In connection with the acquisition, we sold the 10 locations that had been company-owned by Snelling.Snelling located in Bakersfield, CA; Albany, NY; Arlington Heights, IL; Amherst, NY; Dallas, TX; Hayward, CA; Hoffman Estates, IL; Lathrop, CA; Ontario, CA; and Tracy, CA. Two of these welocations were sold to franchisees. Four officeslocations were sold to a third-partythird-party purchaser. Four offices were sold to a California purchaser (the “California Purchaser”) and operate asunder the Snelling name pursuant to a license agreement.agreement with us. The aggregate sale price for these10 locations consisted of (i) $1.0 million in the form of a promissory note that bears interest at 6.0%, per annum, (ii) the right to receive 1.5% of revenue generated at the Ontario location for the next 12 months, subject to certain conditions being satisfied (the "California Conditions"), (iii) the right to receive 2.5% of revenue generated at the Tracy and Lathrop locations for the next 12 months, subject to the California Conditions, (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 nowere 0 remaining company-owned locations at March 31, 2021. One of the California locations operates pursuant to a license agreement whereby they licensethe California Purchaser licenses the Snelling trademark and paypays 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$638 thousand which is reflected on the line item, "Other miscellaneous income," in our consolidated statement of income.
Temporary Alternatives
On January 24, 2022 we completed our acquisition of certain assets of Temporary Alternatives in accordance with the terms of an Asset Purchase Agreement dated January 10, 2022, including 3 locations in West Texas and New Mexico for $5.25 million, inclusive of a prescribed amount of working capital. Temporary Alternatives is a staffing division of dmDickason Personnel Services, a family-owned company based in El Paso, TX. The acquisition of Temporary Alternatives will expand our national footprint into West Texas and grow our franchise base.
The fair values of the assets acquired were determined based on information available to us. Additional information is being gathered to finalize the provisional measurements with respect to the fair value of the assets acquired. Accordingly, the measurement of the assets acquired may change upon finalization of the valuation and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date. The following table summarizes the provisional values of the identifiable assets acquired as of the acquisition date (in thousands).
Cash consideration | | $ | 6,706 | |
Net working capital payable | | | 340 | |
Total consideration | | $ | 7,046 | |
| | | | | |
Customer lists | | $ | 4,375 | |
Accounts receivable | | | 2,671 | |
Purchase price allocation | | $ | 7,046 | |
The following table presents unaudited pro forma information assuming the acquisition of Temporary Alternatives had occurred on January 1, 2021. 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. Gross profit attributable to the acquiree of $47 thousand is included in our consolidated statement of income for the three months ended March 31, 2022.
| | | Three months ended | |
(in thousands, except per share data) | | March 31, 2022 | | | March 31, 2021 | |
Total revenue | | $ | 8,143 | | | $ | 3,681 | |
Net income | | | 1,648 | | | | 3,938 | |
Basic earnings per share | | $ | 0.12 | | | $ | 0.29 | |
Basic weighted average shares outstanding | | | 13,526 | | | | 13,603 | |
Diluted earnings per share | | $ | 0.12 | | | $ | 0.29 | |
Diluted weighted average shares outstanding | | | 13,659 | | | | 13,799 | |
These calculations reflect increased amortization expense, increased SG&A expense, the elimination of losses associated with the transaction, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2021.
In connection with the acquisition, we sold certain assets related to the operations of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was approximately $2.9 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.5 million which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income.
The Dubin Group, Inc., and Dubin Workforce Solutions
On February 21, 2022 we completed our acquisition of the staffing operations of The Dubin Group, Inc., and Dubin Workforce Solutions, Inc. (“Dubin”) in accordance with the terms of an Asset Purchase Agreement dated January 19, 2022 for approximately $2.4 million, inclusive of a prescribed amount of working capital. Dubin provides executive placement services and commercial staffing in the Philadelphia metro area. The acquisition of Dubin will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base.
The fair values of the assets acquired were determined based on information available to us. Additional information is being gathered to finalize the provisional measurements with respect to the fair value of the assets acquired. Accordingly, the measurement of the assets acquired may change upon finalization of the valuation and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date. The following table summarizes the provisional values of the identifiable assets acquired as of the acquisition date (in thousands):
Cash consideration | | $ | 2,100 | |
Note payable & net working capital payable | | | 362 | |
Total consideration | | $ | 2,462 | |
| | | | | |
| | | | | |
Customer relationships | | $ | 1,172 | |
Customer lists | | | 828 | |
Accounts receivable | | | 462 | |
Purchase price allocation | | $ | 2,462 | |
The following table presents unaudited pro forma information assuming the acquisition of Dubin had occurred on January 1, 2021. 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. Gross profit attributable to the acquiree of $5 thousand is included in our consolidated statement of income for the three months ended March 31, 2022.
| | | Three months ended | |
(in thousands, except per share data) | | March 31, 2022 | | | March 31, 2021 | |
Total revenue | | $ | 8,497 | | | $ | 3,156 | |
Net income | | | 1,092 | | | | 3,269 | |
Basic earnings per share | | $ | 0.08 | | | $ | 0.24 | |
Basic weighted average shares outstanding | | | 13,526 | | | | 13,603 | |
Diluted earnings per share | | $ | 0.08 | | | $ | 0.24 | |
Diluted weighted average shares outstanding | | | 13,659 | | | | 13,799 | |
These calculations reflect increased amortization expense, increased payroll expense, increased SG&A expense, the elimination of losses associated with the transaction, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2021.
In connection with the acquisition, we sold certain assets related to the operations of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was $350 thousand. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $478 thousand which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income.
Northbound Executive Search
On February 28, 2022 we completed our acquisition of certain assets of Northbound Executive Search, LTD (“Northbound”) in accordance with the terms of an Asset Purchase Agreement dated January 25, 2022, for approximately $11.0 million, inclusive of a prescribed amount of working capital. Northbound provides executive placement and short-term consultant services primarily to blue chip clients in the financial services industry. The acquisition of Northbound will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base.
The fair values of the assets acquired and the liabilities assumed were determined based on information available to us. Additional information is being gathered to finalize the provisional measurements with respect to the fair value of the assets acquired and liabilities assumed. Accordingly, the measurement of the assets acquired and liabilities assumed may change upon finalization of the valuation and completion of the purchase price allocation, both of which are expected to occur no later than one year from the acquisition date. The following table summarizes the provisional values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash consideration | | $ | 9,663 | |
Note payable | | | 1,500 | |
Total consideration | | $ | 11,163 | |
| | | | | |
Customer relationships | | $ | 8,089 | |
Trade name | | | 1,511 | |
Accounts receivable | | | 3,023 | |
Other current assets | | | 128 | |
Current liabilities assumed | | | (1,588 | ) |
Purchase price allocation | | $ | 11,163 | |
The following table presents unaudited pro forma information assuming the acquisition of Dubin had occurred on January 1, 2021. 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. Gross profit attributable to the acquiree of $96 thousand is included in our consolidated statement of income for the three months ended March 31, 2022.
| | | Three months ended | |
(in thousands, except per share data) | | March 31, 2022 | | | March 31, 2021 | |
Total revenue | | $ | 8,333 | | | $ | 3,601 | |
Net income | | | 1,969 | | | | 3,889 | |
Basic earnings per share | | $ | 0.15 | | | $ | 0.29 | |
Basic weighted average shares outstanding | | | 13,526 | | | | 13,603 | |
Diluted earnings per share | | $ | 0.14 | | | $ | 0.28 | |
Diluted weighted average shares outstanding | | | 13,659 | | | | 13,799 | |
These calculations reflect increased amortization expense, increased SG&A expense, the elimination of losses associated with the transaction, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2021.
In connection with the acquisition, we sold certain assets related to the operations of the acquired locations. In connection with their purchase, the buyers exectued franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was $6.4 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.7 million which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income.
Discontinued operations
The operating results from the potion of the Dubin assets that have not been sold are reported as “Income from discontinued operations, net of tax.” We are actively working to sell these assets and expect to do so in the near future. The income from discontinued operations amounts as reported on our consolidated statements of income is comprised of the following amounts:
| | | Three months ended | |
(in thousands) | | | March 31, 2022 | |
Revenue | | $ | 154 | |
Cost of staffing services | | | 83 | |
Gross profit | | | 72 | |
SG&A | | | 13 | |
Net income before tax | | | 59 | |
Provision for income taxes | | | 14 | |
Net income | | $ | 45 | |
AcquisitionsLink 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(the "Link Agreement"). Link is a family-owned staffing company headquartered in Houston, TX. Pursuant to the Link Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired franchise agreements for approximately 35 locations, and other assets of Link Staffing for a purchase price of $11.1 million. Substantially all of the locations where we assumed franchisor status in this transaction have subsequently signed our HireQuest franchise agreement and will operate under the Snelling tradename.
