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 November 7, 2023:
Table of Contents
| PART I. FINANCIAL INFORMATION | ||
| Consolidated Statements of Changes in Stockholders' Equity (unaudited) |
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| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Consolidated Balance Sheets
(unaudited)
| (in thousands, except par value data) | September 30, 2023 | December 31, 2022 | ||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net of allowance for doubtful accounts | ||||||||
| Notes receivable | ||||||||
| Prepaid expenses, deposits, and other assets | ||||||||
| Prepaid workers' compensation | ||||||||
| 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 | ||||||||
| Intangible asset held for sale - discontinued operations | ||||||||
| 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 |
Nine months ended |
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| (in thousands, except per share data) |
September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
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| Franchise royalties |
$ | $ | $ | $ | ||||||||||||
| Service revenue |
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| Total revenue |
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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 (loss) from discontinued operations, net of tax |
( |
) | ||||||||||||||
| Net income |
$ | $ | $ | $ | ||||||||||||
| Basic earnings (loss) per share |
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| Continuing operations |
$ | $ | $ | $ | ||||||||||||
| Discontinued operations |
( |
) | ||||||||||||||
| Total |
$ | $ | $ | $ | ||||||||||||
| Diluted earnings (loss) per share |
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| Continuing operations |
$ | $ | $ | $ | ||||||||||||
| Discontinued operations |
( |
) | ||||||||||||||
| 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' | ||||||||||||||||||||
| Nine months ended (in thousands except per share data) | Shares | Par value | Amount | paid-in capital | earnings | equity | ||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||
| Common stock dividends ($ per share) | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Restricted common stock granted | - | - | - | - | - | |||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||
| Common stock dividends ($ per share) | - | - | ( | ) | ( | ) | ||||||||||||||||||
| Restricted common stock granted | - | - | - | - | - | |||||||||||||||||||
| Net income | - | - | ||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Three months ended | ||||||||||||||||||||||||
| Balance at June 30, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Common stock dividends ($ per share) | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted common stock granted | - | - | - | - | - | |||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at September 30, 2023 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
| Stock-based compensation | - | |||||||||||||||||||||||
| Common stock dividends ($0.06 per share) | - | ( | ) | ( | ) | |||||||||||||||||||
| Restricted common stock granted | - | - | - | - | - | |||||||||||||||||||
| Net income | - | |||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | ( | ) | $ | $ | $ | |||||||||||||||||
See accompanying notes to consolidated financial statements.
Consolidated Statements of Cash Flows
(unaudited)
| Nine months ended |
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| (in thousands) |
September 30, 2023 |
September 30, 2022 |
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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) provided by 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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| Non-cash 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 |
( |
) | ( |
) | ||||
| 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 (used in) provided by operating activities - discontinued operations |
( |
) | ||||||
| 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 payments on notes receivable |
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| Cash issued for notes receivable |
( |
) | ( |
) | ||||
| Investment in intangible asset |
( |
) | ( |
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| Net change in franchisee deposits |
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| Net cash provided by (used in) investing activities |
( |
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| Cash flows from financing activities |
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| Payments on term loan payable |
( |
) | ( |
) | ||||
| Payments related to debt issuance |
( |
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| Net proceeds from revolving line of credit |
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| Payment of dividends |
( |
) | ( |
) | ||||
| Net cash used in financing activities |
( |
) | ( |
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| Net (decrease) increase 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
(unaudited)
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, executive search, and commercial staffing solutions primarily 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 primary business models operating under the trade names “HireQuest Direct”, “HireQuest”, “Snelling”, “DriverQuest”, “HireQuest Health”, “Northbound Executive Search”, and "MRI". HireQuest Direct specializes primarily in unskilled and semi-skilled industrial and construction personnel. HireQuest and Snelling 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 and MRI specialize in executive placement and consultant services.
On January 24, 2022, we completed our acquisition of Temporary Alternatives, Inc. (“Temporary Alternatives”) to acquire
For additional information related to these transactions, see Note 2 - Acquisitions.
As of September 30, 2023, 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”), and with the instructions to Article 8 of Regulation S-X. 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, 2022. 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.
Foreign Currency Translation
The functional currency of the company and all of its subsidiaries is the United States dollar. Certain franchises located outside the United States may transact business in their local currency. As a result, some accounts receivable may be denominated in currencies other than United States dollar. Assets and liabilities are translated into United States dollars at the exchange rate in effect on the balance sheet date. Royalties received from and expenses charged to non-US franchises are always denominated in United States dollars, and the franchisee bears all foreign exchange risk. Foreign currency translation and re-measurement gains and losses are included in results of operations within other income (expense), net, which was
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, our deferred taxes, our allowance for credit losses, potential impairment of goodwill and other intangibles, stock-based compensation, and estimated fair value of assets and liabilities acquired.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist of amounts due for staffing services provided to customers of franchisees and of accounts receivable originating at company-owned locations. At September 30, 2023, and December 31, 2022, substantially all of our net accounts receivable were due from customers of franchisees. We own the accounts receivable from staffing services provided by our employees on behalf of the franchisees until they age beyond a date agreed upon with each respective franchisee between 42 and 84 days. When accounts receivable age beyond the agreed-upon date, they are charged back to our franchisees. Accordingly, we do not record an allowance for doubtful accounts on these accounts receivable because we do not bear the risk of loss. Otherwise, estimates of expected credit losses on accounts receivable over their life would be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts.
For staffing services provided by company-owned offices, we record accounts receivable at face value less an allowance for doubtful accounts. We determine the allowance for doubtful accounts based on historical write-off experience, the age of the receivable, other qualitative factors and extenuating circumstances, and current economic data which represents our best estimate of the amount of expected credit losses on these accounts receivable, if any. We review the allowance for doubtful accounts periodically and evaluate how conditions that existed during the historical charge-off period may differ from our current expectations and accordingly may revise our estimate of expected credit losses. 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 other than with MRI franchise royalties, which are billed on a monthly 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 | Nine months ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| HireQuest Direct | $ | $ | $ | $ | ||||||||||||
| HireQuest, Snelling, DriverQuest, HireQuest Health, MRI, Northbound, SearchPath and TradeCorp | ||||||||||||||||
| 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. License fees are charged to some locations that utilize our intellectual property that are not franchisees. License fees are
Notes Receivable
Notes receivable from franchisees consist primarily of amounts due to us related to the financing of franchised locations. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. The Company estimates expected credit losses over the life of its notes receivable as of the reporting date based on relevant information about past events, current conditions, and reasonable and supportable forecasts. The Company records the estimate of expected credit losses as an allowance for credit losses. Our notes receivable are measured at an amortized cost basis with the allowance for credit losses reported as a valuation account on the balance sheet that adjusts the asset’s amortized cost basis.
Our 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 compare the amortized cost basis of a note and the fair value of collateral securing the note as of the reporting date. This includes reserves we have collected and hold in cash, any amounts payable to the franchisee, workers’ compensation rebates not yet paid to the franchisee, and other items where we legally have the right to offset any note receivable balance due. Our allowance for losses on notes receivable was approximately $
Some of our notes receivable have contingent consideration based on a percentage of specified system-wide sales that exceed certain thresholds. Notes with contingent consideration are recorded at fair value when originated. Probability of payment is reflected in the fair value, as is the time value of money. Subsequent changes in the recorded amount of contingent consideration are recognized during period in which the change was recognized.
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. There was no impairment reserve on notes receivable from non-franchisees at September 30, 2023 or December 31, 2022.
