UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
For the quarterly period ended
or
Commission File Number
| HIREQUEST, INC. |
| (Exact name of registrant as specified in its Charter) |
| | | |
| (State of incorporation or organization) | (I.R.S. employer identification no. | |
| | ||
| (Address of principal executive offices) (Zip Code) | ||
| Registrant’s telephone number, including area code: ( | ||
Securities registered pursuant to Section 12(b) of the Act:
| | | The | ||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the Registrant is a large accelerated filer ☐, an accelerated filer ☐, a
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Number of shares of issuer's common stock outstanding at August 8, 2022:
Table of Contents
| PART I. FINANCIAL INFORMATION | ||
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Consolidated Balance Sheets
| (in thousands, except par value data) | June 30, 2022 | December 31, 2021 | ||||||
| ASSETS | (unaudited) | |||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts | ||||||||
| Notes receivable | ||||||||
| Prepaid expenses, deposits, and other assets | ||||||||
| Prepaid workers' compensation | ||||||||
| Current assets held for sale - discontinued operations | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Workers’ compensation claim payment deposit | ||||||||
| Franchise agreements, net | ||||||||
| Other intangible assets, net | ||||||||
| Goodwill | ||||||||
| Other assets | ||||||||
| Notes receivable, net of current portion and reserve | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Line of credit | ||||||||
| Term loans payable | ||||||||
| Other current liabilities | ||||||||
| Accrued payroll, benefits, and payroll taxes | ||||||||
| Due to franchisees | ||||||||
| Risk management incentive program liability | ||||||||
| Workers' compensation claims liability | ||||||||
| Total current liabilities | ||||||||
| Term loan payable, net of current portion | ||||||||
| Deferred tax liability | ||||||||
| Workers' compensation claims liability, net of current portion | ||||||||
| Franchisee deposits | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 8) | ||||||||
| Stockholders' equity | ||||||||
| Preferred stock - $ par value, shares authorized; issued | ||||||||
| Common stock - $ par value, shares authorized; and shares issued, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock, at cost - shares | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes to consolidated financial statements.
Consolidated Statements of Income
(unaudited)
| Three months ended |
Six months ended |
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| (in thousands, except per share data) |
June 30, 2022 |
June 30, 2021 |
June 30, 2022 |
June 30, 2021 |
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| Franchise royalties |
$ | $ | $ | $ | ||||||||||||
| Staffing revenue, owned locations |
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| Service revenue |
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| Total revenue |
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| Cost of staffing revenue, owned locations |
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| Gross profit |
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| Selling, general and administrative expenses |
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| Depreciation and amortization |
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| Income from operations |
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| Other miscellaneous income (expense) |
( |
) | ||||||||||||||
| Interest income |
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| Interest and other financing expense |
( |
) | ( |
) | ( |
) | ( |
) | ||||||||
| Net income before income taxes |
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| Provision for income taxes |
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| Net income from continuing operations |
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| Income from discontinued operations, net of tax |
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| Net income |
$ | $ | $ | $ | ||||||||||||
| Basic earnings per share |
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| Continuing operations |
$ | $ | $ | $ | ||||||||||||
| Discontinued operations |
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| Total |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings per share |
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| Continuing operations |
$ | $ | $ | $ | ||||||||||||
| Discontinued operations |
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| Total |
$ | $ | $ | $ | ||||||||||||
| Weighted average shares outstanding |
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| Basic |
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| Diluted |
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See accompanying notes to consolidated financial statements.
Consolidated Statements of Changes in Stockholders’ Equity
(unaudited)
| Common stock | Treasury stock | Additional | Retained | Total stockholders' | ||||||||||||||||||||
| Six months ended (in thousands) | Shares | Par value | Amount | paid-in capital | earnings | equity | ||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Common stock dividends | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted common stock granted for services | ||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Balance at December 31, 2020 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Common stock dividends | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock granted for services | ||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Three months ended | ||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Common stock dividends | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted common stock granted for services | ||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Balance at March 31, 2021 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Common stock dividends | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted stock granted for services | ||||||||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(unaudited)
| Six months ended |
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| (in thousands) |
June 30, 2022 |
June 30, 2021 |
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| Cash flows from operating activities |
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| Net income |
$ | $ | ||||||
| Income from discontinued operations |
( |
) | ||||||
| Net income from continuing operations |
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| Adjustments to reconcile net income to net cash used in operations: |
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| Depreciation and amortization |
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| Non-cash interest |
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| Allowance for losses on notes receivable |
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| Stock based compensation |
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| Deferred taxes |
( |
) | ( |
) | ||||
| Loss on disposition of intangible assets |
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| Bargain purchase gain |
( |
) | ||||||
| Changes in operating assets and liabilities: |
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| Accounts receivable |
( |
) | ( |
) | ||||
| Prepaid expenses, deposits, and other assets |
( |
) | ( |
) | ||||
| Prepaid workers' compensation |
( |
) | ||||||
| Accounts payable |
( |
) | ||||||
| Risk management incentive program liability |
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| Other current liabilities |
( |
) | ||||||
| Accrued payroll, benefits and payroll taxes |
( |
) | ||||||
| Due to franchisees |
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| Workers' compensation claim payment deposit |
( |
) | ||||||
| Workers' compensation claims liability |
( |
) | ( |
) | ||||
| Net cash provided by operating activities - continuing operations |
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| Net cash provided by operating activities - discontinued operations |
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| Net cash provided by operating activities |
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| Cash flows from investing activities |
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| Purchase of acquisitions |
( |
) | ( |
) | ||||
| Purchase of property and equipment |
( |
) | ( |
) | ||||
| Proceeds from the sale of purchased locations |
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| Proceeds from the sale of notes receivable |
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| Proceeds from payments on notes receivable |
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| Cash issued for notes receivable |
( |
) | ( |
) | ||||
| Investment in intangible asset |
( |
) | ( |
) | ||||
| Net change in franchisee deposits |
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| Net cash used in investing activities |
( |
) | ( |
) | ||||
| Cash flows from financing activities |
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| Proceeds from term loan payable |
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| Payments on term loan payable |
( |
) | ||||||
| Payments related to debt issuance |
( |
) | ||||||
| Net proceeds from revolving line of credit |
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| Proceeds from affiliates |
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| Payment of dividends |
( |
) | ( |
) | ||||
| Net cash provided by financing activities |
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| Net decrease in cash |
( |
) | ( |
) | ||||
| Cash, beginning of period |
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| Cash, end of period |
$ | $ | ||||||
| Supplemental disclosure of non-cash investing and financing activities |
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| Notes receivable issued for the sale of intangible assets |
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| Amounts payable related to the purchase of acquisition |
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| Supplemental disclosure of cash flow information |
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| Interest paid |
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| Income taxes paid, net of refunds |
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See accompanying notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Note 1 - Overview and Summary of Significant Accounting Policies
Nature of Business
HireQuest, Inc. (together with its subsidiaries, “HQI, the “Company,” “we,” us,” or “our”) is a nationwide franchisor of offices providing direct-dispatch and commercial staffing solutions in the light industrial and blue-collar segments of the staffing industry and traditional commercial staffing. Our franchisees provide various types of temporary personnel through two business models operating under the trade names “HireQuest Direct”, “HireQuest”, “Snelling”, “LINK Staffing”, “DriverQuest”, “HireQuest Health”, and “Northbound Executive Search”. HireQuest Direct specializes primarily in unskilled and semi-skilled industrial and construction personnel. HireQuest, Snelling, and LINK Staffing specialize primarily in skilled and semi-skilled industrial personnel, clerical and administrative personnel, and permanent placement services. DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications. HireQuest Health specializes in skilled personnel in the medical and dental industries. Northbound Executive Search specializes in executive placement and consultant services in the financial services industry.
