Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 260K
2: EX-31.1 Certification Pursuant to Rule 13A-14(A)/15D-14(A) HTML 21K
Certifications Section 302 of the Sarbanes-Oxly
Act of 2002
3: EX-31.2 Certification Pursuant to Rule 13A-14(A)/15D-14(A) HTML 21K
Certifications Section 302 of the Sarbanes-Oxly
Act of 2002
4: EX-32.1 Certificate Pursuant to Section 18 U.S.C. Pursuant HTML 19K
to Section 906 of the Sarbanes-Oxley Act of 2002
11: R1 Document and Entity Information HTML 49K
12: R2 Consolidated Balance Sheets (Unaudited) HTML 116K
13: R3 Consolidated Balance Sheets (Unaudited) HTML 34K
(Parenthetical)
14: R4 Consolidated Statements of Income (Unaudited) HTML 75K
15: R5 Consolidated Statements of Changes in HTML 44K
Stockholders' Equity
16: R6 Consolidated Statements of Cash Flows (Unaudited) HTML 120K
17: R7 1. Basis of Presentation and Summary of HTML 81K
Significant Accounting Policies
18: R8 2. Acquisitions HTML 35K
19: R9 3. Related Party Transactions HTML 28K
20: R10 4. Line of Credit HTML 21K
21: R11 5. Workers' Compensation Insurance and Reserves HTML 21K
22: R12 6. Stockholders' Equity HTML 22K
23: R13 7. Stock Based Compensation HTML 37K
24: R14 8. Commitments and Contingencies HTML 21K
25: R15 9. Income Tax HTML 22K
26: R16 10. Notes Receivable HTML 27K
27: R17 1. Basis of Presentation and Summary of HTML 99K
Significant Accounting Policies (Policies)
28: R18 1. Basis of Presentation and Summary of HTML 42K
Significant Accounting Policies (Tables)
29: R19 2. Acquisitions (Tables) HTML 30K
30: R20 3. Related Party Transactions (Tables) HTML 22K
31: R21 6. Stockholders' Equity (Tables) HTML 20K
32: R22 7. Stock Based Compensation (Tables) HTML 37K
33: R23 10. Notes Receivable (Tables) HTML 24K
34: R24 1. Basis of Presentation and Summary of HTML 25K
Significant Accounting Policies (Details)
35: R25 1. Basis of Presentation and Summary of HTML 32K
Significant Accounting Policies (Details 1)
36: R26 1. Basis of Presentation and Summary of HTML 25K
Significant Accounting Policies (Details 2)
37: R27 1. Basis of Presentation and Summary of HTML 30K
Significant Accounting Policies (Details 3)
38: R28 1. Basis of Presentation and Summary of HTML 30K
Significant Accounting Policies (Details
Narrative)
39: R29 2. Acquisitions (Details) HTML 45K
40: R30 2. Acquisitions (Details 1) HTML 32K
41: R31 3. Related Party Transactions (Details) HTML 22K
42: R32 3. Related Party Transactions (Details Narrative) HTML 24K
43: R33 4. Line of Credit (Details Narrative) HTML 18K
44: R34 6. Stockholders' Equity (Details) HTML 24K
45: R35 7. Stock Based Compensation (Details) HTML 32K
46: R36 7. Stock Based Compensation (Details 1) HTML 34K
47: R37 7. Stock Based Compensation (Details 2) HTML 31K
48: R38 7. Stock Based Compensation (Details 3) HTML 37K
49: R39 7. Stock Based Compensation (Details Narrative) HTML 25K
50: R40 8. Commitments and Contingencies (Details HTML 19K
Narrative)
51: R41 9. Income Tax (Details Narrative) HTML 19K
52: R42 10. Notes Receivable (Details) HTML 26K
53: R43 10. Notes Receivable (Details Narrative) HTML 21K
55: XML IDEA XML File -- Filing Summary XML 100K
54: EXCEL IDEA Workbook of Financial Reports XLSX 66K
5: EX-101.INS XBRL Instance -- hqi-20210331 XML 631K
7: EX-101.CAL XBRL Calculations -- hqi-20210331_cal XML 141K
8: EX-101.DEF XBRL Definitions -- hqi-20210331_def XML 221K
9: EX-101.LAB XBRL Labels -- hqi-20210331_lab XML 592K
10: EX-101.PRE XBRL Presentations -- hqi-20210331_pre XML 459K
6: EX-101.SCH XBRL Schema -- hqi-20210331 XSD 119K
56: ZIP XBRL Zipped Folder -- 0001654954-21-005908-xbrl Zip 80K
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code:
(843)
723-7400
Securities registered pursuant to Section 12(b) of the
Act:
Common Stock, $0.001 par value
HQI
The NASDAQ Stock Market LLC
Title
of each class
Trading
Symbol(s)
Name of
each exchange on which registered
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements
for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such
files). Yes ☑ No ☐
Indicate
by check mark whether the Registrant is a large accelerated
filer ☐, an accelerated
filer ☐, a non-accelerated
filer ☑, a
smaller reporting company ☑, or
an emerging growth company ☐ (as defined in Rule 12b-2 of the Exchange
Act).
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the Registrant is a shell company
(as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☑
Number of shares of issuer's common stock outstanding at
May 14, 2021:
13,610,074
Note 1 – Overview and Summary of Significant Accounting
Policies
Nature of Business
HireQuest, Inc. (“HQI,” the “Company,”“we,” us,” or “our”) is a nationwide
franchisor of offices providing on-demand labor solutions in the
light industrial and blue-collar segments of the staffing industry
and traditional commercial staffing. Our franchisees provide
various types of temporary personnel through two business models
operating under the trade names “HireQuest Direct,”“HireQuest,”“Snelling,” and “LINK
Staffing.” HireQuest Direct specializes primarily in
unskilled and semi-skilled industrial and construction personnel.
HireQuest, Snelling, and Link specialize primarily in skilled and
semi-skilled industrial personnel as well as clerical and
administrative personnel. They also provide permanent placement
services.
On March 1, 2021, we completed our acquisition of Snelling Staffing
and affiliates (“Snelling”). We acquired substantially
all of the operating assets and assumed certain liabilities of
Snelling for a purchase price of approximately $17.7 million
subject to customary adjustments for net working capital. On March22, 2021, we completed our asset acquisition of Link Staffing and
affiliates (“Link”) where we acquired all of the
franchise relationships and certain other assets of Link for a
purchase price of approximately $11.2 million. For additional
information related to these transactions, see Note 2 –
Acquisitions.
As of March 31, 2021 we had 208 franchisee-owned offices in 35
states and the District of Columbia. We are the employer of record
to approximately 80,000 employees annually, who in turn provide
services for thousands of clients in various industries including
construction, recycling, warehousing, logistics, auctioneering,
manufacturing, hospitality, landscaping, and retail. We provide
staffing, marketing, funding, software, and administrative services
to our franchisees.
Basis of Presentation
We have prepared the accompanying consolidated financial
statements in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
In the opinion of management, the accompanying consolidated
financial statements reflect all adjustments of a normal recurring
nature that are necessary for a fair presentation of the results
for the periods presented.
These consolidated financial statements should be read in
conjunction with the audited consolidated financial statements
and accompanying notes included in our Annual Report filed on Form
10-K for the year ended December 31, 2020. Results for the interim
periods presented are not necessarily indicative of the results
expected for the full year or for any other period.
Consolidation
The consolidated financial statements include the accounts of
HQI and all of its wholly-owned subsidiaries. Intercompany balances
and transactions have been eliminated.
