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 Programrisk 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:
●
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 previouslyaccounts receivable originating at company-owned offices.locations. At March 31, 20202021, approximately 12% of our accounts receivable originated at locations which were previously corporately owned by Snelling, and at December 31, 2019, substantially2020, all of our accounts receivable were due from customers of franchisees.
We own the accounts receivable from labor services provided by our franchisees. Accounts receivable thatfranchisees until they age beyond a date agreed upon with each respective franchisee between 42 and 84 daysdays. 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 previously 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 $99,000$-0- and $168,000$77,000 at March 31, 20202021 and December 31, 2019,2020, 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 linemodel 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. WeRoyalty 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 statutory 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 royalty incentives earned or credits granted under these programs. These incentives and credits are provided to driveencourage new locationoffice development to encourageand organic growth, and to limit workers' compensation exposure. We present franchise royalty fees net of these incentives and credits.
Below are summaries of our franchise royalties disaggregated by brand:business model:
| | | |
| | | | | |
| HireQuest Direct | $3,561,403 | $2,890,714 | $2,906,070 | $3,561,403 |
| HireQuest | 143,839 | 265,421 | 212,921 | 143,839 |
| Snelling | | 140,045 | - |
| Total | $3,705,242 | $3,156,135 | $3,259,036 | $3,705,242 |
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. InterestWe recognize interest income is recognized based on the effective interest rate applied to the outstanding principal balance. Revenue forbalance of overdue accounts. We recognize revenue from trademark license fees as we earn them. We recognize revenue from optional services is recognized as services are provided.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. Adjustments are madeWe make adjustments as necessary. If the actual costcosts of the claims exceedsexceed the amount estimated, we may incur additional charges may be incurred.charges.
Workers’ Compensation Risk Management Incentive Program (“RMIP”)
Our RMIP is designed to incentivize our franchises to keep our temporary employees safe and control their exposure to large workers’ compensation claims. We accomplish this by payingproviding our franchisees a royalty credit in an amount equivalent to a percentage of the premium our franchisesamount 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. OurWe 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 $1.4$1.6 million and $-0- at March 31, 20202021 and December 31, 2019, respectively.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. The fairWe use the Black-Scholes valuation model to determine the value of option awards is determined using the Black-Scholes valuation model.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.
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.
| | | | |
| | Estimated useful life | | | | | | |
| Finite-lived intangible assets: |
|
| | | | | |
| Franchise agreements | 15 years | $19,916,453 | $(73,041) | $19,843,412 | $- | $- | $- |
| Internally developed software | 3 to 10 years | 516,401 | - | 516,401 | 342,697 | - | 342,697 |
| Total finite-lived intangible assets | | $20,432,854 | $(73,041) | $20,359,813 | $342,697 | $- | $342,697 |
Savings Plan
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 DecemberMarch 31, 20192021 and March 31, 2020 totaled approximately 29,000.293,000 and 29,000, respectively.
Diluted common shares outstanding were calculated usingWe use the treasury stock method and areto calculate the diluted common shares outstanding which were as follows:
| | |
| | | | | |
| Weighted average number of common shares used in basic net income per common share | 13,533,247 | 9,939,668 | 13,602,764 | 13,533,247 |
| Dilutive effects of stock options | 1,753 | - | 196,440 | 1,753 |
| Weighted average number of common shares used in diluted net income per common share | 13,535,000 | 9,939,668 | 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.
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 outstanding principal balance, net of estimates for losses,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.
| | |
| | | | |
| Cash | 1 | $10,040,828 | $4,187,450 |
| Notes receivable | 2 | 9,605,114 | 11,409,709 |
| Accounts receivable | 2 | 24,426,333 | 28,201,279 |
Discontinued Operations
During the quarter ended September 29, 2019, we sold substantially all of the offices acquired in the Merger with Command Center. Accordingly, we present the assets and liabilities, operating results, and cash flows for these businesses and previously company-owned offices as discontinued operations, separate from our continuing operations, for all periods presented in our consolidated financial statements and footnotes, unless indicated otherwise.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued guidance on lease accounting. The new guidance continues to classify leases as either finance or operating, but results in the lessee recognizing most operating leases on the balance sheet as right-of-use assets and lease liabilities. This guidance was effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB amended the standard to provide transition relief for comparative reporting, allowing companies to adopt the provisions of the new standard using a modified retrospective transition method on the adoption date, with a cumulative-effect adjustment to retained earnings recorded on the date of adoption. We have elected to adopt the standard using the transition relief provided in the July amendment.
We have elected the three practical expedients allowed for implementation of the new standard, but have not utilized the hindsight practical expedient. Accordingly, we did not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; or 3) initial direct costs for any existing leases.