On January 24, 2022 we completed our acquisition of Temporary Alternatives, Inc. (“Temporary Alternatives”) to acquire locations in west Texas and New Mexico for $
On March 1, 2021, we completed our acquisition of Snelling Staffing and affiliates (“Snelling”). We acquired substantially all of the operating assets and assumed certain liabilities of Snelling for a purchase price of approximately $
For additional information related to these transactions, see Note 2 - Acquisitions.
As of June 30, 2022 we had
Basis of Presentation
We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented.
These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2021. Results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other period.
Consolidation
The consolidated financial statements include the accounts of HQI and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.
U.S. GAAP requires the primary beneficiary of a variable interest entity (“VIE”) to consolidate that entity. To be the primary beneficiary of a VIE, an entity must have both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that are significant to the beneficiary. We provide acquisition financing to some of our franchisees that could result in our having to absorb losses. This results in some franchisees being considered VIEs. We have reviewed our relationship with each of these franchisees and determined that we are not the primary beneficiary of any of these entities. Accordingly, we have not consolidated these entities.
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.
Significant estimates and assumptions underlie our workers’ compensation claim liabilities, our workers’ compensation risk management incentive program accrual, our deferred taxes, the reserve for losses on notes receivable, and the estimated fair value of assets acquired and liabilities assumed, including goodwill.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due for labor services from customers of franchisees, accounts receivable purchased in acquisitions, and accounts receivable originating at, or attributable to, company-owned locations. We own the accounts receivable from labor services provided by our franchisees until they age beyond a date agreed upon with each respective franchisee between 42 and 84 days. When accounts receivable age beyond the agreed-upon date, or are otherwise deemed uncollectable, they are charged back to our franchisees. Accordingly, we do not record an allowance for doubtful accounts on these accounts receivable.
For staffing services provided by company-owned offices, and for purchased accounts receivable, 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 company-owned and purchased accounts receivable was approximately $
Revenue Recognition
Our primary source of revenue comes from royalty fees based on the operation of our franchised offices. Royalty fees from our HireQuest Direct business model are based on a percentage of sales for services our franchisees provide to customers, which ranges from
For franchised locations, we recognize revenue when we satisfy our performance obligations. Our performance obligations primarily take the form of a franchise license and promised services. Promised services consist primarily of paying temporary employees, completing all statutory payroll related obligations, and providing workers' compensation insurance on behalf of temporary employees. Because these performance obligations are interrelated, we do not consider them to be individually distinct and therefore account for them as a single performance obligation. Because our franchisees receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Franchise royalties are billed on a weekly basis. We also offer various incentive programs for franchisees including royalty incentives, royalty credits, and other support initiatives. These incentives and credits are provided to encourage new office development and organic growth, and to limit workers' compensation exposure. We present franchise royalty fees net of these incentives and credits.
For owned locations, 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. Revenue derived from owned locations is recognized at the time we satisfy our performance obligation. Our contracts have a single performance obligation, which is the transfer of services. Because our customers receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Revenue from owned locations is reported net of customer credits, discounts, and taxes collected from customers that are remitted to taxing authorities. Our customers are invoiced every week and we rarely 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 with our customers, there are no significant contract assets or liabilities. We do not extend payment terms beyond one year.
Below are summaries of our franchise royalties disaggregated by business model (in thousands):
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| HireQuest Direct model | $ | $ | $ | $ | ||||||||||||
| HireQuest, Snelling, DriverQuest, HireQuest Health, and Northbound | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
Service revenue, which forms the other component of our total revenue, consists of interest we charge our franchisees on overdue customer accounts receivable, trademark license fees, and other fees for optional services we provide. We recognize interest income based on the effective interest rate applied to the outstanding principal balance of overdue accounts. Trademark license fees are charged to some locations that utilize our intellectual property that are not franchisees. Trademark license fees are
Notes Receivable
Notes receivable from franchisees consist primarily of amounts due to us related to the financing of franchised locations. We report notes receivable from franchisees at the principal balance outstanding less an allowance for losses. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. Notes receivable are generally secured by the assets of each location and the ownership interests in the franchise. We monitor the financial condition of our debtors and record provisions for estimated losses when we believe it is probable that our debtors will be unable to make their required payments. We evaluate the potential impairment of notes receivable based on various analyses, including estimated discounted future cash flows, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When a note receivable is deemed impaired, we discontinue accruing interest and only recognize interest income when payment is received. Our allowance for losses on notes receivable was approximately $
Notes receivable from non-franchisees consist primarily of amounts due to us from the sale of non-core assets acquired after an acquisition. We report notes receivable from non-franchisees at the principal balance outstanding less an allowance for losses. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. Notes receivable are generally unsecured. We monitor the financial condition of our debtors and evaluate the potential impairment of notes receivable based on various analyses, including estimated discounted future cash flows, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When a note receivable is deemed impaired, we discontinue accruing interest and only recognize interest income when payment is received. Our impairment reserve on notes receivable from non-franchisees was approximately $
Intangible Assets
Intangible assets acquired are recorded at fair value. We test our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. We test our indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. If the carrying value exceeds the fair value, we recognize an impairment in an amount equal to the excess, not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. There were
Finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives, which ranges from
Intangible assets internally developed are measured at cost. We capitalize costs to develop or purchase computer software for internal use which are incurred during the application development stage. These costs include fees paid to third parties for development services and payroll costs for employees' time spent developing the software. We expense costs when incurred during the preliminary project stage and the post-implementation stage. Capitalized development costs will be amortized on a straight-line basis over the estimated useful life of the software. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life.
