Star Equity Holdings, Inc.: Form 10-K for the period ended Dec 31, 2022

General

Hudson Global, Inc. (the “Company” or “Hudson”, “we”, “us”, and “our”) is a leading total talent solutions provider operating under the brand name Hudson RPO. We deliver innovative, customized recruitment outsourcing and total talent solutions to organizations worldwide. Through our consultative approach, we develop tailored talent solutions designed to meet our clients’ strategic growth initiatives. We are a Delaware corporation, and have operated as an independent publicly held company since April 1, 2003, when Monster Worldwide, Inc., formerly TMP Worldwide, Inc., spun off its eResourcing division.

The Company delivers Recruitment Process Outsourcing (“RPO”), consisting of recruitment and contracting 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.

On August 19, 2022, Hudson completed the acquisition of Hunt & Badge Consulting Private Limited (“HnB”), an India-headquartered provider of recruitment services to customers operating in India. HnB partners with companies of all sizes, including well-known multinationals, across a variety of industries to help meet their talent procurement needs.

On October 29, 2021, Hudson completed its acquisition of Karani, LLC (“Karani”), a Chicago-headquartered recruiting services provider that primarily serves U.S.-based customers from its operations in India and the Philippines. Karani partners with recruitment and staffing firms to assist with recruiting, sourcing, screening, onboarding, and other talent-related services across a variety of industries. This acquisition has enhanced Hudson RPO’s global delivery capability by adding a substantial presence in India and the Philippines, fostering business in new markets, and further developing Hudson RPO’s technology recruitment capabilities.

On October 1, 2020, Hudson completed its acquisition of Coit Staffing, Inc. (“Coit Staffing”), which expanded its presence in the technology sector and established a Technology Group located in San Francisco. The Technology Group leverages its network and partnerships within the technology sector to seek out new customers and opportunities in other markets around the world. In addition, the Technology Group operates jointly with Hudson RPO’s existing teams in the Americas, Asia Pacific, and Europe, to provide continuous access to knowledge regarding new and emerging technologies in the RPO, Managed Solutions Provider (“MSP”), and Total Talent Solutions space, enabling the Company to better serve its clients around the world.

Business Segments

The Company operates directly in fourteen countries with three reportable geographic business segments: Americas, Asia Pacific, and Europe. For the year ended December 31, 2022, the amounts and percentages of the Company’s total revenue from the three reportable segments were as follows:

$ in thousands

Service Offerings

The Company’s core service offering is RPO, consisting of RPO Recruitment and Contracting:

RPO Recruitment: The Company provides complete recruitment outsourcing, project-based outsourcing, and recruitment consulting for clients’ permanent staff hires. Hudson’s RPO Recruitment services leverage the Company’s consultants, supported by the Company’s specialists, in the delivery of its proprietary methods to identify, select, and engage the best-fit talent for critical client roles.

Contracting: The Company provides 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. 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 specific business needs of the client.

For the year ended December 31, 2022, the amounts and percentages of the Company’s total revenue from the core service offerings were as follows:

$ in thousands

Clients

The Company’s clientele includes mid-to-large-cap multinational companies and government agencies. For the years ended December 31, 2022 and 2021, the Company’s top 25 clients generated over 75% and 85% of the Company’s revenue, respectively. Two clients accounted for an aggregate of 50% of revenue in 2022, and three clients accounted for an aggregate of 65% of revenue in 2021. One client accounted for 20% or greater of accounts receivable as of December 31, 2022 and two clients accounted for 10% or greater of accounts receivable as of December 31, 2021. Our business is dependent upon the continuation of these business relationships as well as new client development.

Market Competition

The markets for the Company’s services and products are highly competitive. There are few barriers to entry, so new entrants occur frequently, resulting in considerable market fragmentation. Companies in this industry compete based on a number of parameters including degree and quality of candidate and position knowledge, industry expertise, global presence, scalability, service quality, and efficiency in completing assignments. Typically, companies with greater strength or scale in these areas generate higher margins.

Growth Strategy

We focus on organically growing our RPO business, reducing overhead expenses as a percentage of revenue, and pursuing acquisition opportunities. We target driving organic growth in RPO by investing in people and technology, as well as sales and marketing, to leverage our existing strong reputation in the market. We are investigating acquisition opportunities to expand capabilities and capacity and utilize our net operating losses. We continue to explore all strategic alternatives to maximize value for stockholders, including without limitation, improving the market position and profitability of our services in the marketplace, and enhancing our valuation. We may pursue our goals through organic growth, strategic initiatives, or other alternatives. We will also continue to monitor capital markets for opportunities to repurchase shares, and consider other actions designed to enhance stockholder value, as well as review information regarding potential acquisitions and provide information to third parties, from time to time.

Human Capital Resources

The Company’s success significantly depends upon its workforce. The Company employs approximately 1,440 people worldwide, including approximately 170 employees in the United States (“U.S.”) and 1,270 employees internationally. Hudson is dedicated to acquiring, investing in, and retaining top talent. Hudson RPO’s global and regional employees have vast training and expertise across human capital solutions. Specifically, of the Company’s employees, approximately 1,340 are client-facing consultants who sell and deliver the Company’s RPO services to its existing client base. The Company’s consultant population has deep expertise in specific functional areas and industry sectors, and provides broad-based recruitment and solution services based on the needs of each client on a regional and global basis.

Amid the COVID-19 pandemic, our employees’ health and safety have been one of our top priorities. In addition to providing employees with remote working opportunities, we have taken a range of precautions for those employees who were working in our offices. These included prioritizing personal space; modifying shared spaces with staggered seating to ensure a physical distance from colleagues is maintained; implementing heightened cleaning measures; providing complimentary sanitization products; instituting cleaning standards; and reinforcing capacity protocols with strategically-placed signage.

Our well-being program, Thrive, provides the framework to support our employees’ physical, mental and financial health and well-being in addition to providing our line managers with the guidance needed to support their teams. Our regional well-being champions rolled out a variety of initiatives aimed at raising awareness and encouraging employees to look after their health and well-being. Our employee assistance programs offers additional support and information to our staff and a range of additional training modules were rolled out focusing on topics such as mental health awareness, health and wellness in the workplace, and keeping remote teams connected.

In addition, the Company values a diverse workplace that honors inclusion and equity. We see differences as a benefit; a diverse mix of minds enables us to create a workplace that fosters creativity, encourages adaptability, and drives innovation. All our employees play an important part in contributing to and shaping our culture. We have taken actions to enhance our employees’ experience working for the Company through the implementation of a continuous performance management framework in order to drive employees’ performance, development, and engagement.

The Company also recognizes the importance of environmental, social and governance (ESG) matters, with a specific focus on human capital management, as integral to creating a sustainable foundation for our long-term business strategy. Our goals for diversity, equity, and inclusion tie into our people-focused approach to ESG initiatives. Another key initiative in our ESG framework has been to provide our employees with access to a volunteering and environmental impact platform. This platform allows our employees to volunteer individually or in groups both locally and remotely, as well as to undertake climate change pledges. The platform also allows us to measure the Company’s impact through volunteer and CO2e reduction tracking and helps us to educate our employees by giving them access to talks from the leading innovators in ESG.

We actively look for ways to connect our employees and encourage them to share their perspectives and experiences with one another. We have formed a Global Diversity, Equity, and Inclusion (“DEI”) Program, with employee-led committees set up in each region to promote DEI initiatives within the Company, including a web series featuring members of our Americas leadership team discussing our DEI journey, experiences with race, gender, and cultural differences, and DEI best practices.

Employees have access to a range of training courses, including courses on anti-harassment, discrimination, and unconscious bias. eLearning is an integral part of the continuous development journey that we offer to all our employees. Through our long-term partnership with one of the leading eLearning providers, our employees have access to an extensive range of hiring and talent management content delivered by industry experts and renowned thought leaders. Our eLearning courses include over 200 hours of learning modules, including over 20 modules specifically on diversity. Tailored learning programs, in which diversity forms a cornerstone, have been created for all client-facing roles. Our employees are encouraged to participate in these learning modules and to complete a minimum of 30 minutes of learning each week.

Segment and Geographic Data

Financial information concerning the Company’s reportable segments and geographic areas of operation is included in Note 15 of the Notes to Consolidated Financial Statements contained in Item 8 of this Annual Report on Form 10-K (this “Form 10-K”).