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 (see "Impairment" below). 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 incurred during the preliminary project stage and the post-implementation stage. Capitalized development costs are 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).
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||
| Estimated useful life | Gross | Accumulated amortization | Net | Gross | Accumulated amortization | Net | |||||||||||||||||||
| Finite-lived intangible assets: | |||||||||||||||||||||||||
| Franchise agreements |
| $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||
| Purchased software |
| ( | ) | ( | ) | ||||||||||||||||||||
| Internally developed software |
| ( | ) | ( | ) | ||||||||||||||||||||
| Total finite-lived intangible assets | ( | ) | ( | ) | |||||||||||||||||||||
| Indefinite-lived intangible assets: | |||||||||||||||||||||||||
| Domain name | Indefinite | - | - | ||||||||||||||||||||||
| Trade name | Indefinite | - | - | ||||||||||||||||||||||
| Total intangible assets | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||
Impairment - Intangible Assets
Indefinite-lived intangible assets are tested annually for impairment during the fourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate the Indefinite-lived intangible asset is more likely than not impaired. Such indicators may include a deterioration in macroeconomic conditions; a significant increase in cost factors; negative overall financial performance (including a decline in our expected future cash flows); entity-specific changes in key personnel, strategy or customers; and industry considerations including competition, legal, regulatory, contractual or asset-specific factors, among others. The occurrence of these indicators could have a significant impact on the recoverability of the indefinite-lived intangible and could have a material impact on our consolidated financial statements. For purposes of our impairment test, the assessment of indefinite-lived intangibles is performed at the asset level.
Impairment of indefinite-lived intangibles is determined using a two-step process. The first step involves assessing qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if we determine, based on the qualitative assessment, that it is more likely than not that an indefinite-lived intangible asset's fair value is less than its carrying amount. Otherwise, no further impairment testing is required. The qualitative assessment may be performed on none, some, or all of our indefinite-lived intangible assets. Alternatively, we can bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test.
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 (see "Impairment" below). 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 September 30, 2023 we had a single reporting unit.
The table below summarizes our goodwill at December 31, 2022 and changes during the nine months ended September 30, 2023 (in thousands):
| Goodwill balance at December 31, 2022 | $ | |||
| Change in goodwill during 2023 | ||||
| Goodwill balance at September 30, 2023 | $ |
Impairment - Goodwill
Goodwill is tested annually for impairment during the third quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. Such indicators may include a sustained, significant decline in our stock price; a decline in our expected future cash flows; significant disposition activity; a significant adverse change in the economic or business environment; and the testing for recoverability of a significant asset group, among others. The occurrence of these indicators could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.
For purposes of our impairment test, we operate as a single reporting unit. Determining the fair value of a reporting unit when performing a quantitative impairment test involves the use of significant estimates and assumptions by management. Different judgments relating to the determination of reporting units could significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.
When evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying value. Qualitative factors include macroeconomic conditions, industry and market conditions, and overall company financial performance. If, after assessing these events and circumstances, we determine that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, a quantitative impairment test is not necessary. If necessary, the quantitative impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the carrying value, no impairment of goodwill is deemed necessary. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, up to the carrying value of the goodwill.
Based on our annual qualitative assessment that was performed during the quarter ended September 30, 2023,we have concluded that it is more likely than not the fair value of our reporting unit exceeded its carrying value and our goodwill was not impaired. As such, it was not necessary to perform the quantitative impairment test.
Marketing and Advertising
Some of our MRI franchisees are required to pay an advertising fee equal to
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 September 30, 2023 and September 30, 2022 totaled approximately
We use the treasury stock method to calculate the diluted common shares outstanding which were as follows (in thousands):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| 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, the line of credit and all other current assets and liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the amortized cost basis as adjusted by an allowance for credit losses, as we believe the stated interest rates reflects the prevailing market rates given our unique collateral position and the scarce capital resources willing to finance a franchise. The fair value of the term loan payable approximates its carrying value because current rates for similar borrowings do not have a material impact.
| September 30, 2023 | ||||||||||||||||
| (in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Notes receivable | ||||||||||||||||
| Accounts receivable | ||||||||||||||||
| Total assets at fair value | $ | $ | $ | $ | ||||||||||||
| Term loans payable | $ | $ | $ | $ | ||||||||||||
| Line of credit | ||||||||||||||||
| Total liabilities at fair value | $ | $ | $ | $ | ||||||||||||
| December 31, 2022 | ||||||||||||||||
| (in thousands) | Total | Level 1 | Level 2 | Level 3 | ||||||||||||
| Cash | $ | $ | $ | $ | ||||||||||||
| Notes receivable | ||||||||||||||||
| Accounts receivable | ||||||||||||||||
| 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 11 - 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.
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 Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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 replaced the “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 was adopted at the beginning of the first quarter of 2023. The adoption of this guidance did not have a significant impact on our financial statements. Related disclosure has been updated to reflect the new standard.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On December 21, 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848, which extends the period of time financial statement preparers can utilize the reference rate reform relief guidance contained in ASU 2022-04. The guidance provides optional practical expedients to ease the potential burden in accounting for contract modifications and hedge accounting related to reference rate reform. The provisions apply only to those transactions that reference the London Inter-Bank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform. On February 28, 2023 the Company refinanced its credit agreement and a term loan that each referenced LIBOR into a replacement line of credit that references the Bloomberg Short-Term Bank Yield Index ("BSBY"), therefore the optional expedient is no longer relevant to the Company’s financial statements and related disclosures. See Note 4 for further details of the transaction.
In October 2021, the FASB issued ASU 2021-08, Business Combinations – Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The guidance is intended to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity in practice. The guidance requires an acquirer to recognize and measure contract assets and liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contracts, as opposed to at fair value on the acquisition date. The standard became effective for the Company on January 1, 2023 and will be applied prospectively to acquisitions occurring after the adoption date. The adoption of this new guidance did not have a material impact on the Company’s financial statements and related disclosures.
Recently Issued Accounting Pronouncements
In October 2023, the FASB issued ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. In U.S. Securities and Exchange Commission (SEC) Release No. 33-10532, Disclosure Update and Simplification, issued August 17, 2018, the SEC referred certain of its disclosure requirements that overlap with, but require incremental information to, generally accepted accounting principles (GAAP) to the FASB for potential incorporation into the FASB Accounting Standards Codification® (Codification). The Codification is the source of authoritative generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. ASU 2023-06 is the result of the Board’s decision to incorporate into the Codification 14 of the 27 disclosures referred by the SEC. Since we are already subject to the SEC’s existing disclosure requirements, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The adoption of this new guidance should not have any impact on the Company’s financial statements and related disclosures.