The table below reflects information related to our intangible assets (in thousands).
| June 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||
| Estimated useful life | Gross | Accumulated amortization | Net | Gross | Accumulated amortization | Net | |||||||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||||||||||
| Franchise agreements |
| $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Customer lists |
| ( | ) | ( | ) | ||||||||||||||||||||
| Purchased software |
| ( | ) | ( | ) | ||||||||||||||||||||
| Internally developed software |
| ||||||||||||||||||||||||
| Total finite-lived intangible assets | ( | ) | ( | ) | |||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||
| Domain name | Indefinite | - | - | ||||||||||||||||||||||
| Trade name | Indefinite | - | - | ||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||
Goodwill
Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business combinations. Goodwill is measured for impairment at least annually, or whenever events and circumstances arise that indicate an impairment may exist. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. We test for goodwill impairment at the reporting unit level. In assessing the value of goodwill, assets and liabilities are assigned to a reporting unit and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. At June 30, 2022 we had a single reporting unit.
The table below summarizes our goodwill at December 31, 2021 and changes during the six months ended June 30, 2022 (in thousands):
| Goodwill balance at December 31, 2021 | $ | |||
| Goodwill recorded on acquisition of Temporary Alternatives | ||||
| Goodwill recorded on acquisition of Dubin | ||||
| Goodwill recorded on acquisition of Northbound | ||||
| Goodwill balance at June 30, 2022 | $ |
Earnings per Share
We calculate basic earnings per share by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding. We do not include the impact of any potentially dilutive common stock equivalents in our basic earnings per share calculations. Diluted earnings per share reflect the potential dilution of securities that could share in our earnings through the conversion of common shares issuable via outstanding stock options and unvested restricted shares, except where their inclusion would be anti-dilutive. Outstanding common stock equivalents at June 30, 2022 and June 30, 2021 totaled approximately
We use the treasury stock method to calculate the diluted common shares outstanding which were as follows (in thousands):
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Weighted average number of common shares used in basic net income per common share | ||||||||||||||||
| Dilutive effects of unvested restricted stock and stock options | ||||||||||||||||
| Weighted average number of common shares used in diluted net income per common share | ||||||||||||||||
Fair Value Measures
Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an ordinary transaction between market participants on the measurement date. Our policy on fair value measures requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The policy establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The policy prioritizes the inputs into three levels that may be used to measure fair value:
Level 1: Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level 3: Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
The carrying amounts of cash, accounts receivable, accounts payable and all other current liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the net book value and balances are reviewed for impairment at least annually. The fair value of the term loan payable approximates its carrying value. The fair value of impaired notes receivable are determined based on estimated future payments discounted back to present value using the notes effective interest rate.
| June 30, 2022 | ||||||||||||||||
| (in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Notes receivable | ||||||||||||||||
| Accounts receivable | ||||||||||||||||
| Notes receivable - impaired | ||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Term loans payable | $ | $ | $ | $ | ||||||||||||
| Line of credit | ||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | ||||||||||||
| December 31, 2021 | ||||||||||||||||
| (in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Notes receivable | ||||||||||||||||
| Accounts receivable | ||||||||||||||||
| Notes receivable - impaired | ||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Term loan payable | $ | $ | $ | $ | ||||||||||||
| Line of credit | ||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | ||||||||||||
For additional information related to our impaired notes receivable, see Note 10 - Notes Receivable.
Discontinued Operations
Company-owned offices that have been disposed of by sale, disposed of other than by sale, or are classified as held-for-sale, are reported separately as discontinued operations. In addition, a newly acquired business that, upon acquisition, meets the held-for-sale criteria will be reported as discontinued operations. Accordingly, the assets and liabilities, operating results, and cash flows for these businesses are presented separate from our continuing operations for all periods presented in our consolidated financial statements and footnotes, unless indicated otherwise. The assets and liabilities of a discontinued operation held for sale are measured at the lower of the carrying value or fair value less cost to sell.
Savings Plan
We have a savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Under our 401(k) plan, eligible employees may contribute a portion of their pre-tax earnings, subject to certain limitations. As a benefit, we match
Reclassification
Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today's “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This guidance is effective for annual periods beginning after December 15, 2022, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.
We do not expect other accounting standards that the FASB or other standards-setting bodies have issued to have a material impact on our financial position, results of operations, or cash flows.
Note 2 - Acquisitions
Business Combinations
Snelling Staffing
On March 1, 2021, we completed our acquisition of certain assets of Snelling in accordance with the terms of the Asset Purchase Agreement dated January 29, 2021 (the “Snelling Agreement”). Snelling is a 67-year-old staffing company headquartered in Richardson, TX. Pursuant to the Snelling Agreement, HQ Snelling Corporation (“HQ Snelling”), our wholly-owned subsidiary, acquired substantially all of the operating assets and assumed certain liabilities of the sellers for a purchase price of approximately $
The following table summarizes the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date. From the date of acquisition through December 31, 2021, adjustments to the fair value of assets acquired and liabilities assumed were adjusted in conjunction with the net working capital reconciliation. These adjustments included an increase in accounts receivable of approximately $
The following table summarizes the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):
| Cash consideration | $ | |||
| Accounts receivable | $ | |||
| Workers' compensation deposit | ||||
| Franchise agreements | ||||
| Customer lists | ||||
| Other current assets | ||||
| Workers' compensation claims liability | ( | ) | ||
| Accrued payroll | ( | ) | ||
| Current liabilities | ( | ) | ||
| Other liabilities | ( | ) | ||
| Bargain purchase | ( | ) | ||
| Purchase price allocation | $ |
The bargain purchase is attributable to the financial position of the seller and because there were few suitable potential buyers. This gain is included in the line item, “Other miscellaneous income (expense),” in our consolidated statement of income.
The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Snelling had occurred on January 1, 2020, (b) all of Snelling’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
These calculations reflect increased amortization expense, increased payroll expense, the elimination of gains associated with the transaction, the elimination of transaction related costs, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2020.
