchase of restricted stock from employees
(534
)
 
(5
)
Net cash provided by (used in) financing activities
7,401

 
(2,244
)
Effect of exchange rates on cash, cash equivalents and restricted cash
228

 
719

Net increase (decrease) in cash, cash equivalents and restricted cash
17,063

 
(6,710
)
Cash, cash equivalents, and restricted cash, beginning of the period
22,006

 
22,511

Cash, cash equivalents, and restricted cash, end of the period
$
39,069

 
$
15,801

Supplemental disclosures of cash flow information:
 
 
 
Cash paid during the period for interest
$
(92
)
 
$
(211
)
Cash received during the period for interest
$
55

 
$

Net cash payments during the period for income taxes
$
(131
)
 
$
(854
)
 
See accompanying notes to condensed consolidated financial statements. 

- 4 -


HUDSON GLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(in thousands)
(unaudited)
 
 
Common stock Outstanding
 
Additional
paid-in
capital
 
Accumulated
deficit
 
Accumulated
other
comprehensive
income (loss)
 
Treasury
stock
 
Total
 
Shares
 
Value
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
31,159

 
$
34

 
$
483,558

 
$
(443,419
)
 
$
10,709

 
$
(7,730
)
 
$
43,152

Net income (loss)

 

 

 
9,357

 

 

 
9,357

Other comprehensive income (loss), net of applicable tax

 

 

 

 
(10,953
)
 

 
(10,953
)
Purchase of treasury stock
(2
)
 

 

 

 

 
(3
)
 
(3
)
Purchase of restricted stock from employees
(277
)
 

 

 

 

 
(534
)
 
(534
)
Stock-based compensation
1,151

 

 
874

 

 

 

 
874

Balance at June 30, 2018
32,031

 
$
34

 
$
484,432

 
$
(434,062
)
 
$
(244
)
 
$
(8,267
)
 
$
41,893

 
See accompanying notes to condensed consolidated financial statements.

- 5 -

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 Article 8 of Regulation S-X of the United States Securities and Exchange Commission ("SEC") for interim financial reporting 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, 2017.
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 period amounts have been reclassified to conform to the current year presentation with no material impact on the condensed consolidated financial statements.

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. During the first quarter of 2018, the Company’s core service offerings included Permanent Recruitment, Contracting, Recruitment Process Outsourcing ("RPO"), and Talent Management Solutions. On March 31, 2018 the Company completed the sale of its Recruitment and Talent Management ("RTM") businesses in three separate transactions and retained its RPO business. The first quarter results for the RTM businesses are reported as discontinued operations. For more information, see Note 5.
As a result of the divestiture of the RTM businesses, the Company now operates directly in nine countries with three reportable geographic business segments: Hudson Americas, Hudson Asia Pacific, and Hudson Europe. See Note 13 for further details regarding the reportable segments.
The Company’s core service offering following the divestiture is RPO. The Company delivers RPO permanent recruitment and contracting outsourced recruitment solutions tailored to the individual needs of primarily mid-to-large-cap multinational companies. The Company's RPO 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. The Company's RPO services include complete recruitment outsourcing, project-based outsourcing, contingent workforce solutions, and recruitment consulting.

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).

- 6 -

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

NOTE 3 – ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Pronouncements

On January 1, 2018, we adopted Accounting Standards Updates ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)" ("ASU 2014-09") and a series of related accounting standard updates designed to create improved revenue recognition and disclosure comparability in financial statements. For more information, see Note 4.

On January 1, 2018, we retroactively adopted ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Financial Accounting Standards Board (the "FASB") Emerging Issues Task Force)." This ASU requires the statements of cash flows to present the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents are now included with cash and cash equivalents when reconciling the beginning of period and end of period amounts presented on the statements of cash flows. The retrospective application of this new accounting guidance resulted in a decrease of $247 in "Decrease (increase) in prepaid and other assets" in Net Cash used in Operating Activities, an increase of $1,189 in "Cash, Cash Equivalents, and Restricted Cash, beginning of the period," and an increase of $942 in "Cash, Cash Equivalents, and Restricted Cash, end of period" in our accompanying consolidated statement of cash flows for the six months ended June 30, 2017 from what was previously presented in our Quarterly Report on Form 10-Q for the six months ended June 30, 2017.

In May 2017, the FASB issued ASU No. 2017-09, "Compensation - Stock Compensation: Scope of Modification Accounting" ("ASU 2017-09"), which provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. An entity will account for the effects of a modification unless the fair value of the modified award is the same as the original award, the vesting conditions of the modified award are the same as the original award and the classification of the modified award as an equity instrument or liability instrument is the same as the original award. ASU 2017-09 is effective for all annual periods, and interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted. The Company adopted ASU 2017-09 on January 1, 2018. The adoption had no impact on the Company's condensed consolidated financial statements.

Recently Issued Accounting Pronouncements

In February 2018, the FASB issued ASU No. 2018-02, "Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income" ("ASU 2018-02"), which provides guidance on reclassification of certain stranded income tax effects in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), enacted on December 22, 2017. ASU No. 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the application of the Tax Act. Additionally, ASU No. 2018-02 requires financial statement preparers to disclose (1) a description of their accounting policy for releasing income tax effects from accumulated other comprehensive income, (2) whether they elect to reclassify the stranded income tax effects from the Tax Act, and (3) information about other income tax effects related to the application of the Tax Act that are reclassified from accumulated other comprehensive income to retained earnings, if any. The amendments in ASU 2018-02 are effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact to its consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"). This ASU requires a company to recognize lease assets and liabilities arising from operation leases in the statement of financial position. This ASU does not significantly change the previous lease guidance for how a lessee should recognize the recognition, measurement and presentation of expenses and cash flows arising from a lease. Additionally, the criteria for classifying a finance lease versus an operating lease are substantially the same as the previous guidance. In July 2018, the FASB issued ASU No. 2018-11, "Leases (Topic 842): Targeted Improvements ("ASU 2018-11"). This ASU allows adoption of the standard as of the effective date without restating prior periods. The amendments in these ASUs are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and early adoption is permitted. We plan to adopt this ASU on January 1, 2019. We expect the adoption of ASU 2016-02 will result in the recognition of right-of-use assets and lease liabilities on our consolidated balance sheets for operating leases.