As a result of adopting this guidance, we recognized a right-of-use asset, and corresponding lease liability, of approximately $200,000 adopted as of January 1, 2019. The adoption of this guidance did not have a material impact on expense recognition. The deferred rent liability, which was the difference between the straight-line lease expense and cash paid, reduced the right-of-use asset upon adoption. | | | |
| | | | |
| Cash | 1 | $1,976,054 | $13,667,434 |
| Notes receivable | 2 | 3,611,868 | 7,618,191 |
| Notes receivable - impaired | 3 | 447,034 | 447,034 |
| Accounts receivable | 2 | 29,716,512 | 21,344,499 |
Recently Issued Accounting Pronouncements
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.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 was issued as a means to reduce the complexity of accounting for income taxes for those entities that fall within the scope of the accounting standard. The guidance is to be applied using a prospective method, excluding amendments related to franchise taxes, which should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. We are currently evaluating the impacts of adoption of the new guidance to our consolidated financial statements.
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, andor cash flows.
Note 2 – Acquisitions
Business Combinations
Snelling Staffing
On July 15, 2019, Command CenterMarch 1, 2021, we completed itsour acquisition of Legacy HQcertain assets of Snelling in accordance with the terms of the Asset Purchase Agreement and Plan of Merger dated April 8, 2019. UponJanuary 29, 2021 (the “Snelling Agreement”). Snelling is a 67-year-old staffing company headquartered in Richardson, TX. Pursuant to the closing of the Merger,Snelling Agreement, HQ Snelling Corporation (“HQ Snelling”), our wholly-owned subsidiary, acquired substantially all of the membership interests in Hire Quest Holdings, LLC were convertedoperating 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 rightFirst Amendment to receive 68%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 Company’s common stock outstanding immediately afterlocations where we assumed franchisor status in this transaction have subsequently signed our HireQuest franchise agreement and will continue to operate under the closing, or 9,939,668 shares.
We accounted for the Merger as a reverse acquisition. As such, Legacy HQ is considered the accounting acquirer and Legacy HQ's historical financial statements replace Command Center’s historical financial statements following the completion of the Merger. The results of operations of both companies are included in our financial statements for all periods beginning July 15, 2019.
The fair value of the purchase consideration is calculated based on the Company's stock price as it is considered to be more reliable than the fair value of the membership interests of Legacy HQ, a private company. Consideration is calculated based on the Company's closing share price of $5.76 on Nasdaq on July 15, 2019.
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 adjustmentadjustments to the values presented below:
Common stock | 4,677,487
|
Closing shareTotal allocable purchase price on July 15, 2019paid in cash | $5.76 |
Stock consideration | $26,942,32517,691,242
|
| | |
| Accounts receivable | $10,480,90712,292,830 |
Cash and cash equivalentsWorkers' compensation deposit | 5,376,5437,200,000 |
Identifiable intangible assetsFranchise agreements | 17,015,85711,034,000 |
| Customer lists | 1,690,000 |
| Other current assets | 725,453109,773 |
Property, plant and equipment, netWorkers' compensation claims liability | 281,186(4,890,930) |
Right-of-use assetAccrued payroll and payroll liabilities | 1,642,695(2,100,000) |
| Current liabilities | (3,124,081) |
Lease liabilities | (1,624,461)
|
Deferred tax liability | (2,930,947663,430)
|
| Other liabilities | (900,8272,021,832) |
PreliminaryBargain purchase | (4,959,169) |
| Purchase price allocation | $26,942,32517,691,242 |
Note 3 – Discontinued Operations
PriorThe bargain purchase is attributable to September 2019, we operated a numberthe financial position of company-owned offices. Subsequently, all owned officesthe seller and because there were sold.few suitable potential buyers. The vast majority of these offices became franchisees. As a result, we no longer operate any company owned offices and operating results from company-owned locations aregain is included in the line item, “Other miscellaneous income,” in our consolidated financial statementsstatement 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:
| | |
| | | |
| Royalty revenue | $4,069,507 | $4,874,260 |
| Net (loss) income | (593,067) | 1,573,164 |
| Basic (loss) earnings per share | $(0.04) | $0.12 |
| Basic weighted average shares outstanding | 13,602,764 | 13,533,247 |
| Diluted (loss) earnings per share | $(0.04) | $0.12 |
| Diluted weighted average shares outstanding | 13,602,764 | 13,535,000 |
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 discontinued operations.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, from discontinued operations as reported on" in our consolidated statementsstatement of operations was comprisedincome.
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 amounts:
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 | |
| | | |
RevenueFranchise agreements | $-10,886,178 |
| Notes receivable | 236,733 |
| Purchase price allocation | $179,747 |
Cost of staffing services | -
| 149,288
|
Gross profit | -
| 30,459
|
SG&A | -
| 4,190
|
Net income before tax | -
| 26,269
|
Provision for income taxes | -
| 6,567
|
Net income | $-
| $19,70111,122,911
|
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 continueassigned six of the franchise agreements we purchased in the transaction, all located in California, to be involvedthe 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 officessale of assets acquired in this transaction, we sold through franchise agreements. The termrecognized a loss of our franchise agreementsapproximately $1.9 million which is five years, subject to renewal atreflected on the end of the current term. For the quarter ended March 31, 2020 and March 31, 2019, approximately $783,000 and $-0- is included in royalty revenueline item, "Other miscellaneous income," in our consolidated statement of operations that originated from sold locations that subsequently became franchisees.income.