Note 2 - Acquisitions
Business Combinations
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 December 31, 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. Franchise royalties attributable to the acquiree of approximately $
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2023 (Actual) | September 30, 2022 | September 30, 2023 (Actual) | September 30, 2022 | |||||||||||||
| 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 gains 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 $
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 September 30, 2023, 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. Franchise royalties attributable to the acquiree of approximately $
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2023 (Actual) | September 30, 2022 | September 30, 2023 (Actual) | September 30, 2022 | |||||||||||||
| 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 2022. 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 $
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 September 30, 2023, the fair value of assets acquired and liabilities assumed 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 | $ | |||
| Net working capital payable | ||||
| 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. Franchise royalties attributable to the acquiree of approximately $
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2023 (Actual) | September 30, 2022 | September 30, 2023 (Actual) | September 30, 2022 | |||||||||||||
| 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 sale price for the operating assets was $
MRI
On December 12, 2022, we completed our acquisition of certain assets of MRI in accordance with the terms of an Asset Purchase Agreement dated November 16, 2022, for approximately $
The following table summarizes the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date:
| Cash consideration | $ | |||
| Contingent consideration | ||||
| Net working capital payable | ||||
| Total consideration | $ | |||
| Customer relationships | $ | |||
| Trade name | ||||
| Royalty receivable | ||||
| 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 MRI. 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 MRI had occurred on January 1, 2021, (b) all of MRI'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. Franchise royalties attributable to the acquiree of approximately $
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2023 (Actual) | September 30, 2022 | September 30, 2023 (Actual) | September 30, 2022 | |||||||||||||
| Total revenue | $ | $ | $ | $ | ||||||||||||
| Net income | ||||||||||||||||
| Basic earnings per share | $ | $ | $ | $ | ||||||||||||
| Basic weighted average shares outstanding | ||||||||||||||||
| Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
| Diluted weighted average shares outstanding | ||||||||||||||||
Note 3 - Related Party Transactions
Prior to entering into a new related party transaction which is disclosable pursuant to Item 404 of Regulation S-K, the Audit Committee reviews and monitors all relevant information available. In addition, the Audit Committee reviews a summary of related parties and related party transactions on a quarterly basis. 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 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 largest stockholder, and irrevocable trusts set up by each of them, collectively own a majority of Bass, a large managing general agent.
Jackson Insurance and Bass brokered property, casualty, general liability, and cybersecurity insurance for a series of predecessor entities prior to the 2019 merger with Command Center. 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 September 30, 2023 and September 30, 2022, 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 September 30, 2023 and September 30, 2022, 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
Other transactions regarding the Worlds Franchisees are summarized below (in thousands):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Franchisee royalties | $ | $ | $ | $ | ||||||||||||
Balances regarding the Worlds Franchisees are summarized below (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Due to franchisee | $ | $ | ||||||
| Risk management incentive program liability | ||||||||
Note 4 - Line of Credit and Term Loans
Revolving Credit Agreement with Bank of America, N.A.
On February 28, 2023 the Company and all of its subsidiaries as borrowers entered into a Revolving Credit Agreement with Bank of America, N.A. for a $
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, and sale/leaseback transactions. 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 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, intellectual property and the real estate owned by HQ Real Property Corporation.
At September 30, 2023, approximately $
Revolving Credit and Term Loan Agreement with Truist Bank
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 "Truist Credit Agreement"), pursuant to which the lenders extended the Borrowers (i) a $
Term Loan
In connection with the Northbound acquisition, we entered into an amortizing term loan from the seller for $
The following table provides the estimated future maturities of term loans as of September 30, 2023 (in thousands):
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total future maturities |
Note 5 - Workers’ Compensation Insurance and Reserves
Beginning in March 2014, one of our predecessor entities ("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 $
Note 6 - Stockholders’ Equity
Dividend
In the third quarter of 2020 we initiated the payment of a quarterly dividend and we intend to continue to pay a quarterly dividend based on our business results and financial position. The following common share dividends were paid during 2023 and 2022 (total paid in thousands):
| Declaration date |
Dividend |
Total paid |
||||||
| March 1, 2022 |
$ | $ | ||||||
| June 1, 2022 |
||||||||
| September 1, 2022 |
||||||||
| December 1, 2022 |
||||||||
| March 1, 2023 |
||||||||
| June 1, 2023 |
||||||||
| September 1, 2023 |
||||||||
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 nine months of 2023, we issued
Also in the first nine months of 2023, we issued
In the first nine months of 2022, we issued
The following table summarizes our restricted stock outstanding at December 31, 2022, and changes during the nine months ended September 30, 2023 (number of shares in thousands).
| Shares | Weighted average grant date price | |||||||
| Non-vested, December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( | ) | ||||||
| Non-vested, September 30, 2023 | ||||||||
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, 2022, and changes during the nine months ended September 30, 2023 (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, 2022 | $ | $ | ||||||||||
| Granted | ||||||||||||
| Outstanding, September 30, 2023 | ||||||||||||
There were
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 September 30, 2023, 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(s). 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 September 30, 2023.
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 September 30, 2023 and September 30, 2022 was 5% and
We use an intra-period tax allocation 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 (benefit) expense allocated to discontinued operations was $(
Note 10 - Discontinued Operations
In connection with the Dubin acquisition, certain assets acquired are still owned by us and classified as held-for-sale. When we acquired Dubin, there were two business lines. Dubin Workforce Solutions specialized in temporary labor assignments. The Dubin Group focused on permanent recruiting. We immediately sold the assets of Dubin Workforce Solutions to a new franchisee. There was not a franchisee identified for the Dubin Group portion of the business, however, we began marketing the franchise and classified it as held-for-sale immediately upon acquisition. We entered into an employment agreement with the seller to continue managing the business as a Company-owned location while it was held-for-sale. During 2022, we actively solicited but did not receive any reasonable offers to purchase the assets and, in response, have adjusted the price. The franchise continues to be actively marketed at a price that is reasonable given its results of operation. We expect to complete a sale of these assets within the next 12 months.
When we acquired Dental Power in 2021, we used the platform to build a customer base in the dental-oriented sector of the staffing industry to increase revenue opportunities under the HireQuest Health brand. Once we acquired MRI in December 2022, there were a number of natural buyers within the MRI Network. At that time we reclassified Dental Power to held-for-sale. On March 1, 2023, we agreed to sell the Dental Power assets to an MRI franchisee, who will continue to operate the business as part of their franchise. The sale agreement calls for proceeds of $
Intangible assets associated with discontinued operations consist of customer lists with a net carrying value of approximately $
The income from discontinued operations amounts as reported on our consolidated statements of operations was comprised of the following amounts (in thousands):
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2023 | September 30, 2022 | September 30, 2023 | September 30, 2022 | |||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of staffing services | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Selling, general and administrative expenses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Depreciation & amortization | ( | ) | ( | ) | ||||||||||||
| (Loss) gain on sale of intangible assets | ( | ) | ||||||||||||||
| Net (loss) income before tax | ( | ) | ||||||||||||||
| (Benefit) provision for income taxes | ( | ) | ||||||||||||||
| Net (loss) income | $ | ( | ) | $ | $ | $ | ||||||||||
Note 11 - 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 credit losses for franchisees separately from the allowance for credit losses from non-franchisees because of the level of detailed sales information available to us with respect to our franchisees. Based on our review of available collateral historical information, current conditions, and reasonable and supportable forecasts, we have established an allowance of approximately $
The following table summarizes our notes receivable balance to franchisees (in thousands):
| September 30, 2023 | December 31, 2022 | |||||||
| Note receivable | $ | $ | ||||||
| Allowance for losses | ( | ) | ( | ) | ||||
| Notes receivable, net | $ | $ | ||||||
Notes from Non-Franchisees
During 2020, the California licensee 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 their note payable to the Company in an effort to increase the probability of repayment. We granted near-term payment concessions in 2021 to help the debtor attempt to improve its financial condition so it may eventually be able to repay the amount due. After reviewing the potential outcomes, we recorded an additional impairment of approximately thousand in June 2022. In August 2022 we provided a third forbearance agreement to avoid foreclosure action. As part of the forbearance we forgave additional payments due on the notes and agreed to a short-term payment schedule to collect a net total of $
We did receive or recognize any interest income during the three months ended September 30, 2023 or September 30, 2022. We received and recognized interest income of approximately $-- and $
Note 12 - Subsequent Events
On October 23, 2023, subsequent to the date of these financial statements, we entered into an agreement to acquire certain assets of TEC Staffing Services, Inc. ("TEC") for approximately $
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, 2022. 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" and "Part II - Item 1A. Risk Factors" 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 and system-wide sales; net income and Adjusted EBITDA (a Non-GAAP Financial Measure); operating results; dividends and shareholder returns; cost synergies of any mergers or acquisitions including those we have completed in 2022 and 2023; 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; all other statements that are not purely historical and that may constitute statements of future expectations; and the impact of any global pandemic including COVID-19. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and similar references to future periods.