U.S. GAAP requires the primary beneficiary of a variable interest
entity (“VIE”) to consolidate that entity. To be the
primary beneficiary of a VIE, an entity must have both the power to
direct the activities that most significantly impact the
VIE’s economic performance, and the obligation to absorb
losses or the right to receive benefits from the VIE that are
significant to the beneficiary. We provide acquisition financing to
some of our franchisees that could result in our having to absorb
losses. This results in some franchisees being considered VIEs. We
have reviewed our relationship with each of these franchisees and
determined that we are not the primary beneficiary of any of these
entities. Accordingly, we have not consolidated these
entities.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus disease
("COVID-19") was first reported in Wuhan, China. Less than four
months later, on March 11, 2020, the World Health Organization
declared COVID-19 a pandemic. The extent of COVID-19's ultimate
effect on our operational and financial performance and the
collectability of our notes receivable will depend on future
developments, including the duration, spread, and intensity of the
pandemic, all of which are uncertain and difficult to predict. As a
result, it is not currently possible to ascertain the overall
impact of COVID-19 on our business. However, the pandemic has so
far had a material adverse effect on our business and results of
operations. If the pandemic continues to be a severe worldwide
health crisis, it could continue to have a material adverse effect
on our future business, results of operations, financial condition,
and cash flows.
7
C:
Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses. Actual results could
differ from those estimates.
Significant estimates and assumptions underlie our workers’
compensation claim liabilities, our workers’ compensation
risk management incentive program accrual, our deferred taxes, the
reserve for losses on notes receivable, and the estimated fair
value of assets acquired, and liabilities assumed.
Property and Equipment
We record property and equipment at cost. We compute depreciation
using the straight-line method over the estimated useful lives.
Land is not depreciated. Repairs and maintenance are expensed as
incurred. When assets are sold or retired, we eliminate cost and
accumulated depreciation from the consolidated balance sheet and
reflect a gain or loss in the consolidated statement of income. The
estimated useful lives of property and equipment are as
follows:
●
Buildings
– 40 years
●
Building
improvements – 15 years
●
Computers,
furniture, and equipment – 5 to 7 years.
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts receivable consist of amounts due for labor services from
customers of franchisees and of accounts receivable originating at
company-owned locations. At March 31, 2021, approximately 12% of
our accounts receivable originated at locations which were
previously corporately owned by Snelling, and at December 31, 2020,
all of our accounts receivable were due from customers of
franchisees. We own the accounts receivable from labor services
provided by our franchisees until they age beyond a date agreed
upon with each respective franchisee between 42 and 84 days. When
accounts receivable age beyond the agreed-upon date, they are
charged back to our franchisees. Accordingly, we do not record an
allowance for doubtful accounts on these accounts
receivable.
For labor services originally provided by company-owned offices, we
record accounts receivable at face value less an allowance for
doubtful accounts. We determine the allowance for doubtful
accounts based on historical write-off experience, the age of the
receivable, other qualitative factors and extenuating
circumstances, and current economic data which represents our best
estimate of the amount of probable losses on these accounts
receivable, if any. We review the allowance for doubtful accounts
periodically and write off past due balances when it is probable
that the receivable will not be collected. We record acquired
accounts receivable net of any estimated allowance for doubtful
accounts. Our allowance for doubtful accounts on accounts
receivable generated by company-owned offices was approximately
$-0- and $77,000 at March 31, 2021 and December 31, 2020,
respectively.
Revenue Recognition
Our primary source of revenue comes from royalty fees based on the
operation of our franchised offices. Royalty fees from our
HireQuest Direct business model are based on a percentage of sales
for services our franchisees provide to customers, which ranges
from 6% to 8%. Royalty fees from our HireQuest business line,
including HireQuest franchisees and Snelling and Link franchisees
who executed a new franchise agreement upon closing, are 4.5% of
the payroll we fund plus 18% of the gross margin for the territory.
Royalty fees from the Snelling and Link franchise agreements
assumed and not renegotiated at closing range from 5.0% to 9.0% of
sales for services our franchisees provide to customers. In
addition to royalty fees, we also charge a license fee to some
locations that utilize our intellectual property but are not
franchisees. License fees are 9% of the gross margin for the
location. Our franchisees are responsible for taking customer
orders, providing customers with services, establishing the prices
charged for services, and control other aspects related to
providing service to customers prior to the service being
transferred to the customer, such as determining which temporary
employees to dispatch to the customer and establishing pay rates
for the temporary employees. Accordingly, we present revenue on a
net basis as agent as opposed to a gross basis as
principal.
We recognize revenue when we satisfy our performance obligations.
Our performance obligations take the form of a franchise license
and promised services. Promised services consist primarily of
paying temporary employees, completing all statutory payroll
related obligations, and providing workers' compensation insurance
on behalf of temporary employees. Because these
performance obligations are interrelated, we do not consider them
to be individually distinct and therefore account for them as a
single performance obligation. Because our franchisees receive and consume
the benefits of our services simultaneously, our performance
obligations are satisfied when our services are provided. Franchise
royalties are billed on a weekly basis. We also offer various
incentive programs for franchisees including royalty incentives,
royalty credits, and other support initiatives. Royalty fees are
reduced to reflect any incentives earned or credits granted under
these programs. These incentives and credits are provided to
encourage new office development and organic growth, and to limit
workers' compensation exposure. We present franchise royalty fees
net of these incentives and credits.
8
Below are summaries of our franchise royalties disaggregated by
business model:
Service revenue, which forms the other component of our total
revenue, consists of interest we charge our franchisees on overdue
customer accounts receivable, trademark license fees, and other
fees for optional services we provide. We recognize interest income
based on the effective interest rate applied to the outstanding
principal balance of overdue accounts. We recognize revenue
from trademark license fees as we earn them. We recognize revenue
from optional services as we provide them.
Workers’ Compensation Claims Liability
We maintain reserves for workers’ compensation claims based
on their estimated future cost. These reserves include claims that
have been reported but not settled, as well as claims that have
been incurred but not reported. Annually, we engage an independent
actuary to estimate the future costs of these claims. Quarterly, we
use development factors provided by an independent actuary to
estimate the future costs of these claims. We make adjustments as
necessary. If the actual costs of the claims exceed the amount
estimated, we may incur additional charges.
Workers’ Compensation Risk Management Incentive Program
(“RMIP”)
Our RMIP is designed to incentivize our franchises to keep our
temporary employees safe and control exposure to large
workers’ compensation claims. We accomplish this by providing
our franchisees a royalty credit in an amount equivalent to a
percentage of the amount they pay for workers’ compensation
insurance if they keep their workers’ compensation loss
ratios below specified thresholds.
Notes Receivable
Notes receivable consist primarily of amounts due to us
related to the financing of franchised locations. We report
notes receivable at the principal balance outstanding less an
allowance for losses. We charge
interest at a fixed rate and interest income is calculated by applying the effective rate to
the outstanding principal balance. Notes receivable are generally
secured by the assets of each location and the ownership interests
in the franchise. We monitor the financial condition of our
franchisees and record provisions for estimated losses when we
believe it is probable that our franchisees will be unable to make
their required payments. We evaluate the potential impairment of
notes receivable based on various analyses, including estimated
discounted future cash flows, at least annually and whenever events
or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. When a note receivable is deemed
impaired, we discontinue accruing interest and only recognize
interest income when payment is received. Our allowance for losses
on notes receivable was approximately $1.6 million at March 31,2021 and December 31, 2020.
Stock-Based Compensation
Periodically, we issue restricted common shares or options to
purchase our common shares to our officers, directors, or
employees. We measure compensation costs for equity awards at their
fair value on their grant date and expense these costs over the
service period on a straight-line basis. The fair value of stock awards is based on
the quoted price of our common stock on the grant
date. We use the
Black-Scholes valuation model to determine the value of option
awards.