- 7 -

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

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 condensed consolidated financial statements.

NOTE 4 – REVENUE RECOGNITION
 Adoption of New Revenue Recognition Guidance

On January 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective approach. Under this method, the guidance is applied only to the most current period presented in the financial statements. ASU 2014-09 outlines a single comprehensive revenue recognition model for revenue arising from contracts with customers and supersedes most of the previous revenue recognition guidance, including industry-specific guidance. Under ASU 2014-09, an entity recognizes revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Our revenue recognition practices remained substantially unchanged as a result of adoption ASU 2014-09 and we did not have any significant changes in our business processes or systems.

Nature of Services

We account for a contract when both parties to the contract have approved the contract, the rights of the parties are identified, payment terms are identified, the contract has commercial substance, and collectability of consideration is probable. Revenues are recognized over time, using an output measure, as the control of the promised services is transferred to the client in an amount that reflects the consideration we expect to be entitled to in exchange for those services. The majority of our contracts are short-term in nature as they include termination clauses that allows either party to cancel within a short termination period, without cause. Revenue includes billable travel and other reimbursable costs and are reported net of sales or use taxes collected from clients and remitted to taxing authorities.

We generally determine standalone selling prices based on the prices included in the client contracts, using expected cost plus margin, or other observable prices. The price as specified in our client contracts is generally considered the standalone selling price as it is an observable input that depicts the price as if sold to a similar client in similar circumstances. Certain client contracts have variable consideration, including usage based fees that increase the transaction price and volume rebates or other similar items that generally reduce the transaction price. We estimate variable consideration using the expected value method based on the terms of the client contract and historical evidence. These amounts may be constrained and are only included in revenue to the extent we do not expect a significant reversal when the uncertainty associated with the variable consideration is resolved. Our estimated amounts of variable consideration subject to constraints are not material and we do not believe that there will be significant changes to our estimates.

We record accounts receivable when our right to consideration becomes unconditional. Contract assets primarily relate to our rights to consideration for services provided that they are conditional on satisfaction of future performance obligations. A contract liability for deferred revenue is recorded when consideration is received, or is unconditionally due, from a client prior to transferring control of services to the client under the terms of a contract. Deferred revenue balances typically result from advance payments received from clients prior to transfer services. We do not have any material contract assets or liabilities as of and for the six months ended June 30, 2018.

Payment terms vary by client and the services offered. We consider payment terms that exceed one year to be extended payment terms. Substantially all of the Company's contracts include payment terms of 90 days or less and we do not extend payment terms beyond one year.

We primarily record revenue on a gross basis as a principal in the Consolidated Statements of Operations and Comprehensive Income based upon the following key factors:

We maintain the direct contractual relationship with the client and are responsible for fulfilling the service promised to the client.

We maintain control over our contractors while the services to the client are being performed, including our contractors' billing rates.


- 8 -

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

RPO Recruitment. We provide complete recruitment outsourcing, project-based outsourcing and recruitment consulting for clients' permanent staff hires. We recognize revenue for our RPO recruitment over time in an amount that reflects the consideration we expect to be entitled to and have an enforceable right to payment in exchange for our services. The client simultaneously receives and consumes the benefits of the services as they are provided. The transaction prices contains both fixed fee and variable usage based consideration. Variable usage based consideration is constrained by candidates accepting offers of permanent employment. We recognized revenue on the fixed fee as the performance obligations are satisfied and usage based fees as the constraint is lifted. We do not incur incremental costs to obtain our RPO recruitment contracts. The costs to fulfill these contracts are expensed as incurred.

RPO Contracting. We provide RPO clients with a range of outsourced professional contract staffing services and managed service provider services offered sometimes on a standalone basis and sometimes as part of a blended total talent solution. We recognize revenue for our RPO contracting services over time as services are performed in an amount that reflects the consideration we expect to be entitled to and have an enforceable right to payment in exchange for our services, which is generally calculated as hours worked multiplied by the agreed-upon hourly bill rate. The client simultaneously receives and consumes the benefits of the services as they are provided. We do not incur incremental costs to obtain our RPO contracting contracts. The costs incurred to fulfill these contracts are expensed as incurred.

Unsatisfied performance obligations. As a practical expedient, we do not disclose the value of unsatisfied performance obligations for (i) contracts with an expected original duration of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

Disaggregation of Revenue

The following table presents our disaggregated revenues from continuing operations by revenue source. For additional information on the disaggregated revenues by geographical segment, see Note 13 of the Notes to the Condensed Consolidated Financial Statements.
 