While we believe these statements are accurate, forward-looking statements are not historical facts and are inherently uncertain. They are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. We cannot assure you that these expectations will occur, and our actual results may be significantly different. Therefore, you should not place undue reliance on these forward-looking statements. Important factors that may cause actual results to differ materially from those contemplated in any forward-looking statements made by us include the following: the level of demand and financial performance of the temporary staffing and permanent placement industry; the financial performance of our franchisees; our and our franchisees’ customers’ ability to navigate successfully the challenges posed by the current instability of the financial markets; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses including without limitation, successful integration following the acquisitions of the MRI Network, Selling Staffing, LINK, Recruit Media, Dental Power, Dubin, Temporary Alternatives, Inc. and subsequent or smaller acquisitions; the impacts of COVID-19 or other diseases or pandemics; the overall economic environment including the impact of any potential recession; 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; workers' compensation expenses that fluctuate from period to period based on the mix of classifications, the level of payroll, recent claims resolution and cumulative experience; 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; 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 below and in our most recent Annual Report on Form 10-K, which we filed with the SEC on March 21, 2023; 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
HireQuest, Inc., together with its subsidiaries, (“HQI,” the “Company,” “we,” us,” or “our”) is a nationwide franchisor of offices providing direct-dispatch, executive search, commercial staffing, and permanent placement solutions primarily in the light industrial, blue-collar, executive, managerial, and administrative segments of the staffing industry. Our franchisees provide various types of temporary personnel, permanent placements, and recruitment services through multiple business models under the trade names “HireQuest Direct,” “Snelling,” “HireQuest,” “DriverQuest,” “HireQuest Health,” “TradeCorp," "Northbound Executive Search," "SearchPath," "Management Recruiters International," "MRI," and "Sales Consultants." Some of the MRI franchises also operate under other brands specific to a locality.
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HireQuest Direct focuses on daily-work/daily-pay jobs primarily for construction and light industrial customers. |
| ● | TradeCorp focuses on skilled laborers and tradespeople, including apprentice, journeyman, and master-level professionals. | |
| ● |
Snelling, HireQuest, and TradeCorp focus on longer-term staffing positions in the light industrial and administrative arenas. |
| ● |
DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications. |
| ● |
HireQuest Health specializes in skilled personnel in the healthcare and dental industries. |
| ● |
Northbound Executive Search, MRI and SearchPath focus on executive, managerial, and professional recruitment services, although they also offer short-term consultant services. |
Our brands exhibit similar long-term financial performance and have similar economic characteristics. Therefore, we provide our services under a single operating division or segment. However, we strive to provide additional information and disclosures related to business models where appropriate.
As of September 30, 2023 we had 425 franchisee-owned offices and 1 company-owned office in 42 states, the District of Columbia, and 13 countries outside of the United States, and we licensed our trade names to 6 offices in California. In addition, on such date, there were 5 MRI locations that provided contract staffing services only. We provide employment for an estimated 85 thousand temporary employees annually working for thousands of clients in many industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, retail, and dental.
Management is pursuing a strategy that includes organic and acquisition growth components. Our organic growth strategy includes expanding existing client business, seeking out national and global account opportunities for our franchisees, access to capital for our franchisees to expand into new markets, and offering new franchises to qualified applicants. Part of this growth strategy includes an expansive training program for our franchisees to start, operate and grow their business. Our acquisition growth strategy includes identifying strategic, accretive, "tuck-in" acquisitions financed primarily through a combination of cash and debt (including seller financing), the issuance of equity in appropriate circumstances, and the use of earn-outs where efficient to protect the negotiated value and future cash flows.
Recent Developments
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 expanded our national footprint into West Texas and grew our franchise base, as 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 pre-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 metropolitan area. The acquisition of Dubin expedited growth into a new staffing vertical, expanded our national footprint, and grew our franchise base. We funded this acquisition with existing cash on hand, deferred purchase payments, and a draw on our pre-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 location have not been sold and as of September 30, 2023 remain classified as held-for-sale. In the meantime, we operate the Philadelphia 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 $1.5 million note payable and 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 expedited growth into a new staffing vertical, expanded our national footprint, and grew our franchise base, as 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 pre-existing line of credit with Truist.
The MRINetwork Acquisition
On December 12, 2022, we completed our acquisition of certain assets of MRINetwork (“MRI”) in accordance with the terms of an Asset Purchase Agreement dated November 16, 2022, for approximately $13.3 million, inclusive of a limited amount of working capital. MRI has been a leader in the recruitment industry since 1965 and has grown into one of the largest franchised executive search and recruitment organizations in the world. We funded this acquisition with existing cash on hand, and a draw on our pre-existing line of credit with Truist.
Results of Operations
Financial Summary
The following table displays our consolidated statements of operations for the three-month and nine-month periods ended September 30, 2023 and September 30, 2022. Percentages reflect the line item as a percentage of total revenue (in thousands, except percentages).
| Three months ended |
Nine months ended |
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| September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
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| Franchise royalties |
$ | 8,894 | 95.9 | % | $ | 7,420 | 94.5 | % | $ | 26,920 | 95.7 | % | $ | 21,217 | 92.7 | % | ||||||||||||||||
| Service revenue |
377 | 4.1 | % | 429 | 5.5 | % | 1,198 | 4.3 | % | 1,677 | 7.3 | % | ||||||||||||||||||||
| Total revenue |
9,271 | 100.0 | % | 7,849 | 100.0 | % | 28,118 | 100.0 | % | 22,894 | 100.0 | % | ||||||||||||||||||||
| Selling, general and administrative expenses |
6,354 | 68.5 | % | 2,111 | 26.9 | % | 17,824 | 63.4 | % | 7,989 | 34.9 | % | ||||||||||||||||||||
| Depreciation and amortization |
699 | 7.5 | % | 497 | 6.3 | % | 2,096 | 7.5 | % | 1,518 | 6.6 | % | ||||||||||||||||||||
| Income from operations |
2,218 | 23.9 | % | 5,241 | 66.8 | % | 8,198 | 29.2 | % | 13,387 | 58.5 | % | ||||||||||||||||||||
| Other miscellaneous income (expense) |
117 | 1.3 | % | (99 | ) | (1.3 | )% | 259 | 0.9 | % | (2,021 | ) | (8.8 | )% | ||||||||||||||||||
| Interest income |
83 | 0.9 | % | 51 | 0.6 | % | 197 | 0.7 | % | 198 | 0.9 | % | ||||||||||||||||||||
| Interest and other financing expense |
(302 | ) | (3.3 | )% | (99 | ) | (1.3 | )% | (1,155 | ) | (4.1 | )% | (256 | ) | (1.1 | )% | ||||||||||||||||
| Net income before income taxes |
2,116 | 22.8 | % | 5,094 | 64.9 | % | 7,499 | 26.7 | % | 11,308 | 49.4 | % | ||||||||||||||||||||
| Provision for income taxes |
518 | 5.6 | % | 946 | 12.1 | % | 1,530 | 5.4 | % | 1,871 | 8.2 | % | ||||||||||||||||||||
| Net income from continuing operations |
1,598 | 17.2 | % | 4,148 | 52.8 | % | 5,969 | 21.2 | % | 9,437 | 41.2 | % | ||||||||||||||||||||
| Net (loss) income from discontinued operations, net of tax |
(115 | ) | (1.2 | )% | 98 | 1.2 | % | 151 | 0.5 | % | 304 | 1.3 | % | |||||||||||||||||||
| Net income |
$ | 1,483 | 16.0 | % | $ | 4,246 | 54.1 | % | $ | 6,120 | 21.8 | % | $ | 9,741 | 42.5 | % | ||||||||||||||||
| Non-GAAP data |
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| Adjusted EBITDA |
$ | 3,742 | 40.4 | % | $ | 6,539 | 83.3 | % | $ | 12,194 | 43.4 | % | $ | 17,661 | 77.1 | % | ||||||||||||||||
Use of Non-GAAP Financial Measure: Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, provision for income taxes, depreciation and amortization, costs related to the work opportunity tax credit (“WOTC”), non-cash compensation and acquisition-related charges, net, and other charges and gains we consider non-recurring. We utilize Adjusted EBITDA as a financial measure as management believes investors find it a useful tool to perform 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, WOTC-related costs, non-cash compensation, acquisition-related charges, net and other non-recurring charges and gains bear little or no relationship to our operating performance.