Note 43 – Related Party Transactions
Some significant shareholders of HQI also own portions of Hire Quest Financial, LLC; Hirequest Insurance Company; Brave New World Services, LLC, formerly known as Hire Quest LTS, LLC; Jackson Insurance Agency,Agency; Bass Underwriters, Inc. and its related entities;Inc; Insurance Technologies, Inc.; and a number of our franchisees.
Hire Quest Financial LLC (“HQF”)
Richard Hermanns, our President, CEO, Chairman of our Board, and most significant stockholder, and Edward Jackson, a member of our Board and a significant stockholder, own a majority of HQF, a financial services entity.
On July 14, 2019, Legacy HQ conveyed approximately $2.2 million of accounts receivable to HQF. These transfers were used to pay down intercompany debt obligations. The intercompany debt was entirely extinguished prior to the Merger between Legacy HQ and Command Center. At March 31, 2020 and December 31, 2019, HQI was not indebted to HQF for any amount. We currently have no business dealings with HQF.
Hirequest Insurance Company (“HQ Ins.”)
Mr. Hermanns, his adult daughter, a trust established for the benefit of his children, and Mr. Jackson, collectively own a majority of HQ Ins., a North Carolina protected cell captive insurance company. Effective March 1, 2010, Hire Quest, LLC purchased a deductible reimbursement insurance policy from HQ Ins. to cover losses up to the $500,000 per claim deductible on the Hire Quest, LLC high-deductible workers’ compensation policy originally obtained through AIG and, later, through ACE American Insurance Company. Hire Quest, LLC terminated its policy with HQ Ins. on July 15, 2019 upon the closing of the Merger. For additional information related to our workers’ compensation insurance, see Note 6 – Workers’ Compensation Insurance and Reserves.
Premiums invoiced by HQ Ins. to Legacy HQ for workers compensation deductible reimbursement insurance during the quarters ended March 31, 2020 and March 31, 2019 were approximately $-0- and $1.8 million, respectively. We currently have no business dealings with HQ Ins. other than cooperating to close Legacy HQ's workers' compensation claims.
Brave New World Services, LLC, formerly known as Hire Quest LTS (“HQ LTS”)
Mr. Jackson and Mr. Hermanns' son-in-law collectively own a majority of HQ LTS.
Historically, HQ LTS employed the personnel at Legacy HQ headquarters. HQI terminated this relationship on July 15, 2019 upon the closing of the Merger. HQ LTS invoiced us approximately $7,000 during the quarter ended March 31, 2019. We currently have no business dealings with HQ LTS.
Jackson Insurance Agency ("Jackson Insurance") and Bass Underwriters, Inc. ("Bass")
Mr. Jackson, owns a majoritymember 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, seeNote 10 – Notes Receivable.
Jackson Insurance and Bass brokered Legacy HQ's property, casualty, general liability, and cybersecurity insurance for a series of predecessor entities (“Legacy HQ”) prior to the Merger.merger with Command Center, Inc. (the “Merger”). Since July 15, 2019, they have brokeredcontinued to broker these same policies for the Company.HQI. Jackson Insurance also brokers certain insurance policies on behalf of some of our franchisees, including the Worlds Franchisees.Franchisees (defined below).
Premiums, taxes, and fees invoiced by Jackson Insurance and Bass to HQI for these insurance policies during the Company'sthree months ended March 31, 2021 and March 31, 2020 polices were approximately $584,000 and $561,000, in the first quarter of 2020. These entities invoiced Hire Quest, LLC approximately $240,000 in the first quarter of 2019.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 depending on the market.premiums.
Insurance Technologies, Inc. ("Insurance Technologies")
Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of them, collectively are theown a majority owners of Insurance Technologies, an IT development and security firm. On October 24, 2019, the CompanyHQI 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 the CompanyHQI approximately $102,000 and $50,000, in the first quarter of 2020respectively, 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 2021 Worlds Franchisees at March 31, 20202021 that operated 4857 of our 135212 offices.
Transactions regarding the Worlds Franchisees are summarized below:
| | |
| | | |
| Franchisee royalties | $1,613,009 | $1,373,876 |
Balances regarding the Worlds Franchisees are summarized below:
| | | | | |
| Due to franchisee | $1,034,194 | $993,495 | $632,335 | $435,072 |
| Risk management incentive program | 1,186,135 | 1,027,960 | |
| Risk management incentive program liability | | 858,868 | 499,199 |
Transactions regarding the Worlds Franchisees are summarized below:
| |
| | | |
| Franchisee royalties | $1,373,876 | $1,633,782 |
Note 54 – Line of Credit
In July 2019, we entered into an agreement with Branch Banking and Trust Company, now Truist, Bank (“Truist”), for a $30 million line of credit with a $15 million sublimit for letters of credit. At March 31, 2020, $9.12021, approximately $14.3 million was utilized by outstanding letters of credit that secure our obligations to our workers’ compensation insurance carrier $1 millionand $500,000 was utilized by a letter of credit that secures our paycard funding account, leaving $19.9$15.2 million potentially available under the agreement for potential additional borrowings.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 65 – Workers’ Compensation Insurance and Reserves.