The following table summarizes the estimated fair values of the identifiable assets acquired as of the acquisition date. Due to the proximity of the acquisition to quarter end, these estimates are preliminary, pending final evaluation, and therefore are subject to revisions that may result in adjustments to the values presented below:
Cash | $11,122,911
|
| |
Franchise agreements | $10,886,178
|
Notes receivable | 236,733
|
Purchase price allocation | $11,122,911
|
date (in thousands):Cash | | $ | 11,123 | |
| | | | | |
Franchise agreements | | | 10,886 | |
Notes receivable | | | 237 | |
Purchase price allocation | | $ | 11,123 | |
We determined the Link transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the franchise agreements. Accordingly, no pro forma financial information is presented.
We assigned six of the franchise agreements we purchased in the transaction, all located in California, to the California Purchaser. These six franchisees operate pursuant to a Link trademark sublicense agreement whereby they pay us 9% of the gross margin of their offices in exchange for a sublicense to utilize the Link tradename. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.9 million which is reflected on the line item, "Other miscellaneous income," in our consolidated statement of income.
Recruit Media
On October 1, 2021 we completed our acquisition of Recruit Media in accordance with the Stock Purchase Agreement dated October 1, 2021 (the “Recruit Agreement”). Pursuant to the Recruit Agreement, we purchased all of the outstanding shares of Recruit Media for approximately $4.4 million, subject to customary representations and warranties. Recruit Media is an IT company whose intellectual property will allow us to accelerate improvements to our platform. The following table summarizes the values of the identifiable assets acquired as of the acquisition date (in thousands):
Cash consideration | | $ | 3,283 | |
Liabilities assumed | | | 1,044 | |
Transaction costs | | | 23 | |
Total consideration | | $ | 4,350 | |
| | | | | |
Purchased software | | | 3,200 | |
Domain name | | | 2,226 | |
Deferred tax liability | | | (1,076 | ) |
Purchase price allocation | | $ | 4,350 | |
We determined the Recruit Media transaction was an asset acquisition for accounting purposes as it did not meet the definition of a business. Accordingly, no pro forma financial information is presented.
Dental Power
On December 6, 2021, we completed our acquisition of the Dental Power Staffing division (“DPS”) in accordance with the terms of the Asset Purchase Agreement dated November 2, 2021 (the "Dental Power Agreement") for $1.9 million. Dental Power is a 46-year-old dental staffing company headquartered in Carrboro, North Carolina. DPS is a provider of temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S. The addition of DPS brings additional resources and experience to HQI that will help expedite growth into a new staffing vertical.
The following table summarizes the values of the identifiable assets acquired as of the acquisition date (in thousands):
Cash consideration | | $ | 1,480 | |
Contingent consideration | | | 382 | |
Total consideration | | $ | 1,862 | |
| | | | | |
Customer lists | | $ | 1,862 | |
The contingent consideration consists of estimated future payments based on the achievement of performance metrics over the following 3 years.
We determined the Dental Power transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the customer list. Accordingly, no pro forma financial information is presented.
Note 3 – - Related Party Transactions
SomePrior to entering into any related party transaction, the Audit Committee reviews all relevant information available. The Audit Committee, in its sole discretion, may approve the related party transaction only if it determines, in good faith and under all circumstances, that the transaction is in the best interests of the Company and its shareholders. The Audit Committee, in its sole discretion, may also impose conditions as it deems appropriate on the Company or the related party in connection with the approval of the related party transaction.
Several significant shareholders and directors of HQI also own portions of Jackson Insurance Agency; Bass Underwriters, Inc; Insurance Technologies, Inc.; and a number of our franchisees.
Jackson Insurance Agency ("Jackson Insurance") and Bass Underwriters, Inc. ("Bass")
Mr. Jackson, a member of our Board and a significant stockholder, and ana member of Mr. Jackson’s immediate family member own Jackson Insurance. Mr. Jackson, Mr. Hermanns, our CEO, Chairman of our Board, and most significant stockholder, and irrevocable trusts set up by each of them, collectively own a majority of Bass, a large managing general agent.
Bass purchased approximately $5.3 million of 6.0% notes receivable at book value in March 2021. For additional information related to this transaction, see
Note 10 – - Notes Receivable.Jackson Insurance and Bass brokered property, casualty, general liability, and cybersecurity insurance for a series of predecessor entities (“Legacy HQ”) prior to the merger with Command Center, Inc. (the “Merger”). Since July 15, 2019, they have continued to broker these same policies for HQI. Jackson Insurance also brokers certain insurance policies on behalf of some of our franchisees, including the Worlds Franchisees (defined below).
Premiums, taxes,During the three months ended March 31, 2022 and fees invoiced byMarch 31, 2021, Jackson Insurance and Bass toinvoiced HQI approximately $107 thousand and $584 thousand, respectively, for premiums, taxes, and fees related to these insurance policies during the three months ended March 31, 2021 and March 31, 2020 were approximately $584,000 and $561,000, respectively.policies. Jackson Insurance and Bass do not retain the majority of the premiums invoiced to HQI, but they do retain a commission of approximately 9% - 15% of premiums.
Insurance Technologies, Inc. ("Insurance Technologies")
Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of them, collectively own a majority of Insurance Technologies, an IT development and security firm. On October 24, 2019, HQI entered into an agreement with Insurance Technologies to add certain cybersecurity protections to our existing information technology systems and to assist in developing future information technology systems within our HQ Webconnect software. In addition, Insurance Technologies assisted with the IT diligence and integration process with respect to the Snelling and Link acquisitions. This arrangement was reviewed and approved by the Audit Committee of our Board of Directors and is monitored by the Audit Committee twice annually.
During the three months ended March 31, 2022 and March 31, 2021 and March 31, 2020,, Insurance Technologies invoiced HQI approximately $102,000$14 thousand and $50,000,$102 thousand, respectively, for services provided pursuant to this agreement. We expecthave retained a full time CIO and thus spending pursuant to this agreement to becomebecame immaterial in the third quarter of 2021.
Mr. Jackson and immediate family members of Mr. Hermanns have significant ownership interests in certain of our franchisees (the “Worlds Franchisees”). There were 2124 Worlds Franchisees at March 31, 20212022 that operated 5765 of our 212226 offices.
Concurrent with the acquisitions of Temporary Alternatives and Northbound, we sold a portion of the assets acquired to entites partially owned by the Worlds. The 2 franchises and 4 locations from these acquisitions are included in the numbers above.Transactions regarding the Worlds Franchisees are summarized below:
| | |
| | | |
| Franchisee royalties | $1,613,009 | $1,373,876 |
| | | Three months ended | |
(in thousands) | | | March 31, 2022 | | | | March 31, 2021 | |
Franchisee royalties | | $ | 2,084 | | | $ | 1,613 | |
Balances regarding the Worlds Franchisees are summarized below:
(in thousands) | | | March 31, 2022 | | | | March 31, 2021 | |
Due to franchisee | | $ | 806 | | | $ | 535 | |
Risk management incentive program payable | | | 568 | | | | 704 | |
| | | |
| Due to franchisee | $632,335 | $435,072 |
| Risk management incentive program liability | 858,868 | 499,199 |
Note 4 – - Line of Credit
and Term LoanIn July 2019, June 2021, we entered into ana loan agreement with Truist Bank (“Truist”) for a $30$60 million revolving line of credit with a $15$20 million sublimit for letters of credit. At March 31, 2021, approximately $14.3credit and a $3.2 million was utilized by outstanding letters ofterm loan. The credit that secure our obligations to our workers’ compensation insurance carrier and $500,000 was utilizedfacilities are provided by a lettersyndication of credit that secures our paycard funding account, leaving $15.2 million available underlenders with Truist acting as 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. Thisadministrative agent. The line of credit is
subject to a borrowing base that is derived from our accounts receivable, subject to certain reserves and other limitations. Under the agreement, Truist may also make swingline loans available in its discretion.All loans made under the line of credit are scheduled to mature on May 31, 2024. June 29, 2026. The current agreement bearsline of credit and swingline loans bear interest at a variable rate equal toto: (a) for LIBOR index rate loans, the Daily One Month London Interbank Offering Rate, or LIBOR,(“LIBOR”) plus a margin between 1.25% and 1.75%. per annum or; (b), for base rate loans, the then applicable base rate plus a margin between 0.25% and 0.75% per annum. The margin is determined based on the value of our net collateral,average excess availability, which is generally equal to our total collateral plus unrestricted cash less the outstanding balance, if any, under the loan agreement. At March 31, 20212022 the effective interest rate was 1.4%approximately 1.7%. A non-use fee of between 0.125% and 0.250%0.25% 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 defaultrepresentations and warranties, affirmative and negative covenants, including but not limited towithout limitation, those covenants governing indebtedness, liens, fundamental changes, restrictions on certain payments, including dividends, unless certain conditions are met, transactions with affiliates, investments, and salesthe sale of assets. This agreement requires us to comply with a fixed charge coverage ratio of at least 1.10:1.25:1.00, and a leverage ratio of not more than 3.0:1.0, tested quarterlymonthly on a rolling four quartertwelve-month basis. At March 31, 20212022 we were in compliance with this covenant.these covenants. Our obligations under this agreement are subject to acceleration upon the occurrence of an event of default as defined in the loan agreement.