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By excluding interest expense, Adjusted EBITDA measures our financial performance irrespective of our capital structure or how we finance our operations. |
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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. |
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By excluding depreciation and amortization expense, Adjusted EBITDA measures the financial performance of our operations without regard to their historical cost. |
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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. |
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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. |
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By excluding acquisition-related charges, net, Adjusted EBITDA provides a basis for measuring the financial performance of our operations without regard to gains or losses that arise from acquisitions. |
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By excluding other non-recurring charges and gains, 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).
| Three months ended |
Nine months ended |
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| September 30, 2023 |
September 30, 2022 |
September 30, 2023 |
September 30, 2022 |
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| Net income |
$ | 1,483 | $ | 4,246 | $ | 6,120 | $ | 9,741 | ||||||||
| Interest expense |
302 | 99 | 1,155 | 256 | ||||||||||||
| Provision for income taxes |
518 | 946 | 1,530 | 1,871 | ||||||||||||
| Depreciation and amortization |
699 | 497 | 2,096 | 1,518 | ||||||||||||
| WOTC related costs |
68 | 157 | 339 | 450 | ||||||||||||
| EBITDA |
3,070 | 5,945 | 11,240 | 13,836 | ||||||||||||
| Non-cash compensation |
306 | 584 | 928 | 1,194 | ||||||||||||
| Acquisition related charges, net |
66 | 10 | (274 | ) | 2,397 | |||||||||||
| Impairment of notes receivable |
300 | - | 300 | 234 | ||||||||||||
| Adjusted EBITDA |
$ | 3,742 | $ | 6,539 | $ | 12,194 | $ | 17,661 | ||||||||
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022
Revenue
Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations, when applicable. Once a company-owned office is sold, disposed of, or otherwise classified as held-for-sale, it would not be reflected in revenue and instead reported as “Income from discontinued operations, net of tax.” For a description of our revenue recognition practices, please refer to “Note 1 – Overview and Summary of Significant Accounting Policies – Revenue Recognition,” and “Critical Accounting Estimates – Revenue Recognition,” which disclosure is incorporated herein by reference. Revenue does not include any owned locations for the three months ended September 30, 2023 or the three months ended September 30, 2022.
Total revenue for the three months ended September 30, 2023 was approximately $9.3 million compared to $7.8 million for the three months ended September 30, 2022, an increase of 18.1%. For the quarter ended September 30, 2023, there was a 24.3% increase in underlying system-wide sales when compared to the prior year quarter. Revenue as a percentage of system-wide sales was 6.1% for the three months ended September 30, 2023 versus 6.5% for the three months ended September 30, 2022. Because MRINetwork focuses on recruitment services, which carry a lower royalty percentage, absolute revenue did not increase at the same pace as system-wide sales. The net revenue rate (as a percentage of system-wide sales) is lower for the same reason.
Franchise Royalties
Franchise royalties for the three months ended September 30, 2023 were approximately $8.9 million, an increase of 19.9% from $7.4 million for the three months ended September 30, 2022. Of the $1.5 million net increase, approximately $1.6 million was due to the MRINetwork acquisition, offset by a decrease from pre-existing locations. Our net effective royalty rate (as a percentage of external system-wide sales) was 5.9% for the three-month period ended September 30, 2023 compared to 6.1% for the three months ended September 30, 2022. Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models under which we operate, as well as incentives we offer during the year. As noted above, the net royalty rate for the MRINetwork is lower due to a larger proportion of recruitment services. A summary of franchise royalties by brand for the three months ended September 30, 2023 and September 30, 2022 are as follows (in thousands):
| Three months ended |
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| September 30, 2023 |
September 30, 2022 |
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| Franchise royalties from HireQuest Direct |
$ | 3,893 | $ | 4,360 | ||||
| Franchise royalties from Snelling and HireQuest |
2,179 | 2,747 | ||||||
| Franchise royalties from DriverQuest and TradeCorp |
73 | 37 | ||||||
| Franchise royalties from HireQuest Health |
119 | (10 | ) | |||||
| Franchise royalties from Northbound, MRI, and SearchPath |
2,630 | 286 | ||||||
| Franchise royalties |
$ | 8,894 | $ | 7,420 | ||||
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. All accounts that age beyond 84 days are charged back to the franchisee and no longer incur interest, although 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 also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vendor programs or IT license blocks. Generally, we do not profit from these arrangements as they represent pass-through items, although there may be timing differences. In addition, there are occasionally classification differences where the cost is embedded in selling, general and administrative expenses.
Service revenue for the three months ended September 30, 2023 was approximately $377 thousand, a decrease of $52 thousand from the three months ended September 30, 2022, when service revenue was approximately $429 thousand. This decrease is almost entirely related to interest income which is included in service revenue. Interest income was $197 thousand for the three months ended September 30, 2023 and $252 thousand for the three months ended September 30, 2022. Fluctuations in interest generally follow the mix of aged accounts in our 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 or reduce 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. We view the imposition of higher interest rates on aged accounts receivable to serve as an incentive for our franchisees to select credit-worthy customers.
Service revenue is expected to fluctuate from quarter-to-quarter.
Operating Expenses
Operating expenses for the three months ended September 30, 2023 were approximately $7.1 million compared to $2.6 million for the three months ended September 30, 2022, an increase of 170.5%. The increase primarily relates to workers' compensation, and variable administrative and overhead costs that we incurred as a result of growth following the MRI Network Acquisition, and that are described below, as well as additional amortization related to intangibles acquired in that acquisition. Overall, operating expenses represented 4.7% of system-wide-sales in the three months ended September 30, 2023 versus 2.1% of system-wide sales in the three months ended September 30, 2022.