This line of credit is scheduled to mature on May 31, 2024. Outstanding borrowings under the loanThe current agreement currently bearbears interest at a variable rate equal to the Daily One Month London Interbank Offering Rate, (“LIBOR”)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, 20202021 the effective interest rate was 2.5%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, which will be tested quarterly on a rolling four quarter basis, commencingbasis. At March 31, 2021 we were in compliance with the four quarters ending September 30, 2020.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 65 – 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, weLegacy HQ terminated ourits deductible reimbursement policy with HQ Ins. and haveWe 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. We assumed the Legacy HQ policy with ACE.
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 $9.1$14.3 million, which we accomplished by providing lettersa 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 Washington, 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:
| Declaration date | | |
| September 15, 2020 | $0.05 | $677,869 |
| December 15, 2020 | 0.05 | 679,779 |
| March 15, 2021 | 0.05 | 680,247 |
Treasury Stock
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 November 2016,December 2019, our stockholdersBoard approved a stock incentive planthe 2019 HireQuest, Inc. Equity Incentive Plan (the “2016“2019 Plan”) under which we are authorized. Subject to grant awards for up to 500,000adjustment in accordance with the terms of the 2019 Plan, no more than 1,500,000 shares of our common stock overare available in the 10-year lifeaggregate for the grant of awards under the plan.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 one-year period.calendar year. These shares vest on the second anniversary of the date on which the matched shares were purchased.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 January 2020,the quarter ended March 31, 2021, we issued 10,1248,166 shares of restricted common stock pursuant to the 20162019 Plan valued at approximately $70,000$82,000 to certain members of our Board of Directors for their services in lieu of cash compensation. Of these, 10,1246,805 shares 8,436 shares vestvested equally over the following three months, and themonths. The remaining 1,6881,361 shares vest on the second anniversary of the date of grant.were issued pursuant to our share purchase match program. Also in January 2020,the first quarter 2021, we issued 8,5821,200 shares of restricted common stock to certain Board members and employees pursuant to our share purchase match program valued at approximately $59,000.$12,000.
In November 2019,2020, we issued 9,83381,943 shares of restricted common stock pursuant to the 20162019 Plan valued at approximately $59,000$539,000 to certain members of our Board of Directors for their services in lieu of cash compensation. Of these, 9,83361,868 shares 8,194 shares vest equally over the following three months, and the remaining 1,639 shares vest on the second anniversary of the date of grant. Also in November of 2019, we issued 4,202 shares of restricted common stock pursuant to the 2016 Plan valued at $25,000 to an employee in lieu of cash for a bonus, which vestvested equally over the following three months. The remaining 20,075 shares were issued pursuant to our share purchase match program.
In September 2019,Also in 2020, we issued 160,00025,000 shares of restricted common stock to certain key employeesan employee pursuant to the 20162019 Plan valued at approximately $1.1 million$179,000 for services, and to encourage retention. These shares vest over four years, with 50% vesting on September 1,11, 2021, and 6.25% vesting each quarter thereafter for the next eight quarters. Also in September 2019,2020, we issued 90,0001,742 shares of restricted common stock to certain employees pursuant to the 2016 Planour share purchase match program valued at $648,000 for services to non-employee members of our Board of Directors. These shares vest equally over approximately three years with the first vesting occurring the day before our annual stockholder meeting to be held in 2020, and the remainder vesting in equal portions on each of the first two anniversaries of that date.
$12,000.
The following table summarizes our restricted stock outstanding at December 31, 2019,2020, and changes during the quarterthree months ended March 31, 2020.2021.
| | Weighted average grant date price | | Weighted average grant date price |
| Non-vested, December 31, 2019 | 255,634 | $7.18 | |
| Non-vested, December 31, 2020 | | 283,456 | $7.18 |
| 18,706 | 7.15 | 9,366 | 10.03 |
| (14,057) | 6.69 | (6,805) | 10.03 |
Non-vested, March 31, 2020 | 260,283 | 7.32 | |
| Non-vested, March 31, 2021 | | 286,017 | 7.22 |
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 24,00015,000 stock options vested at March 31, 20202021 and December 31, 2019.2020.
The following table summarizes our stock options outstanding at December 31, 2019,2020, and changes during the quarterthree months ended March 31, 2020:2021:
| Number of shares underlying options | Weighted average exercise price per share | Weighted average grant date fair value |
| Outstanding, December 31, 2019 | 29,165 | $7.20 | $3.46 |
| Granted | - | - | - |
| Forfeited | - | - | - |
| - | - | - |
Outstanding, March 31, 2020 | 29,165 | 7.20 | 3.76 |
| | Number of shares underlying options | Weighted average exercise price per share | Weighted average grant date fair value |
| Outstanding, December 31, 2020 | 17,082 | $6.10 | $3.36 |
| Granted | - | - | - |
| Outstanding, March 31, 2021 | 17,082 | 6.10 | 3.36 |
The following table summarizes our non-vested stock options outstanding at December 31, 2019,2020, and changes during the quarterthree months ended March 31, 2020:2021:
| Number of shares underlying options | Weighted average exercise price per share | Weighted average grant date fair value |
| Non-vested, December 31, 2019 | 5,416 | $5.48 | $3.01 |
| - | - | - |
| - | - | - |
| - | - | - |
Non-vested, March 31, 2020 | 5,416 | 5.48 | 3.01 |
| | Number of shares underlying options | Weighted average exercise price per share | Weighted average grant date fair value |
| Non-vested, December 31, 2020 | 2,188 | $5.50 | $3.05 |
| Vested | - | - | - |
| Non-vested, March 31, 2021 | 2,188 | 5.50 | 3.05 |
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 $5.97$17.25 at March 31, 2020:2021:
| Number of shares underlying options | Weighted average exercise price per share | Weighted average remaining contractual life (years) | Aggregate intrinsic value | Number of shares underlying options | Weighted average exercise price per share | Weighted average remaining contractual life (years) | Aggregate intrinsic value |
| Outstanding | 29,165 | $7.20 | 4.47 | $36,171 | 17,082 | $6.10 | 5.43 | $202,582 |
| Exercisable | 23,749 | 7.59 | 3.64 | 32,334 | 14,894 | 6.18 | 5.16 | 164,839 |
At March 31, 2020,2021, there was unrecognized stock-based compensation expense totaling approximately $1.3 million$659,000 relating to non-vested options and restricted stock grants that will be recognized over the next 3.32.4 years.