Intangible Assets
Intangible assets acquired or internally developed are measured at
cost. The cost of acquired intangible assets consist of their
purchase price. Subsequent costs are capitalized only if it is
probable that they will increase the future economic benefits
associated with the specific asset. All other costs are expensed as
incurred. The cost of internally developed intangibles consists of
fees paid to third parties for development services and payroll
costs for employees' time spent on development incurred during the
application development stage. Costs originating during the
preliminary project stage and post-implementation state are
expensed as incurred. Intangible assets are reviewed for impairment
at least annually and/or whenever events and circumstances arise
that indicate impairment may exist.
9
Intangible assets are amortized using the straight-line method over
their estimated useful lives. The table below reflects information related to
our finite-lived intangible assets. For additional information
related to significant additions to intangible assets,
see Note 2 –
Acquisitions.
We have a savings plan that qualifies under Section 401(k) of the
Internal Revenue Code. Under our 401(k) plan, eligible employees
may contribute a portion of their pre-tax earnings, subject to
certain limitations. As a benefit, we match 100% of each
employee’s first 3% of contributions, then 50% of each
employee’s contribution beyond 3%, up to a maximum match of
4% of the employee’s eligible earnings.
Earnings per Share
We calculate basic earnings (loss) per share by dividing net income
or loss available to common stockholders by the weighted average
number of common shares outstanding. We do not include the impact
of any potentially dilutive common stock equivalents in our basic
earnings (loss) per share calculations. Diluted earnings per share
reflect the potential dilution of securities that could share in
our earnings through the conversion of common shares issuable via
outstanding stock options and unvested restricted shares, except
where their inclusion would be anti-dilutive. Outstanding common
stock equivalents at March 31, 2021 and March 31, 2020 totaled
approximately 293,000 and 29,000, respectively.
We use the treasury stock method to calculate the diluted common
shares outstanding which were as follows:
Weighted
average number of common shares used in basic net income per common
share
13,602,764
13,533,247
Dilutive
effects of stock options
196,440
1,753
Weighted
average number of common shares used in diluted net income per
common share
13,799,203
13,535,000
Fair Value Measures
Fair value is the price that would be received to sell an asset, or
paid to transfer a liability, in the principal or most advantageous
market for the asset or liability in an ordinary transaction
between market participants on the measurement date. Our policy on
fair value measures requires us to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring
fair value. The policy establishes a fair value hierarchy based on
the level of independent, objective evidence surrounding the inputs
used to measure fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement. The policy prioritizes the inputs into three levels
that may be used to measure fair value:
Level 1: Applies to assets or liabilities for which there are
quoted prices in active markets for identical assets or
liabilities.
Level 2: Applies to assets or liabilities for which there are
inputs other than quoted prices that are observable for the asset
or liability such as quoted prices for similar assets or
liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent
transactions (less active markets); or model-derived valuations in
which significant inputs are observable or can be derived
principally from, or corroborated by, observable market
data.
Level 3: Applies to assets or liabilities for which there are
unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or
liabilities.
10
The carrying amounts of cash and cash equivalents, accounts
receivable, accounts payable and all other current liabilities
approximate fair values due to their short-term nature. The fair
value of notes receivable approximates the net book value and
balances are reviewed for impairment at least annually. The fair
value of impaired notes receivable are determined based on
estimated future payments discounted back to present value using
the notes effective interest rate.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments
– Credit Losses (Topic 326): Measurement of Credit Losses on
Financial Instruments. The standard significantly changes how
entities will measure credit losses for most financial assets and
certain other instruments that are not measured at fair value
through net income. The standard will replace today's
“incurred loss” approach with an “expected
loss” model for instruments measured at amortized cost. It
also simplifies the accounting model for purchased credit-impaired
debt securities and loans. This guidance is effective for annual
periods beginning after December 15, 2022, and interim periods
therein. Early adoption is permitted for annual periods beginning
after December 15, 2018, and interim periods therein. We are
currently evaluating the impact of the new guidance on our
consolidated financial statements and related
disclosures.
We do not expect other accounting standards that the FASB or other
standards-setting bodies have issued to have a material impact on
our financial position, results of operations, or cash
flows.
Note 2 – Acquisitions
Business Combinations
Snelling Staffing
On March 1, 2021, we completed our acquisition of certain assets of
Snelling in accordance with the terms of the Asset Purchase
Agreement dated January 29, 2021 (the “Snelling
Agreement”). Snelling is a 67-year-old staffing company
headquartered in Richardson, TX. Pursuant to the Snelling
Agreement, HQ Snelling Corporation (“HQ Snelling”), our
wholly-owned subsidiary, acquired substantially all of the
operating assets and assumed certain liabilities of the sellers for
a purchase price of approximately $17.7 million, subject to
customary adjustments for net working capital. Also on March 1,2021, HQ Snelling entered into the First Amendment to the Purchase
Agreement, pursuant to which HireQuest, Inc. agreed to advance $2.1
million to the sellers at closing so the seller could facilitate
payment on behalf of HQ Snelling to settle accrued payroll
liabilities HQ Snelling assumed pursuant to the Snelling Agreement.
Substantially all of the locations where we assumed franchisor
status in this transaction have subsequently signed our HireQuest
franchise agreement and will continue to operate under the Snelling
tradename.
The following table summarizes the estimated fair values of the
identifiable assets acquired and liabilities assumed as of the
acquisition date. These estimates are preliminary, pending final
evaluation of certain assets and liabilities, and therefore are
subject to revisions that may result in adjustments to the values
presented below:
Total
allocable purchase price paid in cash
$17,691,242
Accounts
receivable
$12,292,830
Workers'
compensation deposit
7,200,000
Franchise
agreements
11,034,000
Customer
lists
1,690,000
Other
current assets
109,773
Workers'
compensation claims liability
(4,890,930)
Accrued
payroll and payroll liabilities
(2,100,000)
Current
liabilities
(663,430)
Other
liabilities
(2,021,832)
Bargain
purchase
(4,959,169)
Purchase
price allocation
$17,691,242
11
The bargain purchase is attributable to the financial position of
the seller and because there were few suitable potential buyers.
The gain is included in the line item, “Other miscellaneous
income,” in our consolidated statement of
income.
The following table presents unaudited pro forma information
assuming the acquisition of Snelling had occurred on January 1,2020. The unaudited pro forma information is not necessarily
indicative of the results of operations that would have been
achieved if the acquisition had taken place on that
date:
These calculations reflect increased amortization expense,
increased payroll expense, the elimination of gains associated with
the transaction, the elimination of transaction related costs, and
the consequential tax effects that would have resulted had the
acquisition closed on January 1, 2020.
In connection with the acquisition, we sold the 10 locations that
had been company-owned by Snelling. Two of these, we sold to
franchisees. Four offices were sold to a third-party purchaser.
Four offices were sold to a California purchaser (the
“California Purchaser”) and operate as Snelling
pursuant to a license agreement. The aggregate sale price for these
locations consisted of (i) $1.0 million in the form of a promissory
note that bears interest at 6.0%, (ii) the right to receive 1.5% of
revenue generated at the Ontario location for the next 12 months,
(iii) the right to receive 2.5% of revenue generated at the Tracy
and Lathrop locations for the next 12 months, (iv) the right to
receive 2.0% of revenue generated at the Princeton location for the
next 36 months, and (v) approximately $1 million in cash. There are
no remaining company-owned locations at March 31, 2021.
One
of the California locations operates pursuant to a license
agreement whereby they license the Snelling trademark and pay us a
royalty of 9% of their gross margin. In conjunction with the sale
of assets acquired in this transaction, we recognized a gain of
approximately $638,000 which is reflected on the line item, "Other
miscellaneous income," in our consolidated statement of
income.
Asset Acquisition
Link Staffing
On March 22, 2021, we completed our acquisition of the franchise
relationships and certain other assets of Link in accordance with
the terms of the Asset Purchase Agreement dated February 12, 2021
(the "Link Agreement"). Link is a family-owned staffing company
headquartered in Houston, TX. Pursuant to the Link Agreement, HQ
Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired
franchise agreements for approximately 35 locations, and other
assets of Link Staffing for a purchase price of $11.1 million.