Workers' Compensation
Workers' compensation expense was approximately $1.5 million for the three months ended September 30, 2023, an increase of $2.8 million when compared to a net benefit of approximately $1.3 million recorded in the three months ended September 30, 2022. Our workers' compensation reserves provide benefits following a workplace injury. Benefits are usually statutory in nature and are generally provided in partial or complete replacement of the injured worker’s recourse to the liability system. Payments may include medical treatment, rehabilitation, lost wages, and survivor benefits. Workers compensation rating is typically based on job classification, and our workers fall in hundreds of classifications. Annually, we use third-party actuaries to ensure that the overall ratings are sound, that individual insurer rates are adequate, and that individual risks receive a fair rate that reflects both the characteristics of the job classification and the Company's risk experience. The company pays premiums, actual claims, and establishes reserves for future claims. In turn we charge our franchises a percentage of payroll as determined by our workers' compensation carrier, plus or minus certain incentives and charges we provide for good or bad workers' compensation claims history. The overall charge is an estimate of the fully developed future costs and may not always coincide with the actual costs we incur resulting in expense or benefit in a given period. Over the long-term, our workers' compensation expense should equal the amounts we collect from franchisees and essentially be a pass-through cost. In the short-term, we cannot accurately predict the effects of workers' compensation in specific future periods, and historical trends are not indicative of future results.
In recent periods (including the three months ended September 30, 2022), we have benefited from a workers compensation reserve assumed in a 2021 acquisition that was reduced as claims were resolved. The remainder of the associated liability now appears relatively stable and we do not expect benefits in future periods. Generally workers' compensation expense (benefit) will fluctuate based on the mix of classifications, the level of payroll, recent claims resolution and cumulative experience. We cannot accurately predict the effects of workers' compensation, and historical trends are not indicative of future results.
Compensation and Benefits
Compensation-related expenses include wages, payroll taxes, benefits, and stock-based compensation, and continue to be the largest component of operating expenses. Compensation and benefits for the three months ended September 30, 2023 was approximately $2.9 million compared to $2.4 million for the three months ended September 30, 2022, an increase of 19.5%. The increase was mainly the result of higher employee headcount and related employee salaries and wages, which increased with system-wide sales as a result of acquisitions and organic growth, particularly the MRINetwork Acquisition.
Other Selling, General, and Administrative Expenses ("SG&A")
The remaining $676 thousand increase in other SG&A expenses for the three months ended September 30, 2023 is primarily related to additional costs that we expected would incrementally escalate after the MRINetwork and other acquisitions since January 1, 2022. This increase includes advertising and marketing ($76 thousand), IT expenses, licenses, dues ($87 thousand), onboarding and recruiting services ($270 thousand), third party services related to Contract staffing ($169 thousand), and similar expanded costs (insurance, professional fees, etc.). In addition, we increased our reserve for credit losses by approximately $300 thousand during the three months ended September 30, 2023.
Overall, excluding workers' compensation, depreciation and amortization, and the credit loss reserve, operating expenses increased 34.1%, versus a 19.9% increase in franchise royalties. This increase (SG&A excluding workers compensation cost and the effect bad debt reserve changes) is primarily associated with costs related to the acquisition of MRINetwork. By the end of the quarter ended September 30, 2023, the incremental costs related to the MRI Network reached what would be expected based upon current revenue volumes under that brand. Because the support of executive recruiting franchises is somewhat different than our traditional staffing franchise offerings, our relative SG&A costs for our staffing operations increased as a percentage of revenues due to the decline in staffing revenues.
Other Income and Expense
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022
Revenue
Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations. Once a company-owned office is sold, disposed of, or otherwise classified as held-for-sale, it would not be reflected in revenue and instead reported as “Income from discontinued operations, net of tax.” For a description of our revenue recognition practices, please refer to “Note 1 – Overview and Summary of Significant Accounting Policies – Revenue Recognition,” and “Critical Accounting Estimates – Revenue Recognition,” which disclosure is incorporated herein by reference. Revenue does not include any owned locations for the nine months ended September 30, 2023 or the nine months ended September 30, 2022.
Total revenue for the nine months ended September 30, 2023 was approximately $28.1 million compared to $22.9 million for the nine months ended September 30, 2022, an increase of 22.8%, even though system-wide sales increased 35.5%. Revenue as a percentage of system-wide sales was 6.1% for the nine months ended September 30, 2023 versus 6.7% for the nine months ended September 30, 2022. Because MRINetwork focuses on recruitment services, which carry a lower royalty percentage, absolute revenue did not increase at the same pace as system-wide sales. The net revenue rate (as a percentage of system-wide sales) is lower for the same reason.
Franchise Royalties
Franchise royalties for the nine months ended September 30, 2023 were approximately $26.9 million, an increase of 26.9% from $21.2 million for the nine months ended September 30, 2022. Approximately $5.8 million of this increase was due to the MRINetwork acquisition. Our net effective royalty rate (as a percentage of external system-wide sales) was 5.9% for the nine-month period ended September 30, 2023 compared to 6.2% for the nine months ended September 30, 2022. Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models under which we operate, as well as incentives we offer during the year. As noted above, the net royalty rate for the MRINetwork is lower due to a larger proportion of recruitment services. A summary of franchise royalties by brand for the nine months ended September 30, 2023 and September 30, 2022 are as follows (in thousands):
| Nine months ended |
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| September 30, 2023 |
September 30, 2022 |
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| Franchise royalties from HireQuest Direct |
$ | 11,780 | $ | 12,139 | ||||
| Franchise royalties from Snelling and HireQuest |
6,973 | 8,123 | ||||||
| Franchise royalties from DriverQuest and TradeCorp |
297 | 49 | ||||||
| Franchise royalties from HireQuest Health |
381 | 155 | ||||||
| Franchise royalties from Northbound, MRI, and SearchPath |
7,489 | 751 | ||||||
| Franchise royalties |
$ | 26,920 | $ | 21,217 | ||||
Northbound royalties in the nine months ended September 30, 2022 only represents activity since the February 28, 2022 acquisition date. Snelling royalties in the nine months ended September 30, 2022 only represents Temporary Alternatives activity since the January 24, 2022 acquisition date and Dubin activity since the February 21, 2022 acquisition date.
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. All accounts that age beyond 84 days are charged back to the franchisee and no longer incur interest, although 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 also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vendor programs or IT license blocks. Generally, we do not profit from these arrangements as they represent pass-through items, although there may be timing differences. In addition, there are occasionally classification differences where the cost is embedded in selling, general and administrative expenses.
Service revenue for the nine months ended September 30, 2023 was approximately $1.2 million, a decrease of $479 thousand, or 28.6%, from the nine months ended September 30, 2022, when service revenue was approximately $1.7 million. This decrease was largely due to a high volume of insurance related services that occurred in the nine months ended September 30, 2022.
Included in service revenue is interest income of $659 thousand for the nine months ended September 30, 2023 and $709 thousand for the nine months ended September 30, 2022. Fluctuations in interest generally follow the mix of aged accounts in our 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 or reduce 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. We view the imposition of higher interest rates on aged accounts receivable to serve as an incentive for our franchisees to select credit-worthy customers.
Service revenue is expected to fluctuate from quarter-to-quarter.
Operating Expenses
Operating expenses for the nine months ended September 30, 2023 were approximately $19.9 million compared to $9.5 million for the nine months ended September 30, 2022, an increase of 109.5%. The increase primarily relates to workers' compensation, and variable administrative and compensation costs that we inherited as a result of the MRI Network Acquisition and that are described below, as well as additional amortization related to intangibles acquired in that acquisition. Overall, operating expenses represented 4.3% of system-wide-sales in the nine months ended September 30, 2023 versus 2.8% of system-wide sales in the nine months ended September 30, 2022.