Note 8 – Commitments and Contingencies
Franchise Acquisition Indebtedness
WeNew franchisees financed the purchase of several offices by new franchisees with notes receivable.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, 20202021 and December 31, 20192020 was approximately $2.5 million.$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, 2020.2021.
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 as the tax environment changes. For additional information related to our notes receivable, see changesNote 10 – Notes Receivable..
Our effective tax rate for the quarterthree 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 primarily 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. This tax creditCredit, which is designed to encourage employers to hire workers from certain targeted groups with higher than average unemployment rates. Other differences between the statutory federal income tax rate of 21.0% and our effective tax rate result from state income taxes, certain non-deductible expenses, and tax effects of stock-based compensation.
Note 10 – Notes Receivable
SomeSeveral franchisees, as well as the purchaser of our previously owned California locations, have borrowed funds from us primarily to finance the initial purchase price of office assets. In March of 2021, we sold locations. 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 $9.6$4.1 million and $11.4$8.1 million as of March 31, 20202021 and December 31, 2019, respectively, net of allowance for losses.
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 locationoffice and the ownership interests in the franchisee. Interestfranchise. We report interest income on franchisee notes is reported inreceivable as other miscellaneous income in our consolidated statements of operations andoperations. This interest income was approximately $135,000 and $198,000 and $-0- induring the quartersthree months ended March 31, 20202021 and March 31, 2019,2020, respectively.
We estimate the allowance for losslosses for franchisees discretelyseparately from the allowance for losslosses from non-franchisees because of the level of detailed sales information available to us. There have been no historic losses for either segment.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 $1.4$1.6 million as of March 31, 2021 and December 31, 2020 for potentially uncollectible notes receivable. There were no loans in default as of March 31, 2020.
The following table summarizes changes in our notes receivable balance to franchisees:
Balance as of December 31, 2019 | $9,702,471
|
Notes issued | 38,000
|
Payments received | (438,410)
|
Change in valuation allowance | (366,472)
|
Balance as of March 31, 2020 | $8,935,589
|
| | | |
| Notes receivable | $4,017,181 | $8,023,807 |
| Allowance for losses | (405,313) | (405,313) |
| Notes receivable, net | $3,611,868 | $7,618,494 |
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 notesnote receivable balance to non-franchisees:that has been deemed impaired:
Balance as of December 31, 2019 | $1,707,238
|
Accrued interest | 43,155
|
Total unpaid balance | 1,750,393
|
Change in valuation allowance | (1,080,868)
|
Balance as of March 31, 2020 | $669,525
|
Note 11 - Subsequent Events
Issuance of Common Stock
In April 2020, we issued 8,381 shares of restricted common stock pursuant to the 2016 Plan valued at approximately $52,000 to certain members of our Board of Directors for their services in lieu of cash compensation. Of these 8,381 shares, 6,985 shares vest equally over the following three months, and the remaining 1,396 shares vest on the second anniversary of the date of grant.| | | |
| Note receivable | $1,640,393 | $1,640,393 |
| Allowance for losses | (1,193,359) | (1,193,359) |
| Notes receivable, net | $447,034 | $447,034 |
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 for the quarter ended March 31, 2020 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 the novel coronavirus disease (“COVID-19”);COVID-19; operating results; dividends and shareholder returns; anticipated benefits of the merger with Command Center, Inc., or the conversion to the franchise model;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 including, without limitation, successful integration following the merger with Command Center, Inc.;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; and the factors discussed in the “Risk Factors” section and elsewhere in our most recent Annual Report on Form 10-K, which we filed with the SEC on March 30, 2020.25, 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 ownedwholly-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, 2020,2021, we had 135approximately 210 franchisee-owned offices in 3035 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.
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 recent coronavirus pandemic has already had, and we expect it to continue to have, a significant impact onsignificantly impacted our operations. In March 2020, infections of the novel coronavirus disease ("COVID-19") had become pandemic with persons testing positive in all fifty states and the District of Columbia. With widespread infection in the United States and abroad, national, state, and local authorities recommended social distancing and have takentook dramatic action, including without limitation, 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, serious adverse impacts on domesticour business and foreign economies of uncertain duration.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. Most economists are predicting the United States will soon enter, or may already have entered, a recession.