Three Months Ended June 30, 2018
 
   RPO Recruitment
 
RPO Contracting
 
Total
Revenue
$
11,696

 
$
5,319

 
$
17,015

Direct costs (1)
1,464

 
4,750

 
6,214

Gross margin
$
10,232

 
$
569

 
$
10,801

 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
   RPO Recruitment
 
RPO Contracting
 
Total
Revenue
$
10,987

 
$
3,530

 
$
14,517

Direct costs (1)
642

 
3,170

 
3,812

Gross margin
$
10,345

 
$
360

 
$
10,705

 
Six Months Ended June 30, 2018
 
   RPO Recruitment
 
RPO Contracting
 
Total
Revenue
$
23,385

 
$
9,845

 
$
33,230

Direct costs (1)
3,482

 
8,793

 
12,275

Gross margin
$
19,903

 
$
1,052

 
$
20,955

 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
   RPO Recruitment
 
RPO Contracting
 
Total
Revenue
$
21,055

 
$
7,417

 
$
28,472

Direct costs (1)
1,090

 
6,675

 
7,765

Gross margin
$
19,965

 
$
742

 
$
20,707


(1)
Direct costs in RPO 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

- 9 -

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

direct costs. The region where services are provided, the mix of RPO recruitment and RPO contracting, 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 "Salaries and related" in the Condensed Consolidated Statement of Operations.

NOTE 5 – DISCONTINUED OPERATIONS
    
On March 31, 2018, the Company completed the sale of its RTM Businesses in Belgium, Europe (excluding Belgium) and Asia Pacific ("APAC") in separate transactions (the "Sale Transactions") to Value Plus NV, Morgan Philips Group S.A., and Apache Group Holdings Pty Limited, respectively. The gross proceeds from the sale were $38,960. In addition $17,626 of debt was assumed by the buyers.

The following is a reconciliation of the gross proceeds to the net proceeds as presented in the statement of cash flows for the six months ended June 30, 2018.
Gross proceeds
$
38,960

Add: purchase price adjustments
149

Less: cash and restricted cash sold
(9,547
)
Less: transaction costs
(1,595
)
Net cash proceeds as presented in the statement of cash flows
$
27,967


The divestiture generated a pre-tax gain of $14,032 for the six months ended June 30, 2018, which includes a benefit of $10,819 reclassification adjustment relating to the net foreign currency translation gains previously included in accumulated other comprehensive income. The pre-tax gain is subject to adjustment for various purchase price adjustments.

The RTM businesses met the criteria for discontinued operations set forth in Accounting Standards Codification ("ASC") 205 on March 31, 2018 subsequent to approval of the sale by our stockholders. 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 RTM businesses included in discontinued operations were as follows:
 
 
June 30,
2018
 
December 31,
2017
Cash
 
$

 
$
15,460

Accounts receivable
 

 
60,333

Prepaid and other current assets
 

 
3,737

Total current assets
 

 
79,530

Property and equipment, net
 

 
6,251

Deferred tax assets, non-current
 

 
6,080

Other assets, non-current
 

 
1,570

Total non-current assets
 

 
13,901

Total assets
 
$

 
$
93,431

 
 
 
 
 
Accounts payable
 
$
42

 
$
5,764

Accrued expenses and other current liabilities
 
324

 
39,108

Short-term borrowings
 

 
7,080

Total current liabilities
 
366

 
51,952

Total non-current liabilities
 

 
6,210

Total liabilities
 
$
366

 
$
58,162


- 10 -

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


Reported results for the discontinued operations by period were as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Revenue
$

 
$
99,074

 
$
108,463

 
$
188,524

Gross margin

 
37,621

 
38,663

 
70,051

Operating expenses:
 
 
 
 
 
 
 
Salaries and related

 
26,963

 
29,032

 
51,952

Other selling, general and administrative

 
7,368

 
8,355

 
14,318

Depreciation and amortization

 
608

 
680

 
1,193

Business reorganization

 
(2
)
 
50

 
290

Operating income (loss)

 
2,684

 
546

 
2,298

Non-operating income (expense):
 
 
 
 
 
 
 
Interest income (expense), net

 
(115
)
 
(88
)
 
(203
)
Other non-operating income (loss)

 
7

 
216

 
(337
)
Income (Loss) from discontinued operations before taxes and gain (loss) on sale

 
2,576

 
674

 
1,758

Gain (loss) from sale of discontinued operations
(11
)
 

 
14,032

 

Income (loss) from discontinued operations before income taxes
(11
)
 
2,576

 
14,706

 
1,758

Provision (benefit) for income taxes

 
616

 
1,099

 
633

Income (loss) from discontinued operations
$
(11
)
 
$
1,960

 
$
13,607

 
$
1,125


Depreciation, capital expenditures, and significant operating and investment non cash items of the discontinued operations by period were as follows:
 
Six Months Ended June 30,
 
2018
 
2017
Depreciation and amortization
$
680

 
$
1,193

Stock-based compensation expense
$
233

 
$
114

Capital expenditures
$
284

 
$
425


RTM Revenue Recognition

The Company RTM businesses delivered permanent recruitment, contracting, and talent management solutions to its clients. The contracts have a single performance obligations and we recognized revenue from these services over time in an amount that reflects the consideration expected to be entitled to in exchange for our services. We do not incur incremental costs to obtain these contracts. The costs to fulfill these contracts were expensed as incurred. See Note 4 for additional information on the Company's revenue recognition policies.

Permanent recruitment revenue. We recognize permanent placement revenue when employment candidates accept offers of permanent employment. We have a substantial history of estimating the financial impact of permanent placement candidates who do not remain with its clients through the typically 90-day guarantee period. Fees to clients are generally calculated as a percentage of the new employee’s annual compensation. No fees for permanent placement services are charged to employment candidates.

Temporary contracting revenue. We recognize temporary contracting revenue over time in the amount to which the Company has a right to invoice, when the services are rendered by the Company’s temporary employees which is generally calculated as hours worked multiplied by the agreed-upon hourly bill rate. The client simultaneously receives and consumes the

- 11 -

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

benefits of the services as they are provided. We do not incur costs to obtain our temporary contracting contracts. The costs incurred to fulfill these contracts are expensed as incurred.