Available Information

We maintain a website with the address www.hudsonrpo.com (http://www.hudsonrpo.com). We are not including the information contained on our website as part of, or incorporating it by reference into, this Form 10-K. Through our website, we make available free of charge our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and other reports and amendments to these reports that we file with or furnish to the Securities and Exchange Commission (“SEC”) in a timely manner after we provide them.

The following risk factors and other information included in this Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, results of operations, and cash flows could be materially adversely affected.

Our operations will be affected by global economic fluctuations.

Clients’ demand for our services may fluctuate widely with changes in economic conditions in the markets in which we operate. Those conditions include slower employment growth or reductions in employment, which directly impact our service offerings. In addition, certain geopolitical events such as the war in Ukraine, the U.S./China trade tensions, and the ongoing COVID-19 pandemic, have caused significant economic, market, political, and regulatory uncertainty in some of the Company’s markets. We have limited flexibility to combat these uncertainties and reduce expenses during economic downturns due to some overhead costs that are fixed in the short-term. As a result, we may face increased pricing pressures during these periods.

Our clients’ demands for RPO recruiting and contracting services largely depend on the market conditions and the strength of the labor markets in the countries where we operate. In the second half of 2022, the market conditions were more challenging than anticipated due to the higher inflation, higher interest rates, and decreased demand for labor in certain markets. In addition, in connection with the challenging business environment, some of our customers have reduced demand, and certain other customers have eliminated our services on a temporary or permanent basis. We anticipate that the market conditions will continue to be challenging into 2023.

The pricing pressures and global economic fluctuations are not limited to the periods of U.S./China trade tensions and the COVID-19 pandemic. After a partial recovery in 2021, economic conditions in most of the world’s major markets slowed down in 2022. Higher than expected inflation in most markets, rising interest rates, and the continuing impact of the war in Ukraine, as well as new variants of the COVID-19 virus, have led to significant market disruption, including further wage inflation, increased operating costs, staffing challenges, reduced consumer confidence, and limited capital market accessibility that impact our business. The inflationary environment and related interest rate impacts continue to have a significant adverse impact on the economy and market conditions. These factors may impact labor markets and the demand for workforce, available borrowing capacity, cash flow protection, and more. As a result, our business, financial condition, and results of operations may be negatively affected.

Our business may be adversely affected by the ongoing COVID-19 pandemic.

The continual spread of COVID-19 and the emergence of new variants has caused a broad impact globally, including restrictions on travel and quarantine policies put into place by businesses and governments, adversely affecting the economies and financial markets of many countries, and resulting in an economic downturn. The economic downturn, as well as the uncertainty regarding the duration, spread and intensity of the pandemic, has led to labor shortages, supply restrictions, and inflationary pressures. Considering the rapidly evolving landscape, it is difficult to predict the demand for our services in the near future. The pandemic has had and may continue to have a negative impact on our business, including our results of operation.

We may not be able to successfully execute our strategic initiatives or meet our long-term financial goals.

We have been engaged in strategic initiatives to refocus on our core business to maximize long-term stockholder value, to improve our cost structure and efficiency, and to increase our selling efforts and the development of new business. We cannot provide any assurance that we will be able to successfully execute these or other strategic initiatives or that we will be able to execute these initiatives on our expected timetable. We may not be successful in refocusing our core business and obtaining operational efficiencies or replacing revenues lost as a result of these strategic initiatives.

We may face risks related to potential or current acquisitions or dispositions of businesses.

As part of our growth strategy, we may pursue acquisition opportunities that we believe can complement or expand our current business activities or sell other businesses. Acquisition and disposition activity exposes us to a number of risks. There could be unforeseen liabilities or asset impairments that arise in connection with the businesses that we may sell or the businesses that we may acquire in the future. With respect to businesses that we may sell, we would also no longer be able to rely on any cash flow they generated, and there is no assurance that when or if we reinvested any proceeds from a sale it would be in an acquisition that generates the anticipated benefits. We also may not realize all of the anticipated benefits of acquisitions of Karani and HnB, or potential future strategic transactions, which could adversely affect our business, financial condition and results of operations. Our ability to achieve certain benefits from acquisitions of businesses will depend in large part upon our ability to successfully integrate such businesses in an efficient and effective manner. We may not be able to integrate any such businesses smoothly or successfully, and the process may take longer than expected. We can provide no assurances that we will enter into any agreements in connection with potential acquisitions or dispositions or as to the timing of any potential strategic transactions. The strategic transaction process may disrupt our business including diverting management’s attention from ongoing business concerns.

Our profitability and growth depend on the success of our global RPO business, which is subject to a variety of business risks and uncertainties.

We are focused on our global RPO business. Any evaluation of our RPO business and our prospects must be considered in light of the risks and uncertainties stated above, as well as the following:

• the ability to maintain our relationships with our existing clients;
• the ability to attract new clients; and
• the ability to maintain or generate the amount of cash required to operate the RPO business.

If we are unable to address these risks, our business, results of operations, and prospects could suffer.

Our revenues fluctuate from quarter to quarter; no single quarter is predictive of future periods’ results.

Our revenues fluctuate quarter to quarter primarily due to the vacation periods during the first quarter in the Asia Pacific region and the third quarter in the Americas and Europe regions. Demand for our services is typically lower during traditional vacation periods when clients and candidates are on vacation.

Our business is highly dependent upon our largest customers, and the loss of any of those customers, or any material reduction in our business with those customers, could materially and adversely affect our financial condition and results of operations.

For the years ended December 31, 2022 and 2021, the Company’s top 25 clients generated over 75% and 85% of the Company’s revenue, respectively. Two clients accounted for an aggregate 50% of revenue in 2022, and three clients accounted for an aggregate 65% of revenue in 2021. As of December 31, 2022, one client accounted for 20% or greater of accounts receivable. As of December 31, 2021, two clients accounted for 10% or greater of accounts receivable. The loss of these customers or any material reduction in the amount of business we conduct with these customers, or any material adverse change in the financial condition of such customers, could materially and adversely affect our financial condition and results of operations. If we are unable to replace such revenue from existing or new customers, it could have a material adverse effect on our business, financial condition, and results of operations, and the market price of our common stock could decline significantly.

Our revenue can vary because our clients can terminate their relationship with us at any time with limited or no penalty.

Our RPO business is significantly affected by our clients’ hiring needs and their views of their future prospects. Clients may, on very short notice, terminate, reduce, or postpone their recruiting assignments with us and, therefore, affect demand for our services. This could have a material adverse effect on our business, financial condition, and results of operations.

Our markets are highly competitive.

The markets for our services are highly competitive. Our markets are characterized by pressures to provide high levels of service, incorporate new capabilities and technologies, accelerate job completion schedules, and reduce prices. Furthermore, we face competition from a number of sources. These sources include other executive search firms and professional search, staffing, and consulting firms. Several of our competitors have greater financial and marketing resources than we do. Due to competition, we may experience reduced margins on our services, loss of market share and loss of customers. If we are not able to compete effectively with current or future competitors as a result of these and other factors, our business, financial condition, and results of operations could be materially adversely affected.

We have no significant proprietary technology that would preclude or inhibit competitors from entering the recruitment outsourcing market. We cannot provide assurance that existing or future competitors will not develop or offer services that provide significant performance, price, creative, or other advantages over our services. In addition, we believe that, with continuing development of information technology, the industries in which we compete may attract new competitors. Specifically, the increased use of web-based and mobile technology may attract technology-oriented companies to the recruitment industry. We cannot provide assurance that we will be able to continue to compete effectively against existing or future competitors. Any of these events could have a material adverse effect on our business, financial condition, and results of operations.

We have had periods of negative cash flows and operating losses that may recur in the future.

We have experienced negative cash flows and reported operating and net losses in previous years. We cannot provide any assurance that we will have positive cash flows or operating profitability in the future, particularly to the extent the global economy recovers slowly or slows down, or inflation increases. If our revenue declines or if operating expenses exceed our expectations, we may not be profitable and may not generate positive operating cash flows.

Our credit facilities may restrict our operating flexibility in the future.