Workers' Compensation
Workers' compensation expense was approximately $2.3 million for the nine months ended September 30, 2023, versus a net benefit of approximately $2.1 million for the nine months ended September 30, 2022, an increase of $4.5 million. Our workers' compensation reserves provide benefits following a workplace injury. Benefits are usually statutory in nature and are generally provided in partial or complete replacement of the injured worker’s recourse to the liability system. Payments may include medical treatment, rehabilitation, lost wages, and survivor benefits. Workers compensation rating is typically based on job classification, and our workers fall in hundreds of classifications. Annually, we use third-party actuaries to ensure that the overall ratings are sound, that individual insurer rates are adequate, and that individual risks receive a fair rate that reflects both the characteristics of the job classification and the Company's risk experience. The company pays premiums, actual claims, and establishes reserves for future claims. In turn we charge our franchises a percentage of payroll based on as determined by our workers' compensation carrier, plus or minus certain incentives and charges we provide for good or bad workers' compensation claims history. The overall charge is an estimate of the current and fully developed future costs and may not always coincide with the payments we make, resulting in expense or benefit in a given period. Over the long-term, our workers' compensation expense should equal the amounts we collect from franchisees and essentially just be a pass-through cost. In the short-term, we cannot accurately predict the effects of workers' compensation in specific future periods, and historical trends are not indicative of future results.
Approximately $365 thousand of the benefit recorded during the nine months ended September 30, 2022 relates to a workers compensation reserve assumed in a 2021 acquisition and resulted in a net benefit as claims were resolved. Generally workers' compensation expense (benefit) will fluctuate based on the mix of classifications, the level of payroll, recent claims resolution and cumulative experience.
Compensation and Benefits
Compensation-related expenses include wages, payroll taxes, benefits, and stock-based compensation, and continue to be the largest component of operating expenses. Compensation and benefits for the nine months ended September 30, 2023 was approximately $9.6 million compared to $6.5 million for the nine months ended September 30, 2022, an increase of 46.4%. The increase was mainly the result of higher employee headcount and related employee salaries and wages, which increased with system-wide sales as a result of acquisitions and organic growth, particularly the MRINetwork Acquisition.
Other Selling, General, and Administrative Expenses ("SG&A")
The remaining $2.3 million increase in other SG&A expenses is related to additional costs that we expected would incrementally escalate after the MRINetwork and other acquisitions since January1, 2022. This increase includes advertising and marketing ($311 thousand), IT expenses, licenses, dues ($665 thousand), recruiting and onboarding ($376 thousand), third party services related to Contract staffing ($604 thousand), and similar expanded costs (insurance, professional fees, etc.). In addition, we increased our reserve for credit losses by approximately $300 thousand during the nine months ended September 30, 2023.
Overall, excluding workers' compensation, depreciation and amortization, and the credit loss reserve, operating expenses increased 53.9%, compared to a 26.9% increase in franchise royalties. This increase (SG&A excluding workers compensation cost and the effect bad debt reserve changes) is primarily associated with costs related to the acquisition of MRINetwork. These costs were particularly higher in the first quarter. By the end of the third quarter, the incremental costs related to the MRI Network reached what would be expected based upon current revenue volumes under that brand. Because the support of executive recruiting franchises is somewhat different than our traditional staffing franchise offerings, our relative SG&A costs for our staffing operations increased as a percentage of revenues due to the decline in staffing revenues experienced since March.
Other Income and Expense
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, 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 (if any), and other liquidity requirements associated with our continuing operations for the next 12 months. We also believe that these sources of liquidity and capital will be sufficient to satisfy our 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 continue to increase as the Federal Reserve raises its benchmark interest rates in an effort to control inflation.
Operating Activities
During the nine months ended September 30, 2023, cash provided by continuing operating activities was approximately $1.8 million and included net income from continuing operations of approximately $6.0 million, adjusted by non-cash items (primarily depreciation, stock-based compensation, amortization and deferred taxes) of approximately $3.8 million. These provisions were offset by changes in operating assets and liabilities requiring cash of approximately $7.9 million, including an increase in accounts receivable of $4.4 million. During the nine months ended September 30, 2022, cash generated by operating activities was approximately $11.3 million and included net income from continuing operations of approximately $9.5 million, adjusted by non-cash items of approximately $5.7 million, including a net loss on the sale of intangible assets acquired of approximately $2.2 million. These provisions were partially offset by changes in operating assets and liabilities requiring cash of approximately $4.4 million.
Investing Activities
During the nine months ended September 30, 2023, cash generated by investing activities was approximately $310 thousand, primarily from payments on notes receivable. During the nine months ended September 30, 2022, cash used by investing activities was approximately $10.1 million and included cash paid for acquisitions of approximately $19.1 million. This use was offset by proceeds from the sale of purchased locations of approximately $9.3 million.
Financing Activities
During the nine months ended September 30, 2023, cash used by financing activities was approximately $4.0 million and included net proceeds from our revolving line of credit of approximately $1.9 million. These proceeds were offset by approximately $2.5 million in dividends and a payoff of our term loan of $3.3 million. During 2022, cash provided by financing activities was approximately $882 thousand and included net proceeds from our revolving line of credit of approximately $2.0 million offset by the payment of dividends totaling approximately $2.5 million and net payments on our term loan of approximately $438 thousand.
Revolving Credit Agreement with Bank of America, N.A.
On February 28, 2023 the Company and all of its subsidiaries as borrowers (collectively, the "Borrowers") entered into a Revolving Credit Agreement with Bank of America, N.A. (the "Bank") for a $50,000,000 revolving facility (the “Senior Credit Facility”), which includes a $20,000,000 sublimit for the issuance of standby letters of credit. The Company also has a one-time right, upon at least ten business days’ prior written notice to the Bank to increase the maximum amount of the Senior Credit Facility to $60 million. The Senior Credit Facility replaces the Company's prior $60 million credit agreement with Truist Bank. The Senior Credit Facility provides for certain financial covenants including an Asset Coverage Ratio of at least 1.0:1.0 at all times; maintaining a Total Funded Debt to Adjusted EBITDA Ratio not exceeding 3.0:1.0; and maintaining, on a consolidated basis, a Fixed Charge Coverage Ratio of at least 1.25:1.0. Interest will accrue on the outstanding balance of the line of credit at a variable rate equal to (a) the BSBY Daily Floating Rate plus a margin between 1.00% and 1.75% per annum. In each case, the applicable margin is determined by the Company's Total Funded Debt to Adjusted EBITDA, as defined in the related credit agreement (the "Credit Agreement"). The Senior Credit Facility will mature on February 28, 2028.
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, and sale/leaseback transactions. 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 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, intellectual property and the real estate owned by HQ Real Property Corporation.
The Company utilized the proceeds of the Senior Credit Facility (i) first to pay off its existing credit agreement with Truist (described below), (ii) second, to pay off its existing term loan with Truist (described below), and (iii) third, 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 Senior Credit Facility for working capital, required letters of credit, and general corporate purposes in accordance with the terms of the Senior Credit Facility.
