| Overview and Summary of Significant Accounting Policies | Nature of Business HireQuest, Inc. (“HQI,” the “Company,”
“we,” us,” or “our”) is a nationwide franchisor of branch offices providing on-demand labor solutions
in the light industrial and blue-collar segments of the staffing industry. We provide various types of temporary personnel through
two business models operating under the trade names “HireQuest Direct,” previously known as “Trojan Labor,”
and “HireQuest,” previously known as “Acrux Staffing.” HireQuest Direct specializes primarily in unskilled
and semi-skilled industrial and construction personnel. HireQuest specializes primarily in skilled and semi-skilled industrial
personnel as well as clerical and secretarial personnel. Currently, we have more than 150 franchised
branches in 30 states and the District of Columbia. Prior to September 29, 2019, when we finalized our conversion of all company-owned
branches to franchise-owned branches, we also owned and operated a number of branches. We provide employment to more than 85,000
individuals annually working for thousands of clients in various industries including construction, recycling, warehousing, logistics,
auctioneering, manufacturing, hospitality, landscaping, and retail. We provide staffing, marketing, funding, software, and administrative
services to our franchisees. Prior to September 29, 2019, we provided the same services to our owned temporary staffing locations. HQI is the product of the merger between Command
Center, Inc., or Command Center, with Hire Quest Holdings, LLC, and its wholly-owned subsidiary, Hire Quest, LLC, which we collectively
refer to as Legacy HQ. We refer to this merger as the Merger. Upon the closing of the Merger, all of the ownership interests in
Hire Quest Holdings, LLC were converted into the right to receive an aggregate amount of shares representing 68% of the total shares
of the Company’s common stock outstanding immediately after the closing. For additional information related to the Merger,
see Note 2 – Acquisitions Basis of Presentation We have prepared the accompanying unaudited
consolidated financial statements in accordance with accounting principles generally accepted in the United States of America,
or GAAP, for interim financial reporting and rules and regulations of the United States Securities and Exchange Commission, or
SEC. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance
with GAAP have been condensed or omitted. In the opinion of our management, all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of the financial position, results of operations, and cash flows for the fiscal periods
presented have been included. You should read these consolidated financial
statements in conjunction with the audited consolidated financial statements and accompanying notes of Hire Quest, LLC included
in our Form 8-K/A filed with the SEC on August 23, 2019. The results of operations for the quarter and the three quarters ended
September 29, 2019 are not necessarily indicative of the results expected for the full fiscal year, or for any other fiscal period. Fiscal period end As of January 1, 2019, we changed our financial
reporting period from a calendar year to a fiscal year. Our fiscal year end is the Sunday closest to the last day of December.
Our fiscal quarters end on the last Sunday closest to the last day in March, June and September. This change in fiscal year end
and fiscal quarter end did not have a material effect on the comparability of the periods presented. Consolidation The consolidated financial statements include
the accounts of HQI and all of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been
eliminated in consolidation. Use of estimates The preparation of consolidated financial statements
in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates and
assumptions underlie our workers’ compensation claim liabilities, the allowance for doubtful accounts, and our deferred taxes. Accounts receivables and allowance for
doubtful accounts Accounts receivables consist of amounts due
for labor services from customers of franchises and of previously owned locations. At September 29, 2019, approximately 78% and
22% of our accounts receivables were due from franchise and owned locations, respectively. At December 31, 2018, approximately
99% and 1% of our accounts receivable were due from franchise and owned locations, respectively. We own accounts receivable from labor services
provided by franchisees. We charge accounts receivable that remain uncollected beyond 84 days after the invoice date back to the
franchisee. Accordingly, we do not record an allowance for doubtful accounts on these accounts receivable. For labor services provided by previously owned
locations, we record accounts receivable at face value less an allowance for doubtful accounts. We determine the allowance for
doubtful accounts based on historical write-off experience, the age of the receivable, other qualitative factors and extenuating
circumstances, and current economic data which represents our best estimate of the amount of probable losses on these accounts
receivable, if any. We review the allowance for doubtful accounts periodically and write off past due balances when it is probable
that the receivable will not be collected. Our allowance for doubtful accounts on receivables generated by owned locations was
approximately $362,000 and $-0- at September 29, 2019 and December 31, 2018, respectively. Revenue recognition We account for revenue when both parties to
the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified,
and collectability of consideration is probable. Our revenue arises from (1) royalties paid by our franchisees, (2) revenues from
company-owned locations, and (3) interest we charge our franchisees on overdue accounts. We invoice customers every week and generally
do not require payment prior to the delivery of service. Substantially all of our contracts include payment terms of 30 days or
less and are short-term in nature. Because of our payment terms, there are no significant contract assets or liabilities. We do
not extend payment terms beyond one year. Revenue from franchise royalties is based on
a percentage of sales generated by the franchisee and recognized at the time the underlying sales occur. We recognize revenue from
company-owned locations at the time we satisfy our performance obligation, which is the transfer of services. Because our customers
receive and consume the benefits of our services simultaneously, we typically satisfy our performance obligations when we provide
our services. We report revenue net of customer credits, discounts, and taxes collected from customers that we remit to taxing
authorities. We recognize revenue from interest on overdue accounts receivable related to franchisee sales when they age past forty-two
days. Leases Operating leases are included in right-of-use
asset and lease current and long-term liabilities. We recognize lease expense for operating leases on a straight-line basis over
the lease term, and include it in selling, general and administrative expenses. If any of our leases require variable payments
of property taxes, insurance, and common area maintenance, in addition to base rent, we do not include the variable portion of
these lease payments in our right-of-use asset or lease liabilities. We expense these variable payments when we incur the obligation
to pay them and include them in lease expense as part of selling, general and administrative expenses. We measure lease right-of-use assets and lease
liabilities using the present value of future minimum lease payments over the lease term at the lease commencement date. The right-of-use
asset also includes any lease payments made on or before the commencement date of the lease, less any lease incentives we received.