Talent management revenue. Talent management services generally contain a single performance obligation satisfied over time. Revenue is recognized over time as the performance obligation is satisfied, because the services provided do not have any alternative use to the Company, and contracts generally include language giving the Company an enforceable right to payment for services provided to date. We measure revenue using an output method. Cost incurred represents work performed and thereby best depicts the transfer of control to the customer.

Disaggregation of Revenue

The following table presents our disaggregated revenues from discontinued operations by revenue source.

 
Three Months Ended June 30, 2018
 
Permanent Recruitment
 
Contracting
 
Talent Management
 
Other
 
Total
Revenue
$

 
$

 
$

 
$

 
$

Direct costs (1)

 

 

 

 

Gross margin
$

 
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017
 
Permanent Recruitment
 
Contracting
 
Talent Management
 
Other
 
Total
Revenue
$
21,255

 
$
66,695

 
$
10,559

 
$
565

 
$
99,074

Direct costs (1)
120

 
58,886

 
1,915

 
532

 
61,453

Gross margin
$
21,135

 
$
7,809

 
$
8,644

 
$
33

 
$
37,621


 
Six Months Ended June 30, 2018
 
Permanent Recruitment
 
Contracting
 
Talent Management
 
Other
 
Total
Revenue
$
20,700

 
$
76,615

 
$
10,694

 
$
454

 
$
108,463

Direct costs (1)
190

 
67,980

 
1,225

 
405

 
69,800

Gross margin
$
20,510

 
$
8,635

 
$
9,469

 
$
49

 
$
38,663

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Permanent Recruitment
 
Contracting
 
Talent Management
 
Other
 
Total
Revenue
$
39,253

 
$
129,229

 
$
18,974

 
$
1,068

 
$
188,524

Direct costs (1)
249

 
113,773

 
3,413

 
1,038

 
118,473

Gross margin
$
39,004

 
$
15,456

 
$
15,561

 
$
30

 
$
70,051



(1)
Direct costs include the direct staffing costs of salaries, payroll taxes, employee benefits, travel expenses, 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 categories. 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.



- 12 -

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

NOTE 6 – STOCK-BASED COMPENSATION
Incentive Compensation Plan
The Company maintains the Hudson Global, Inc. 2009 Incentive Stock and Awards Plan, as amended and restated May 24, 2016 (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. As determined by the Compensation Committee, equity awards also may be subject to immediate vesting upon the occurrence of certain events following a change in control of the Company. The Company primarily grants restricted stock and restricted stock units to 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. On May 24, 2016, the Company's stockholders approved an amendment and restatement of the ISAP to, among other things, increase the number of shares of the Company's common stock that are reserved for issuance by 2,400,000 shares. As of June 30, 2018, there were 1,284,467 shares of the Company’s common stock available for future issuance under the ISAP.
The following table presents a summary of the quantity and vesting conditions for stock-based units granted to the Company's employees for the six months ended June 30, 2018:
Vesting conditions
 
Number of Restricted Stock Units Granted
Performance and service conditions (1) (2)
 
220,000

Performance and service conditions (1) (3)
 
207,353

Total shares of stock award granted
 
427,353

(1)
The performance conditions with respect to restricted stock units may be satisfied as follows: 
(a)
For employees from the Americas, APAC, and Europe 70% of the restricted stock units may be earned on the basis of performance as measured by a "regional adjusted EBITDA," and 30% of the restricted stock units may be earned on the basis of performance as measured by a "group adjusted EBITDA"; and
(b)
For employees from the Corporate office 50% of the restricted stock units may be earned on the basis of performance as measured by a "group adjusted EBITDA," and 50% of the restricted stock units may be earned on the basis of performance as measured by a "corporate costs" target.
(2)
To the extent restricted stock units are earned on the basis of performance, such restricted stock units will vest on the basis of service as follows:
(a)
33% of the restricted stock units will vest on the first anniversary of the grant date;
(b)
33% of the restricted stock units will vest on the second anniversary of the grant date; and
(c)
34% of the restricted stock units will vest on the third anniversary of the grant date; provided that, in each case, the employee remains employed by the Company from the grant date through the applicable service vesting date.
(3)
To the extent restricted stock units are earned on the basis of performance, such restricted stock units will vest on the basis of service as follows:
(a)
66.6% of the restricted stock units will vest on the first anniversary of the last day of the performance period;

- 13 -

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

(b)
16.7% of the restricted stock units will vest on the second anniversary of the last day of the performance period;
(c)
16.7% of the restricted stock units will vest on the third anniversary of the last day of the performance period; provided that, in each case, the employee remains employed by the Company from the grant date through the applicable service vesting date.
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. Restricted stock units issued under the Director Plan contain the right to a dividend equivalent award in the form of additional restricted stock units. The dividend equivalent award is calculated using the same rate as the cash dividend paid on a share of the Company's common stock, and then divided by the closing price of the Company’s common stock on the date the dividend is paid to determine the number of additional restricted stock units to grant. Dividend equivalent awards have the same vesting terms as the underlying awards. During the six months ended June 30, 2018, the Company granted 94,154 restricted stock units to its non-employee directors pursuant to the Director Plan. As of June 30, 2018, 967,938 restricted stock units are deferred.
For the three and six months ended June 30, 2018 and 2017, the Company’s stock-based compensation expense related to stock options and restricted stock units were as follows:
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Stock options
 