In connection with the acquisition, we sold the
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
The fair values of the assets acquired were determined based on information available to us. From the date of acquisition through June 30, 2022, the fair value of assets acquired were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in customer lists of approximately $
| Cash consideration | $ | |||
| Net working capital payable | ||||
| Total consideration | $ | |||
| Customer lists | $ | |||
| Accounts receivable | ||||
| Goodwill | ||||
| Purchase price allocation | $ |
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Temporary Alternatives. Goodwill is deductible for income tax purposes.
The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Temporary Alternatives had occurred on January 1, 2021, (b) all of Temporary Alternative’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
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 $
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. (collectively “Dubin”) in accordance with the terms of an Asset Purchase Agreement dated January 19, 2022 for approximately $
The fair values of the assets acquired were determined based on information available to us. From the date of acquisition through June 30, 2022, the fair value of assets acquired were adjusted in conjunction with a third-party valuation. These adjustments included an increase in customer relationships of approximately $
| Cash consideration | $ | |||
| Note payable & net working capital payable | ||||
| Total consideration | $ | |||
| Customer relationships | $ | |||
| Customer lists | ||||
| Accounts receivable | ||||
| Goodwill | ||||
| Purchase price allocation | $ |
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Dubin. Goodwill is deductible for income tax purposes.
The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Dubin had occurred on January 1, 2021, (b) all of Dubin’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
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 divided Dubin into separate businesses and sold certain assets related to the operations of one 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 $
The remaining assets related to the operations of the other acquired locations have not been sold and as of June 30, 2022 are classified as available-for-sale and the operating results are reported as “Income from discontinued operations, net of tax.” We are actively working to sell these assets. In the meantime, we operate the Philadelphia Snelling franchise as company-owned. The income from discontinued operations amounts as reported on our consolidated statements of income is comprised of the following amounts (in thousands):
| Three months ended | Six months ended | |||||||
| June 30, 2022 | June 30, 2022 | |||||||
| Revenue | $ | $ | ||||||
| Cost of staffing services | ||||||||
| Gross profit | ||||||||
| SG&A | ||||||||
| Net income before tax | ||||||||
| Provision for income taxes | ||||||||
| Net 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 $
The fair values of the assets acquired and the liabilities assumed were determined based on information available to us. From the date of acquisition through June 30, 2022, the fair value of assets acquired and liabilities assumes were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in customer relationships of approximately $
| Cash consideration | $ | |||
| Note payable | ||||
| Total consideration | $ | |||
| Customer relationships | $ | |||
| Trade name | ||||
| Accounts receivable | ||||
| Other current assets | ||||
| Goodwill | ||||
| Current liabilities assumed | ( | ) | ||
| Purchase price allocation | $ |
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Northbound. Goodwill is deductible for income tax purposes.
The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Northbound had occurred on January 1, 2021, (b) all of Northbound's operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
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 Northbound acquisition, we entered into an amortizing term loan from the seller for $
Immediately after 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 ale price for the operating assets was $
Asset Acquisitions
LINK Staffing
On March 22, 2021, we completed our acquisition of the franchise relationships and similar assets of LINK in accordance with the terms of the Asset Purchase Agreement dated February 12, 2021 (the "LINK Agreement"). LINK is a family-owned staffing company headquartered in Houston, TX. Pursuant to the LINK Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired franchise agreements for approximately
| Cash consideration | $ | |||
| Franchise agreements | ||||
| Notes receivable | ||||
| Purchase price allocation | $ |
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
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 $
| Cash consideration | $ | |||
| Liabilities assumed | ||||
| Transaction costs | ||||
| Total consideration | $ | |||
| Purchased software | ||||
| Domain name | ||||
| Deferred tax liability | ( | ) | ||
| Purchase price allocation | $ |
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 (“Dental Power”) in accordance with the terms of the Asset Purchase Agreement dated November 2, 2021 (the "Dental Power Agreement") for $
The following table summarizes the values of the identifiable assets acquired as of the acquisition date (in thousands):
| Cash consideration | $ | |||
| Contingent consideration | ||||
| Total consideration | $ | |||
| Customer lists | $ |
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
Prior to entering into a related party transaction which is disclosable pursuant to Item 404 of Regulation S-K, 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 (in whole or in part).
Jackson Insurance Agency ("Jackson Insurance") and Bass Underwriters, Inc. ("Bass")
Edward Jackson, a member of our Board and significant stockholder, and a member of Mr. Jackson’s immediate family own Jackson Insurance. Mr. Jackson, Richard 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.
In March of 2021, we sold approximately $
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).
During the three months ended June 30, 2022 and June 30, 2021, Jackson Insurance and Bass invoiced HQI approximately $
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.
During the three months ended June 30, 2022 and June 30, 2021, Insurance Technologies invoiced HQI approximately $
The Worlds Franchisees
Mr. Jackson and immediate family members of Mr. Hermanns have significant ownership interests in certain of our franchisees (the “Worlds Franchisees”). There were
Concurrent with the Snelling acquisition in 2021 we sold the Princeton, NJ assets acquired to an entity partially owned by the Worlds Franchisees. Gross proceeds from the sale of Princeton was $
Other transactions regarding the Worlds Franchisees are summarized below (in thousands):
| Three months ended | Six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Franchisee royalties | $ | $ | $ | $ | ||||||||||||
Balances regarding the Worlds Franchisees are summarized below (in thousands):
| June 30, 2022 | December 31, 2021 | |||||||
| Due to franchisee | $ | $ | ||||||
| Risk management incentive program liability | ||||||||
Note 4 - Line of Credit and Term Loans
In June 2021, we entered into a loan agreement with Truist Bank (“Truist”) for a $
All loans made under the line of credit are scheduled to mature on June 29, 2026. The line of credit and swingline loans bear interest at a variable rate equal to: (a) for LIBOR index rate loans, the Daily One Month London Interbank Offering Rate, (“LIBOR”) plus a margin between
At June 30, 2022, approximately $
The Truist term loan is scheduled to mature on June 29, 2036 and bears interest at a variable rate equal to LIBOR plus a margin of
The Truist line of credit and the Truist term loan are cross collateralized, cross defaulted and coterminous.
In connection with the Northbound acquisition, we entered into an amortizing term loan from the seller for $
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 $
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 thousand per incident. Command Center’s ACE policy included a one-time obligation for the Company to pay any single claim filed under the Command Center policy within a policy year that exceeds $500 thousand (if any), but only up to $750 thousand for that claim. All other claims within the policy year were subject to the $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 $10.7 million, which we accomplished by providing a letter of credit under our agreement with Truist. For workers’ compensation claims originating in the monopolistic jurisdictions of North Dakota, Ohio, Washington, and Wyoming, we pay workers’ compensation insurance premiums and obtain full coverage under mandatory state administered programs. Our liability associated with claims in these jurisdictions is limited to premium payments based upon the amount of payroll paid within each jurisdiction. Accordingly, our consolidated financial statements reflect only the mandated workers’ compensation insurance premium liability for workers’ compensation claims in these jurisdictions.