The Company’s Australian subsidiary (“Australian Borrower”) entered into an invoice finance credit facility agreement (the “NAB Facility Agreement”) with National Australia Bank Limited (“NAB”). The ability to borrow under the NAB Facility Agreement is limited to a percentage of eligible trade receivables up to a maximum of 4 million Australian dollars. Borrowings under this facility are secured by substantially all of the assets of the Australian Borrower. As of December 31, 2022, there were no amounts outstanding under the NAB Facility Agreement.

We may enter into additional credit facilities in the future that contain various restrictions and covenants that restrict our operating flexibility including:

• borrowings limited to eligible receivables;
• lenders’ ability to impose restrictions, such as payroll or other reserves;
• limitations on payments of dividends by our subsidiaries to us, which may restrict our ability to pay dividends to our stockholders;
• restrictions on our ability to make additional borrowings, or to consolidate, merge, or otherwise fundamentally change our ownership;
• limitations on capital expenditures, investments, dispositions of assets, guarantees of indebtedness, permitted acquisitions, and repurchases of stock; and
• limitations on certain intercompany payments of expenses, interest, and dividends.

These restrictions and covenants could have adverse consequences for investors, including restrictions on our ability to incur additional debt financing for future working capital or capital expenditures, a lesser ability for us to take advantage of significant business opportunities, such as acquisition opportunities, the potential need for us to undertake equity transactions, which may dilute the ownership of existing investors, and our inability to react to market conditions by selling lesser-performing assets. In addition, our payment of principal and interest on any future indebtedness would reduce our cash available for operations.

In addition, a default, amendment, or waiver to our NAB Facility Agreement or a future agreement to avoid a default may result in higher rates of interest and could impact our ability to obtain additional borrowings. Finally, debt incurred under the NAB Facility Agreement bears interest at the variable receivable finance indicator rate, plus a margin of 1.60% per annum. Any increase in interest expense could reduce the funds available for operations.

Our investment strategy subjects us to risks.

From time to time, we make investments as part of our growth plans. Investments may not perform as expected because they are dependent on a variety of factors, including our ability to effectively integrate new personnel and operations, our ability to sell new services, and our ability to retain existing or gain new clients.

We face risks related to our international operations.

We conduct direct operations in fourteen countries and face both translation and transaction risks related to foreign currency exchange. For the year ended December 31, 2022, approximately 76% of our revenue was earned outside of the U.S. Our financial results could be materially affected by a number of factors particular to international operations. These include, but are not limited to, difficulties in staffing and managing international operations, operational issues such as longer customer payment cycles and greater difficulties in collecting accounts receivable, changes in tax laws or other regulatory requirements, issues relating to uncertainties of laws and enforcement relating to the regulation and protection of intellectual property, and currency fluctuation. If we are forced to discontinue any of our international operations, we could incur material costs to close down such operations.

Regarding the foreign currency risk inherent in international operations, the results of our local operations are reported in the applicable foreign currencies and then translated into U.S. dollars at the applicable foreign currency exchange rates for inclusion in our financial statements. In addition, we generally pay operating expenses in the corresponding local currency. Because of devaluations and fluctuations in currency exchange rates or the imposition of limitations on conversion of foreign currencies into U.S. dollars, we are subject to currency translation exposure on the revenue and income of our operations in addition to economic exposure. Our consolidated U.S. dollar cash balance could be lower because a significant amount of cash is generated outside of the U.S. This risk could have a material adverse effect on our business, financial condition, and results of operations.

Additionally, our international operations may also be adversely affected by political events, domestic or international terrorist events, hostilities or complications due to natural, nuclear, war or other disasters, including the ongoing Russian invasion of Ukraine and the remnants of the zero-COVID policy in China. The ongoing COVID-19 pandemic also has resulted in increased travel restrictions and the extended shutdown of certain businesses in the countries in which we operate. These or any further political or governmental developments or health concerns in the U.S. and foreign countries in which we operate could result in social, economic, and labor instability, as well as affect demand for our services. These uncertainties could have a material adverse effect on the continuity of our business and our results of operations and financial condition.

We depend on our key management personnel.

Our success depends to a significant extent on our senior management team. The loss of the services of one or more key senior management team members could have a material adverse effect on our business, financial condition, and results of operations. In addition, if one or more key employees join a competitor or form a competing company, the resulting loss of existing or potential clients could have a material adverse effect on our business, financial condition, and results of operations. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to a COVID-19 pandemic in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

Failure to attract and retain qualified personnel, management and advisors could negatively impact our business, financial condition, and results of operations.

Our ability to implement our business objectives and serve our customers depends upon our ability to attract and retain highly skilled professionals, management and advisors who possess the skills and experience necessary to operate our business, as well as personnel who meet the staffing requirements of our clients. In addition, our ability to execute our strategy requires that we retain and recruit personnel, management and advisors with experience in our RPO business.

We must continually evaluate and upgrade our base of available qualified personnel to keep pace with changing client needs and emerging technologies. Competition for qualified professionals with proven skills is intense amidst the widespread U.S. labor shortage, and the demand for these individuals is expected to remain strong for the foreseeable future. There can be no assurance that qualified personnel will continue to be available to us in sufficient numbers with the current market conditions. As such, we may be required to adjust our budget to account for pressures to increase wages in order to compete for skilled personnel. If we are unable to attract the necessary qualified personnel for our clients and our business, it may have a negative impact on our business, financial condition, and results of operations.

We face risks in collecting our accounts receivable.

In virtually all of our businesses, we invoice customers after providing services, which creates accounts receivable. Delays or defaults in payments owed to us could have a significant adverse impact on our business, financial condition, and results of operations. Factors that could cause a delay or default include, but are not limited to, global economic conditions, business failures, and turmoil in the financial and credit markets.

In certain situations, we provide our services to clients under a contractual relationship with a third-party vendor manager, rather than directly to the client. In those circumstances, the third-party vendor manager is typically responsible for aggregating billing information, collecting receivables from the client, and paying staffing suppliers once funds are received from the client. In the event that the client has paid the vendor manager for our services and we are unable to collect from the vendor manager, we may be exposed to financial losses.

If we are unable to maintain costs at an acceptable level, our operations could be adversely impacted.

Our ability to reduce costs in line with our revenues is important for the improvement of our profitability. Efforts to improve our efficiency could be affected by several factors including turnover, client demands, market conditions, continued increases in inflation, changes in laws, and availability of talent. If we fail to realize the expected benefits of these cost reduction initiatives, this could have an adverse effect on our financial condition and results of operations.

We rely on our information systems, and if we lose our information processing capabilities or fail to further develop our technology, our business could be adversely affected.

Our success depends in large part upon our ability to store, retrieve, process, and manage substantial amounts of information, including our client and candidate databases. To achieve our strategic objectives and to remain competitive, we must continue to develop and enhance our information systems. This may require the acquisition of equipment and software and the development, either internally or through independent consultants, of new proprietary software. If we are unable to design, develop, implement, and utilize, in a cost-effective manner, information systems that provide the capabilities necessary for us to compete effectively, or if we experience any interruption or loss of our information processing capabilities, for any reason, this could adversely affect our business, financial condition, and results of operations.

Because we operate in an international environment, we are subject to greater cyber-security risks and incidents due to our broader and more distributed network footprint. Some of these threats may include attacks from foreign governments. While we continue to employ resources to monitor our systems and protect our infrastructure, any unauthorized access or use of information, virus or similar breach or disruption to our systems could result in disrupted operations, loss of information, damage to our reputation and customer relationships, and other significant liabilities, any of which could materially harm our business.

We also use mobile devices, social networking, and other online activities to connect with our candidates, clients, and business partners. While we have implemented measures to prevent security breaches and cyber incidents, our measures may not be effective, and any security breaches or cyber incidents could adversely affect our business, financial condition, and results of operations.

Our business depends on uninterrupted service to clients.

Our operations depend on our ability to protect our facilities, computer and telecommunication equipment, and software systems against damage or interruption from fire, power loss, cyber-attacks, sabotage, telecommunications interruption, weather conditions, natural disasters, and other similar events. Additionally, severe weather can cause our employees or contractors to miss work and interrupt delivery of our service, potentially resulting in a loss of revenue. While interruptions of these types that have occurred in the past have not caused material disruption, it is not possible to predict the type, severity, or frequency of interruptions in the future or their impact on our business.

We may be exposed to employment-related claims, legal liability, and costs from clients, employees, and regulatory authorities that could adversely affect our business, financial condition, or results of operations, and our insurance coverage may not cover all of our potential liability.