$

 
$

 
$

 
$

Restricted stock units
 
180

 
517

 
874

 
708

Total
 
$
180

 
$
517

 
$
874

 
$
708

 
Stock Options
Stock options granted by the Company generally expire between five and ten years after the date of grant and have an exercise price of at least 100% of the fair market value of the underlying share of common stock on the date of grant.
As of June 30, 2018, the Company had no unrecognized stock-based compensation expense related to outstanding unvested stock options.
Changes in the Company’s stock options for the six months ended June 30, 2018 and 2017 were as follows: 
 
Six Months Ended June 30,
 
2018
 
2017
 
Number of
Options
 
Weighted
Average
Exercise Price
per Share
 
Number of
Options
 
Weighted
Average
Exercise Price
per Share
Options outstanding at January 1,
100,000

 
$
3.86

 
123,500

 
$
6.16

Expired/forfeited

 

 
(23,500
)
 
15.97

Options outstanding at June 30,
100,000

 
$
3.86

 
100,000

 
$
3.86

Options exercisable at June 30,
100,000

 
$
3.86

 
100,000

 
$
3.86


Restricted Stock Units
As of June 30, 2018, the Company had approximately $732 of unrecognized stock-based compensation expense related to outstanding unvested restricted stock units. The Company expects to recognize that cost over a weighted average service period of 2.45 years. Restricted stock units have no voting or dividend rights until the awards are vested.

- 14 -

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

Changes in the Company’s restricted stock units for the six months ended June 30, 2018 and 2017 were as follows:
 
Six Months Ended June 30,
 
2018
 
2017
 
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,
1,088,933

 
$
1.16

 
480,000

 
$
2.79

Granted
521,507

 
1.74

 
1,323,033

 
1.07

Shares earned above target (a)
244,855

 
1.00

 

 

Vested
(1,256,445
)
 
1.19

 
(381,760
)
 
1.47

Forfeited
(7,515
)
 
1.00

 
(332,340
)
 
2.79

Unvested restricted stock units at June 30,
591,335

 
$
1.55

 
1,088,933

 
$
1.16


(a)
The number of shares earned above target are based on the performance target established by the Compensation Committee at the initial grant date.

NOTE 7 – INCOME TAXES

Income Tax Provision

On December 22, 2017, the President of the U.S. signed into law the Tax Act. The legislation significantly changes U.S. tax law by, among other things, lowering corporate income tax rates, implementing a territorial tax system, and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The Company recognized the income tax effects of the Tax Act in its 2017 financial statements in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Tax Act was signed into law. As such, the Company’s financial results reflect the income tax effects of the Tax Act for which the accounting under ASC Topic 740 is complete and provisional amounts for those specific income tax effects of the Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. The Company did not identify items for which the income tax effects of the Tax Act have not been completed and a reasonable estimate could not be determined as of December 31, 2017.

The Company recorded a provisional amount of $0 tax payable with respect to the deemed mandatory repatriation of undistributed foreign earnings of foreign subsidiaries and the Company has elected to account for the global intangible low-taxed income ("GILTI") tax, if applicable, in the period in which it is incurred, and therefore has not provided any deferred tax impacts of GILTI in its condensed consolidated financial statements for the year ended December 31, 2017. On this basis, the net impact on tax expense provided in the Company’s condensed consolidated financial statements for the year ended December 31, 2017 related to the Tax Act is $0. The ultimate impact may differ from the provisional amounts due to additional analysis, changes in interpretations and assumptions, and additional regulatory guidance. The provisional accounting is expected to be complete when the 2017 U.S. federal income tax return is filed in 2018.

During the six months ended June 30, 2018, the Company did not make any adjustments to its provisional amounts included in its condensed consolidated financial statements for the year ended December 31, 2017. Also, because the Company has not recognized tax benefits in its financial statements for U.S. tax losses, there is $0 tax impact of the inclusion of GILTI income as a period cost during the six months ended June 30, 2018.

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.

- 15 -

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

Effective Tax Rate
The provision for income taxes for the six months ended June 30, 2018 was $281 on a pre-tax loss from continuing operations of $3,969, compared to a provision for income taxes of $392 on pre-tax loss from continuing operations of $821 for the same period in 2017. The Company’s effective income tax rate was negative 7.1% and 47.7% for the six months ended June 30, 2018 and 2017, respectively. For the six months ended June 30, 2018, the effective tax rate differed from the U.S. Federal statutory rate of 21% primarily due to the inability of the Company to recognize tax benefits on certain 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 six months ended June 30, 2017, the effective tax rate differed from the U.S. Federal statutory rate of 35% primarily due to the inability of the Company to recognize tax benefits on certain 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.
Uncertain Tax Positions 
As of June 30, 2018 and December 31, 2017, the Company had $1,978 and $1,682, 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 $577 and $566 as of June 30, 2018 and December 31, 2017, respectively. Estimated interest and penalties are classified as part of the provision for income taxes in the Company’s Condensed Consolidated Statement of Operations and totaled to a provision of $28 and $28 for the six months ended June 30, 2018 and 2017, 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 June 30, 2018, the Company's open tax 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
 
2014
Majority of U.S. state and local jurisdictions
 
2013
Australia
 
2017
Belgium
 
2015
Canada
 
2013
Netherlands
 
2012
Switzerland
 
2013
United Kingdom
 
2017
Jurisdictions in Asia
 
2018
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 June 30, 2018, it is reasonably possible that the total amount of unrecognized tax benefits could decrease in the range of $0 to $180 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.