At March 31, 2022, approximately $10.7 million of availability under the line of credit was utilized by outstanding letters of credit that secure our obligations to our workers’ compensation insurance carrier and $500 thousand was utilized by a letter of credit that secures our paycard funding account. This loan agreement replaces our prior $30 million line of credit. For additional information related to the letter of credit securing our workers’ compensation obligations see Note 5 – Workers’ - Workers’ Compensation Insurance and ReservesReserves.
The term loan is scheduled to mature on June 29, 2036 and bears interest at a variable rate equal to LIBOR plus a margin of 2.0%. At March 31, 2022 the effective interest rate was approximately 2.5%. The term loan will be paid in equal monthly installments based upon a 15-year amortization of the original principal amount of the term loan, provided that any remaining principal balance is due and payable in full on the earlier of the date of termination of the commitments on the line of credit and June 29, 2036. The term loan is collateralized by all real property owned by us. The proceeds of approximately $3.2 million were used to pay off our prior credit facility and to pay transaction related fees and expenses.
The loan agreement contains hardwired mechanics for the replacement of LIBOR with a rate based upon the secured overnight financing rate (“SOFR”) published by the Federal Reserve Bank of New York or a successor administrator upon LIBOR’s cessation or other benchmark transition event set forth in the loan agreement, together with a spread adjustment.
In connection with the Northbound acquisition, we entered into a term loan for $1.5 million scheduled to mature on March 1, 2025 that bears interest at 4.0%. The term loan is unsecured and subordinated to our senior instruments (line of credit and term loan). The term loan is payable in 36 monthly installments beginning on April 1, 2022 until March 1, 2025. We may prepay the term loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment.
Note 5 - Workers’ Compensation Insurance and Reserves
Beginning in March 2014, Legacy HQ obtained its workers’ compensation insurance through Chubb Limited and ACE American Insurance Company (collectively, “ACE”), in all states in which it operated, other than monopolistic jurisdictions. The ACE policy was a high deductible policy pursuant to which Legacy HQ had primary responsibility for all claims with ACE providing insurance for covered losses and expenses in excess of $500,000$500 thousand 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$500 thousand deductible with ACE. This resulted in Legacy HQ effectively being fully insured during this time period. Effective July 15, 2019, Legacy HQ terminated its deductible reimbursement policy with HQ Ins. We assumed the primary responsibility for all claims up to the deductible occurring on or after July 15, 2019. The primary responsibility offor all claims occurring before July 15, 2019 remains with HQ Ins.
Command Center, the predecessor entity that acquired Legacy HQ in 2019, also obtained its workers’ compensation insurance through ACE. Pursuant to Command Center’s most recent policy, which expired on March 1, 2020, ACE provided insurance for covered losses and expenses in excess of $500,000$500 thousand per incident. Command Center’s ACE policy included a one-timeone-time obligation for the Company to pay any single claim filed under the Command Center policy within a policy year that exceeds $500,000$500 thousand (if any), but only up to $750,000$750 thousand for that claim. All other claims within the policy year were subject to the $500,000$500 thousand deductible. Effective July 15, 2019, in connection with the Merger, we assumed all of the workers’ compensation claims of Command Center. We also assumed Command Center’s workers’ compensation policy with ACE.
Under these high deductible programs, we are effectively self-insured. Per our contractual agreements with ACE, we must provide collateral deposits of approximately $14.3$10.7 million, which we accomplished by providing a letter of credit under our agreement with Truist. The amount of our current letter of credit includes an additional amount of $5.2 million that was issued in conjunction with the release of a $7.2 million cash deposit that was acquired in the Snelling transaction.
For workers’ compensation claims originating in the monopolistic jurisdictions of North Dakota, Ohio, Washington, and Wyoming, we pay workers’ compensation insurance premiums and obtain full coverage under mandatory state administered programs. Our liability associated with claims in these jurisdictions is limited to premium payments based upon the amount of payroll paid within each jurisdiction. Accordingly, our consolidated financial statements reflect only the mandated workers’ compensation insurance premium liability for workers’ compensation claims in these jurisdictions.
Note 6 – Stockholders’ - Stockholders’ Equity
In the third quarter of 2020, we declared and paidinitiated the payment of a $0.05 per common sharequarterly dividend. We intend to continue to pay this dividend on a quarterly basis,dividend, based on our business results and financial position. The following common share dividends were paid during 20212022 and 2020:
Declaration date | | Dividend | | | Total paid | |
September 1, 2020 | | $ | 0.05 | | | $ | 678 | |
December 1, 2020 | | | 0.05 | | | | 680 | |
March 1, 2021 | | | 0.05 | | | | 680 | |
June 1, 2021 | | | 0.06 | | | | 817 | |
September 1, 2021 | | | 0.06 | | | | 822 | |
December 1, 2021 | | | 0.06 | | | | 822 | |
March 1, 2022 | | | 0.06 | | | | 822 | |
| 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 December 2019, our Board approved the 2019 HireQuest, Inc. Equity Incentive Plan (the “2019“2019 Plan”). Subject to adjustment in accordance with the terms of the 2019 Plan, no more than 1,500,0001.5 million shares of common stock are available in the aggregate for the grant of awards under the 2019 Plan. No more than 1,000,0001 million shares may be issued in the aggregate pursuant to the exercise of incentive stock options. In addition, no more than 250,000250 thousand shares may be issued in the aggregate to any employee or consultant, and no more than 50,00050 thousand shares may be issued in the aggregate to any non-employee director in any twelve-monthtwelve-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$25 thousand in aggregate value per individual within any calendar year. These shares vest on the second anniversary of the date on which the matched shares were purchased if the individual is still employed by the Company and certain other vesting criteria are met. During the first quarter 2021,of 2022, we issued approximately 4,0004 thousand shares valued at approximately $61,000$76 thousand under this program. During the first quarter 2020,of 2021, we issued approximately 22,0004 thousand shares valued at approximately $147,000$61 thousand under this program.
In the firstquarter ended March 31, of 2022, we have issued 3,984 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $69 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these, 3,320 shares vested equally over the following three months. The remaining 664 shares were issued pursuant to our share purchase match program.
Also in the first quarter of 2022, we have issued 44,871 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $764 thousand to key employees for their services in lieu of cash compensation. Of these, 41,066 shares vested equally over the following three months. The remaining 3,805 shares were issued pursuant to our share purchase match program. In addition, we issued 28,735 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $537 thousand to the vast majority of our workforce for services and to encourage retention. These shares vest on the first anniversary of the date of grant.
In the first quarter of 2021, we issued 8,166 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $82,000$82 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these, 6,805 shares vested equally over the following three months. The remaining 1,361 shares were issued pursuant to our share purchase match program. Also in the first quarter 2021, we issued 1,200 shares of restricted common stock to certain Board members and employees pursuant to our share purchase match program valued at approximately $12,000.
In 2020, we issued 81,943 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $539,000 to members of our Board of Directors for their services in lieu of cash compensation. Of these, 61,868 shares vested equally over the following three months. The remaining 20,075 shares were issued pursuant to our share purchase match program.
Also in 2020, we issued 25,000 shares of restricted common stock to an employee pursuant to the 2019 Plan valued at approximately $179,000 for services, and to encourage retention. These shares vest over four years, with 50% vesting on September 11, 2021, and 6.25% vesting each quarter thereafter for the next eight quarters. Also in 2020, we issued 1,742 shares of restricted common stock to certain employees pursuant to our share purchase match program valued at approximately $12,000.
$12 thousand.The following table summarizes our restricted stock outstanding at December 31, 2020,2021, and changes during the three months ended March 31, 2021.
| | Weighted average grant date price |
| Non-vested, December 31, 2020 | 283,456 | $7.18 |
| Granted | 9,366 | 10.03 |
| Vested | (6,805) | 10.03 |
| Non-vested, March 31, 2021 | 286,017 | 7.22 |
2022.(number of shares in thousands) | | | Shares | | | | Weighted average grant date price | |
Non-vested, December 31, 2021 | | | 196 | | | | 11.26 | |
Granted | | | 78 | | | | 17.65 | |
Vested | | | (19 | ) | | | 8.91 | |
Non-vested, March 31, 2022 | | | 255 | | | | 13.37 | |
Stock options that were outstanding at Command Center were deemed to be issued on the date of the Merger. Outstanding awards continue to remain in effect according to the terms of the Command Center 2008 Plan, the Command Center 2016 Plan, and the corresponding award documents. There were approximately 15,00013 thousand stock options vested at March 31, 20212022 and December 31, 2020.