Note 6 - Stockholders’ Equity
Dividend
In the third quarter of 2020, we initiated the payment of a quarterly dividend and intend to continue to pay a quarterly dividend, based on our business results and financial position. The following common share dividends were paid during 2022 and 2021 (total paid in thousands):
| Declaration date |
Dividend |
Total paid |
||||||
| March 1, 2021 |
$ | $ | ||||||
| June 1, 2021 |
||||||||
| September 1, 2021 |
||||||||
| December 1, 2021 |
||||||||
| March 1, 2022 |
||||||||
| June 1, 2022 |
||||||||
Note 7 - Stock Based Compensation
Employee Stock Incentive Plan
In December 2019, our Board approved the 2019 HireQuest, Inc. Equity Incentive Plan (the “2019 Plan”). Subject to adjustment in accordance with the terms of the 2019 Plan, no more than
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
In the first six months of 2022, we have issued
Also in the first six months of 2022, we have issued
In the first six months of 2021, we issued
The following table summarizes our restricted stock outstanding at December 31, 2021, and changes during the six months ended June 30, 2022 (number of shares in thousands).
| Shares | Weighted average grant date price | |||||||
| Non-vested, December 31, 2021 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Non-vested, June 30, 2022 | ||||||||
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
The following table summarizes our stock options outstanding at December 31, 2021, and changes during the six months ended June 30, 2022 (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 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Outstanding, June 30, 2022 | ||||||||||||
There were no non-vested stock options outstanding at June 30, 2022 or at December 31, 2021.
The following table summarizes information about our outstanding stock options, and reflects the intrinsic value recalculated based on the closing price of our common stock of $
| Number of shares underlying options | Weighted average exercise price per share | Weighted average remaining contractual life (years) | Aggregate intrinsic value | |||||||||||||
| Outstanding and exercisable | $ | $ | ||||||||||||||
At June 30, 2022, there was unrecognized stock-based compensation expense totaling approximately $
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 $
Legal Proceedings
From time to time, we are involved in various legal and administrative proceedings. Based on information currently available to us, we do not expect material uninsured losses to arise from any of these matters. We believe the outcome of these matters, even if determined adversely, will not have a material adverse effect on our business, financial condition or results of operations. There have been no material changes in our legal proceedings as of June 30, 2022.
Note 9 - Income Tax
Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year and changes in tax law and tax rates. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes.
Our effective tax rate for continuing operations during the three months ended June 30, 2022 and June 30, 2021 was
We use an intra-period tax allocation is to allocate total income tax expense (or benefit) to the different components of continuing operations and discontinued operations. This allocation uses a with and without methodology to determine income tax expense for discontinued operations. Tax expense allocated to discontinued operations was $
Note 10 - Notes Receivable
Notes from Franchisees
Several franchisees borrowed funds from us primarily to finance the initial purchase price of office assets, including intangible assets.
Notes outstanding, net of allowance for losses, were approximately $
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 the economy on certain borrowers’ economic performance and estimated future cash flows, we have established an allowance of approximately $
The following table summarizes our notes receivable balance to franchisees (in thousands):
| June 30, 2022 | December 31, 2021 | |||||||
| Note receivable | $ | $ | ||||||
| Allowance for losses | ( | ) | ( | ) | ||||
| Notes receivable, net | $ | $ | ||||||
Notes from Non-Franchisees
In connection with the Snelling acquisition, we sold certain California locations that had been company-owned by Snelling to the California purchaser (the “California Purchaser”). These locations are permitted to operate under the Snelling trademark pursuant to a license agreement paying us a royalty of
During 2020, the California Purchaser experienced significant economic hardships due to the impacts of COVID-19 and the related government mandates in the state. As a result, we restructured a portion of the notes 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. During the three months ended June 30, 2022 we have been asked to provide a third forbearance agreement and avoid foreclosure action. We are currently negotiating the terms and conditions related to that agreement. As part of the forbearance we will likely have to forgive additional payments due on the notes. After reviewing the potential outcomes, we recorded an additional impairment of approximately $
For notes to non-franchisees, we recognized interest income on this note of approximately $-
The following table summarizes our non-franchisee note receivable balance that has been deemed impaired (in thousands):
| June 30, 2022 | December 31, 2021 | |||||||
| Note receivable | $ | $ | ||||||
| Allowance for losses | ( | ) | ( | ) | ||||
| Notes receivable, net | $ | $ | ||||||
Item 2. Management’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 mergers or 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 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; our and our franchisees’ customers’ ability to navigate successfully the challenges posed by current global supply disruptions and inflation, including with respect to energy prices; 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, 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 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 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 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.
Overview
We are a nationwide franchisor of offices providing direct-dispatch and commercial staffing solutions in the light industrial and blue-collar segments of the staffing industry and traditional commercial staffing. Our franchisees provide various types of temporary personnel through two business models operating under the trade names “HireQuest Direct”, “HireQuest”, “Snelling”, “LINK Staffing”, “DriverQuest”, “HireQuest Health”, and “Northbound Executive Search”. HireQuest Direct specializes primarily in unskilled and semi-skilled industrial and construction personnel. HireQuest, Snelling, and LINK specialize primarily in skilled and semi-skilled industrial personnel, clerical and administrative personnel, and permanent placement services. DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications. HireQuest Health specializes in skilled personnel in the medical and dental industries. Northbound Executive Search specializes in executive placement and consultant services in the financial services industry. As of June 30, 2022 we had 223 franchisee-owned offices and 2 company owned offices in 38 states and the District of Columbia. We provide employment for an estimated 75,000 temporary employees annually working for thousands of clients in many industries including construction, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, and retail.
The COVID-19 pandemic materially adversely impacted our business in 2020 and, to a much lesser extent, into 2021. Comparisons between 2022 and 2021 should be viewed through a COVID-19 lens with the understanding that for the six-month period ended June 30, 2021 our revenues and expenses were impacted by COVID and 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 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 Staffing 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 $17.9 million, subject to customary adjustments for net working 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 to be used to pay accrued payroll liabilities that HQ Snelling assumed pursuant to the Snelling Agreement. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist Bank ("Truist").