Substantially all of the locations where we assumed franchisor
status in this transaction have subsequently signed our HireQuest
franchise agreement and will operate under the Snelling
tradename.
The following table summarizes the estimated fair values of the
identifiable assets acquired as of the acquisition date. Due to the
proximity of the acquisition to quarter end, these estimates are
preliminary, pending final evaluation, and therefore are subject to
revisions that may result in adjustments to the values presented
below:
Cash
$11,122,911
Franchise
agreements
$10,886,178
Notes
receivable
236,733
Purchase
price allocation
$11,122,911
We determined the Link transaction was an asset acquisition as
substantially all of the fair value of the gross assets acquired
was concentrated in the franchise agreements. Accordingly, no pro
forma financial information is presented.
We assigned six of the franchise agreements we purchased in the
transaction, all located in California, to the California
Purchaser. These six franchisees operate pursuant to a Link
trademark sublicense agreement whereby they pay us 9% of the gross
margin of their offices in exchange for a sublicense to utilize the
Link tradename. In
conjunction with the sale of assets acquired in this transaction,
we recognized a loss of approximately $1.9 million which is
reflected on the line item, "Other miscellaneous income," in our
consolidated statement of income.
12
Note 3 – Related Party Transactions
Some significant shareholders of HQI also own portions of Jackson
Insurance Agency; Bass Underwriters, Inc; Insurance Technologies,
Inc.; and a number of our franchisees.
Jackson Insurance Agency ("Jackson Insurance") and Bass
Underwriters, Inc. ("Bass")
Mr. Jackson, a member of our Board and a significant stockholder,
and an immediate family member own Jackson Insurance. Mr. Jackson,
Mr. Hermanns, our CEO, Chairman of our Board, and most significant
stockholder, and irrevocable trusts set up by each of them,
collectively own a majority of Bass, a large managing general
agent.
Bass purchased approximately $5.3 million of 6.0% notes receivable
at book value in March 2021. For additional information related to
this transaction, see Note 10 – Notes
Receivable.
Jackson Insurance and Bass brokered property, casualty, general
liability, and cybersecurity insurance for a series of predecessor
entities (“Legacy HQ”) prior to the merger with Command
Center, Inc. (the “Merger”). Since July 15, 2019, they
have continued to broker these same policies for HQI. Jackson
Insurance also brokers certain insurance policies on behalf of some
of our franchisees, including the Worlds Franchisees (defined
below).
Premiums, taxes, and fees invoiced by Jackson Insurance and Bass to
HQI for these insurance policies during the three months ended
March 31, 2021 and March 31, 2020 were approximately $584,000 and
$561,000, respectively. Jackson Insurance and Bass do not retain
the majority of the premiums invoiced to HQI, but they do retain a
commission of approximately 9% - 15% of premiums.
Insurance Technologies, Inc. ("Insurance
Technologies")
Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of
them, collectively own a majority of Insurance Technologies, an IT
development and security firm. On October 24, 2019, HQI entered
into an agreement with Insurance Technologies to add certain
cybersecurity protections to our existing information technology
systems and to assist in developing future information technology
systems within our HQ Webconnect software. In addition, Insurance
Technologies assisted with the IT diligence and integration process
with respect to the Snelling and Link acquisitions. This
arrangement was reviewed and approved by the Audit Committee of our
Board of Directors and is monitored by the Audit Committee twice
annually.
During the three months ended March 31, 2021 and March 31, 2020,
Insurance Technologies invoiced HQI approximately $102,000 and
$50,000, respectively, for services provided pursuant to this
agreement. We expect spending pursuant to this agreement to become
immaterial in the third quarter of 2021.
The Worlds Franchisees
Mr. Jackson and immediate family members of Mr. Hermanns have
significant ownership interests in certain of our franchisees (the
“Worlds Franchisees”). There were 21 Worlds
Franchisees at March 31, 2021 that operated 57 of our 212
offices.
Transactions regarding the Worlds Franchisees are summarized
below:
In July 2019, we entered into an agreement with Truist, for a $30
million line of credit with a $15 million sublimit for letters of
credit. At March 31, 2021, approximately $14.3 million was utilized
by outstanding letters of credit that secure our obligations to our
workers’ compensation insurance carrier and $500,000 was
utilized by a letter of credit that secures our paycard funding
account, leaving $15.2 million available under the agreement for
potential additional borrowings, subject to availability under the
terms of the line of credit. For additional information related to
the letter of credit securing our workers’ compensation
obligations see Note 5 – Workers’
Compensation Insurance and Reserves.
This line of credit is scheduled to mature on May 31, 2024. The
current agreement bears interest at a variable rate equal to the
Daily One Month London Interbank Offering Rate, or LIBOR, plus a
margin between 1.25% and 1.75%. The margin is determined based on
the value of our net collateral, which is equal to our total
collateral plus unrestricted cash less the outstanding balance, if
any, under the loan agreement. At March 31, 2021 the effective
interest rate was 1.4%. A non-use fee of between 0.125% and 0.250%
accrues on the unused portion of the line of credit. As collateral
for repayment of any and all obligations under this agreement, we
granted Truist a security interest in substantially all of our
operating assets and the operating assets of our subsidiaries. This
agreement, and other loan documents, contain customary events of
default and negative covenants, including but not limited to those
governing indebtedness, liens, fundamental changes, transactions
with affiliates, and sales of assets. This agreement requires us to
comply with a fixed charge coverage ratio of at least 1.10:1.00,
tested quarterly on a rolling four quarter basis. At March 31, 2021
we were in compliance with this covenant. Our obligations under
this agreement are subject to acceleration upon the occurrence of
an event of default as defined in the loan agreement.
Note 5 – Workers’ Compensation Insurance and
Reserves
Beginning in March 2014, Legacy HQ obtained its workers’
compensation insurance through Chubb Limited and ACE American
Insurance Company (collectively, “ACE”), in all states
in which it operated, other than monopolistic jurisdictions. The
ACE policy was a high deductible policy pursuant to which Legacy HQ
had primary responsibility for all claims with ACE providing
insurance for covered losses and expenses in excess of $500,000 per
incident. In addition to the ACE policy, Legacy HQ purchased a
deductible reimbursement insurance policy from Hirequest Insurance
Company (“HQ Ins.”), a captive insurer, to cover losses
up to the $500,000 deductible with ACE. This resulted in Legacy HQ
effectively being fully insured during this time period. Effective
July 15, 2019, Legacy HQ terminated its deductible reimbursement
policy with HQ Ins. We assumed the primary responsibility for all
claims up to the deductible occurring on or after July 15, 2019.
The primary responsibility of all claims occurring before July 15,2019 remains with HQ Ins.
Command Center, the predecessor entity that acquired Legacy HQ in
2019, also obtained its workers’ compensation insurance
through ACE. Pursuant to Command Center’s most recent
policy, which expired on March 1, 2020, ACE provided insurance for
covered losses and expenses in excess of $500,000 per incident.
Command Center’s ACE policy included a one-time obligation
for the Company to pay any single claim filed under the Command
Center policy within a policy year that exceeds $500,000 (if any),
but only up to $750,000 for that claim. All other claims within the
policy year were subject to the $500,000 deductible. Effective
July 15, 2019, in connection with the Merger, we assumed all of the
workers’ compensation claims of Command Center. We also
assumed Command Center’s workers’ compensation policy
with ACE.
Under these high deductible programs, we are effectively
self-insured. Per our contractual agreements with ACE, we must
provide collateral deposits of approximately $14.3 million, which
we accomplished by providing a letter of credit under our agreement
with Truist. The amount of our current letter of credit includes an
additional amount of $5.2 million that was issued in conjunction
with the release of a $7.2 million cash deposit that was acquired
in the Snelling transaction.