We entered 2020 prepared for a potential economic downturn2021 with a strong balance sheet. Our current assets exceeded current liabilities by more than $30approximately $16 million. InWe 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 first quarter of 2020, wepandemic. 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 improvedincrease our already-strong cash positionfranchise base without incurring any debt at March 31, 2021. We have been able to $10 million. Theremain profitable throughout the pandemic. Still, the sweeping and persistent nature of the COVID-19 pandemic makes it extremely difficult to predict howhas depressed our business operations will be affected in the long term. But the likely overall impact of the pandemic is viewed as highly negative to the general economy. The COVID-19 outbreak has negatively impacted our operationssystem-wide sales and revenue as well as those of our franchisees.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 into April and May. Ourthrough our current quarter. On a month-to-month basis, our system-wide sales appearedhave consistently trended closer to be consistent for the last few weeks of April,historically normal numbers, however, they were lower than system-wide sales in March, and wethe 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 revenuefranchise royalties in the secondcoming quarters, and potentially into next year. Some of the depression in sales will be offset by the acquisitions we made in the first quarter and, perhaps, beyond. Whatof 2021. It remains unclear and difficult to predict is the length of timehow long we will stay at this comparatively reduced level of sales.sales, and the evolving nature of the pandemic makes reliable predictions extremely difficult.
To date, our franchisees have closed or consolidated 13 offices at least, in part, due to the potential 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. We have witnessed a significant drop in the amount of hospitality, event service, catering, and auto auction business that our franchisees do. Our other lines of business may suffer in the future as well. For example, in a small number of jurisdictions our customers have been declared non-essential businesses causing business to slow extensively. Some of our other customers may choose voluntarily to close their worksites. To date, however, our business remails open, and we continue to provide key services to essential businesses.
In response to current economic conditions, we are taking appropriate measures to control and reduce selling, general, and administrative expense ("SG&A"). In addition, we placed a reserve of $1.4 million on the promissory notes we hold from our franchisees and the purchasers of our previously owned California offices. We calculated the reserve based on our review of the financial condition of the borrowers and of the underlying collateral. This reserve arose directly out of the impacts of COVID-19. We believed such a reserve would assist us in dealing with non-payment or delayed payment of portions of these notes.
As discussed more fully below, our already strongwe have reduced liquidity position has improved since December 31, 2019 because of decreased funding requirements for temporary employees which has caused our accounts receivable2020 as we used cash to be converted to cash upon collection. We increasedcomplete two acquisitions. As a result, our cash balance decreased by approximately $5.8$11.7 million inthrough the first quarter of 20202021 from $4.2$13.7 million at year end to $10.0$2.0 million. When combined with our borrowing capacity under our line of credit and lackabsence 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 quartersinterim periods ended March 31, 20202021 and March 31, 20192020 (in thousands, except percentages). Sales and expenses at company-owned offices are reflected onPercentages reflect the line item “Income from discontinued operations, netas a percentage of tax.”total revenue.
| | |
| | | | | |
| Franchise royalties | $3,705 | 89.9% | $3,156 | 90.9% | $3,259 | 95.8% | $3,705 | 89.9% |
| Service revenue | 415 | 10.1% | 316 | 9.1% | 144 | 4.2% | 415 | 10.1% |
| Total revenue | 4,120 | 100.0% | 3,472 | 100.0% | 3,403 | 100.0% | 4,120 | 100.0% |
| Selling, general and administrative expenses | 3,253(1) | 79.0% | 1,552 | 44.7% | 3,842 | 112.9% | 3,253 | 79.0% |
| Depreciation and amortization | 32 | 0.7% | 14 | 0.4% | 333 | 9.8% | 32 | 0.8% |
| Income (loss) from operations | 835 | 20.3% | 1,906 | 54.9% | (772) | -22.7% | 835 | 20.3% |
| Other miscellaneous income | 251 | 6.1% | 28 | 0.8% | 3,916 | 115.1% | 251 | 6.1% |
| Interest and other financing expense | (11) | (0.3%) | (185) | (5.3%) | (5) | -0.1% | (11) | -0.3% |
| Net income before income taxes | 1,074 | 26.1% | 1,749 | 50.4% | 3,140 | 92.3% | 1,074 | 26.1% |
| Provision (benefit) for income taxes | 199 | 4.9% | 51 | 1.5% | (602) | -17.7% | 199 | 4.8% |
| Income (loss) from continuing operations | 875 | 21.2% | 1,698 | 48.9% | |
| Income from discontinued operations, net of tax | - | 0.0% | 20 | 0.6% | |
| Net income (loss) | $875 | 21.2% | $1,717 | 49.5% | |
| Net income | | $3,742 | 110.0% | $875 | 21.2% |
1.
Includes a reserve of approximately $1.4 million on notes receivable.