The LINK Acquisition
On March 22, 2021, we completed our acquisition of the franchise relationships and certain other assets of LINK 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 was a family-owned staffing company headquartered in Houston, TX. Pursuant to the LINK Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired approximately 35 franchised offices, customer lists and contracts, and other assets of LINK for a purchase price of $11.1 million (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 outstanding 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. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.
The Dental Power Acquisition
On December 6, 2021 we completed our acquisition of the Dental Power Staffing division ("Dental Power") of Dental Power International, Inc. (“DPI”) in accordance with the terms of a definitive agreement, dated November 2, 2021, for approximately $1.9 million. DPI is a 46-year-old dental staffing company headquartered in Carrboro, North Carolina with long-standing client relationships in the dental industry. providing temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S. As of June 30, 2022, all of the operations acquired from DPI remain company owned. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.
The Temporary Alternatives Acquisition
On January 24, 2022 we completed our acquisition of certain assets of Temporary Alternatives in accordance with the terms of the Asset Purchase Agreement dated January 10, 2022 , including three locations in West Texas and New Mexico for approximately $7.0 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, and we immediately entered into a franchise agreement and sold the non-working capital assets acquired. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.
The Dubin Acquisition
On February 21, 2022 we completed our acquisition of the staffing operations of The Dubin Group, Inc., and Dubin Workforce Solutions, Inc. (collectively “Dubin”) in accordance with the terms of an Asset Purchase Agreement dated January 19, 2022 for approximately $2.5 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. We funded this acquisition with existing cash on hand, deferred purchase payments, and a draw on our existing line of credit with Truist. We divided Dubin into separate businesses and sold certain customer related assets of one of the acquired locations to a new franchisee. The remaining assets related to the operations of the other acquired locations have not been sold and as of June 30, 2022 are classified as available-for-sale. In the meantime, we operate the Philadelphia Snelling franchise as company-owned.
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 $11.4 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, and we immediately entered into a franchise agreement and sold the customer-related assets acquired. We funded this acquisition with existing cash on hand, seller financing of $1.5 million, and a draw on our existing line of credit with Truist.
Results of Operations
Financial Summary
The following table displays our consolidated statements of operations for the interim periods ended June 30, 2022 and June 30, 2021. Percentages reflect the line item as a percentage of total revenue (in thousands, except percentages).
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June 30, 2021 |
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| Franchise royalties |
$ | 7,220 | 77.7 | % | $ | 5,451 | 95.5 | % | $ | 13,793 | 79.1 | % | $ | 8,710 | 95.6 | % | ||||||||||||||||
| Staffing revenue, owned locations |
1,288 | 13.9 | % | - | 0.0 | % | 2,392 | 13.7 | % | - | 0.0 | % | ||||||||||||||||||||
| Service revenue |
780 | 8.4 | % | 256 | 4.5 | % | 1,248 | 7.2 | % | 399 | 4.4 | % | ||||||||||||||||||||
| Total revenue |
9,288 | 100.0 | % | 5,707 | 100.0 | % | 17,433 | 100.0 | % | 9,109 | 100.0 | % | ||||||||||||||||||||
| Cost of staffing revenue, owned locations |
947 | 10.2 | % | - | 0.0 | % | 1,709 | 9.8 | % | - | 0.0 | % | ||||||||||||||||||||
| Gross profit |
8,341 | 89.8 | % | 5,707 | 100.0 | % | 15,724 | 90.2 | % | 9,109 | 100.0 | % | ||||||||||||||||||||
| Selling, general and administrative expenses |
3,530 | 38.0 | % | 2,041 | 35.8 | % | 6,367 | 36.5 | % | 5,882 | 64.6 | % | ||||||||||||||||||||
| Depreciation and amortization |
610 | 6.6 | % | 366 | 6.4 | % | 1,176 | 6.7 | % | 699 | 7.7 | % | ||||||||||||||||||||
| Income from operations |
4,201 | 45.2 | % | 3,300 | 57.8 | % | 8,181 | 46.9 | % | 2,528 | 27.8 | % | ||||||||||||||||||||
| Other miscellaneous income |
1,458 | 15.7 | % | 30 | 0.5 | % | (1,922 | ) | (11.0 | )% | 3,811 | 41.8 | % | |||||||||||||||||||
| Interest income |
54 | 0.6 | % | 96 | 1.7 | % | 147 | 0.8 | % | 231 | 2.5 | % | ||||||||||||||||||||
| Interest and other financing expense |
(109 | ) | (1.2 | )% | (20 | ) | (0.4 | )% | (157 | ) | (0.9 | )% | (25 | ) | (0.3 | )% | ||||||||||||||||
| Net income before income taxes |
5,604 | 60.3 | % | 3,406 | 59.7 | % | 6,249 | 35.8 | % | 6,545 | 71.9 | % | ||||||||||||||||||||
| Provision for income taxes |
847 | 9.1 | % | 686 | 12.0 | % | 934 | 5.4 | % | 83 | 0.9 | % | ||||||||||||||||||||
| Net income from continuing operations |
4,757 | 51.2 | % | 2,720 | 47.7 | % | 5,315 | 30.5 | % | 6,462 | 70.9 | % | ||||||||||||||||||||
| Income from discontinued operations, net of tax |
134 | 1.4 | % | - | 0.0 | % | 179 | 1.0 | % | - | 0.0 | % | ||||||||||||||||||||
| Net income |
$ | 4,891 | 52.7 | % | $ | 2,720 | 47.7 | % | $ | 5,494 | 31.5 | % | $ | 6,462 | 70.9 | % | ||||||||||||||||
| Non-GAAP data |
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| Adjusted EBITDA |
$ | 5,913 | 63.7 | % | $ | 4,407 | 77.2 | % | $ | 11,220 | 64.4 | % | $ | 5,940 | 65.2 | % | ||||||||||||||||
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, compliance costs related to the work opportunity tax credit (“WOTC”) and other charges we consider unusual and/or 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 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 below (in thousands).