For workers’ compensation claims originating in the
monopolistic jurisdictions of North Dakota, Ohio, Washington, and
Wyoming, we pay workers’ compensation insurance premiums and
obtain full coverage under mandatory state administered programs.
Our liability associated with claims in these jurisdictions is
limited to premium payments based upon the amount of payroll paid
within each jurisdiction. Accordingly, our
consolidated financial statements reflect only the mandated
workers’ compensation insurance premium liability for
workers’ compensation claims in these
jurisdictions.
Note 6 – Stockholders’ Equity
Dividend
In the third quarter of 2020, we declared and paid a $0.05 per
common share dividend. We intend to continue to pay this dividend
on a quarterly basis, based on our business results and financial
position. The following common share dividends were paid during
2021 and 2020:
Effective July 2020, our Board of Directors authorized a one-year
repurchase plan for up to 1 million shares of our common stock at a
cost not to exceed $100,000 per month. During the year ended
December 31, 2020, we purchased 23,638 shares of our common stock
at an aggregate cost of approximately $146,000 resulting in an
average price of $6.20 per share. These shares are held in
treasury. Additionally, there were 9,454 restricted shares that did
not meet their vesting criteria, which are also held in treasury.
We have not purchased any shares of our common stock during
2021.
Note 7 – Stock Based Compensation
Employee Stock Incentive Plan
In December 2019, our Board approved the 2019 HireQuest, Inc.
Equity Incentive Plan (the “2019 Plan”). Subject to
adjustment in accordance with the terms of the 2019 Plan, no more
than 1,500,000 shares of common stock are available in the
aggregate for the grant of awards under the 2019 Plan. No more than
1,000,000 shares may be issued in the aggregate pursuant to the
exercise of incentive stock options. In addition, no more than
250,000 shares may be issued in the aggregate to any employee or
consultant, and no more than 50,000 shares may be issued in the
aggregate to any non-employee director in any twelve-month
period. Shares of common stock available for distribution
under the Plan may consist, in whole or in part, of authorized and
unissued shares, treasury shares or shares reacquired by the
Company in any manner. The 2019 Plan was approved by our
shareholders in June 2020 and became effective as of that
date.
In September 2019, our Board approved a share purchase match
program to encourage ownership and further align the interests of
key employees and directors with those of our shareholders. Under
this program, we will match 20% of any shares of our common stock
purchased on the open market by or granted in lieu of cash
compensation to key employees and directors up to $25,000 in
aggregate value per individual within any calendar year. These
shares vest on the second anniversary of the date on which the
matched shares were purchased if the individual is still employed
by the Company and certain other vesting criteria are met. During
the first quarter 2021, we issued approximately 4,000 shares valued
at approximately $61,000 under this program. During the first
quarter 2020, we issued approximately 22,000 shares valued at
approximately $147,000 under this program.
In the quarter ended March 31, 2021, we issued 8,166 shares of
restricted common stock pursuant to the 2019 Plan valued at
approximately $82,000 to members of our Board of Directors for
their services in lieu of cash compensation. Of these, 6,805 shares
vested equally over the following three months. The remaining 1,361
shares were issued pursuant to our share purchase match program.
Also in the first quarter 2021, we issued 1,200 shares of
restricted common stock to certain Board members and employees
pursuant to our share purchase match program valued at
approximately $12,000.
In 2020, we issued 81,943 shares of restricted common stock
pursuant to the 2019 Plan valued at approximately $539,000 to
members of our Board of Directors for their services in lieu of
cash compensation. Of these, 61,868 shares vested equally over the
following three months. The remaining 20,075 shares were issued
pursuant to our share purchase match program.
Also in 2020, we issued 25,000 shares of restricted common stock to
an employee pursuant to the 2019 Plan valued at approximately
$179,000 for services, and to encourage retention. These shares
vest over four years, with 50% vesting on September 11, 2021, and
6.25% vesting each quarter thereafter for the next eight quarters.
Also in 2020, we issued 1,742 shares of restricted common stock to
certain employees pursuant to our share purchase match program
valued at approximately $12,000.
The following table summarizes our restricted stock outstanding at
December 31, 2020, and changes during the three months ended March31, 2021.
Stock options that were outstanding at Command Center were deemed
to be issued on the date of the Merger. Outstanding awards continue
to remain in effect according to the terms of the Command Center
2008 Plan, the Command Center 2016 Plan, and the corresponding
award documents. There were approximately 15,000 stock options
vested at March 31, 2021 and December 31, 2020.
15
The following table summarizes our stock options outstanding at
December 31, 2020, and changes during the three months ended March31, 2021:
The following table summarizes our non-vested stock options
outstanding at December 31, 2020, and changes during the three
months ended March 31, 2021:
The following table summarizes information about our outstanding
stock options, and reflects the intrinsic value recalculated based
on the closing price of our common stock of $17.25 at March 31,2021:
Number
of shares underlying options
Weighted
average exercise price per share
Weighted
average remaining contractual life (years)
Aggregate
intrinsic value
Outstanding
17,082
$6.10
5.43
$202,582
Exercisable
14,894
6.18
5.16
164,839
At March 31, 2021, there was unrecognized stock-based compensation
expense totaling approximately $659,000 relating to non-vested
options and restricted stock grants that will be recognized over
the next 2.4 years.
Note 8 – Commitments and Contingencies
Franchise Acquisition Indebtedness
New franchisees financed the purchase of several offices with
promissory notes. In some instances, this financing resulted in
certain franchises being considered VIEs. We have determined that
we are not required to consolidate these entities because we do not
have the power to direct these entities’ daily operations. If
these franchises default on these notes, we bear the risk of loss
of the outstanding balance on these notes, less what we could
recoup from the potential resale of the repossessed office. The
balance due from the franchises determined to be VIEs on March 31,2021 and December 31, 2020 was approximately $2.6 million and $2.1
million, respectively.
Legal Proceedings
From time to time, we are involved in various legal and
administrative proceedings. Based on information currently
available to us, we do not expect material uninsured losses to
arise from any of these matters. We believe the outcome of
these matters, even if determined adversely, will not have a
material adverse effect on our business, financial condition or
results of operations. There have been no material changes in our
legal proceedings as of March 31, 2021.
16
Note 9 – Income Tax
Income tax expense during interim periods is based on applying an
estimated annual effective income tax rate to year-to-date income,
plus any significant unusual or infrequently occurring items which
are recorded in the interim period. The computation of the
annual estimated effective tax rate at each interim period requires
certain estimates and significant judgment including, but not
limited to, the expected operating income for the year and changes
in tax law and tax rates. The accounting estimates used
to compute the provision for income taxes may change as new events
occur, more experience is obtained, additional information becomes
known, or the tax environment changes.
Our effective tax rate for the three months ended March 31,2021 and March 31, 2020 was (19.2)% and 18.5%, respectively. The
bulk of the difference between the statutory federal income tax
rate of 21.0% and our effective income tax rate results
from the bargain purchase gain, which is recorded net of deferred
taxes and is treated as a permanent difference, and the federal
Work Opportunity Tax Credit, which is designed to encourage
employers to hire workers from certain targeted groups with higher
than average unemployment rates. Other differences result from
state income taxes, certain non-deductible expenses, and tax
effects of stock-based compensation.
Note 10 – Notes Receivable
Several franchisees, as well as the purchaser of our previously
owned California locations, borrowed funds from us primarily to
finance the initial purchase price of office assets. In March of
2021, we sold approximately $5.3 million of notes receivable to
Bass, a related party. Virtually all of the notes sold to Bass
originated from the sale of branch locations acquired in the
Merger. These notes were sold
at their current outstanding principal value. The proceeds from the
sale of these notes were used to finance the Snelling and Link
transactions.