2021.The following table summarizes our stock options outstanding at December 31, 2020,2021, and changes during the three months ended March 31, 2021:
| | 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 our2022.(number of shares in thousands) | | | Number of shares underlying options | | | | Weighted average exercise price per share | | | | Weighted average grant date fair value | |
Outstanding, December 31, 2021 | | | 13 | | | | 5.47 | | | | 2.98 | |
Granted | | | 0 | | | | 0 | | | | 0 | |
Outstanding, March 31, 2022 | | | 13 | | | | 5.47 | | | | 2.98 | |
There were no non-vested stock options outstanding at March 31, 2022 or at December 31, 2020, and changes during the three months ended March 31, 2021:
| | 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 |
2021.The following table summarizes information about our outstanding stock options, and reflects the intrinsic value recalculated based on the closing price of our common stock of $17.25$19.33 at March 31, 2021:
| | Number of shares underlying options | Weighted average exercise price per share | Weighted average remaining contractual life (years) | Aggregate intrinsic value |
| Outstanding | 17,082 | $6.10 | 5.43 | $202,582 |
| Exercisable | 14,894 | 6.18 | 5.16 | 164,839 |
2022.(number of options in thousands) | | | Number of shares underlying options | | | | Weighted average exercise price per share | | | | Weighted average remaining contractual life (years) | | | | Aggregate intrinsic value | |
Outstanding and exercisable | | | 13 | | | $ | 5.47 | | | | 6.0 | | | $ | 190 | |
At March 31, 2021,2022, there was unrecognized stock-based compensation expense totaling approximately $659,000$2.2 million relating to non-vested options and restricted stock grants that will be recognized over the next 2.43.7 years.
Note 8 – - Commitments and Contingencies
Franchise Acquisition Indebtedness
New franchisees financed the purchase of several offices with promissory notes. In some instances, this financing resulted in certain franchises being considered VIEs. We have determined that we are not required to consolidate these entities because we do not have the power to direct these entities’ daily operations. If these franchises default on these notes, we bear the risk of loss of the outstanding balance on these notes, less what we could recoup from the potential resale of the repossessed office. The balance due from the franchises determined to be VIEs was approximately $3.2 million and $2.9 million on March 31, 20212022 and December 31, 2020 was approximately $2.6 million and $2.1 million,2021, respectively.
From time to time, we are involved in various legal and administrative proceedings. Based on information currently available to us, we do not expect material uninsured losses to arise from any of these matters. We believe the outcome of these matters, even if determined adversely, will not have a material adverse effect on our business, financial condition or results of operations. There have been no material changes in our legal proceedings as of March 31, 2021.
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year and changes in tax law and tax rates. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes
.Our effective tax rate for continuing operations during the three months ended March 31, 2022 and March 31, 2021 was 13.5% and March 31, 2020 was (19.2)% and 18.5%, respectively. The bulk of the difference between the statutory federal income tax rate of 21.0% and our effective income tax rate results from the bargain purchase gain, which is recorded net of deferred taxes and is treated as a permanent difference, and the federal Work Opportunity Tax Credit, which is designed to encourage employers to hire workers from certain targeted groups with higher than averagehigher-than-average unemployment rates. Other differences result from state income taxes, certain non-deductible expenses, and tax effects of stock-based compensation.
Note 10 – - Notes Receivable
Several franchisees, as well as the purchaser of our previously owned California locations, borrowed funds from us primarily to finance the initial purchase price of office assets. In March of 2021, we sold approximately $5.3 million of notes receivable to Bass, a related party. Virtually all of the notes sold to Bass originated from the sale of branch locations acquired in the Merger. These notes were sold at their current outstanding principal value. The proceeds from the sale of these notes were used to finance the Snelling and Link transactions.
Notes outstanding, net of allowance for losses, were approximately $4.1$4.5 million and $8.1$4.2 million as of March 31, 20212022 and December 31, 2020,2021, respectively. Notes receivable generally bear interest at a fixed rate between 6.0% and 10.0%. Notes receivable are generally secured by the assets of each office and the ownership interests in the franchise. We report interest income on notes receivable as other miscellaneous income in our consolidated statements of operations. This interestInterest income was approximately $135,000$93 thousand and $198,000$135 thousand during the three months ended March 31, 2022 and March 31, 2021 and March 31, 2020,, respectively.
We estimate the allowance for losses for franchisees separately from the allowance for losses from non-franchisees because of the level of detailed sales information available to us with respect to the former.
Based on our review of the financial condition of the borrowers, the underlying collateral value, and the potential future impact of COVID-19COVID-19 on certain borrowers’ economic performance and estimated future cash flows, we have established an allowance of approximately $1.6$1.9 million as of March 31, 20212022 and December 31, 20202021 for potentially uncollectible notes receivable.
The following table summarizes changes in our notes receivable balance to franchisees:
| | | |
| Notes receivable | $4,017,181 | $8,023,807 |
| Allowance for losses | (405,313) | (405,313) |
| Notes receivable, net | $3,611,868 | $7,618,494 |
(in thousands) | | | March 31, 2022 | | | | December 31, 2021 | |
Note receivable | | $ | 4,728 | | | $ | 4,433 | |
Allowance for losses | | | (405 | ) | | | (405 | ) |
Notes receivable, net | | $ | 4,323 | | | $ | 4,028 | |
During 2020,one of our note holdersdebtors experienced significant economic hardships due to the impacts of COVID-19.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 on this note of approximately $135,000 and $198,000$41 thousand during the three months ended March 31, 2022 and March 31, 2021 and March 31, 2020, respectively.
. The following table summarizes changes in our note receivable balance that has been deemed impaired:
(in thousands) | | | March 31, 2022 | | | | December 31, 2021 | |
Note receivable | | $ | 1,640 | | | $ | 1,640 | |
Allowance for losses | | | (1,501 | ) | | | (1,501 | ) |
Notes receivable, net | | $ | 139 | | | $ | 139 | |
| | | |
| Note receivable | $1,640,393 | $1,640,393 |
| Allowance for losses | (1,193,359) | (1,193,359) |
| Notes receivable, net | $447,034 | $447,034 |
ItemItem 2. Management’sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The financial position, results of operations, cash flows and other information included herein are not necessarily indicative of the financial position, results of operations and cash flows that may be expected in future periods. See "Special Note Regarding Forward-Looking Statements" below for a discussion of uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additionally, we use a non-GAAP financial measure and a key performance indicator to evaluate our results of operations. For important information regarding the use of such non-GAAP measure, including a reconciliation to the most comparable GAAP measure, see the section titled "Use of Non-GAAP Financial Measure: Adjusted EBITDA" below. For important information regarding the use of such key performance indicator, see the section titled “Key Performance Indicator: System-Wide Sales” below.
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q and other documents incorporated herein by reference include, and our officers and other representatives may sometimes make or provide, certain estimates and other forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act, including, among others, statements with respect to future revenue, franchise sales, system-wide sales, and the growth thereof; net income and Adjusted EBITDA (a Non-GAAP Financial Measure); the impact of any global pandemic including COVID-19; operating results; dividends and shareholder returns; anticipated benefits of the mergermergers or acquisitions including those we have completed in 2021;acquisitions; 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,materialize, and our actual results may be significantly different. Therefore, you should not place undue reliance on these forward-looking statements. Important factors that may cause actual results to differ materially from those contemplated in any forward-looking statements made by us include the following: the level of demand and financial performance of the temporary staffing industry; the financial performance of our franchisees; the impacts of COVID-19 or other diseases or pandemics; changes in customer demand; the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones, and the level of service failures that could lead customers to use competitors’ services; significant investigative or legal proceedings including, without limitation, those brought about by the existing regulatory environment or changes in the regulations governing the temporary staffing industry and those arising from the action or inaction of our franchisees and temporary employees; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses; disruptions to our technology network including computer systems and software;software whether resulting from a cyber attack or otherwise; natural events such as severe weather, fires, floods, and earthquakes, or man-made or other disruptions of our operating systems;systems or the economy including by war; the factors discussed in the “Risk Factors” section in our most recent Annual Report on Form 10-K, which we filed with the SEC on March 25, 2021;15, 2022; 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.
We are a nationwide franchisor of on-demand laboroffices providing direct-dispatch and commercial staffing solutions providers in the light industrial and blue-collar segments of the staffing industry. We were formedindustry and traditional commercial staffing. Our franchisees provide various types of temporary personnel through two business models operating under the merger between Hire Quest Holdings, LLC (“Hire Quest Holdings”)trade names “HireQuest Direct”, “HireQuest”, “Snelling”, “LINK Staffing”, “DriverQuest”, “HireQuest Health”, and Command Center, Inc. We refer to Hire Quest Holdings“Northbound Executive Search”. HireQuest Direct specializes primarily in unskilled and its wholly-owned subsidiary, Hire Quest, LLC, collectively as Legacy HQ. We refer to this merger, which closed on July 15, 2019, assemi-skilled industrial and construction personnel. HireQuest, Snelling, and Link specialize primarily in skilled and semi-skilled industrial personnel, clerical and administrative personnel, and permanent placement services. DriverQuest specializes in commercial drivers serving a variety of industries and applications. HireQuest Health specializes in skilled personnel in the Merger.medical and dental industries. Northbound Executive Search specializes in executive placement and consultant services in the financial services industry. As of March 31, 2021,2022 we had approximately 210224 franchisee-owned offices and 2 company owned office in 3538 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 individuals75 thousand temporary employees 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.
The COVID-19 pandemic materially adversely impacted our business in 2020 and, to a much lesser extent, into the first quarter of 2021. Comparisons between 2022 and 2021 should be viewed through a COVID-19 lens with the understanding that for the quarter ended March 31, 2021 our revenues and expenses were significantly lower than they otherwise would have been. A full economic recovery has been slow to occur, and it is uncertain if businesses will remain fully open, or another broad shutdown will occur due to a variant or new strain. The long-term effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, and government vaccination efforts, is also uncertain. Also affecting comparisons between 2022 and 2021 were the acquisitions consummated in 2021 and 2022 as described below.