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| June 30, 2022 |
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| Net income |
$ | 4,891 | $ | 2,720 | $ | 5,494 | $ | 6,462 | ||||||||
| Interest expense |
109 | 20 | 157 | 25 | ||||||||||||
| Provision for income taxes |
847 | 686 | 934 | 83 | ||||||||||||
| Depreciation and amortization |
610 | 366 | 1,176 | 699 | ||||||||||||
| WOTC related costs |
163 | 146 | 295 | 239 | ||||||||||||
| EBITDA |
6,620 | 3,938 | 8,056 | 7,508 | ||||||||||||
| Non-cash compensation |
364 | 301 | 610 | 569 | ||||||||||||
| Acquisition related charges, net |
(1,304 | ) | 168 | 2,321 | (2,137 | ) | ||||||||||
| Impairment of notes receivable |
233 | - | 233 | - | ||||||||||||
| Adjusted EBITDA |
$ | 5,913 | $ | 4,407 | $ | 11,220 | $ | 5,940 | ||||||||
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 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 June 30, 2022 was approximately $8.3 million compared to $5.7 million for the three months ended June 30, 2021, an increase of 46.2%. Gross profit as a percentage of system-wide sales was 6.9% for the three months ended June 30, 2022 versus 6.4% for the three months ended June 30, 2021. The 60-basis point improvement was primarily due to increased service revenue and the Gross Profit from the company owned locations.
Franchise Royalties
Franchise royalties for the three months ended June 30, 2022 were approximately $7.2 million, an increase of 32.5% from $5.5 million for the three months ended June 30, 2021. This increase is consistent with the 33.7% increase in underlying system-wide-sales for the quarter ended June 30, 2022 compared to the prior year quarter. Approximately $418 thousand of this increase in royalties was due to the Snelling, LINK, Northbound, Temporary Alternatives and Dubin acquisitions and approximately $1.4 million was due to organic growth. Our net effective royalty rate (as a percentage of external system-wide sales) held steady at 6.1% for the three-month period ended June 30, 2022 and 2021. Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models we operate under, as well as incentives we offer during the year. A summary of franchise royalties for the three months ended June 30, 2022 and June 30, 2021 are as follows (in thousands):
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| Franchise royalties from pre-existing locations |
$ | 4,673 | $ | 3,322 | ||||
| Franchise royalties from 2021 acquisitions |
2,008 | 2,129 | ||||||
| Franchise royalties from 2022 acquisitions |
539 | - | ||||||
| Franchise royalties |
$ | 7,220 | $ | 5,451 | ||||
Service Revenue
Service revenue consists of interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. Direct costs to provide certain services are reflected as a reduction in service revenue. As accounts receivable age over 42 days, our franchisees pay us interest on these accounts equal to 0.5% of the amount of the uncollected receivable each 14-day period. Accounts that age over 84 days are charged back to the franchisee and no longer incur 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.
Service revenue for the three months ended June 30, 2022 was approximately $780 thousand, an increase of $524 thousand from the three months ended June 30, 2021, when service revenue was approximately $256 thousand. This increase was largely due to the growth in the number of franchisee locations and corresponding service-related fees. Due to the timing of certain services and the related costs to provide them, we have incurred a disproportionate amount of service revenue in the three months ended June 30, 2022 and do not expect the same trend to continue in the next two quarters. The remaining increase relates to interest and follows the overall increase in accounts receivable, although relatively few age over 42 days and result in service revenue for us. Many of our franchisees have 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 June 30, 2022, all of the operations acquired from DPI remain company owned, but franchisees in 19 locations are operating under the HireQuest Health banner. Although we may franchise Dental Power operations in the future, we currently have no firm plans in place to do so. For the three months ended June 30, 2022, staffing revenue from owned locations was $1.3 million. We had no company owned locations during the three months ended June 30, 2021.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended June 30, 2022 were approximately $3.5 million, an increase from $2.0 million for the three months ended June 30, 2021. The increase in SG&A expenses primarily relates to salaries and benefits, which increased $766 thousand as a result of additional headcount to keep pace with growth in system-wide sales as a result of the 2021 and 2022 acquisitions, plus organic growth. In addition, Compensation expense in the three months ended June 30, 2022 includes an accrual of approximately $303 thousand for executive bonuses. There was no such accrual in the three months ended June 30, 2021. Compensation-related expenses remain by far the largest component of SG&A.
For the three months ended June 30, 2022, SG&A also includes a $233 thousand impairment charge related to notes receivable due from non-franchisees. During 2020, the California Purchaser experienced significant economic hardships due to the impacts of COVID-19 and the related government mandates in the state. As a result, we restructured a portion of the notes 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. During the three months ended June 30, 2022 we were asked to provide a third forbearance agreement and avoid foreclosure action. We are currently negotiating the terms and conditions related to that agreement. As part of the forbearance we will likely have to forgive additional payments due on the notes. After reviewing the potential outcomes, we recorded an additional impairment of approximately $233 thousand at June 30, 2022, bringing the note balance down to approximately $71 thousand, which we expect to collect before the end of 2022.
Other Income and Expense
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June 30, 2021 |
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| Franchise royalties from pre-existing locations |
$ | 8,400 | $ | 6,553 | ||||
| Franchise royalties from 2021 acquisitions |
4,699 | 2,157 | ||||||
| Franchise royalties from 2022 acquisitions |
694 | - | ||||||
| Franchise royalties |
$ | 13,793 | $ | 8,710 | ||||
Service Revenue
Our working capital requirements are driven largely by temporary employee payroll, 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 aged 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 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. We expect our borrowing costs to increase as the Federal Reserve raises its benchmark interest rates in an effort to bring down inflation.
Operating Activities
During the six months ended June 30, 2022, cash generated by continuing operating activities was approximately $8.7 million and included net income of approximately $5.3 million, adjusted by non-cash items including a net loss on the sale of intangible assets acquired of approximately $2.2 million, depreciation and amortization in the amount of $1.2 million, and stock-based compensation of $1.3 million. These provisions were partially offset by changes in operating assets and liabilities requiring cash of approximately $1.2 million. During the six months ended June 30, 2021, cash generated by operating activities was approximately $11.3 million and included net income of approximately $6.5 million, adjusted by non-cash items including a net loss on the sale of intangible assets acquired of approximately $1.2 million, depreciation and amortization in the amount of $700 thousand, and stock-based compensation of $569 thousand. These provisions were partially offset by a bargain purchase gain recognized in relation to an acquisition of approximately $5.0 million, and changes in operating assets and liabilities requiring cash of approximately $1.0 million. Cash for the six months ended June 30, 2021 was also boosted by the return of a workers’ compensation claim deposit of approximately $7.2 million which was acquired in the Snelling transaction
Investing Activities
During the six months ended June 30, 2022, cash used by investing activities was approximately $10.0 million and included cash paid for acquisitions of approximately $19.1 million. This use was partially offset by the proceeds from the sale of purchased locations of approximately $9.3 million. During the six months ended June 30, 2021, cash used by investing activities was approximately $24.0 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 the six months ended June 30, 2022, cash provided by financing activities was approximately $751 thousand and included net proceeds from our revolving line of credit of approximately $2.7 million. This provision was offset by the payment of approximately $1.6 million in dividends and net payments on our term loan of $266 thousand. During 2021, cash provided by financing activities was approximately $1.2 million and included initiation of the term loan of approximately $3.2 million offset by the payment of dividends totaling approximately $1.5 million, and debt issuance costs of $476 thousand related to establishing our line of credit.