- 16 -

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

NOTE 8 – 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 six months ended June 30, 2018 and 2017 were as follows:

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Earnings (loss) per share ("EPS"):
 
 

 
 

 
 

 
 

EPS - basic and diluted:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(0.04
)
 
$
(0.02
)
 
$
(0.13
)
 
$
(0.04
)
Income (loss) from discontinued operations
 

 
0.06

 
0.42

 
0.04

Net income (loss)
 
$
(0.04
)
 
$
0.04

 
$
0.29

 
$

EPS numerator - basic and diluted:
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 
$
(1,353
)
 
$
(734
)
 
$
(4,250
)
 
$
(1,213
)
Income (loss) from discontinued operations
 
(11
)
 
1,960

 
13,607

 
1,125

Net income (loss)
 
$
(1,364
)
 
$
1,226

 
$
9,357

 
$
(88
)
EPS denominator (in thousands):
 
 

 
 

 
 

 
 
Weighted average common stock outstanding - basic
 
32,277

 
32,048

 
32,212

 
32,104

Common stock equivalents: stock options and restricted stock units (a)
 

 

 

 

Weighted average number of common stock outstanding - diluted
 
32,277

 
32,048

 
32,212

 
32,104


(a)
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 6 for further details on outstanding stock options and unvested restricted stock units) 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 six months ended June 30, 2018 and 2017 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 June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Unvested restricted stock units
 
591,335

 
1,088,933

 
591,335

 
1,088,933

Stock options
 
100,000

 
100,000

 
100,000

 
100,000

Total
 
691,335

 
1,188,933

 
691,335

 
1,188,933


- 17 -

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


NOTE 9 – CASH, CASH EQUIVALENTS, AND RESTRICTED CASH
Cash, cash equivalents, and restricted cash as reported within the accompanying Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 was as follows: 
 
June 30,
2018
 
December 31,
2017
Cash and cash equivalents of continuing operations
$
38,641

 
$
5,580

Cash and cash equivalents of discontinuing operations

 
15,460

Restricted cash included in prepaid and other
111

 
112

Restricted cash included in other assets
317

 
102

Restricted cash included in current assets of discontinued operations

 
183

Restricted cash included in non-current assets of discontinued operations

 
569

Total cash, cash equivalents, and restricted cash
$
39,069

 
$
22,006


Restricted cash under the caption "Prepaid and other" primarily includes a bank guarantee for licensing in Switzerland. Restricted cash under the caption "Other assets" primarily include deposits held under a collateral trust agreement, which supports the Company’s workers’ compensation policy.

NOTE 10 – 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 legal reserves are included under the caption "Other non-current liabilities" in the Condensed Consolidated Balance Sheets. The Company had no reserves as of June 30, 2018 and December 31, 2017, respectively.
Departure of Certain Employees

As previously disclosed on July 6, 2018, the Company and David F. Kirby, the Company’s Senior Vice President, Treasury and Investor Relations, determined that Mr. Kirby would leave his positions with the Company effective July 27, 2018. In addition, the Company terminated the employment of its Corporate Counsel and Corporate Secretary effective June 29, 2018. As a result, during the three and six months ended June 30, 2018 the Company recognized severance expense of $601 for the two corporate employees classified within salaries and related expense in the Company's Condensed Consolidated Statement of Operations.

As previously disclosed, on April 1, 2018, Stephen A. Nolan gave notice to the Company's Board of Directors of his resignation as Chief Executive Officer and a director of the Company effective as of April 1, 2018. On April 1, 2018, following the resignation of Mr. Nolan, the Board of Directors of the Company appointed Jeffrey E. Eberwein, the Chairman of the Board of Directors, as Chief Executive Officer, and Richard K. Coleman, Jr., a director of the Company, as the Chairman of the Board

- 18 -

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

of Directors. As a result, during the three and six months ended June 30, 2018 the Company recognized additional compensation expense of $0 and $2,024, respectively to its former Chief Executive Officer classified within salaries and related expense in the Company's Condensed Consolidated Statement of Operations.

NOTE 11 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss), net of applicable tax, consisted of the following:
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Foreign currency translation adjustments
 
$
(244
)
 
$
10,671

Pension plan obligations
 

 
38

Accumulated other comprehensive income (loss)
 
$
(244
)
 
$
10,709


NOTE 12 – 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. During the three and six months ended June 30, 2018, the Company repurchased 2,200 shares on the open market for $3. As of June 30, 2018, under the July 30, 2015 authorization, the Company had repurchased 3,641,605 shares for a total cost of $7,374.

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



NOTE 13 – 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. 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. The following information is presented net of discontinued operations. For more information see Note 5.
 
Hudson
Americas
 
Hudson
Asia Pacific
 
Hudson
Europe
 
Corporate
 
Inter-Segment Elimination
 
Total
For The Three Months Ended June 30, 2018
 
 
 
 
 
 
Total revenue
$
3,509

 
$
9,600

 
$
3,906

 
$

 
$

 
$
17,015

Total gross margin
$
2,923

 
$
5,759

 
$
2,119

 
$

 
$

 
$
10,801

EBITDA (loss) (a)
$
(76
)
 
$
508

 
$
34

 
$
(1,768
)
 
$

 
$
(1,302
)
Depreciation and amortization

 

 
2

 

 

 
2

Intercompany interest income (expense), net

 
(108
)
 

 
108

 

 

Interest income (expense), net

 

 

 
60

 

 
60

Income (loss) from continuing operations before income taxes
$
(76
)
 
$
400

 
$
32

 
$
(1,600
)
 
$

 
$
(1,244
)
 
 
 
 
 
 
 
 
 
 
 
 
For The Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
Total revenue
$
7,209

 
$
18,425

 
$
7,596

 
$

 
$

 
$
33,230

Total gross margin
$
6,046

 
$
10,682


$
4,227


$


$

 
$
20,955

EBITDA (loss) (a)
$
215

 
$
1,052

 
$
45

 
$
(5,339
)
 
$

 
$
(4,027
)
Depreciation and amortization

 

 
2

 

 