Recent Developments
The Snelling Staffing Acquisition
On March 1, 2021, we completed our acquisition of certain assets of Snelling Staffing ("Snelling") in accordance with the terms of the Asset Purchase Agreement dated January 29, 2021 (the “Snelling Agreement”). At the time of acquisition, Snelling isStaffing was 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 approximately 47 offices and substantially all of the operating assets, and assumed certain liabilities of the sellers for a purchase price of approximately $17.7$17.9 million, subject to customary adjustments for net working capital.capital plus further adjustment of $7.2 million of collateral released to the sellers by their workers' compensation insurer (the "Snelling Acquisition"). 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 be paid to the sellers at closing so the seller could facilitate payment on behalf of HQ Snelling to settlebe used to pay accrued payroll liabilities that HQ Snelling assumed pursuant to the Snelling Agreement. Substantially allWe funded this acquisition with existing cash on hand and a draw on our existing line of the locations where we assumed franchisor status in this transaction have subsequently signed our HireQuest Direct franchise agreement.
In connectioncredit 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”Truist Bank ("Truist")
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 LinkLINK Staffing (“Link”) in accordance with the terms of the Asset Purchase Agreement dated February 12, 2021 (the "Link Agreement"). At the time of acquisition Link iswas 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,franchised offices, customer lists and contracts, and other assets of Link Staffing for a purchase price of $11.1 million. Substantiallymillion (the "Link Acquisition"). We funded this acquisition with existing cash on hand.
The Recruit Media Acquisition
On October 1, 2021 we completed our acquisition of Recruit Media, Inc. (“Recruit Media”) in accordance with the terms of the Stock Purchase Agreement dated October 1, 2021 (the “Recruit Agreement”). Pursuant to the Recruit Agreement, we purchased all of the locations whereoutstanding shares of common stock of Recruit Media for approximately $4.4 million. Recruit Media is a tuck-in acquisition whose intellectual property compliments our technological structure, allowing us to accelerate improvements to our platform.
The Dental Power Acquisition
On December 6, 2021 we assumed franchisor status in this transaction have subsequently signedcompleted our HireQuest Direct franchise agreement.
We assigned sixacquisition of the
franchise agreements we purchasedDental Power Staffing division of Dental Power International, Inc. (“Dental Power”) in accordance with the terms of a definitive agreement, dated November 2, 2021, for approximately $1.9 million. Dental Power is a 46-year-old dental staffing company headquartered in Carrboro, North Carolina with long-standing client relationships in the
transaction,dental industry. providing temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S. As of March 31, 2022, 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 marginoperations acquired from Dental Power remain company owned.The Temporary Alternatives Acquisition
On January 24, 2022 we completed our acquisition of their officescertain assets of Temporary Alternatives in exchangeaccordance with the terms of the Asset Purchase Agreement dated January 10, 2022 , including three locations in West Texas and New Mexico for approximately $5.25 million, inclusive of a sublicense to utilizeprescribed amount of working capital. Temporary Alternatives is a staffing division of dmDickason Personnel Services, a family-owned company based in El Paso, TX. The acquisition of Temporary Alternatives will expand our national footprint into West Texas and grow our franchise base.
The Dubin Acquisition
On February 21, 2022 we completed our acquisition of the Link tradename.
COVID-19
staffing operations of The coronavirus pandemic has significantly impacted our operations. With widespread infectionDubin Group, Inc., and Dubin Workforce Solutions, Inc. (“Dubin”) in accordance with the terms of an Asset Purchase Agreement dated January 19, 2022 for approximately $2.4 million, inclusive of a prescribed amount of working capital. Dubin provides executive placement services and commercial staffing in the United StatesPhiladelphia metro area. The acquisition of Dubin will help expedite growth into a new staffing vertical, expand our national footprint, and abroad, national, state, and local authorities recommended social distancing and took dramatic action, including ordering the workforce to stay home, banning all non-essential businesses from operating, refusing to issue new building permits, and invalidating current building permits causing work to stop at many of our jobsites. These measures, while intended to protect human life, have had, and are expected to continue to have, adverse impacts on our business and the economy as a whole. While most states have advanced significantly into the reopening process, it is unclear when, or if, a full economic recovery will occur. It is also unclear whether businesses will remain open or another broad shutdown will occur. The long-term effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, and government vaccination efforts, is also uncertain.
We entered 2021 with a strong balance sheet. Our current assets exceeded current liabilities by approximately $16 million. We were able to complete two acquisitions and significantly increasegrow our franchise
base without incurring any debt at March 31, 2021. We have been ablebase. The Northbound Acquisition
On February 28, 2022 we completed our acquisition of certain assets of Northbound Executive Search, LTD (“Northbound”) in accordance with the terms of an Asset Purchase Agreement dated January 25, 2022, for approximately $11.0 million, inclusive of a prescribed amount of working capital. Northbound provides executive placement and short-term consultant services primarily to remain profitable throughoutblue chip clients in the pandemic. Still, the sweepingfinancial services industry. The acquisition of Northbound will help expedite growth into a new staffing vertical, expand our national footprint, 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 increasegrow our franchise base without incurring any debt at March 31, 2021. We have been able to remain profitable throughout the pandemic. Still, the sweeping and persistent naturebase.
To date, our franchisees have closed or consolidated 13 offices at least, in part, due to the financial impacts of COVID-19. Of these closures, 11 were in metropolitan areas where our franchisees still maintain at least one office that we expect can service customers of the closed or consolidated offices. The other two offices did not historically produce significant amounts of system-wide sales or resulting revenue. It is possible that other offices may still be forced to close. Some of our franchisees may experience economic hardship or even failure. In general, those franchisees whose businesses are oriented towards construction, manufacturing, logistics, or waste services have been less impacted to date than those whose businesses are more focused on hospitality, catering, special events, or auto auction services.
As discussed more fully below, we have reduced liquidity since December 31, 2020 as we used cash to complete two acquisitions. As a result, our cash balance decreased by approximately $11.7 million through the first quarter of 2021 from $13.7 million at year end to $2.0 million. When combined with our borrowing capacity under our line of credit and absence of debt, we expect that we have sufficient liquidity to continue our operations for the foreseeable future, even under the current circumstances presented by COVID-19. That said, the impact of the COVID-19 crisis on availability of capital or credit is difficult to predict and may be significant.
Any of the above factors, or other cascading effects of the COVID-19 pandemic that are not currently foreseeable, could materially negatively impact our revenue, net income, and other results of operations, reduce system-wide sales, cause office closings or cause us to lose franchisees, and impact our liquidity position, possibly significantly. The duration of any such impacts cannot be predicted at this time.
The following table displays our consolidated statements of operations for the interim periods ended March 31, 20212022 and March 31, 2020 (in thousands, except percentages).2021. Percentages reflect the line item as a percentage of total revenue.
| | | Three months ended | |
(in thousands, except percentages) | | | March 31, 2022 | | | | March 31, 2021 | |
Franchise royalties | | $ | 6,573 | | | | 80.7 | % | | $ | 3,259 | | | | 95.8 | % |
Staffing revenue, owned locations | | | 1,104 | | | | 13.6 | % | | | - | | | | 0.0 | % |
Service revenue | | | 468 | | | | 5.7 | % | | | 144 | | | | 4.2 | % |
Total revenue | | | 8,145 | | | | 100.0 | % | | | 3,403 | | | | 100.0 | % |
Cost of staffing revenue, owned locations | | | (762 | ) | | | (9.4 | )% | | | - | | | | 0.0 | % |
Gross profit | | | 7,383 | | | | 90.6 | % | | | 3,403 | | | | 100.0 | % |
Selling, general and administrative expenses | | | 2,838 | | | | 34.8 | % | | | 3,842 | | | | 112.9 | % |
Depreciation and amortization | | | 566 | | | | 6.9 | % | | | 333 | | | | 9.8 | % |
Income from operations | | | 3,979 | | | | 48.9 | % | | | (772 | ) | | | (22.7 | )% |
Other miscellaneous income | | | (3,379 | ) | | | (41.5 | )% | | | 3,781 | | | | 111.1 | % |
Interest income | | | 93 | | | | 1.1 | % | | | 136 | | | | 4.0 | % |
Interest and other financing expense | | | (48 | ) | | | (0.6 | )% | | | (5 | ) | | | (0.1 | )% |
Net income before income taxes | | | 645 | | | | 7.9 | % | | | 3,140 | | | | 92.3 | % |
Provision for income taxes | | | 87 | | | | 1.1 | % | | | (602 | ) | | | (17.7 | )% |
Income from continuing operations | | | 558 | | | | 6.9 | % | | | 3,742 | | | | 110.0 | % |
Income from discontinued operations, net of tax | | | 45 | | | | 0.6 | % | | | - | | | | 0.0 | % |
Net income | | $ | 603 | | | | 7.4 | % | | $ | 3,742 | | | | 110.0 | % |
Non-GAAP data | | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 5,307 | | | | 71.9 | % | | $ | 1,533 | | | | 45.0 | % |
Use of Non-GAAP Financial Measure: Adjusted EBITDA
Earnings before interest, taxes, depreciation and amortization, and non-cash compensation, or adjusted EBITDA, is a non-GAAP measure that represents our net income before interest expense, income tax expense, depreciation and amortization, non-cash compensation, costs related to the work opportunity tax credit (“WOTC”) and other charges we consider non-recurring. We utilize adjusted EBITDA as a financial measure as management believes investors find it a useful tool to perform more meaningful comparisons and evaluations of past, present, and future operating results. We believe it is a complement to net income and other financial performance measures. Adjusted EBITDA is not intended to represent or replace net income as defined by U.S. GAAP and should not be considered as an alternative to net income or any other measure of performance prescribed by U.S. GAAP. We use adjusted EBITDA to measure our financial performance because we believe interest, taxes, depreciation and amortization, non-cash compensation, WOTC-related costs and other non-recurring charges bear little or no relationship to our operating performance. By excluding interest expense, adjusted EBITDA measures our financial performance irrespective of our capital structure or how we finance our operations. By excluding taxes on income, we believe adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding factors that are beyond our control. By excluding depreciation and amortization expense, adjusted EBITDA measures the financial performance of our operations without regard to their historical cost. By excluding non-cash compensation, adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the value of our restricted stock and stock option awards. By excluding WOTC related costs, adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the costs associated with qualifying for this tax credit. In addition, by excluding certain non-recurring charges, adjusted EBITDA provides a basis for measuring financial performance without such extraordinary items. In addition, our Credit Agreement requires us to comply with a fixed charge coverage ratio and a leverage ratio, both of which include adjusted EBITDA substantially as defined above. For all of these reasons, we believe that adjusted EBITDA provides us, and investors, with information that is relevant and useful in evaluating our business.