We use our incremental borrowing rate based on the information available at the lease commencement date in determining the present
value of lease payments. We estimate the incremental borrowing rates based on what we would be required to pay for a collateralized
loan over a similar term. Business combinations We account for business acquisitions under the
acquisition method of accounting by recognizing identifiable tangible and intangible assets acquired, liabilities assumed, and
non-controlling interests in the acquired business at their fair values. We record as goodwill the excess of the cost of the acquired
business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed. We expense acquisition
related costs as we incur them. Reserve on notes receivable In connection with the Merger and to execute
on our strategy to convert company-owned locations to franchisee-owned locations, we sold the operating assets of the Command Center
owned branches to new and existing franchisees during the fiscal quarter ended September 29, 2019. We received consideration for
these assets primarily in the form of promissory notes. We record these notes receivable at their face value net of a reserve.
We determine the reserve based on historical experience, the ratio of the note receivable compared to the estimated value of the
branch, and other qualitative factors and extenuating circumstances. We review this reserve on notes receivable periodically. The
reserve was approximately $1.3 million at September 29, 2019 and $-0- at December 31, 2018, respectively. Earnings per share Basic earnings per share is calculated by dividing
net income or loss available to common stockholders by the weighted average number of common shares outstanding, and does not include
the impact of any potentially dilutive common stock equivalents. Diluted earnings per share reflect the potential dilution of securities
that could share in our earnings through the conversion of common shares issuable via outstanding stock options, except where their
inclusion would be anti-dilutive. Outstanding common stock equivalents at September 29, 2019 and September 30, 2018 totaled approximately
61,000 and -0-, respectively. Diluted common shares outstanding were calculated
using the treasury stock method and are as follows:
Quarter ended Three quarters ended
September 29, 2019
September 30, 2018
September 29, 2019
September 30, 2018
Weighted average number of common shares used in basic net income per common share 12,927,634 9,939,668 10,939,318 9,939,668
Dilutive effects of stock options - - - -
Weighted average number of common shares used in diluted net income per common share 12,927,634 9,939,668 10,939,318 9,939,668 Recently adopted accounting pronouncements In May 2014, the Financial Accounting Standards
Board, or FASB, issued new revenue recognition guidance under Accounting Standards Update, or ASU, 2014-09, Revenue from Contracts
with Customers, that supersedes the existing revenue recognition guidance under GAAP. The new standard focuses on creating a single
source of revenue guidance for revenue arising from contracts with customers for all industries. The objective of the new standard
is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents
what the company expects to be entitled to in exchange for those goods or services. On January 1, 2019, we adopted the new revenue
recognition guidance using the modified retrospective method for all open contracts and related amendments. Results for reporting
periods beginning after January 1, 2019 are presented under the new revenue recognition guidance, while prior period amounts were
not adjusted and continue to be reported in accordance with historic accounting guidance. The adoption of this new guidance did
not have a material impact on our consolidated financial statements. In February 2016, the FASB issued guidance on
lease accounting. The new guidance continues to classify leases as either finance or operating, but results in the lessee recognizing
most operating leases on the balance sheet as right-of-use assets and lease liabilities. This guidance was effective for annual
and interim periods beginning after December 15, 2018, with early adoption permitted. In July 2018, the FASB amended the standard
to provide transition relief for comparative reporting, allowing companies to adopt the provisions of the new standard using a
modified retrospective transition method on the adoption date, with a cumulative-effect adjustment to retained earnings recorded
on the date of adoption. We have elected to adopt the standard using the transition relief provided in the July amendment. We have elected the three practical expedients
allowed for implementation of the new standard, but have not utilized the hindsight practical expedient. Accordingly, we did not
reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing
leases; or 3) initial direct costs for any existing leases. As a result of adopting this guidance, we recognized
a right-of-use asset, and corresponding lease liability, of approximately $200,000 as of July 15, 2019, the date the guidance
became effective for us because of the Merger between Legacy HQ and Command Center. Had we adopted this guidance at the beginning
of the year, the effect to our balance sheet would have been substantially the same as with the mid-year adoption. The adoption
of this guidance did not have a material impact on expense recognition. The difference between the right-of-use assets and
lease liabilities relates to the deferred rent liability balance as of the end of fiscal 2018 associated with the leases capitalized.
The deferred rent liability, which was the difference between the straight-line lease expense and cash paid, reduced the right-of-use
asset upon adoption. Recently issued accounting pronouncements In June 2016, the FASB issued ASU 2016-13, Financial
Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard significantly
changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at
fair value through net income. The standard will replace today's “incurred loss” approach with an “expected loss”
model for instruments measured at amortized cost. For available-for-sale securities, entities will be required to record allowances
rather than reduce the carrying amount, as they do today under the other-than-temporary impairment model. It also simplifies the
accounting model for purchased credit-impaired debt securities and loans. This guidance is effective for annual periods beginning
after December 15, 2019, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15,
2018, and interim periods therein. We are currently evaluating the impact of the new guidance on our consolidated financial statements
and related disclosures. We do not expect other accounting standards
that the FASB or other standards-setting bodies have issued to have a material impact on our financial position, results of operations,
and cash flows. |