Notes outstanding, net of allowance for losses, were approximately
$4.1 million and $8.1 million as of March 31, 2021 and December 31,2020, respectively. Notes receivable generally bear interest at a
fixed rate between 6.0% and 10.0%. Notes receivable are generally
secured by the assets of each office and the ownership interests in
the franchise. We report interest income on notes receivable
as other miscellaneous income in our consolidated statements of
operations. This interest income was approximately $135,000 and
$198,000 during the three months ended March 31, 2021 and March 31,2020, respectively.
We estimate the allowance for losses for franchisees separately
from the allowance for losses from non-franchisees because of the
level of detailed sales information available to us with respect to
the former.
Based on our review of the financial condition of the borrowers,
the underlying collateral value, and the potential future impact of
COVID-19 on certain borrowers’ economic performance and
estimated future cash flows, we have established an allowance of
approximately $1.6 million as of March 31, 2021 and December 31,2020 for potentially uncollectible notes receivable.
The following table summarizes changes in our notes receivable
balance to franchisees:
During 2020, one of our note holders experienced significant
economic hardships due to the impacts of COVID-19. As a result, we
restructured one note receivable in an effort to increase the
probability of repayment. We granted near-term payment concessions
to help the debtor attempt to improve its financial condition so it
may eventually be able to repay the amount due. We recognized
interest income of approximately $135,000 and $198,000 during the
three months ended March 31, 2021 and March 31, 2020,
respectively.
The following table summarizes changes in our note receivable
balance that has been deemed impaired:
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of
Operations
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and other documents incorporated
herein by reference include, and our officers and other
representatives may sometimes make or provide, certain estimates
and other forward-looking statements within the meaning of the safe
harbor provisions of the U.S. Private Securities Litigation Reform
Act of 1995, Section 27A of the Securities Act, and Section 21E of
the Exchange Act, including, among others, statements with respect
to future revenue, franchise sales, system-wide sales, and the
growth thereof; the impact of any global pandemic including
COVID-19; operating results; dividends and shareholder returns;
anticipated benefits of the merger or acquisitions including those
we have completed in 2021; intended office openings or closings;
expectations of the effect on our financial condition of claims and
litigation; strategies for customer retention and growth;
strategies for risk management; and all other statements that are
not purely historical and that may constitute statements of future
expectations. Forward-looking statements can be identified by
words such as: “anticipate,”“intend,”“plan,”“goal,”“seek,”“believe,”“project,”“estimate,”“expect,”“strategy,”“future,”“likely,”“may,”“should,”“will,” and
similar references to future periods.
While we believe these statements are accurate, forward-looking
statements are not historical facts and are inherently uncertain.
They are based only on our current beliefs, expectations, and
assumptions regarding the future of our business, future plans and
strategies, projections, anticipated events and trends, the
economy, and other future conditions. We cannot assure you that
these expectations will occur, and our actual results may be
significantly different. Therefore, you should not place undue
reliance on these forward-looking statements. Important factors
that may cause actual results to differ materially from those
contemplated in any forward-looking statements made by us include
the following: the level of demand and financial performance of the
temporary staffing industry; the financial performance of our
franchisees; the impacts of COVID-19 or other diseases or
pandemics; changes in customer demand; the extent to which we are
successful in gaining new long-term relationships with customers or
retaining existing ones, and the level of service failures that
could lead customers to use competitors’ services;
significant investigative or legal proceedings including, without
limitation, those brought about by the existing regulatory
environment or changes in the regulations governing the temporary
staffing industry and those arising from the action or inaction of
our franchisees and temporary employees; strategic actions,
including acquisitions and dispositions and our success in
integrating acquired businesses; disruptions to our technology
network including computer systems and software; natural events
such as severe weather, fires, floods, and earthquakes, or man-made
or other disruptions of our operating systems; the factors
discussed in the “Risk Factors” section in our most
recent Annual Report on Form 10-K, which we filed with the SEC on
March 25, 2021; and the other factors discussed in this Quarterly
Report and our Annual Report.
Any forward-looking statement made by us in this Quarterly Report
on Form 10-Q is based only on information currently available to us
and speaks only as of the date on which it is made. The Company
disclaims any obligation to update or revise any forward-looking
statement, whether written or oral, that may be made from time to
time, based on the occurrence of future events, the receipt of new
information, or otherwise, except as required by law.
Overview
We are a nationwide franchisor of on-demand labor solutions
providers in the light industrial and blue-collar segments of the
staffing industry. We were formed through the merger between Hire
Quest Holdings, LLC (“Hire Quest Holdings”) and Command
Center, Inc. We refer to Hire Quest Holdings and its wholly-owned
subsidiary, Hire Quest, LLC, collectively as Legacy HQ. We refer to
this merger, which closed on July 15, 2019, as the Merger. As of
March 31, 2021, we had approximately 210 franchisee-owned offices
in 35 states and the District of Columbia. We also licensed the use
of our trademarks to offices in California. Our franchisees provide
employment for an estimated 80,000 individuals annually working for
thousands of clients in many industries including construction,
recycling, warehousing, logistics, auctioneering, manufacturing,
disaster cleanup, janitorial, special events, hospitality,
landscaping, and retail.
Recent
Developments
Snelling Staffing Acquisition
On March 1, 2021, we completed our acquisition of certain assets of
Snelling in accordance with the terms of the Asset Purchase
Agreement dated January 29, 2021 (the “Snelling
Agreement”). Snelling is a 67-year-old staffing company
headquartered in Richardson, TX. Pursuant to the Snelling
Agreement, HQ Snelling Corporation (“HQ Snelling”), our
wholly-owned subsidiary, acquired substantially all of the
operating assets and assumed certain liabilities of the sellers for
a purchase price of approximately $17.7 million, subject to
customary adjustments for net working capital. Also on March 1,2021, HQ Snelling entered into the First Amendment to the Purchase
Agreement, pursuant to which HireQuest, Inc. agreed to advance $2.1
million to the sellers at closing so the seller could facilitate
payment on behalf of HQ Snelling to settle accrued payroll
liabilities HQ Snelling assumed pursuant to the Snelling Agreement.
Substantially all of the locations where we assumed franchisor
status in this transaction have subsequently signed our HireQuest
Direct franchise agreement.
18
In connection with the acquisition, we sold the 10 locations that
had been company-owned by Snelling. Two of these, we sold to
franchisees. Four offices were sold to a third-party purchaser.
Four offices were sold to a California purchaser (the
“California Purchaser”) and operate as Snelling
pursuant to a license agreement. The aggregate sale price for these
locations consisted of (i) $1.0 million in the form of a promissory
note that bears interest at 6.0%, (ii) the right to receive 1.5% of
revenue generated at the Ontario location for the next 12 months,
(iii) the right to receive 2.5% of revenue generated at the Tracy
and Lathrop locations for the next 12 months, (iv) the right to
receive 2.0% of revenue generated at the Princeton location for the
next 36 months, and (v) approximately $1 million in cash. There are
no remaining company-owned locations at March 31,2021.
One of the California locations operates pursuant to a license
agreement whereby they license the Snelling trademark and pay us a
royalty of 9% of their gross margin. The California Purchaser will
convert the remaining three California locations to franchisees at
which point these franchisees will begin to pay us 9% of their
gross margin.
Link Staffing Acquisition
On March 22, 2021, we completed our acquisition of the franchise
relationships and certain other assets of Link in accordance with
the terms of the Asset Purchase Agreement dated February 12, 2021
(the "Link Agreement"). Link is a family-owned staffing company
headquartered in Houston, TX. Pursuant to the Link Agreement, HQ
Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired
franchise agreements for approximately 35 locations, and other
assets of Link Staffing for a purchase price of $11.1 million.
Substantially all of the locations where we assumed franchisor
status in this transaction have subsequently signed our HireQuest
Direct franchise agreement.