We are in the business of employing people and placing them in the workplaces of other businesses. Risks relating to these activities include:

• claims of misconduct or negligence on the part of our employees;
• claims by our employees of discrimination or harassment directed at them, including claims relating to actions of our clients;
• claims related to the employment of illegal aliens or unlicensed personnel;
• claims for payment of workers’ compensation and other similar claims;
• claims for violations of wage and hour requirements;
• claims for entitlement to employee benefits;
• claims of errors and omissions of our temporary employees;
• claims by taxing authorities related to our independent contractors and the risk that such contractors could be considered employees for tax purposes;
• claims by candidates that we place for wrongful termination or denial of employment;
• claims related to our non-compliance with data protection laws, which require the consent of a candidate to transfer resumes and other data;
• claims related to the recruitment process; and
• claims by our clients relating to our employees’ misuse of client proprietary information, misappropriation of funds, other misconduct, criminal activity or similar claims.

We may incur fines and other losses or negative publicity with respect to these problems. In addition, some or all of these claims may give rise to litigation, which could be time-consuming to our management team, costly, and could have a negative effect on our business. In some cases, we have agreed to indemnify our clients against some or all of these types of liabilities. We cannot assure that we will not experience these problems in the future, that our insurance will cover all claims, or that our insurance coverage will continue to be available at economically feasible rates.

Our ability to utilize net operating loss carryforwards may be limited.

The Company has U.S. net operating loss carryforwards (“NOLs”). The losses generated prior to 2018 expire through 2037 and the losses generated in 2018 and later years do not expire. Section 382 of the U.S. Internal Revenue Code imposes an annual limitation on a corporation’s ability to utilize NOLs if it experiences an “ownership change.” In general terms, an ownership change may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by greater than 50% over a three-year period. The Company has experienced ownership changes in the past. Ownership changes in our stock, some of which are outside of our control, could result in a limitation in our ability to use our NOLs to offset future taxable income, could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitation were not in effect, and could cause such NOLs to expire unused, reducing or eliminating the benefit of such NOLs.

There may be volatility in our stock price.

The market price for our common stock has fluctuated in the past and could fluctuate substantially in the future. For example, during 2022, the market price of our common stock reported on the NASDAQ Global Select Market ranged from a high of $44.00 to a low of $20.51. Factors such as general macroeconomic conditions adverse to workforce expansion, the announcement of variations in our quarterly financial results or changes in our expected financial results could cause the market price of our common stock to fluctuate significantly. Further, due to the volatility of the stock market, our relatively low daily trading volume or actions by significant stockholders, the price of our common stock could fluctuate for reasons unrelated to our operating performance.

Our future earnings could be reduced as a result of the imposition of licensing or tax requirements or new regulations that prohibit, or restrict certain types of employment services we offer in the U.S. and foreign countries.

Our future earnings could be reduced if additional regulatory requirements are imposed in the countries in which we operate. The countries in which we operate may:

• create additional regulations that prohibit or restrict the types of employment services that we currently provide;
• impose new or additional benefit requirements;
• require us to obtain additional licensing to provide recruitment services;
• impose new or additional restrictions on movements between countries;
• increase taxes, such as sales or value-added taxes, payable by the providers of recruitment services;
• increase the number of various tax and compliance audits relating to a variety of regulations, including wage and hour laws, unemployment taxes, workers’ compensation, immigration, and income, value-added, and sales taxes; or
• revise transfer pricing laws or successfully challenge our transfer prices, which may result in higher foreign taxes or tax liabilities or double taxation of our foreign operations.

Any future regulations that make it more difficult or expensive for us to continue to provide our services may have a material adverse effect on our business, financial condition and results of operations.

Provisions in our organizational documents and Delaware law will make it more difficult for someone to acquire control of us.

Our certificate of incorporation and by-laws and the Delaware General Corporation Law contain several provisions that make it more difficult to acquire control of us in a transaction not approved by our Board of Directors, including transactions in which stockholders might otherwise receive a premium for their shares over then current prices, and that may limit the ability of stockholders to approve transactions that they may deem to be in their best interests. Our certificate of incorporation and by-laws currently include provisions:

• authorizing our Board of Directors to issue shares of our preferred stock in one or more series without further authorization of our stockholders;
• requiring that stockholders provide advance notice of any stockholder nomination of directors or any new business to be considered at any meeting of stockholders; and
• providing that vacancies on our Board of Directors will be filled by the remaining directors then in office.

In addition, Section 203 of the Delaware General Corporation Law generally provides that a corporation may not engage in any business combination with any interested stockholder during the three-year period following the time that the stockholder becomes an interested stockholder, unless a majority of the directors then in office approve either the business combination or the transaction that results in the stockholder becoming an interested stockholder or specified stockholder approval requirements are met.

We have identified a material weakness in our internal control over financial reporting which could, if not remediated or if we identify additional material weaknesses or other adverse findings in the future, impair our ability to report accurate and timely financial information, adversely affect investor confidence, and have a material and adverse effect on our financial condition and results of operations.

Management identified an error related to the accounting treatment of a discretionary bonus paid by the Company on behalf of a customer. The effect of this error is an understatement of revenue and direct contracting costs and reimbursed expenses in the amount of $5.762 million for the three- and six-month periods ended June 30, 2022 and the nine-month period ended September 30, 2022. The Company intends to restate its unaudited condensed consolidated financial statements for the Non-Reliance Periods as soon as practicable by filing amendments to the Company’s Quarterly Reports on Form 10-Q for the fiscal quarters ended June 30, 2022 and September 30, 2022, to correct this error. The error had no impact on the Company’s consolidated balance sheet, consolidated statement of cash flows, net income, the presentation of the non-GAAP metric EBITDA, or any other accounts for such periods. As a result of the error, we identified a material weakness in the design and implementation of internal controls over the revenue recognition process, specifically the failure to properly evaluate whether the Company was to be considered the principal or the agent in a non-routine transaction involving a discretionary bonus paid by the Company on behalf of a customer. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Management is committed to maintaining a strong internal control environment and believes its remediation efforts will represent an improvement to the control environment. Management is developing new controls and anticipates that the new controls, as implemented and when tested for a sufficient period of time, will remediate the material weakness. If we are not successful in implementing these remediation measures or in developing other internal controls, it may impair our ability to report accurate and timely financial information. These remediation measures may be time consuming and costly and there is no assurance that the measures we take will remediate the material weakness identified or be sufficient to avoid potential future material weaknesses. Further, we will not be able to fully assess whether the steps we are taking will remediate the material weakness in our internal control over financial reporting until we have completed our implementation efforts and sufficient time passes in order to evaluate their effectiveness.

In addition, until we remediate the material weakness, or if we identify additional material weaknesses in our internal control over financial reporting, we may not detect errors on a timely basis and our financial statements may be materially misstated. In such case, we may be unable to maintain compliance with securities law requirements regarding timely filing of periodic reports in addition to applicable stock exchange listing requirements, investors may lose confidence in our financial reporting, and our stock price may decline as a result. For further discussion of the material weakness, see Item 9A. Controls and Procedures.

All of the Company’s operating offices are located in leased premises. Our principal executive office and headquarters are located at 53 Forest Avenue, Suite 102, Old Greenwich, CT 06870, where we occupy space with approximately 2,000 aggregate square feet.

The Company maintains offices in the Americas, Asia Pacific, and Europe. In the Americas, the Company maintains 2 leased locations with approximately 7,300 aggregate square feet; in Asia Pacific, the Company maintains 6 leased locations with approximately 30,800 aggregate square feet; and in Europe, the Company maintains 1 leased location with approximately 1,200 aggregate square feet. All leased space is considered to be adequate for the operation of our business, and no difficulties are foreseen in meeting any future space requirements.

The Company is involved in various legal proceedings that are incidental to the conduct of its business. The Company is not involved in any pending or threatened legal proceedings that it believes could reasonably be expected to have a material adverse effect on its financial condition or 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 Consolidated Financial Statements and the notes thereto, included in Item 8 of this Form 10-K. 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 15 to the Consolidated Financial Statements in Item 8 for EBITDA segment reconciliation information. Note that amounts within this Item shown in millions may not recalculate due to rounding.