However, because adjusted EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed and intangible assets. In addition, because adjusted EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt, nor does it show trends in interest costs due to changes in our financing or changes in interest rates. Adjusted EBITDA, as defined by us, may not be comparable to adjusted EBITDA as reported by other companies that do not define adjusted EBITDA exactly as we define the term. Because we use adjusted EBITDA to evaluate our financial performance, we reconcile it to net income, which is the most comparable financial measure calculated and presented in accordance with U.S. GAAP.
| | |
| | | |
| Franchise royalties | $3,259 | 95.8% | $3,705 | 89.9% |
| Service revenue | 144 | 4.2% | 415 | 10.1% |
| Total revenue | 3,403 | 100.0% | 4,120 | 100.0% |
| Selling, general and administrative expenses | 3,842 | 112.9% | 3,253 | 79.0% |
| Depreciation and amortization | 333 | 9.8% | 32 | 0.8% |
| Income (loss) from operations | (772) | -22.7% | 835 | 20.3% |
| Other miscellaneous income | 3,916 | 115.1% | 251 | 6.1% |
| Interest and other financing expense | (5) | -0.1% | (11) | -0.3% |
| Net income before income taxes | 3,140 | 92.3% | 1,074 | 26.1% |
| Provision (benefit) for income taxes | (602) | -17.7% | 199 | 4.8% |
| Net income | $3,742 | 110.0% | $875 | 21.2% |
| | | Three months ended | |
(in thousands) | | | March 31, 2022 | | | | March 31, 2021 | |
Net income | | $ | 603 | | | $ | 3,742 | |
Interest expense | | | 48 | | | | 5 | |
Provision for income taxes | | | 87 | | | | (602 | ) |
Depreciation and amortization | | | 566 | | | | 333 | |
WOTC related costs | | | 132 | | | | 92 | |
EBITDA | | | 1,436 | | | | 3,570 | |
Non-cash compensation | | | 246 | | | | 268 | |
Non-recurring acquisition related charges, net | | | 3,625 | | | | (2,305 | ) |
Adjusted EBITDA | | $ | 5,307 | | | $ | 1,533 | |
Three Months Ended March 31, 2022Compared to the Three Months Ended March 31, 2021
Gross Profit
Our total revenue consists of franchise royalties, staffing revenue with respect to our owned locations, and service revenue. Gross profit includes total revenue less the cost of staffing services at owned locations. Once a company-owned office is sold, disposed of, or otherwise classified as available-for-sale, it would not be reflected in gross profit and instead reported as “Income from discontinued operations, net of tax.”
Gross profit for the three months ended March 31, 2021 was approximately $7.4 million compared to $3.4 million for the three months ended March 31, 2021, an increase of 117.0%. This increase is consistent with the 81.5% increase in underlying system-wide-sales for the quarter ended March 31, 2022 compared to the prior year quarter. Gross profit as a percentage of system-wide sales was 7.3% for the three-month ended March 31, 2022 versus 6.1% for the three months ended March 31, 2021. The 120-basis point improvement was primarily due to increased service revenue and the Gross Profit from the company owned location, as well as an increase in our net effective royalty rate for the quarter.
Franchise Royalties
Franchise royalties for the three months ended March 31, 20212022 were approximately $3.3$6.6 million, a decreasean increase of 12.0%101.7% from $3.7$3.3 million for the three months ended March 31, 2020. This decrease2021. Approximately $2.8 million of this increase in royalties was due to decreased activitythe Snelling and Link acquisitions and approximately $328 thousand was due to organic growth this year as the negative effects of COVID-19 in 2021, as we did not experience significant decreased economic activity last year until the final few weeks of the first quarter. The effect of this decreased activity more than offset the $32,000 positive impact of additional franchise royalties receivedwere less pronounced in the first quarter ended March 31, 2022 than in the prior year quarter. Our net effective royalty rate (as a percentage of external system-wide sales) increased from 5.8% for the three months ended March 31, 2021 as a resultto 6.6% for the three months ended March 31, 2022. Our net effective royalty rate will fluctuate due to mix of our recent acquisitions. While system-wide sales, and resulting franchise royalties, have been slowly approaching historical levels on a month-over-month basis sincebusiness among the beginning of April of last year,various royalty models we expect decreased royalty revenue to persist throughout 2021, and perhaps beyond, relative to pre-pandemic levels.
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 receivablethat age over 84 days 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 chargedincur interest. Some of our franchisees elect to charge back accounts that age over 42 days in order to avoid the interest charge. In addition to royalty fees, we also charge a license fee to some locations that utilize our intellectual property that are not franchisees. License fees are 9% of the gross margin for the location. We have no employees and provide no services at the licensed locations. These license fees are included in service revenue.
Service revenue for the three months ended March 31, 2022 was approximately $468 thousand, an increase from approximately $144 thousand for the three months ended March 31, 2021. This increase was largely due to the introduction of trademark license fees after the 2021 Acquisitions. The remaining increase follows the overall increase in accounts receivable, although relatively few age over 42 days and result in service revenue for us. In addition, for the quarter ended March 31, 2022, more franchisees elected to charge back accounts early in order to avoid the interest charge. Therefore, there will not be a proportionally large increase in service revenue even when there is a large increase in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely. The Company does not strive to increase interest on aged accounts receivable.
Staffing Revenue, Owned Locations
Following the December 2021 acquisition of Dental Power, we have a platform to build a customer base in the dental-oriented sector of the staffing industry, which we expect will benefit our entire system by increasing revenue opportunities under the HireQuest Health brand. As of March 31, 2022, all of the operations acquired from Dental Power remain company owned. Although we may franchise these operations in the future, we currently have no firm plans in place to do so. For the three months ended March 31, 2022, staffing revenue from owned locations was $1.1 million. We had no company owned locations during the three-months ended March 31, 2021.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended March 31, 2022 were approximately $2.8 million, a decrease of 26.1% from $3.8 million for the three months ended March 31, 2021. The decrease in SG&A expenses relates to a reduction in workers compensation expenses of approximately $818 thousand, primarily as a result of aggressive claims management and lower experience rates. The reduction in workers compensation expenses is mostly a reflection of our efforts to reduce the long-tail exposure from Snelling pre-acquisition claims.
Other Income and Expense
Other income and expense consists of depreciation, amortization, interest income, rent received from sub-tenants, and other non-operating income and expense.
Service revenueDepreciation and amortization
Depreciation and amortization for the three months ended March 31, 2022 was approximately $566 thousand compared to $333 thousand for the three months ended March 31, 2021. We own our corporate headquarters, a building of approximately 15 thousand square feet, in Goose Creek, South Carolina. This building serves as our base of operations for nearly all of the employees who provide franchisee support functions. In late 2021, we completed the construction of a 10 thousand square foot building adjacent to our corporate headquarters and a supporting parking lot. Depreciation increased by approximately $20 thousand in the three months ended March 31, 2022 due to this addition. The remaining increase of $233 thousand was primarily due to additional amortization stemming from acquisitions. We acquired $21.9 million of franchise agreements and $9.0 million of other intangibles in acquisitions during 2021 and $3.2 million of other intangibles in acquisitions during the three months ended March 31, 2022. Of the $12.2 million in other intangibles, only $3.7 million are indefinite lived and not amortized. Future years will continue to have significant amortization expense until the underlying intangibles are disposed of, impaired or fully amortized. Future acquisitions are expected to further increase tangible and intangible assets on our balance sheet, and correspondingly increase depreciation and amortization.