We assigned six of the franchise agreements we purchased in the
transaction, all located in California, to the California
Purchaser. These six franchisees operate pursuant to a Link
trademark sublicense agreement whereby they pay us 9% of the gross
margin of their offices in exchange for a sublicense to utilize the
Link tradename.
COVID-19
The coronavirus pandemic has significantly impacted our operations.
With widespread infection in the United States and abroad,
national, state, and local authorities recommended social
distancing and took dramatic action, including ordering the
workforce to stay home, banning all non-essential businesses from
operating, refusing to issue new building permits, and invalidating
current building permits causing work to stop at many of our
jobsites. These measures, while intended to protect human life,
have had, and are expected to continue to have, adverse impacts on
our business and the economy as a whole. While most states have
advanced significantly into the reopening process, it is unclear
when, or if, a full economic recovery will occur. It is also
unclear whether businesses will remain open or another broad
shutdown will occur. The long-term effectiveness of economic
stabilization efforts, including government payments to affected
citizens and industries, and government vaccination efforts, is
also uncertain.
We entered 2021 with a strong balance sheet. Our current assets
exceeded current liabilities by approximately $16 million. We were
able to complete two acquisitions and significantly increase our
franchise base without incurring any debt at March 31, 2021. We
have been able to remain profitable throughout the pandemic. Still,
the sweeping and persistent We entered 2021 with a strong balance
sheet. Our current assets exceeded current liabilities by
approximately $16 million. We were able to complete two
acquisitions and significantly increase our franchise base without
incurring any debt at March 31, 2021. We have been able to remain
profitable throughout the pandemic. Still, the sweeping and
persistent nature of the COVID-19 pandemic has depressed our
system-wide sales and resulting franchise royalties. While we did
not see major impacts on system-wide sales and resulting revenue
until the final few weeks of the first quarter of 2020, these
depressed sales have continued through our current quarter. On a
month-to-month basis, our system-wide sales have consistently
trended closer to historically normal numbers, however, system-wide
sales in the first quarter of 2021 remained lower than in the first
quarter of 2020. We continue to expect negative impacts on
system-wide sales and resulting franchise royalties in the coming
quarters, and potentially into next year. Some of the depression in
sales will be offset by the acquisitions we made in the first
quarter of 2021. It remains unclear how long we will stay at this
comparatively reduced level of sales, and the evolving nature of
the pandemic makes reliable predictions extremely
difficult.
19
To date, our franchisees have closed or consolidated 13 offices at
least, in part, due to the financial impacts of COVID-19. Of these
closures, 11 were in metropolitan areas where our franchisees still
maintain at least one office that we expect can service customers
of the closed or consolidated offices. The other two offices did
not historically produce significant amounts of system-wide sales
or resulting revenue. It is possible that other offices may still
be forced to close. Some of our franchisees may experience
economic hardship or even failure. In general, those franchisees
whose businesses are oriented towards construction, manufacturing,
logistics, or waste services have been less impacted to date than
those whose businesses are more focused on hospitality, catering,
special events, or auto auction services.
As discussed more fully below, we have reduced liquidity since
December 31, 2020 as we used cash to complete two acquisitions. As
a result, our cash balance decreased by approximately $11.7 million
through the first quarter of 2021 from $13.7 million at year end to
$2.0 million. When combined with our borrowing capacity under our
line of credit and absence of debt, we expect that we have
sufficient liquidity to continue our operations for the foreseeable
future, even under the current circumstances presented by COVID-19.
That said, the impact of the COVID-19 crisis on availability of
capital or credit is difficult to predict and may be
significant.
Any of the above factors, or other cascading effects of the
COVID-19 pandemic that are not currently foreseeable, could
materially negatively impact our revenue, net income, and other
results of operations, reduce system-wide sales, cause office
closings or cause us to lose franchisees, and impact our liquidity
position, possibly significantly. The duration of any such impacts
cannot be predicted at this time.
Results of Operations
Financial Summary
The following table displays our consolidated statements of
operations for the interim periods ended March 31, 2021 and March31, 2020 (in thousands, except percentages). Percentages reflect
the line item as a percentage of total revenue.
Franchise royalties for the three months ended March 31, 2021 were
approximately $3.3 million, a decrease of 12.0% from $3.7 million
for the three months ended March 31, 2020. This decrease in
royalties was due to decreased activity due to COVID-19 in 2021, as
we did not experience significant decreased economic activity last
year until the final few weeks of the first quarter. The effect of
this decreased activity more than offset the $32,000 positive
impact of additional franchise royalties received in the first
quarter 2021 as a result of our recent acquisitions. While
system-wide sales, and resulting franchise royalties, have been
slowly approaching historical levels on a month-over-month basis
since the beginning of April of last year, we expect decreased
royalty revenue to persist throughout 2021, and perhaps beyond,
relative to pre-pandemic levels.
20
Service Revenue
Service revenue consists of interest we charge our franchisees on
overdue customer accounts receivable, trademark license fees, and
other miscellaneous fees for optional services we provide. As
accounts receivable age over 42 days, our franchisees pay us
interest on these accounts equal to 0.5% of the amount of the
uncollected receivable each 14-day period. Accounts receivable are
charged back to the franchisee at a date agreed upon between the
Company and the respective franchisee between 42 and 84 days, at
which time they are no longer charged interest.
Service revenue for the three months ended March 31, 2021 was
approximately $144,000, a decrease from approximately $415,000 for
the three months ended March 31, 2020. This decrease was due to
lower interest income and lower system-wide sales-based
fees.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended March 31, 2021 were
approximately $3.8 million, an increase of 18.1% from $3.3 million
for the three months ended March 31, 2020. This increase is
primarily related to acquisition-related expenses of approximately
$1.4 million. In addition, we saw a relative increase in charges
related to workers’ compensation of approximately $892,000,
and an increase in computer related costs of approximately $89,000.
These increases were partially offset by a decrease in professional
fees of $130,000 and the absence of the $1.4 million note
impairment incurred last year.
Miscellaneous Income
Miscellaneous income for the three months ended March 31, 2021 was
approximately $3.9 million, an increase of approximately $3.7
million, from $251,000 for the three months ended March 31, 2020.
This increase is primarily due to a bargain purchase gain of
approximately $4.9 million recognized as part of the Snelling
transaction. This gain was partially offset by a net loss of
approximately $1.2 million in relation to the sale of acquired
assets.
Liquidity and Capital Resources
Our major source of liquidity and capital is cash generated from
our ongoing operations. We also receive principal and interest
payments on notes receivable, most of which were issued in
connection with the sale of offices we acquired in the merger with
Command Center. We also sold approximately $5.3 million of these
notes at face value to Bass in the first quarter of 2021 to
generate cash for our two acquisitions. In addition, we have the
capacity to borrow under our line of credit with
Truist.
On March 31, 2021, our current assets exceeded our current
liabilities by approximately $16.7 million. Our current assets
included approximately $2.0 million of cash and $29.7 million of
accounts receivable, which our franchisees have billed to customers
and which we own in accordance with our franchise agreements. Our
largest current liabilities include approximately $7.6 million
related to our workers’ compensation claims liability, $4.2
million due to our franchisees on upcoming settlement statements,
and $3.2 million in accrued benefits and payroll
taxes.
In July 2019, we entered into an agreement with Truist, for a $30
million line of credit with a $15 million sublimit for letters of
credit. At March 31, 2021, approximately $14.3 million was utilized
by outstanding letters of credit that secure our obligations to our
workers’ compensation insurance carrier and $500,000 was
utilized by a letter of credit that secures our paycard funding
account, leaving $15.2 million available under the agreement for
potential additional borrowings, subject to availability under the
terms of the line of credit. For additional information related to
the letter of credit securing our workers’ compensation
obligations see Note 5 – Workers’
Compensation Insurance and Reserves, which disclosure is incorporated herein by
reference. For additional information related to our line of credit
see Note 4
– Line of Credit, which
disclosure is incorporated herein by reference.