This MD&A includes the following sections:

• Executive Overview
• Results of Operations
• Liquidity and Capital Resources
• Contingencies
• Critical Accounting Estimates
• Recent Accounting Pronouncements
• Forward-Looking Statements

Executive Overview

The Company’s objective is to increase value to the Company’s stockholders by providing global RPO solutions to customers. With direct operations in fourteen 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 highly successful 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 the Company and candidates more successful in achieving clients’ business requirements.

The Company’s proprietary frameworks, assessment tools, and leadership development programs, coupled with its broad geographic footprint, allow 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 meet the Company’s objective, the Company engages 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; and
• Improving the Company’s cost structure and efficiency of its support functions and infrastructure.

We continue to explore all strategic alternatives to maximize value for the Company’s stockholders, including without limitation, improving the market position and profitability of our services in the marketplace, and enhancing our valuation. We may pursue our goals through organic growth, strategic initiatives, or other alternatives. Additionally, we will continue to monitor capital markets for opportunities to repurchase shares, and consider other actions designed to enhance value to our stockholders, as well as review information regarding potential acquisitions and provide information to third parties regarding potential dispositions of assets or business lines, from time to time.

This MD&A discusses the results of the Company’s RPO business for the years ended December 31, 2022 and 2021.

Current Market Conditions

Our clients’ demands for RPO recruiting and contracting services largely depend on the market conditions and the strength of the labor markets in the countries where we operate. In the second half of 2022, the market conditions were more challenging than anticipated due to the higher inflation, higher interest rates and decreased demand for labor in certain markets. In addition, in connection with the challenging business environment, some of our customers have reduced demand, and certain other customers have eliminated our services on a temporary or permanent basis. We anticipate that the market conditions will continue to be challenging into 2023.

After a partial recovery in 2021, economic conditions in most of the world’s major markets slowed down in 2022. Higher than expected inflation in most markets, rising interest rates and the continuing impact of the Russian invasion of Ukraine, as well as new variants of the COVID-19 virus, have led to significant market disruption, including further wage inflation, increased operating costs, staffing challenges, reduced consumer confidence, and limited capital market accessibility that impact our business. These impacts and expected future inflation and interest rate increases could have material adverse impacts on various aspects of our business in the future.

The continued economic uncertainty has also resulted in volatility in global currencies. Stronger foreign currencies in other markets compared to the U.S. dollar during a reporting period cause local currency results of the Company’s foreign operations to be translated into more U.S. dollars.

COVID-19 Pandemic

The continuing impact of COVID-19 and its variants around the world continues to present significant risks to the Company. However, the Company is vigilantly monitoring the business environment surrounding COVID-19 and continues to proactively address this situation as it evolves. The Company believes it can continue to take appropriate actions to manage its business in this challenging environment due to the flexibility of its workforce and the strength of its balance sheet.

The COVID-19 pandemic affected the Company’s operations in prior years and may continue to do so in the future. The COVID-19 pandemic may impact the Company’s business, operations, and financial results and conditions, directly and indirectly, including without limitation, having impacts on the health of the Company’s management and employees, marketing and sales operations, customer and consumer behaviors, as well as the overall economy. The scope and nature of these impacts, most of which are beyond the Company’s control, continue to evolve with new variants of the COVID-19 virus and the future impact on the Company’s business is uncertain.

Constant Currency (Non-GAAP Financial Measure)

The Company operates on a global basis, with the majority of its revenue generated outside of the U.S. Accordingly, fluctuations in foreign currency exchange rates can affect our results of operations. For the discussion of reportable segment results of operations, the Company uses constant currency information. Constant currency compares financial results between periods as if exchange rates had remained constant period-over-period. The Company defines the term “constant currency” to mean that financial data for previously reported periods are translated into U.S. dollars using the same foreign currency exchange rates that were used to translate financial data for the current period. Constant currency metrics should not be considered in isolation or as a substitute for reported results prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. The Company’s management reviews and analyzes business results in constant currency because it believes these results better represent the Company’s underlying business trends.

Financial Performance

The following is a summary of the Company’s financial performance highlights for the years ended December 31, 2022 and 2021. This summary should be considered in the context of the additional disclosures in this MD&A which further highlight the Company’s results by segment.

• Revenue was $200.9 million for the year ended December 31, 2022, compared to $169.2 million for 2021, an increase of $31.7 million, or 19%. The increase in revenue was principally driven by growth in the Americas.
• On a constant currency basis, revenue increased $42.8 million, or 27%, primarily due to an increase in RPO recruitment revenue of $34.4 million, or 54%, and an increase in contracting revenue of $8.4 million, or 9%, compared to 2021. Revenue included an increase of $8.3 million from the acquisition of Karani

(“Karani Acquisition”). (see Note 4 to the Consolidated Financial Statements in Item 8), which contributed 5 percentage points to the revenue growth.

• Selling, general and administrative expenses, and other non-operating income (expense) (“SG&A and Non-Op”) was $88.5 million for the year ended December 31, 2022, compared to $63.2 million for 2021, an increase of $25.2 million, or 40%.
• On a constant currency basis, SG&A and Non-Op increased $28.0 million or 46%. SG&A and Non-Op, as a percentage of revenue, was 44% for the year ended December 31, 2022, compared to 38% for 2021. The increase was principally due to higher staff costs of $23.8 million, higher advertising and marketing expenses of $1.8 million and higher travel and entertainment costs of $0.9 million.
• EBITDA was $10.8 million for the year ended December 31, 2022, compared to EBITDA of $4.9 million for 2021. On a constant currency basis, EBITDA increased $6.4 million in 2022 compared to 2021. The Karani Acquisition positively contributed EBITDA of $2.0 million.
• Net income was $7.1 million for the year ended December 31, 2022, compared to a net income of $3.2 million for 2021. On a constant currency basis, net income increased $4.3 million in 2022.

Changes in revenue, adjusted net revenue, SG&A and Non-Op, operating income (loss), net income (loss) and EBITDA (loss) include the effect of changes in foreign currency exchange rates. The tables below include a reconciliation of constant currency results to the most directly comparable U.S. GAAP financial measures, and summarize the impact of foreign currency exchange rate adjustments on the Company’s operating results for the years ended December 31, 2022 and 2021.

$ in thousands

- 16 -

(a) Represents Revenue less the Direct contracting costs and reimbursed expenses caption on the Consolidated Statements of Operations.

(b) SG&A and Non-Op is a measure that management uses to evaluate the segments’ expenses, which include the following captions on the Consolidated Statements of Operations: Salaries and related, Office and general, Marketing and promotion, and Other income (expense), net. Corporate management expenses are included in the segments’ other income (expense).

(c) See EBITDA reconciliation in the following section.

Use of EBITDA (Non-GAAP Financial Measure)

Management believes EBITDA is a meaningful indicator of the Company’s performance that provides useful information to investors regarding the Company’s financial condition and results of operations. EBITDA is considered by management as an indicator of operating performance and the most comparable measure across the regions in which we operate. Management uses this measurement to evaluate capital needs and working capital requirements. Similar to constant currency, EBITDA should not be considered in isolation or as a substitute for operating income or net income prepared in accordance with U.S. GAAP or as a measure of the Company’s profitability. EBITDA is derived from net income (loss) adjusted for the provision for (benefit from) income taxes, interest expense (income), and depreciation and amortization.

The reconciliation of EBITDA to the most directly comparable U.S. GAAP financial measure is provided in the table below:

$ in thousands

- 17 -

Results of Operations:

Americas (reported currency)

Revenue - Americas

$ in millions

For the year ended December 31, 2022, RPO recruitment revenue increased by $22.4 million, or 83%, while contracting revenue increased by $0.5 million, or 26%. The Karani Acquisition contributed 29 percentage points to the revenue growth (see Note 4 to the Consolidated Financial Statements in Item 8).

Adjusted net revenue - Americas

$ in millions

For the year ended December 31, 2022, RPO recruitment adjusted net revenue increased $21.8 million, or 82%, while contracting adjusted net revenue increased $0.1 million, or 18%, compared to 2021. The Karani Acquisition contributed 31 percentage points to the adjusted net revenue growth (see Note 4 to the Consolidated Financial Statements in Item 8).

Total adjusted net revenue, as a percentage of revenue, increased to 95% for 2022, compared to 94% for 2021, primarily attributable to the higher mix of RPO recruitment to contracting revenue in 2022 compared to 2021.