Other income and expense
For the three months ended March 31, 2022, other miscellaneous income was a loss of approximately $3.4 million, compared to income of $3.8 million for the three months ended March 31, 2021. In the three months ended March 31, 2022, we recognized approximately $3.6 million in losses resulting from the conversion of the Temporary Alternatives, Dubin and Northbound acquisitions to franchises. A portion of the Dubin assets acquired have not been converted to a franchise yet. These assets meet the held for sale criteria, and are presented on the balance sheet at their fair value less cost to sell. The operating results from this portion off the Dubin assets are reported as “Income from discontinued operations, net of tax”. The remaining items of other miscellaneous income is primarily gross rents from leasing excess space at our corporate headquarters to third parties. We lease approximately 3,220 square feet of office space in our headquarters to unaffiliated companies. These leases are at the market rate.
Other miscellaneous income in the months ended March 31, 2021 includes a bargain purchase gain of approximately $4.9 million from the Snelling acquisition (adjusted to $5.6 million in later quarters), which is recorded net of deferred taxes. This gain was partially offset by losses during the three months ended March 31, 2021 on the transfer of unwanted assets acquired in the Link transaction of approximately $1.9 million. The remaining items of other miscellaneous income consist of small gains and losses resulting from the conversion of Snelling owned stores to franchises, and gross rents from leasing excess space at our corporate headquarters to third parties.
Interest income for the three months ended March 31, 2022 was approximately $93 thousand compared to $136 thousand for the three months ended March 31, 2021. Interest income represents interest related to the financing of franchised locations, and one note to the California Purchaser. The decrease is consistent with a decrease in principal related to the financing of franchised locations from approximately $8.1 million, which was the balance for most of Q1 2021, versus $4.5 million at March 31, 2022. In March 2021, we sold approximately $5.3 million of notes receivable to Bass for no gain or loss in order to mitigate credit risk and potential future losses.
Interest and other financing expense relates primarily to the Revolving Credit and Term Loan Agreement with Truist. Interest and other financing expense increased from $5 thousand at March 31, 2021 to $48 thousand at March 31, 2022. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs.
Provision for income tax
Income tax expense was approximately $87 thousand for the three months ended March 31, 2022. We estimate an annual projected effective tax rate (ETR) for the year to determine income tax expense (benefit) in the interim periods. The estimated annual ETR does not include tax effects from significant unusual or infrequently occurring items. Such items are accounted for discretely during the period in which they occur. The ETR is primarily driven by the federal Work Opportunity Tax Credit, which is included as part of income tax expense because it can be claimed only on the income tax return and can be realized only through the existence of taxable income. Other significant items affecting our tax rate are and windfall tax deductions related to stock-based compensation, overall limits on executive compensation. Our ETR for the three months ended March 31, 2022 was 11.1%.
Income tax benefit for the three months ended March 31, 2021 was approximately $144,000, a decrease from approximately $415,000 for$602 thousand. The tax benefit includes the three months ended March 31, 2020. This decrease was due to lower interest income and lower system-wide sales-based fees.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended March 31, 2021 were approximately $3.8 million, an increase of 18.1% from $3.3 million for the three months ended March 31, 2020. This increase is primarily related to acquisition-related expenses of approximately $1.4 million. In addition, we saw a relative increase in charges related to workers’ compensation of approximately $892,000, and an increase in computer related costs of approximately $89,000. These increases were partially offset by a decrease in professional fees of $130,000 and the absence of the $1.4 million note impairment incurred last year.
Miscellaneous Income
Miscellaneous income for the three months ended March 31, 2021 was approximately $3.9 million, an increase of approximately $3.7 million, from $251,000 for the three months ended March 31, 2020. This increase is primarily due to anon-taxable bargain purchase gain recognized in 2021. Bargain purchase gains are recorded net of approximately $4.9 million recognizeddeferred taxes, and are treated as part ofpermanent differences, resulting in a lower ETR in the Snelling transaction. This gain was partially offset by a net loss of approximately $1.2 million in relationperiod recorded. We do not expect that benefit to the sale of acquired assets.
reoccur, but generally expect that our effective tax rate will be significantly lower than statutory rates due to ongoing Work Opportunity Tax Credits and stock-based compensation,
Liquidity and Capital Resources
Overview
Our major source of liquidity and capital is cash generated from our ongoing
operations.operations consisting of royalty revenue, staffing revenue from owned loctions, and service revenue. We also receive principal and interest payments on notes receivable
most of which werethat we issued in connection with the
saleconversion of
company-owned or acquired offices
we acquired in the merger with Command Center. We also sold approximately $5.3 million of these notes at face value to
Bass in the first quarter of 2021 to generate cash for our two acquisitions.franchised offices. In addition, we have the capacity to borrow under our line of credit with Truist.
(See “—
Revolving Credit and Term Loan Agreement with Truist” below).
On March 31, 2021,2022, our current assets exceeded our current liabilities by approximately $16.7$18.9 million. Our current assets included approximately $2.0$1.8 million of cash and $29.7$41.3 million of net accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements. We used approximately $18.8 million of cash during the three months ended March 31, 2022 for acquisitions. Our largest current liabilities includeas of March 31, 2022 included approximately $7.6$8.2 million related to our workers’ compensation claims liability, $4.2$8.2 million due to our franchisees on upcomingpending settlement statements, and $3.2$5.5 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 availableborrowings 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.credit.
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, –and weekly cash settlements with our franchises. Since collections from accounts receivable lag employee pay 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. As the economy recovers, our cash balance generally decreases and accounts receivable increase.
We believe that our current cash balance, together with the future cash generated from operations, and our borrowing capacity under our line of credit, will be sufficient to satisfy our working capital needs, capital asset purchases, and other liquidity requirements associated with our continuing operations for
at least the next 12 months.
We also believe that future cash generated from operations, principal and interest payments on notes receivable, and our borrowing capacity under our line of credit, will be sufficient to satisfy our working capital needs, capital asset purchases, future dividends, and other liquidity requirements associated with our continuing operations beyond 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.
During the three months ended March 31, 2022, cash generated by operating activities was approximately $5.1 million and included net income of approximately $558 thousand, a net loss on the sale of intangible assets acquired of approximately $3.6 million, an increase in other current liabilities of approximately $684 thousand, and an increase in accounts receivable of approximately $2.6 million. These provisions were partially offset by an increase in accounts payable and accrued expenses of approximately $2.6 million. During the three months ended March 31, 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.
Investing Activities
During 2020,the three months ended March 31, 2022, cash providedused by operatinginvesting activities was approximately $5.5$9.3 million and included net incomecash paid for acquisitions 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$18.5 million. These provisions wereThis use was partially offset by an increase in prepaid expenses, deposits, and other assetsthe proceeds from the sale of purchased locations of approximately $954,000 and an increase in prepaid workers’ compensation of approximately $531,000.
Investing Activities
$9.3 million. During
the three months ended March 31, 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.
Financing Activities
During 2020,the three months ended March 31, 2022, cash provided by investingfinancing activities was approximately $323,000$4.4 million and included an increase in franchisee depositsnet proceeds from our revolving line of credit of approximately $643,000 and proceeds from notes receivable of approximately $438,000. These provisions were partially$5.3 million. This provision was offset by the purchase of property and equipmentpayment of approximately $677,000.
Financing Activities
$823 thousand in dividends. During
2020,2021, cash used by financing activities was approximately
$668,000$668 thousand and included the payment of a dividend of approximately
$680,000. During 2020, cash provided$680 thousand offset slightly by
financing activitiespayments on term loans.Revolving Credit and Term Loan Agreement with Truist
On June 29, 2021 the Company and all of its subsidiaries as borrowers (collectively, the "Borrowers") entered into a Revolving Credit and Term Loan Agreement with Truist Bank, as Administrative Agent, and the lenders from time to time made a party thereto (the "Credit Agreement"), pursuant to which the lenders extended the Borrowers (i) a $60 million revolving line of credit with a $20 million sublimit for letters of credit (the "Line of Credit") and (ii) a $3,153,500 term loan (the "Term Loan"). Truist Bank may also make Swingline Loans available in its discretion. The Credit Agreement replaced the Company's prior $30 million credit facility with BB&T, now Truist. The Credit Agreement provides for a borrowing base on the Line of Credit that is derived from the Borrowers' accounts receivable subject to certain reserves and other limitations. Interest will accrue on the outstanding balance of the Line of Credit at a variable rate equal to (a) the LIBOR Index Rate plus a margin between 1.25% and 1.75% per annum or (b) the then applicable Base Rate, as that term is defined in the Credit Agreement plus a margin between 0.25% and 0.75% per annum. In each case, the applicable margin is determined by the Company's Average Excess Availability on the Line of Credit, as defined in the Credit Agreement. Interest will accrue on the Term Loan at a variable rate equal to (a) the LIBOR Index Rate plus 2.0% per annum or (b) the then applicable Base Rate plus 1.0% per annum. In addition to interest on outstanding principal under the Credit Agreement, the Borrowers will pay a commitment fee on the unused portion of the Line of Credit in an amount equal to 0.25% per annum. All loans made pursuant to the Line of Credit mature on June 29, 2026. The Term Loan will be paid in equal monthly installments based upon a 15-year amortization of the original principal amount of the Term Loan and will be payable in monthly installments with the remaining principal balance due and payable in full on the earlier of the date of termination of the commitments on the Line of Credit and June 29, 2036.