Our working capital requirements are driven largely by temporary
employee payroll and accounts receivable from customers. Since
receipts lag employee pay – which is typically daily or
weekly – our working capital requirements increase as
system-wide sales increase, and vice-versa. When the economy
contracts, our cash balance tends to increase in the short-term as
payroll funding requirements decrease and accounts receivable are
converted to cash upon collection.
We believe that our current cash balance, together with the future
cash generated from operations, and our borrowing capacity under
our line of credit, will be sufficient to satisfy our working
capital needs, capital asset purchases, and other liquidity
requirements associated with our continuing operations for at least
the next 12 months. Our access to, and the availability of,
financing on acceptable terms in the future will be affected by
many factors including overall liquidity in the capital or credit
markets, the state of the economy and our credit strength as viewed
by potential lenders. We cannot provide assurances that we will
have future access to the capital or credit markets on acceptable
terms. The impact of the COVID-19 crisis on availability of
capital or credit is difficult to predict and may be
significant.
21
Operating Activities
During 2021, cash generated by operating activities was
approximately $11.9 million and included net income of
approximately $3.7 million, a decrease in accounts receivable of
approximately $4.0 million, the return of a workers’
compensation claim deposit of approximately $7.2 million which was
acquired in the Snelling transaction, and a net loss on the sale of
intangible assets acquired of approximately $1.2 million. These
provisions were partially offset by a gain recognized in relation
to an acquisition of approximately $5.0 million. During 2020, cash
provided by operating activities was approximately $5.5 million and
included net income of approximately $875,000, a decrease in
accounts receivable of approximately $3.8 million and an increase
in our allowance for losses on notes receivable of approximately
$1.4 million. These provisions were partially offset by an increase
in prepaid expenses, deposits, and other assets of approximately
$954,000 and an increase in prepaid workers’ compensation of
approximately $531,000.
Investing Activities
During 2021, cash used by investing activities was approximately
$22.9 million and included cash paid for acquisitions of
approximately $28.8 million. This use was offset by proceeds from
the sale of notes receivable of approximately $5.3 million and the
sale of purchased locations of approximately $1.0 million. During
2020, cash provided by investing activities was approximately
$323,000 and included an increase in franchisee deposits of
approximately $643,000 and proceeds from notes receivable of
approximately $438,000. These provisions were partially offset by
the purchase of property and equipment of approximately
$677,000.
Financing Activities
During 2020, cash used by financing activities was approximately
$668,000 and included the payment of a dividend of approximately
$680,000. During 2020, cash provided by financing activities was
approximately $28,000.
Key Performance Indicator: System-Wide Sales
We refer to total sales generated by our franchisees as
“franchise sales.” For the period prior to their
conversion to franchises, we refer to sales at company-owned and
operated offices as “company-owned sales.” In turn, we
refer to the sum of franchise sales and company-owned sales as
“system-wide sales.” In other words, system-wide sales
include sales at all offices, whether owned and operated by us or
by our franchisees. System-wide sales is a key performance
indicator. While we do not record system-wide sales as revenue,
management believes that information on system-wide sales is
important to understanding our financial performance because those
sales are the basis on which we calculate and record much of our
franchise royalty revenue, are directly related to all other
royalty revenue and service revenue, and are indicative of the
financial health of our franchisee base. Management uses
system-wide sales to benchmark current operating levels to historic
operating levels. System-wide sales should not be considered as an
alternative to revenue.
During the three months ended March 31, 2021 and March 31, 2020,
all of our offices were franchised. As such, system-wide sales for
the three months ended March 31, 2021 and March 31, 2020 were all
derived from franchised offices. System-wide sales were $54.3
million for the three months ended March 31, 2021, down $2.2
million, or 3.8% compared to the three months ended March 31, 2020.
The decrease in system-wide sales is primarily a result of the
effects of COVID-19 as we did not start to experience the negative
impacts until the final few weeks of the first quarter of
2020.
Number of Offices
We examine the number of offices we open and close every period.
The number of offices is directly tied to the amount of royalty and
service revenue we earn. Our franchisees opened four offices in the
first quarter and did not close any.
The following table accounts for the number of offices opened and
closed or consolidated in the first three months of
2021.
We do not engage in any off-balance sheet financing
arrangements.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk
We are a “smaller reporting company” as defined by Rule
12b-2 of the Exchange Act, and, as such, are not required to
provide the information required by this Item.
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of our disclosure controls and
procedures as required by Exchange Act Rule 13a-15(b) as of the end
of the period covered by this report. Based on that evaluation,
management concluded that these disclosure controls and procedures
were not effective as of the end of such period as a result of the
material weakness disclosed below.
We identified a material weakness in our internal control over
financial reporting as we did not have sufficient accounting
resources available to, handle the volume of technical accounting
issues, and provide adequate review functions, in connection with
the integration of acquisitions.
A material weakness is a deficiency, or 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 is taking appropriate action to remediate the
material weakness in internal control over financial reporting,
including evaluating hiring additional staff in the accounting
department and engaging third party professionals with acquisition
expertise.
Other than disclosed above, there were no changes in our internal
control over financial reporting during our quarter ended March 31,2021 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
From time to time we are involved in various legal and
administrative proceedings. Based on information currently
available to us, we do not expect material uninsured losses to
arise from any of these matters. We believe the outcomes of these
proceedings, even if determined adversely, will not have a material
adverse effect on our business, financial condition, results of
operations, or liquidity and capital resources.
There have been no material changes from the risk factors we
previously disclosed in our Annual Report on Form 10-K for the year
ended December 31, 2020 filed with the SEC on March 25,2021.
Item 2. Unregistered Sales of Equity
Securities and Use of Proceeds
Asset Purchase Agreement dated January 29, 2021 by and among
Snelling Staffing, LLC, Snelling Services, LLC, Snelling
Employment, LLC, Snelling Medical Staffing, LLC, Snelling
Investments, Inc., Snelling Holdings, LLC as the Sellers'
Representative, HQ Snelling Corporation, and HireQuest, Inc.
(incorporated by
reference to Exhibit 2.1 to Form 8-K filed on February 1,2021)
Asset Purchase Agreement dated February 12, 2021 between and among
LINK Staffing Services Corporation, Franlink, Inc., Stafflink,
Inc., and HQ Link Corporation. (incorporated by reference to
Exhibit 2.1 to Form 8-K filed on February 16,2021)
First Amendment to Asset Purchase Agreement dated March 1, 2021 by
and among Snelling Staffing, LLC, Snelling Services, LLC, Snelling
Employment, LLC, Snelling Medical Staffing, LLC, Snelling
Investments, Inc., Snelling Holdings, LLC, HQ Snelling Corporation,
and HireQuest, Inc. (incorporated by reference to
Exhibit 2.1 to Form 8-K filed on March 2, 2021)
Note Purchase Agreement dated March 1, 2021 by and between HQ
Financial Corporation, as Seller, and Bass Underwriters, Inc., as
Purchaser. (incorporated by reference to
Exhibit 2.2 to Form 8-K filed on March 2, 2021)
Certification of Richard Hermanns, Chief Executive Officer of
HireQuest, Inc. pursuant to Rule 13a-14(a) as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith)
Certification of Cory Smith, Chief Financial Officer of HireQuest,
Inc. pursuant to Rule 13a-14(a) as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002 (filed herewith)
Certification of Richard Hermanns, Chief Executive Officer of
HireQuest, Inc., and Cory Smith, Chief Financial Officer of
HireQuest, Inc., pursuant to 18 U.S.C. Section 1350, as adopted in
Section 906 of the Sarbanes-Oxley Act of 2002 (furnished
herewith)
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, hereunto duly
authorized.