SG&A and Non-Op - Americas

$ in millions

For the year ended December 31, 2022, SG&A and Non-Op increased $19.1 million, or 76%, compared to 2021, while SG&A and Non-Op as a percentage of revenue decreased from 88% to 86%. The decrease in SG&A and Non-Op as a percentage of revenue was primarily due to year-to-date gains in adjusted net revenue outpacing higher consultant staff costs driven by the Company’s investments in the sales team and industry marketing activities.

Operating Income and EBITDA - Americas

$ in millions

Operating income growth of $2.6 million was primarily due to the stronger adjusted net revenue results and lower SG&A and Non-Op as a percentage of revenue, partially offset by amortization expense of $0.5 million associated with the acquisitions of Coit Staffing and Karani.

For the year ended December 31, 2022, EBITDA was $4.9 million, or 9% of revenue, compared to EBITDA $1.8 million, or 6% of revenue, in 2021. The increase in EBITDA was due to the same factors noted above.

The difference between operating income and EBITDA for the year ended December 31, 2021, was primarily due to corporate management expenses.

Asia Pacific (constant currency)

Revenue - Asia Pacific

$ in millions

For the year ended December 31, 2022, RPO recruitment revenue increased by $6.8 million, or 27%, and contracting revenue increased by $1.5 million, or 2%, compared to 2021.

In Australia, for the year ended December 31, 2022, revenue increased $5.8 million, or 6%, compared to 2021. The increase was primarily in RPO recruitment revenue, which increased by $6.4 million, or 34%, partially offset by contracting revenue, which decreased by $0.6 million, or 1%. The increases in RPO recruitment revenue were primarily due to higher demand from existing clients, as well as the implementation of new client contracts, while the decrease in contracting revenue was due to lower volume from existing clients.

In Asia, revenue increased $1.2 million, or 14%, for the year ended December 31, 2022, compared to 2021, as the result of new client wins and higher demand from existing clients.

Adjusted net revenue - Asia Pacific

$ in millions

For the year ended December 31, 2022, RPO recruitment adjusted net revenue increased by $6.9 million, or 29%, while contracting adjusted net revenue increased by $0.7 million, or 23%, compared to the same period in 2021.

In Australia, adjusted net revenue increased by $7.1 million, or 34%, for the year ended December 31, 2022, compared to the same period in 2021. The increase was primarily reflected in RPO recruitment adjusted net revenue, which grew $6.6 million, or 37%, while contracting adjusted net revenue increased by $0.5 million, or 19%. The increases in RPO recruitment revenue were primarily due to higher demand from existing clients.

In Asia, adjusted net revenue increased $0.5 million, or 9%, for the year ended December 31, 2022, compared to 2021. The increase in Asia was primarily driven by new client wins and higher demand from existing clients in China.

Adjusted net revenue as a percentage of revenue, for the year ended December 31, 2022, was 29%, compared to 24% for 2021. The increase in total adjusted net revenue as a percentage of revenue was attributed to the greater mix of higher margin RPO recruitment revenue to contracting revenue in 2022 (as contracting is generally a lower margin service offering), compared to 2021.

SG&A and Non-Op - Asia Pacific

$ in millions

For the year ended December 31, 2022, SG&A and Non-Op increased $5.1 million, or 24%, compared to 2021. The increase was primarily due to higher consultant staff costs. SG&A and Non-Op, as a percentage of revenue, was 23% in 2022, compared to 20% in 2021. The increase was principally due to the lower mix of contracting revenue, where the majority of costs are reflected in adjusted net revenue.

Operating Income and EBITDA - Asia Pacific

$ in millions

Operating income was $8.4 million for the year ended December 31, 2022, compared to $6.3 million for 2021. The increase in operating income was principally due to the change in adjusted net revenue, as described above.

For the year ended December 31, 2022, EBITDA was $7.3 million, or 6% of revenue, compared to EBITDA of $5.1 million, or 5% of revenue, in 2021. The increase in EBITDA for the year ended December 31, 2022 was principally due to the factors noted above.

The difference between operating income and EBITDA for the years ended December 31, 2022 and 2021 was principally due to corporate management expenses.

Europe (constant currency)

Revenue - Europe

$ in millions

For the year ended December 31, 2022, RPO recruitment revenue increased by $5.2 million, or 45%, while contracting increased by $6.4 million, or 81%, compared to 2021.

In the U.K., for the year ended December 31, 2022, revenue increased by $11.8 million, or 67%, to $29.4 million from $17.6 million in 2021. The change was driven by higher RPO recruitment revenue of $5.4 million, and higher contracting revenue of $6.4 million.

In Continental Europe, for the year ended December 31, 2022, total revenue was $1.7 million, compared to $1.9 million for 2021, a decrease of $0.2 million, or 12%. The decrease was due to lower demand from existing recruitment clients.

Adjusted net revenue - Europe

$ in millions

For the year ended December 31, 2022, adjusted net revenue increased by $4.7 million, or 42%, driven by an increase in RPO recruitment revenue of $4.7 million, or 43%, compared to the same period in 2021.

In the U.K., total adjusted net revenue for the year ended December 31, 2022, increased $4.9 million, or 51%, compared to the same period in 2021. The change in the U.K. was primarily driven by an increase in RPO recruitment adjusted net revenue of $4.8 million, or 53%.

In Continental Europe, for the year ended December 31, 2022, total adjusted net revenue decreased by $0.1 million, or 7%, compared to the same period in 2021.

SG&A and Non-Op - Europe

$ in millions

For the year ended December 31, 2022, SG&A and Non-Op increased $4.1 million, or 40%, compared to 2021. The increase in SG&A and Non-Op was due to higher staff consultant costs, advertising and marketing expenses, travel and entertainment costs, and training and conferences in the current year. SG&A and Non-Op, as a percentage of revenue, was 46% in 2022 compared to 53% in 2021. The increase in SG&A and Non-Op, as a percentage of revenue, was primarily due to the higher consultant staff costs.

Operating Income and EBITDA - Europe

$ in millions

Operating income was $1.7 million for the year ended December 31, 2022, compared to $1.2 million for 2021. The increase was principally due to the adjusted net revenue gains partially offset by higher SG&A and Non-Op, as described above.

For the year ended December 31, 2022, EBITDA was $1.5 million, or 5% of revenue, compared to EBITDA of $0.9 million for 2021. The increase in EBITDA for the year ended December 31, 2022 was principally due to factors noted above.

The difference between operating income and EBITDA for the years ended December 31, 2022 and 2021 was principally due to foreign currency exchange and corporate management expenses.

The following are discussed in reported currency

Corporate expenses, net of corporate management expenses

For the year ended December 31, 2022, corporate expenses were $2.9 million compared to $3.3 million for 2021, a decrease of $0.4 million, or 13%. The decrease was primarily due to lower professional fees and stock compensation expense, partially offset by higher corporate allocations.

Depreciation and Amortization Expense

Depreciation and amortization expense was $1.4 million and $0.6 million for the years ended December 31, 2022 and 2021, respectively. The increase was driven by the amortization expense associated with the acquisitions of Coit Staffing and Karani (see Note 4 to the Consolidated Financial Statements in Item 8) of $0.3 million and $0.8 million, respectively.

Interest Income, Net

Net interest income was $0.1 million and $0.0 million for the years ended December 31, 2022 and 2021, respectively.

Other income (expense), Net

Net other income was $0.0 million for the year ended December 31, 2022, as opposed to net other expense of $0.1 million for the same period in 2021.

Provision for (benefit from) Income Taxes

The provision for income taxes for the year ended December 31, 2022 was $2.3 million, on $9.5 million of pre-tax income, compared to a provision from income taxes of $1.1 million on $4.3 million of pre-tax income for 2021. The effective tax rate for the year ended December 31, 2022 was 24.6%, compared to 25.7% for 2021. The change in the Company’s effective tax rate compared to 2021 is primarily related to the reduction and effective lapsing of statutes for certain historic foreign uncertain tax positions and the mix of income and losses in different jurisdictions taxed at different rates, as well as changes in valuation allowances in the U.S. and in our foreign subsidiaries. For the year ended December 31, 2022, the effective tax rate difference from the U.S. federal statutory rate of 21% was primarily attributable to the mix of income and losses in different jurisdictions taxed at different rates, as well as changes in valuations allowances in the U.S. and in our foreign subsidiaries.