 
2

Intercompany interest income (expense), net

 
(108
)
 

 
108

 

 

Interest income (expense), net

 

 

 
60

 

 
60

Income (loss) from continuing operations before income taxes
$
215

 
$
944

 
$
43

 
$
(5,171
)
 
$

 
$
(3,969
)
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable, net
$
2,605

 
$
6,787

 
$
4,803

 
$
6

 
$

 
$
14,201

Long-lived assets, net of accumulated depreciation and amortization (b)
$

 
$

 
$
5

 
$

 
$

 
$
5

Total assets
$
4,618

 
$
9,863

 
$
8,643

 
$
31,398

 
$

 
$
54,522


- 20 -

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
 
Inter-
Segment
Elimination
 
Total
For The Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
Total revenue
$
4,161

 
$
6,817

 
$
3,539

 
$

 
$

 
$
14,517

Total gross margin
$
3,731

 
$
4,726

 
$
2,248

 
$

 
$

 
$
10,705

EBITDA (loss) (a)
$
301

 
$
1,055

 
$
364

 
$
(2,125
)
 
$

 
$
(405
)
Depreciation and amortization

   

 

 
79

 
$

 
79

Interest income (expense), net

   

 

 
(4
)
 
$

 
(4
)
Income (loss) from continuing operations before income taxes
$
301

   
$
1,055

 
$
364

 
$
(2,208
)
 
$

 
$
(488
)
 
 
 
 
 
 
 
 
 
 
 
 
For The Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
Total revenue
$
8,475

 
$
13,159

 
$
6,838

 
$

 
$

 
$
28,472

Total gross margin
$
7,571

 
$
8,911

 
$
4,225

 
$

 
$

 
$
20,707

Business reorganization
$
(91
)
 
$

 
$
1

 
$
(23
)
 
$

 
$
(113
)
EBITDA (loss) (a)
$
635

 
$
1,797

 
$
541

 
$
(3,630
)
 
$

 
$
(657
)
Depreciation and amortization
2

 

 

 
158

 

 
160

Interest income (expense), net

 

 

 
(4
)
 

 
(4
)
Income (loss) from continuing operations before income taxes
$
633

 
$
1,797

 
$
541

 
$
(3,792
)
 
$

 
$
(821
)
 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2017
 

 
 

 
 

 
 

 
 

 
 

Accounts receivable, net
$
2,378

   
$
4,793

 
$
3,803

 
$

 
$

 
$
10,974

Long-lived assets, net of accumulated depreciation and amortization (b)
$

   
$

 
$
1

 
$
201

 
$

 
$
202

Total assets
$
5,637

 
$
5,117

 
$
4,868

 
$
2,298

 
$

 
$
17,920


(a)
SEC Regulation S-K Item 229.10(e)1(ii)(A) defines EBITDA as earnings before interest, taxes, depreciation and amortization. EBITDA is presented to provide additional information to investors about the Company's operations on a basis consistent with the measures that the Company uses to manage its operations and evaluate its performance. Management also uses this measurement to evaluate working capital requirements. EBITDA should not be considered in isolation or as a substitute for operating income and net income prepared in accordance with U.S. GAAP or as a measure of the Company's profitability.

(b)
Comprised of property and equipment. Corporate assets are included in the United States.



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

Geographic Data Reporting
A summary of revenues for the three and six months ended June 30, 2018 and 2017 and long-lived assets and net assets by geographic area as of June 30, 2018 and 2017, presented net of discontinued operations, were as follows:
 
United
Kingdom
 
Australia
 
United
States
 
Other
 
Total
For The Three Months Ended June 30, 2018
 
 

 
 

Revenue (a)
$
3,829

 
$
8,476

 
$
3,281

 
$
1,429

 
$
17,015

For The Three Months Ended June 30, 2017
 
 

 
 

Revenue (a)
$
2,682

 
$
5,499

 
$
3,943

 
$
2,393

 
$
14,517

For The Six Months Ended June 30, 2018
 
 
 
 
Revenue (a)
$
7,364

 
$
16,115

 
$
6,815

 
$
2,936

 
$
33,230

For The Six Months Ended June 30, 2017
 
 
 
 
Revenue (a)
$
5,298

 
$
10,836

 
$
8,047

 
$
4,291

 
$
28,472

As of June 30, 2018
 

 
 

 
 

 
 

 
 

Long-lived assets, net of accumulated depreciation and amortization (b)
$
5

 
$

 
$

 
$

 
$
5

Net assets
$
3,538

 
$
3,414

 
$
30,069

 
$
5,238

 
$
42,259

As of June 30, 2017
 

 
 

 
 

 
 

 
 

Long-lived assets, net of accumulated depreciation and amortization (b)
$

 
$

 
$
201

 
$
1

 
$
202

Net assets
$
1,865

 
$
2,071

 
$
2,292

 
$
1,932

 
$
8,160

  
(a) Revenue by geographic region disclosed above is net of any inter-segment revenue and, therefore, represents only revenue from external customers according to the location of the operating subsidiary.
(b) Comprised of property and equipment. Corporate assets are included in the United States.