QuarterThree Months Ended March 31, 20202021
Franchise Royalties
We charge our franchisees a royalty fee on gross billings to customers based on one of two models: the HireQuest Direct model or the HireQuest model. Under the HireQuest Direct model, the royalty fee charged ranges from 6% to 8% of gross billings. Royalty fees are charged at 8% for the first $1,000,000 of annual billing, with the royalty fee dropping ½ of 1% for every $1,000,000 of annual billing thereafter until the royalty fee is 6%. The smaller royalty fee is charged only on the incremental billing, resulting in an actual royalty fee at a blended rate between 6% and 8%. Under this model, we grant our franchisees credits for low margin business. Under the HireQuest model, the royalty fee is 4.5% of the temporary payroll we fund plus 18% of the gross margin for the territory.
Franchise royalties for the quarterthree months ended March 31, 20202021 were approximately $3.7$3.3 million, an increasea decrease of 17.4%12.0% from $3.2$3.7 million for the quarterthree months ended March 31, 2019. Of this increase, approximately $783,000 arose from2020. 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 offices acquired through the Merger. Royalty revenue during the lastfinal few weeks of the first quarter 2020 was negatively impacted byquarter. The effect of this decreased activity related to COVID-19. This negativemore than offset the $32,000 positive impact continued intoof additional franchise royalties received in the second quarter. Wefirst 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 in the second quarter,to persist throughout 2021, and perhaps beyond, when comparedrelative to historicalpre-pandemic levels.
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 that age over 84 daysreceivable 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 quarterthree months ended March 31, 20202021 was approximately $415,000, an increase of $99,000$144,000, a decrease from approximately $316,000 in$415,000 for the first quarter of 2019.three months ended March 31, 2020. This increase is largely relateddecrease was due to an increase inlower interest charged on overdue customer accounts receivable.income and lower system-wide sales-based fees.
Selling, General, and Administrative Expenses (“SG&A”)
SG&A expenses for the quarter wasthree months ended March 31, 2021 were approximately $3.3$3.8 million, an increase of 109.6%18.1% from $1.6$3.3 million infor the first quarter of 2019. The majority of thisthree months ended March 31, 2020. This increase is due to a $1.4 million reserve placed on notes receivable we issued to finance the sale of offices acquired in the Merger. This reserve is directlyprimarily related to the negative impact COVID-19 has had on the economy, the financial conditionacquisition-related expenses of our borrowers,approximately $1.4 million. In addition, we saw a relative increase in charges related to workers’ compensation of approximately $892,000, and the value of the underlying collateral. We also had an increase in stock-based compensation of approximately $323,000, an increase in legal and professional fees of $282,000 primarily as a result of increased auditor and legal feescomputer related to SEC filings, and increased compensation costs of approximately $147,000.$89,000. These increased costsincreases were partially offset by a decrease in workers’ compensation costsprofessional 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 $702,000.
In$3.7 million, from $251,000 for the last few weeksthree 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 first quarter, we significantly cut our payroll costs at our corporate headquarters toSnelling transaction. This gain was partially offset our expectationby a net loss of decreased revenue resulting from COVID-19.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 Merger.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, 2020,2021, our current assets exceeded our current liabilities by approximately $28.5$16.7 million. Our current assets included approximately $10.0$2.0 million of cash and $24.4$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 $3.3 million due to our franchisees, $2.5$7.6 million related to our workers’ compensation claims liability, and $2.1$4.2 million due in relation to our risk management incentive program.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 seeNote 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 witnessed this in the first quarter of 2020 as COVID-19 decreased our temporary payroll requirements. Our cash balance rose from $4.2 million at the end of 2019 to $10.0 million at the end of the first quarter.
We believe that our current cash balance, together with the future cash generated from operations, principal and interest payments on notes receivable, and our borrowing capacity under our line of credit, with Truist, will provide adequate resourcesbe sufficient to meetsatisfy our working capital needs, capital asset purchases, and cashother 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.
Operating Activities
NetDuring 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 from continuing operations for the quarter ended March 31, 2020 was approximately $5.5 million. Operating activity for the quartermillion 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. Net cash provided by operating activities from continuing operations for the quarter ended March 31, 2019 was approximately $2.1 million. Operating activity for the first quarter of 2019 included net income from continuing operations of approximately $1.7 million$954,000 and an increase in prepaid workers’ compensation of approximately $1.4 million due our franchisees. These provisions were offsets by a decrease in accounts payable of approximately $1.1 million.
$531,000.
Investing Activities
NetDuring 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 for the quarter ended March 31, 2020 was approximately $323,000. Investing activity for the first quarter of 2020$323,000 and included an increase in franchisee deposits of approximately $643,000 and payments onproceeds from notes receivable of approximately $438,000, which$438,000. These provisions were partially offset by the purchase of property and equipment of approximately $677,000. Net cash provided by investing activities for the quarter ended March 31, 2019 was approximately $875,000 and was primarily due an increase in franchisee deposits.
Financing Activities
NetDuring 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 the quarter ended March 31, 2020 was approximately $28,000 and was due to an increase in amounts due from affiliates. Net cash used by financing activities for the quarter ended March 31, 2019 was approximately $3.3 million and was primarily due to payments to affiliates of approximately $3.1 million.$28,000.