Net Income

Net income was $7.1 million for the year ended December 31, 2022, compared to net income of $3.2 million for 2021, an increase in net income of $3.9 million. Basic and diluted earnings per share were $2.37 and $2.27, respectively for the year ended December 31, 2022, compared to basic and diluted income per share of $1.11 and $1.07 in 2021.

Liquidity and Capital Resources

As of December 31, 2022, cash and cash equivalents and restricted cash totaled $27.5 million, as compared to $22.1 million as of December 31, 2021. The following table summarizes the cash flow activities for the years ended December 31, 2022 and 2021:

$ in millions

*Does not sum due to rounding

Cash Flows from Operating Activities

For the year ended December 31, 2022, net cash provided by operating activities was $9.5 million, as compared to $2.5 million of net cash provided by operating activities for the same period in 2021, resulting in an increase in net cash provided by operating activities of $7.0 million. The increase resulted principally from the Company’s higher net income in 2022, partially offset by less favorable working capital comparisons to the prior year.

Cash Flows from Investing Activities

For the year ended December 31, 2022, net cash used in investing activities was $1.3 million, as compared to $6.3 million in 2021. Net cash used in investing activities in 2022 primarily reflects the cash paid of $0.8 million on August 2022 for the acquisition of HnB, while net cash used in investing activities in 2021 reflects the cash paid of $6.0 million on October 29, 2021 for the acquisition of Karani (see Note 4 to Consolidated Financial Statements in Item 8 for additional information.)

Cash Flows from Financing Activities

For the year ended December 31, 2022, net cash used in financing activities was $2.0 million. The increase in net cash used in financing activities was attributable to the common stock repurchased, for an aggregate of $1.1 million in 2022, payment on a note of $0.6 million associated with the Karani Acquisition, and payments of $0.3 million in taxes in connection with the net issuance of common stock upon the vesting of restricted stock units.

Invoice Finance Credit Facility

On April 8, 2019, the Company’s Australian subsidiary (“Australian Borrower”) entered into an invoice finance credit facility agreement (the “NAB Facility Agreement”) with National Australia Bank Limited (“NAB”). The NAB Facility Agreement provides the Australian Borrower with the ability to borrow funds based on a percentage of eligible trade receivables up to a maximum of 4 million Australian dollars. No receivables have terms greater than 90 days, and any risk of loss is retained by the Australian Borrower. The interest rate is calculated as the variable receivable finance indicator rate, plus a margin of 1.60% per annum. Borrowings under this facility are secured by substantially all of the assets of the Australian Borrower. The NAB Facility Agreement does not have a stated maturity date and can be terminated by either the Australian Borrower or NAB upon 90 days written notice. As of December 31, 2022, there were no amounts outstanding under the NAB Facility Agreement. Interest expense and fees incurred on the NAB Facility Agreement were $18 thousand and $20 thousand for the years ended December 31, 2022 and 2021, respectively. The Company was in compliance with all financial covenants under the NAB Facility Agreement as of December 31, 2022.

Liquidity and Capital Resources Outlook

As of December 31, 2022, the Company had cash and cash equivalents on hand of $27.1 million. The Company also has the capability to borrow an additional 4 million Australian dollars under the NAB Facility Agreement. In addition, the Company has a promissory note outstanding of $1.3 million, in connection with the Karani Acquisition. The Company has no financial guarantees, outstanding debt or other lease agreements or arrangements that could trigger a requirement for an early payment or that could change the value of our assets. The Company believes that it has sufficient liquidity to satisfy its needs through at least the next 12 months, based on the Company’s financial position as of December 31, 2022. The Company’s near-term cash requirements during 2023 are primarily related to the funding of the Company’s operations. For the full year 2023, the Company expects to make capital expenditures of less than $1 million, which includes the Company’s lease obligations. The Company is closely managing its capital spending and will perform capital additions where economically prudent, while continuing to invest strategically for future growth.

As of December 31, 2022, $14.4 million of the Company’s cash and cash equivalents noted above was held in the U.S. and the remainder was held internationally, primarily in Australia ($6.3 million), Hong Kong ($1.1 million), China ($1.0 million), India ($1.0 million), the U.K. ($0.9 million), Belgium ($0.6 million), Singapore ($0.4 million), Switzerland ($0.4 million), and the Philippines ($0.3 million). The majority of the Company’s offshore cash is available to it as a source of funds, net of any tax obligations or assessments.

The Company believes that future external market conditions remain uncertain, particularly access to credit, rates of near-term projected economic growth, and levels of unemployment in the markets in which the Company operates. Due to these uncertain external market conditions, the Company cannot provide assurance that its actual cash requirements will not be greater in the future than those currently expected, especially if market conditions deteriorate substantially and interest rates and inflation continue to increase. If sources of liquidity are not available or if the Company cannot generate sufficient cash flow from operations, the Company could be required to obtain additional sources of funds through additional operating improvements, capital market transactions, asset sales or financing from third parties, or a combination of these sources. The Company cannot provide assurance that these additional sources of funds will be available or, if available, would have reasonable terms.

Off-Balance Sheet Arrangements

Contingencies

From time to time in the ordinary course of business, the Company is subject to compliance audits by U.S. federal, state, local, and foreign government regulatory, tax, and other authorities relating to a variety of regulations, including wage and hour laws, unemployment taxes, workers’ compensation, immigration, and income, value-added, and sales taxes. The Company is also subject to, from time to time in the ordinary course of business, various claims, lawsuits, 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. Periodic events and management actions such as business reorganization initiatives can change the number and types of audits, claims, lawsuits, contract disputes, or complaints asserted against the Company. Such events can also change the likelihood of assertion and the behavior of third parties to reach resolution regarding such matters.

The economic conditions in the recent past have given rise to many news reports and bulletins from clients, tax authorities and other parties about changes in their procedures for audits, payment, plans to challenge existing contracts and other such matters aimed at being more aggressive in the resolution of such matters in their own favor. The Company believes that it has appropriate procedures in place for identifying and communicating any matters of this type, whether asserted or likely to be asserted, and it evaluates its liabilities in light of the prevailing circumstances. Changes in the behavior of third parties could cause the Company to change its view of the likelihood of a claim and what might constitute a trend. Employment laws vary in the markets in which we operate, and in some cases, employees and former employees have extended periods during which they may bring claims against the Company.

For matters that reach the threshold of probable and estimable, the Company establishes reserves for legal, regulatory, and other contingent liabilities. The Company did not have any reserves as of December 31, 2022 and 2021, respectively. Although the outcome of these matters cannot be determined, the Company believes that none of the currently pending matters, individually or in the aggregate, will have a material adverse effect on the Company’s financial condition, results of operations, or liquidity.

Critical Accounting Estimates

Our discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities. U.S. GAAP provides the framework from which to make these estimates, assumptions and disclosures. We choose accounting policies within U.S. GAAP that our management believes are appropriate to accurately and fairly report our operating results and financial position in a consistent manner. Our management regularly assesses these policies in light of current and forecasted economic conditions. Our accounting policies are stated in Note 2 to the Consolidated Financial Statements in Item 8. We believe the following accounting policies are critical to understanding our results of operations and affect the more significant judgments and estimates used in the preparation of our Consolidated Financial Statements that are inherently uncertain.

Revenue Recognition

The Company recognizes 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 contain both fixed fee and variable usage-based consideration. Variable usage-based consideration is constrained by candidates accepting offers of permanent employment. We recognize 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.

The Company recognizes revenue for our 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 contracting contracts. The costs incurred to fulfill these contracts are expensed as incurred.

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.

Income Taxes

We account for income taxes using the asset and liability method in accordance with Accounting Standards Codification (“ASC”) 740, “Income Taxes.” This standard establishes financial accounting and reporting standards for the effects of income taxes that result from an enterprise’s activities. It requires an asset and liability approach for financial accounting and reporting of income taxes.