- 22 -

Index

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Condensed Consolidated Financial Statements and the notes thereto, included in Part 1 of this Form 10-Q. The reader should also refer to the Condensed Consolidated Financial Statements and 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, 2017. This MD&A contains forward-looking statements. Please see "FORWARD-LOOKING STATEMENTS" for a discussion of the uncertainties, risks and assumptions associated with these statements. This MD&A also uses the non-generally accepted accounting principle measure of earnings before interest, taxes, depreciation and amortization ("EBITDA"). See Note 13 to the Condensed Consolidated Financial Statements of this Form 10-Q for EBITDA segment reconciliation information. The tables and information in this MD&A were derived from exact numbers and may have immaterial rounding differences.
This MD&A includes the following sections:
Executive Overview
Results of Operations
Liquidity and Capital Resources
Contingencies
Recent Accounting Pronouncements
Critical Accounting Policies
Forward-Looking Statements

Executive Overview

On March 31, 2018, the Company completed the sale of its recruitment and talent management ("RTM") businesses in Belgium, Europe (excluding Belgium), and Asia Pacific ("APAC") in separate transactions to Value Plus NV, Morgan Philips Group S.A., and Apache Group Holdings Pty Limited, respectively. The proceeds from the sale were $39.0 million, or $28.0 million net of cash and restricted cash sold of $9.5 million, and transaction costs of $1.6 million. Debt assumed in the Sales Transactions by the buyers was $17.6 million.

The finalization of these transactions aligns the Company’s strategy to focus going forward on Recruitment Process Outsourcing ("RPO") solutions globally. With direct operations in nine countries and relationships with specialized professionals and organizations around the globe, the Company brings a strong ability to match talent with opportunities by assessing, recruiting, developing, and engaging the best and brightest people for the Company's clients. The Company combines broad geographic presence, world-class talent solutions and a tailored, consultative approach to help businesses, and professionals achieve maximum performance. The Company's focus is to continually upgrade its service offerings and delivery capability tools to make candidates more successful in achieving its clients' business requirements.

The Company’s proprietary frameworks, assessment tools and leadership development programs, coupled with its broad geographic footprint allows the Company to design and implement regional and global outsourced recruitment solutions that the Company believes greatly enhance the quality and efficiency of its clients' hiring.
To accelerate the implementation of the Company's strategy, the Company engaged in the following initiatives:
Facilitating growth and development of the global RPO business through strategic investments in people, innovation and technology.
Building and differentiating the Company's brand through its unique outsourcing solutions offerings.
Improving the Company’s cost structure and efficiency of its support functions and infrastructure.

This MD&A discusses the results of the Company’s RPO businesses for three and six months ended June 30, 2018 and 2017, and excludes the results of the Company’s RTM businesses, which, as discussed in Note 5 to the Condensed Consolidated Financial Statements are reported in discontinued operations.

- 23 -

Index


Current Market Conditions
Economic conditions in most of the world's major markets have improved since 2017. In the U.K., the 2016 referendum to exit the European Union (commonly referred to as "Brexit") adversely impacted global markets initially, including currencies, and resulted in increased volatility in the value of the British pound as compared to the U.S. dollar. A weaker British pound compared to the U.S. dollar during a reporting period causes local currency results of the Company's U.K. operations to be translated into fewer U.S. dollars. The Company's U.K. operations, future financial performance, and translation of results may be affected, in part, by the outcome of tariff, trade, regulatory, and other negotiations as the U.K. negotiates its exit from the European Union.
The Company closely monitors the economic environment and business climate in its markets and responds accordingly. At this time, the Company is unable to accurately predict the outcome of these events or changes in general economic and political conditions and their effect on the demand for the Company's services.
Financial Performance
The Company achieved mixed financial performance for the second quarter of 2018 in the markets in which it operates. On a constant currency basis, for the three months ended June 30, 2018, revenue increased by $2.2 million, or 14.7%, and gross margin decreased by $0.1 million, or 1.2%, respectively, compared to the same period in 2017.
 
The changes in revenue and gross margin were driven by strong results in Australia, partially offset by declines in revenue and gross margin in the Americas.

The following is a summary of the highlights for the three and six months ended June 30, 2018 and 2017. This summary should be considered in the context of the additional disclosures in this MD&A which further highlight the results by segment.

Revenue was $17.0 million for the three months ended June 30, 2018, compared to $14.5 million for the same period in 2017, an increase of $2.5 million, or 17.2%.
On a constant currency basis, the Company's revenue increased $2.2 million, or 14.7%, due to an increase of $1.7 million in RPO contracting revenue (up 47.4% compared to the same period in 2017) and $0.5 million in RPO recruitment revenue (up 4.2% compared to the same period in 2017).
Revenue was $33.2 million for the six months ended June 30, 2018, compared to $28.5 million for the same period in 2017, an increase of $4.8 million, or 16.7%.
On a constant currency basis, the Company's revenue increased $3.8 million, or 12.9%, mainly due to an increase of $2.1 million in RPO contracting revenue (up 27.4% compared to the same period in 2017) and $1.7 million in RPO recruitment revenue (up 7.7% compared to the same period in 2017).
Gross margin was $10.8 million for the three months ended June 30, 2018, compared to $10.7 million for the same period in 2017, an increase of $0.1 million, or 0.9%.
On a constant currency basis, gross margin decreased $0.1 million, or 1.2%, mainly due to a decrease of $0.3 million in RPO recruitment gross margin (down 3.1% compared to the same period in 2017) partially offset by an increase of $0.2 million in RPO contracting gross margin (up 55.2% compared to the same period in 2017).
Gross margin was $21.0 million for the six months ended June 30, 2018, compared to $20.7 million for the same period in 2017, an increase of $0.2 million, or 1.2%.
On a constant currency basis, gross margin decreased $0.4 million, or 1.8%, mainly due to a decrease of $0.7 million in RPO recruitment gross margin (down 3.3% compared to the same period in 2017) partially offset by an increase of $0.3 million in RPO contracting gross margin (up 37.5% compared to the same period in 2017).
Selling, general and administrative expenses and other non-operating income (expense) ("SG&A and Non-Op") were $12.1 million for the three months ended June 30, 2018, compared to $11.1 million for the same period in 2017, an increase of $1.0 million, o