Key Performance Indicator: System-Wide Sales
We refer to total sales generated by our franchisees as “franchise sales.” WeFor the period prior to their conversion to franchises, we refer to offices that we ownedsales at company-owned and operated offices as “company-owned offices.sales.” Sales at company-owned offices are reflected net of costs, expenses, and taxes associated with those sales on our financial statements as “Income from discontinued operations, net of tax.” WeIn turn, we refer to the sum of franchise sales and sales at company-owned officessales 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 non-GAAP measure.key performance indicator. While we do not record franchisesystem-wide sales as revenue, management believes that information on system-wide sales is important to understanding the Company’sour financial performance because those sales are the basis on which we calculate and record much of our franchise royalty revenue, are directly related to interest charged on overdue accounts, which we record underall other royalty revenue and service revenue, and are indicative of the financial health of theour franchisee base. Management uses system-wide sales to benchmark current operating levels to historic operating levels. System-wide sales are not intended to represent revenue as defined by GAAP, and such information should not be considered as an alternative to revenue or any other measure of performance prescribed by U.S. GAAP.revenue.
During the first quarter ofthree months ended March 31, 2021 and March 31, 2020, all of our offices were franchised. Accordingly,As such, system-wide sales for the first quarter ofthree months ended March 31, 2021 and March 31, 2020 were all produced atderived from franchised offices. The following table reflects our system-wide sales broken into its components for the periods indicated:
| | | |
| Franchise sales | $56,462,605 | $47,384,474 |
| Company-owned sales | - | 179,747 |
| System-wide sales | $56,462,605 | $47,564,221 |
System-wide sales were $56.4$54.3 million infor the first quarter of 2020, up $8.9three months ended March 31, 2021, down $2.2 million, or 18.7% over3.8% compared to the first quarter of 2019.three months ended March 31, 2020. The increasedecrease in system-wide sales arose largely fromis primarily a result of the offices added in July 2019 viaeffects of COVID-19 as we did not start to experience the Merger. Innegative impacts until the closingfinal few weeks of the first quarter of 2020, we experienced a decline in week-over-week system-wide sales. This decline has continued into the second quarter. The week-over-week system-wide sales appeared to stabilize at a decreased level in the last few weeks of April. We expect system-wide sales to be lower in the second quarter, and perhaps, beyond.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 quarterthree months of 2020.2021.
Franchised Offices,offices, December 31, 20192020 | 147139 |
Closed or consolidated in 2020 | (13-) |
| Opened in 2020 | 15 |
| Purchased in 2021 (net of sold locations) | 64 |
Franchised Offices,offices, March 31, 20202021 | 135208 |
Office closures and consolidations in the first quarter of 2020 were largely related to the economic impacts of COVID-19. Of the 13 closures or consolidations, 11 were in metropolitan areas where our franchisees still maintain one or multiple offices. The remaining 2 offices, Findlay, OH and Flagstaff, AZ, did not historically produce significant amounts of system-wide sales and resulting revenue. Accordingly, weOff-Balance Sheet Arrangements
We do not expect such closures and consolidations in-and-of themselves to have a material impact on our system-wide sales, revenue, or other results of operations. It is difficult to predict whether the impacts of COVID-19 will cause more closures. A franchisee opened one officeengage in Rock Hill, South Carolina.
any off-balance sheet financing arrangements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a “smaller reporting company” as defined by Regulation S-KRule 12b-2 of the Exchange Act, and, as such, we are not required to provide the information contained inrequired by this item pursuant to Regulation S-K.Item.
Item 4. Controls and Procedures
(a) EvaluationUnder the supervision and with the participation of disclosure controls and procedures. Our Chief Executive Officer and our Chief Financial Officer evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) undermanagement, including the Securities and Exchange Act of 1934, as amended, the Exchange Act), prior to the filing of this Form 10-Q. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that, aswe have evaluated the effectiveness of March 31, 2020, 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 effective.not effective as of the end of such period as a result of the material weakness disclosed below.
(b) ChangesWe 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 controlscontrol over financial reporting. There havereporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not been anybe 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, 2020, which2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. 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 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, 20192020 filed with the Securities and Exchange CommissionSEC on March 30, 2020.25, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during the quarter ended March 31, 2020.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our own securities during the quarter ended March 31, 2020.None.
Item 5. Other Information
None.
Exhibit No. | | Description |
| | 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 Certificationof 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 Certificationof 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 (filed(furnished herewith). |
| 101.INS | | XBRL Instance Document (filed herewith). |
| 101.SCH | | XBRL Taxonomy Extension Schema Document (filed herewith). |
| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith). |
| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document (filed herewith). |
| 101.LAB | | XBRL Taxonomy Extension Label Linkbase Document (filed herewith). |
| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document (filed 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.
| HireQuest, Inc.
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Date: May 17, 2021 | By: |
/s/ Richard Hermanns | |
| | May 11, 2020Richard Hermanns | |
Richard Hermanns
| |
| | Date | |
| President and Chief Executive Officer | |
| | | |
| | /s/ Cory Smith | |
| | |
Cory Smith | |
| | | |
/s/ Cory Smith
| |
| | May 11, 2020 | |
Cory Smith | |
| | Date | |
| Chief Financial Officer | |
| | | |
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