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 June 30, 2022, availability under the line of credit was approximately $27.0 million based on eligible collateral, less letter of credit reserves, bank product reserves, and current advances.
Economy and Inflation
Many leading economists predict high rates of inflation will continue through 2022. We do not believe inflation has had a material effect on our Company’s results of operations as inflation generally results in higher rates per hour that can offset any slowdown in organic growth opportunities. This might not be the case if inflation continues to grow. A prolonged period of high inflation may also impact our ability to carry out our acquisition strategy. On the other hand, if business conditions deteriorate, it may be easier for us to identify an acquisition candidate.
In late 2019, there was an outbreak of a new strain of coronavirus (COVID) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID a pandemic. Further, the COVID outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets.
More recently, more contagious variants of COVID, such as the Delta and Omicron variants, have emerged and spread globally, which has caused some governments to reimplement various measures, or impose new restrictions, in an effort to lessen the spread of COVID and its variants. While we do not expect COVID to impact our operations, it could impact our acquisition strategy, positively or negatively. The extent to which new opportunities are presented to us will depend on future developments, which remain highly uncertain and cannot be predicted with confidence.
Key Performance Indicator: System-Wide Sales
We refer to total sales generated by our franchisees as “franchise sales.” For any 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, although we do not record system-wide sales as revenue. Management believes that information on system-wide sales is important to understanding our financial performance because those sales are the basis on which we calculate and record much of our franchise royalty revenue, are directly related to all other royalty revenue and service revenue and are indicative of the financial health of our franchisee base. Management uses system-wide sales to benchmark current operating levels to historic operating levels. System-wide sales should not be considered as an alternative to revenue.
During the six months ended June 30, 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 six months ended June 30, 2021, all of our offices were franchised. The following table reflects our system-wide sales broken into its components for the periods indicated. Percentages indicate the change in system-wide sales relative to the comparable prior period (in thousands, except percentages).
| Three months ended |
Six months ended |
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| June 30, 2022 |
June 30, 2021 |
Change |
June 30, 2022 |
June 30, 2021 |
Change |
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| System-wide sales |
$ | 120,032 | $ | 89,744 | 33.7 | % | $ | 221,065 | $ | 145,849 | 51.6 | % | ||||||||||||
Approximately $36.4 million of system-wide sales during the three months ended June 30, 2022 was due to the 2021 acquisitions, and approximately $8.4 million was due to the 2022 acquisitions. For the six months ended June 30, 2022, approximately $68.6 million was due to the 2021 acquisitions and approximately $10.6 million was due to the 2022 acquisitions. For the three and six months ended June 30, 2021 approximately $31.8 million and $38.5 million was due to the 2021 acquisitions, respectively.
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 2022.
| Offices, December 31, 2020 |
139 | |||
| Purchased in 2021 (net of sold locations) |
65 | |||
| Opened in 2021 |
14 | |||
| Closed in 2021 |
(1 | ) | ||
| Offices, December 31, 2021 |
217 | |||
| Opened in 2022 |
8 | |||
| Purchased in 2022 |
3 | |||
| Closed in 2022 |
(3 | ) | ||
| Offices, June 30, 2022 |
225 |
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and, as such, are not required to provide the information required by this Item.
Item 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.
As 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. 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 June 30, 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 Plans to Remediate Material Weakness
On December 1, 2021 we hired David S. Burnett as CFO. We believe that the addition of Mr. Burnett materially strengthened our internal control over financial reporting. Management continues to take action to remediate the material weakness in internal control over financial reporting, including hiring additional staff in the accounting department and engaging third party professionals with the appropriate technical expertise.
We 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 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
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.
Our business, financial condition, and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below and in Part I, Item 1A of our most recent annual report on Form 10-K which we filed with the SEC on March 15, 2022 under the heading “Risk Factors,” any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results, and stock price. Except as set forth below, there have been no material changes to the risk factors included in our Form 10-K for the year ended December 31, 2021, filed with the SEC on March 15, 2022.
If our goodwill is impaired, we will record a non-cash charge to our results of operations and the amount of the charge may be material. At least annually, or whenever events or circumstances arise indicating impairment may exist, we review goodwill for impairment as required by generally accepted accounting principles in the United States. The estimated fair value of our goodwill could change if there are future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or a permanent change to our market capitalization. In the future, we may need to reduce the carrying amount of goodwill by taking a non-cash charge to our results of operations. Such a charge would have the effect of reducing goodwill with a corresponding impairment expense and may have a material effect upon our reported results. The additional expense may reduce our reported profitability or increase our reported losses in future periods and could negatively affect the market for our securities, our ability to obtain other sources of capital, and may generally have a negative effect on our future operations.
Our results of operations could be adversely affected by economic and political conditions globally and the effects of these conditions on our and our franchisees’ customers’ businesses and levels of business activity. The Russian invasion of Ukraine and the resulting economic sanctions imposed by the United States and other countries, along with certain international organizations, have impacted the global economy, including by exacerbating inflationary pressures created by COVID-related supply chain disruptions, and given rise to potential global security issues that may adversely affect international business and economic conditions. Although we have no operations in Russia or Ukraine, certain of our or our franchisees’ customers may have been or may in the future be impacted by these events. The ongoing effects of the hostilities and sanctions may not be limited to Russia and Russian companies and may spill over to and negatively impact other regional and global economic markets. A prolonged conflict may result in increased inflation, rising energy prices and an even more constrained supply chain, and thus may exacerbate the inflationary global economic environment. At this time, the extent and duration of the military action, resulting sanctions and future economic and market disruptions, and resulting effects on the Company, are impossible to predict
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
None.
| Exhibit No. |
Description |
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| 31.1 |
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| 31.2 |
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| 32.1 |
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| 101.INS |
Inline XBRL Instance Document (filed herewith) |
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| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document (filed herewith) |
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| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith) |
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| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith) |
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| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith) |
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| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith) |
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| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.
| /s/ Richard Hermanns |
August 9, 2022 |
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| Richard Hermanns |
Date |
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| President and Chief Executive Officer |
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| /s/ David S. Burnett |
August 9, 2022 |
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| David S. Burnett |
Date |
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| Chief Financial Officer |