The Credit Agreement and other loan documents contain customary representations and warranties, affirmative, and negative covenants, including without limitation, those covenants governing indebtedness, liens, fundamental changes, restricting certain payments including dividends unless certain conditions are met, transactions with affiliates, investments, engaging in business other than the current business of the Borrowers and business reasonably related thereto, sale/leaseback transactions, speculative hedging, and sale of assets. The Credit Agreement and other loan documents also contain customary events of default including, without limitation, payment default, material breaches of representations and warranties, breach of covenants, cross-default on material indebtedness, certain bankruptcies, certain ERISA violations, material judgments, change in control, termination or invalidity of any guaranty or security documents, and defaults under other loan documents. The Credit Agreement also requires the Borrowers, on a consolidated basis, to comply with a fixed charge coverage ratio of at least 1.25:1.00 and a leverage ratio of not more than 3.0:1.0. The obligations under the Credit Agreement and other loan documents are secured by substantially all of the assets of the Borrowers as collateral including, without limitation, their accounts and notes receivable, stock of the Company's subsidiaries, and intellectual property and the real estate owned by HQ Real Property Corporation.
The Company utilized the proceeds of the Term Loan (i) first to pay off its prior credit facility, and (ii) second, to pay transaction fees and expenses incurred in connection with closing the transactions described above. The Company intends to utilize the proceeds of any loans made under the Line of Credit and the remainder of the Term Loan for working capital, acquisitions, required letters of credit, and general corporate purposes in accordance with the terms of the Credit Agreement. On March 1, 2022, our workers' compensation provider agreed to reduce the required collateral deposit from $14.3 million to $10.7 million. The collateral is currently accomplished by delivering letters of credit under the Credit Agreement.
At March 31, 2022, availability under the line of credit was approximately $28,000.$19.2 million based on eligible collateral, less letter of credit reserves, bank product reserves, and current advances.
Key Performance Indicator: System-Wide Sales
We refer to total sales generated by our franchisees as “franchise sales.” For theany period prior to their conversion to franchises, we refer to sales at company-owned and operated offices as “company-owned sales.” In turn, we refer to the sum of franchise sales and company-owned sales as “system-wide sales.” In other words, system-wide sales include sales at all offices, whether owned and operated by us or by our franchisees. In addition, system-wide sales includes sales at company-owned offices that are classified as discontinued operations. System-wide sales is a key performance indicator. Whileindicator, although we do not record system-wide sales as revenue, managementrevenue. Management believes that information on system-wide sales is important to understanding our financial performance because those sales are the basis on which we calculate and record much of our franchise royalty revenue, are directly related to all other royalty revenue and service revenue and are indicative of the financial health of our franchisee base. Management uses system-wide sales to benchmark current operating levels to historic operating levels. System-wide sales should not be considered as an alternative to revenue.
During the three months ended March 31, 2022, nearly all of our offices were franchised with the only exceptions being the Dental Power location acquired in the fourth quarter of 2021 and a portion of the Dubin operations acquired in the first quarter of 2022. The Dubin operations are presented in the consolidated financial statements as discontinued operations because they are considered held-for-sale. During the three months ended March 31, 2021, and March 31, 2020, all of our offices were franchised. As such,The following table reflects our system-wide sales broken into its components for the three monthsperiods indicated. Percentages indicate the change in system-wide sales relative to the comparable prior period.
| | | Three months ended | |
(in thousands, except percentages) | | | March 31, 2022 | | | | March 31, 2021 | | | | Change | |
System-wide sales | | $ | 101,032 | | | $ | 56,105 | | | | 80.1 | % |
* In our Form 10-Q for the period ended March 31, 2021, and March 31, 2020 were all derived from franchised offices. System-widewe reported system-wide sales wereof $54.3 million for the three monthsperiod ended March 31, 2021. Starting with the second quarter of 2021, we updated the calculation of system-wide sales to include franchisees that manage their own payroll and billing at the local level. Including these franchisees or the period ended March 31, 2021 down $2.2 million, or 3.8% compared to the three months ended March 31, 2020. The decreaseresulted in an updated system-wide sales is primarily a resultamount of the effects of COVID-19 as we did not start to experience the negative impacts until the final few weeks of the first quarter of 2020.
$56.1 million. 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 of 2022 and did not close any.
The following table accounts for the number of offices opened and closed or consolidated in the first three months of 2021.
2022.Franchised offices, December 31, 2020 | | | 139 | |
Closed in 2020 | -
|
Opened in 2020 | 5
|
Purchased in 2021 (net of sold locations) | 64
| | 65 | |
Opened in 2021 | | | 14 | |
Closed in 2021 | | | (1 | ) |
Franchised offices, December 31, 2021 | | | 217 | |
Opened in 2022 | | | 4 | |
Purchased in 2022 | | | 3 | |
Franchised offices, March 31, 20212022 | 208
| | 224 | |
Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements.
ItemItem 3. Quantitative and Qualitative Disclosures about Market Risk
We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and, as such, are not required to provide the information required by this Item.
ItemItem 4. Controls and Procedures
Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, management concluded that these disclosure controls and procedures were not effective as of the end of such period as a result of the material weakness disclosed below.
WeAs previously reported, we identified a material weakness in our internal control over financial reporting as we did not have sufficient accounting resources available to handle the volume of technical accounting issues and provide adequate review functions, in connection with the integration of acquisitions.
functions. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Notwithstanding the material weakness, which still existed as of March 31, 2022, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded that the consolidated financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.
Management is committedPlans to maintaining a strongRemediateMaterial Weakness
On December 1, 2021 we hired David Burnett as CFO. We believe that the addition of Mr. Burnett materially strengthened our internal control environment and is taking appropriateover financial reporting. Management continues to take 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 acquisitionthe appropriate technical expertise.
Other than disclosed above, there were no changesWe are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated as soon as possible. We have made significant progress towards remediation and continue to implement our remediation plan for the material weakness in our internal control over financial reporting described above. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.
Changes in internal control over financial reporting
Other than efforts to remediate the material weakness described above, there was no change to the Company's internal control over financial reporting that occurred during ourthe quarter ended March 31, 20212022 and that havehas materially affected, or areis reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
PARTPART II. OTHER INFORMATION
ItemItem 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.
ItemItem 1A. Risk Factors
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, 20202021 filed with the SECSecurities and Exchange Commission on March 25, 2021.
15, 2022.ItemItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
ItemItem 5. Other Information
ExhibitNo. | | Description |
31.1 | | Asset Purchase Agreement dated January 29, 2021 by and among Snelling Staffing, LLC, Snelling Services, LLC, Snelling Employment, LLC, Snelling Medical Staffing, LLC, Snelling Investments, Inc., Snelling Holdings, LLC as the Sellers' Representative, HQ Snelling Corporation, and HireQuest, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed on February 1, 2021) |
| | Asset Purchase Agreement dated February 12, 2021 between and among LINK Staffing Services Corporation, Franlink, Inc., Stafflink, Inc., and HQ Link Corporation. (incorporated by reference to Exhibit 2.1 to Form 8-K filed on February 16, 2021) |
| | First Amendment to Asset Purchase Agreement dated March 1, 2021 by and among Snelling Staffing, LLC, Snelling Services, LLC, Snelling Employment, LLC, Snelling Medical Staffing, LLC, Snelling Investments, Inc., Snelling Holdings, LLC, HQ Snelling Corporation, and HireQuest, Inc. (incorporated by reference to Exhibit 2.1 to Form 8-K filed on March 2, 2021) |
| | Note Purchase Agreement dated March 1, 2021 by and between HQ Financial Corporation, as Seller, and Bass Underwriters, Inc., as Purchaser. (incorporated by reference to Exhibit 2.2 to Form 8-K filed on March 2, 2021) |
| | Certification of Richard Hermanns, Chief Executive Officer of HireQuest, Inc. pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| | Certification of Cory Smith,David S. Burnett, Chief Financial Officer of HireQuest, Inc. pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| | Certification of Richard Hermanns, Chief Executive Officer of HireQuest, Inc., and Cory Smith,David S. Burnett, Chief Financial Officer of HireQuest, Inc., pursuant to 18 U.S.C. Section 1350, as adopted in Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith) |
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) |
| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
SIGNATURESPursuant 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.
/s/ Richard Hermanns | | HireQuest, Inc.
May 10, 2022 | |
Richard Hermanns | | Date | |
President and Chief Executive Officer | | | |
| | | | |
Date: May 17, 2021
| By: | /s/ Richard Hermanns
| |
| | | Richard Hermanns | |
| | President and Chief Executive Officer | |
| | | | |
/s/ David S. Burnett | | /s/ Cory Smith May 10, 2022 | |
David S. Burnett | | Cory Smith Date | |
Chief Financial Officer | | Chief Financial Officer | | |