The calculation of net deferred tax assets assumes sufficient future earnings for the realization of such assets as well as the continued application of currently anticipated tax rates. Included in net deferred tax assets is a valuation allowance for deferred tax assets where management believes it is more likely than not that the deferred tax assets will not be realized in the relevant jurisdiction. If we determine that a deferred tax asset will not be realizable, an adjustment to the deferred tax asset will result in a reduction of earnings at that time. Our assessment includes an analysis of whether deferred tax assets will be realized in the ordinary course of operations based on the available positive and negative evidence, including the scheduling of deferred tax liabilities and forecasted income from operations. The underlying assumptions we use in forecasting future taxable income require significant judgment. In the event that actual income from operations differs from forecasted amounts, or if we change our estimates of forecasted income from operations, we could record additional charges or reduce allowances in order to adjust the carrying value of deferred tax assets to their realizable amount. Such adjustments could be material to our Consolidated Financial Statements. See Note 6 to the Consolidated Financial Statements in Item 8 for further information regarding deferred tax assets and valuation allowances.

ASC 740-10-55-3, “Recognition and Measurement of Tax Positions - a Two Step Process,” provides implementation guidance related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a two-step evaluation process for a tax position taken or expected to be taken in a tax return. The first step is recognition and the second is measurement. ASC 740 also provides guidance on derecognition, measurement, classification, disclosures, transition and accounting for interim periods. In addition, ASC 740-10-25-9 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. As of December 31, 2022, the Company’s gross liability for income taxes associated with uncertain tax positions was $0.4 million.

The Company’s unrecognized tax benefits, if recognized in the future, would affect the Company’s annual effective income tax rate. See Note 6 to the Consolidated Financial Statements in Item 8 for further information regarding unrecognized tax benefits. We elected to continue our historical practice of classifying applicable interest and penalties as a component of the provision for income taxes.

We provide tax reserves for federal, state, local and international exposures relating to periods subject to audit. The development of reserves for these exposures requires judgments about tax issues, potential outcomes and timing, and is a subjective critical estimate. We assess our tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting dates. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with greater than 50% likelihood of being realized upon settlement with a tax authority that has full knowledge of all relevant information. For those tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the Consolidated Financial Statements. Where applicable, associated interest and penalties have also been recognized. Although the outcome relating to these exposures are uncertain, we believe that our reserves reflect the probable outcome of known tax contingencies. In certain circumstances, the ultimate outcome of exposures and risks involves significant uncertainties which render them inestimable. If actual outcomes differ materially from these estimates, including those that cannot be quantified, they could have a material impact on our results of operations.

The Company has provided tax on all unremitted earnings of our foreign subsidiaries taking into consideration all expected future events based on presently existing tax laws and rates.

The Company has elected to recognize the tax on Global Intangible Low Taxed Income (“GILTI”) as a period expense in the year the tax is incurred.

Business Combinations and Asset Acquisitions

Business Combinations are accounted for under the acquisition method in accordance with ASC 805, “Business Combinations.” The acquisition method requires identifiable assets acquired and liabilities assumed and any non-controlling interest in the business acquired to be recognized and measured at fair value on the acquisition date, which is the date that the acquirer obtains control of the acquired business. The amount by which the fair value of consideration transferred as the purchase price exceeds the net fair value of assets acquired and liabilities assumed is recorded as goodwill. Acquisitions that do not meet the definition of a business under the ASC are accounted for as asset acquisitions. Asset acquisitions are accounted for by allocating the cost of the acquisition to the individual assets acquired and liabilities assumed on a relative fair value basis. Goodwill is not recognized in an asset acquisition with any consideration in excess of net assets acquired allocated to acquired assets on a relative fair value basis. Transaction costs are expensed in a business combination and are considered a component of the cost of the acquisition in an asset acquisition.

Recent Accounting Pronouncements

See Note 2 to our Consolidated Financial Statements in Item 8 regarding the impact or potential impact of recent accounting pronouncements upon our financial position and results of operations.

Forward-Looking Statements

This Form 10-K contains statements that the Company believes to be “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this Form 10-K, including statements regarding the Company’s future financial condition, results of operations, business operations and business prospects, are forward-looking statements. Words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “predict,” “believe,” and similar words, expressions, and variations of these words and expressions are intended to identify forward-looking statements. All forward-looking statements are subject to important factors, risks, uncertainties, and assumptions, including industry and economic conditions that could cause actual results to differ materially from those described in the forward-looking statements. Such factors, risks, uncertainties, and assumptions include, but are not limited to, (1) global economic fluctuations, (2) rising inflationary pressures and interest rates, (3) the adverse impacts of the coronavirus, or COVID-19 pandemic, (4) the Company’s ability to successfully achieve its strategic initiatives, (5) risks related to potential acquisitions or dispositions of businesses by the Company, (6) the Company’s ability to operate successfully as a company focused on its RPO business, (7) risks related to fluctuations in the Company’s operating results from quarter to quarter, (8) the loss of or material reduction in our business with any of the Company’s largest customers, (9) the ability of clients to terminate their relationship with the Company at any time, (10) competition in the Company’s markets, (11) the negative cash flows and operating losses that may recur in the future, (12) risks relating to how future credit facilities may affect or restrict our operating flexibility, (13) risks associated with the Company’s investment strategy, (14) risks related to international operations, including foreign currency fluctuations, political events, natural disasters or health crises, including the ongoing COVID-19 pandemic and the Russian invasion of Ukraine conflict, (15) the Company’s dependence on key management personnel, (16) the Company’s ability to attract and retain highly skilled professionals, management, and advisors, (17) the Company’s ability to collect accounts receivable, (18) the Company’s ability to maintain costs at an acceptable level, (19) the Company’s heavy reliance on information systems and the impact of potentially losing or failing to develop technology, (20) risks related to providing uninterrupted service to clients, (21) the Company’s exposure to employment-related claims from clients, employers and regulatory authorities, current and former employees in connection with the Company’s business reorganization initiatives, and limits on related insurance coverage, (22) the Company’s ability to utilize net operating loss carryforwards, (23) volatility of the Company’s stock price, (24) the impact of government regulations, (25) restrictions imposed by blocking arrangements, and (26) a material weakness in our internal control over financial reporting could have a significant adverse effect on our business and the price of our common stock. The foregoing list should not be construed to be exhaustive. Actual results could differ materially from the forward-looking statements contained in this Form 10-K. In view of these uncertainties, you should not place undue reliance on any forward-looking statements, which are based on our current expectations. These forward-looking statements speak only as of the date of this Form 10-K. The Company assumes no obligation, and expressly disclaims any obligation, to update any forward-looking statements, whether as a result of new information, future events or otherwise.

The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has conducted an evaluation of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2022. Such controls and procedures are designed only to provide reasonable assurance. There is no complete assurance that these controls and procedures will operate effectively under all circumstances.

Management’s Annual Report on Internal Control Over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15(d)-15(f) of the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2022 using the criteria set forth in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, the Company’s management believes that, as of December 31, 2022, the Company’s internal control over financial reporting was not effective due to a material weakness as described below.

The Company identified a material weakness in the design and implementation of internal controls over the revenue recognition process, specifically the failure to properly evaluate whether the Company was to be considered the principal or the agent in a non-routine transaction involving a discretionary bonus paid by the Company on behalf of a customer. The material weakness resulted in an understatement of revenue and direct contracting costs and reimbursed expenses in the amount of $ 5.762 million for the three- and six-month periods ended June 30, 2022 and the nine-month period ended September 30, 2022. The error had no impact on the Company’s consolidated balance sheet, consolidated statement of cash flows, net income, the presentation of the non-GAAP metric EBITDA, or any other accounts for such periods.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Plan of Remediation of Material Weaknesses in Internal Control Over Financial Reporting

In order to address the material weakness in internal control over financial reporting described above, management intends to perform, with direction from the Company’s audit committee, the following remediation activities:

• Enhance controls over the revenue recognition process, specifically on evaluating whether the Company is to be considered the principal or the agent in non-routine transactions with customers.
• Plan a comprehensive review of design and performance of internal controls over the revenue recognition process to modify existing or add new controls to address risks identified in the material weakness.
• Enhance period-end close procedures designed to identify and review material non-routine transactions and engage external advisers in a timely manner to assist us in the evaluation of any such material non-routine transactions.

Management is committed to remediating the material weakness in a timely fashion and to making continuous improvements to the Company’s internal control over financial reporting. Management will continually assess the effectiveness of the remediation efforts and may determine to take additional measures to address control deficiencies or modify the remediation plan described above.

This Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to the SEC’s rules for non-accelerated filers that permit the Company to provide only management’s assessment report for the year ended December 31, 2022.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended December 31, 2022 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.