At September 30, 2023, availability under the Senior Credit Facility was approximately $25.9 million based on eligible collateral, less letter of credit reserves, bank product reserves, and current advances, assuming continued covenant compliance. Our all-in-rate of borrowing was 6.6% and is repriced daily. On October 23, 2023, we entered into an agreement to acquire certain assets of TEC Staffing Services, Inc. ("TEC") for approximately $9.8 million. The offices will be converted to the Snelling franchise model and offered to prospective buyers as franchises. We will finance this acquisition with our Senior Credit Facility, and expect to recover the proceeds through the subsequent franchising of operations and royalties from future operations.
Revolving Credit and Term Loan Agreement with Truist Bank
On June 29, 2021 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 "Truist 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 "Truist Line of Credit") and (ii) a $3,153,500 term loan (the "Truist Term Loan"). Under the agreement, Truist Bank could also make Swingline Loans available in its discretion. The Truist Credit Agreement replaced the Company's prior $30 million credit facility with BB&T, now Truist. The Truist Credit Agreement provided for a borrowing base on the Truist Line of Credit that was derived from the Borrowers' accounts receivable subject to certain reserves and other limitations. Interest accrued on the outstanding balance of the Truist 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 was defined in the Truist Credit Agreement plus a margin between 0.25% and 0.75% per annum. In each case, the applicable margin was determined by the Company's Average Excess Availability on the Truist Line of Credit, as defined in the Truist Credit Agreement. Interest accrued on the Truist 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 Truist Credit Agreement, the Borrowers paid a commitment fee on the unused portion of the Truist Line of Credit in an amount equal to 0.25% per annum. All loans made pursuant to the Truist Line of Credit were to mature on June 29, 2026. The Truist Term Loan was due to be paid in equal monthly installments based upon a 15-year amortization of the original principal amount of the Truist Term Loan and was 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 Truist Line of Credit and June 29, 2036.
The Company utilized the proceeds of the Truist 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 certain acquisitions.
Economy and Inflation
Many leading economists predict high rates of inflation will continue through 2023. 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.
The February 2022 Russian invasion of Ukraine and the resulting economic sanctions imposed by the United States and other countries, along with certain international organizations, have significantly impacted the global economy, including exacerbating inflationary pressures created by COVID-related supply chain disruptions, and given rise to potential global security issues that have adversely affected and may continue to adversely affect international business and economic conditions. The ongoing effects of the hostilities and sanctions are no longer limited to Russia and Russian companies and have spilled over to and negatively impacted other regional and global economic markets.
In October 2023, the Palestinian militant group Hamas launched an unprecedented assault on Israel, who in turn formally declared war as its soldiers battled Hamas fighters and launched airstrikes on Gaza. This war between Israel and Hamas could spur inflation and hamper global growth if it turns into a wider conflict that causes a significant increase in oil prices.
Global conflicts such as these have resulted in rising energy prices and an even more constrained supply chain, and thus aggravated the inflationary global environment with cost increases affecting labor, fuel, materials food and services. At this time, the ultimate extent of the duration of the military actions, resulting sanctions and future economic and market disruptions, and resulting effects on the Company, and on our acquisition strategy, are impossible to predict.
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.
At nine months ended September 30, 2023, nearly all of our offices were franchised with the only exceptions being a portion of the Dubin operations acquired in the first quarter of 2022. The following table reflects our system-wide sales broken into its components for the periods indicated. The Dubin operations are presented in the consolidated financial statements as discontinued operations because they are considered held-for-sale, but their system-wide sales are reflected along with all other offices in the table below. Percentages indicate the change in system-wide sales relative to the comparable prior period (in thousands, except percentages):
| Three months ended |
Nine months ended |
|||||||||||||||||||||||
| September 30, 2023 |
September 30, 2022 |
Change |
September 30, 2023 |
September 30, 2022 |
Change |
|||||||||||||||||||
| System-wide sales from HireQuest Direct |
$ | 65,572 | $ | 69,322 | (5.4 | )% | $ | 186,515 | $ | 190,903 | (2.3 | )% | ||||||||||||
| System-wide sales from Snelling and HireQuest |
37,801 | 45,662 | (17.2 |
)% | 121,555 | 132,782 | (8.5 |
)% | ||||||||||||||||
| System-wide sales from DriverQuest and TradeCorp |
1,237 | 539 | 129.5 |
% | 3,248 | 2,142 | 51.6 |
% | ||||||||||||||||
| System-wide sales from HireQuest Health |
1,922 | 1,831 | 5.0 |
% | 4,921 | 4,289 | 14.7 |
% | ||||||||||||||||
| System-wide sales from Northbound, MRI, and SearchPath |
44,466 | 4,090 | 987.2 |
% | 143,764 | 9,423 | 1425.7 |
% | ||||||||||||||||
| System-wide sales from Discontinued Operations |
209 | 1,801 | (88.4 | )% | 1,688 | 4,772 | (64.6 | )% | ||||||||||||||||
| System-wide sales |
$ | 151,207 | $ | 123,245 | 22.7 |
% | $ | 461,691 | $ | 344,311 | 34.1 |
% | ||||||||||||
The addition of MRINetwork accounted for $39.3 million of the increase in system-wide sales during the three months ended September 30, 2023, as sales from pre-existing locations decreased approximately $10.5 million. The addition of MRINetwork accounted for $129.1 million of the increase in system-wide sales during the nine months ended September 30, 2023, as sales from pre-existing locations decreased approximately $14.0 million.
Of the $117.4 million increase in system-wide sales in the nine months ended September 30, 2023, $2.3 million relates to the Northbound, Temporary Alternatives and Dubin acquisitions.
Northbound system-wide sales in the nine months ended September 30, 2022 only represents activity since the February 28, 2022 acquisition date. Snelling system-wide sales only represents Temporary Alternatives activity since the January 24, 2022 acquisition date, and Dubin system-wide sales since the February 21, 2022 acquisition date.
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. We count an office if it has a physical location and is generating revenue.
The following table accounts for the number of offices opened and closed or consolidated during the nine month ended September 30, 2023:
| Offices, December 31, 2021 |
217 | |||
| Purchased in 2022 (net of sold locations) |
207 | |||
| Opened in 2022 |
16 | |||
| Closed in 2022 |
(5 | ) | ||
| Offices, December 31, 2022 |
435 | |||
| Opened in 2023 |
7 | |||
| Closed in 2023 |
(16 | ) | ||
| Offices, September 30, 2023 |
426 |
Critical Accounting Estimates
See Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2022.
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 September 30, 2023 , 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. In addition, the Company has created a remediation plan, performed additional compensating control procedures during the six acquisitions that have occurred since the material weakness, tested those controls, and developed a new formal set of controls to follow going forward that directly address the risks in that area. 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 believe 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
During the quarter ended September 30, 2023, there were no significant changes in our internal control over financial reporting, other than those referred to above, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time we are involved in various legal and administrative proceedings. Based on information currently available to us, we do not expect material uninsured losses to arise from any of these matters. We believe the outcomes of these proceedings, even if determined adversely, will not have a material adverse effect on our business, financial condition, results of operations, or liquidity and capital resources.
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 21, 2023 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 21, 2023.
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 significantly 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 have adversely affected and may continue to adversely affect international business and economic conditions. In addition, the threat of a wider war in the Middle East after the Hamas terrorist attacks on Israel could affect oil prices and have other effects on the global economy. Although we have no operations in Russia or Ukraine or in the Middle East, 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 are no longer limited to companies from such regions and have spilled over to and negatively impacted other regional and global economic markets.
The conflicts have resulted in rising energy prices and an even more constrained supply chain, and thus exacerbated the inflationary global economic environment, with cost increases affecting labor, fuel, materials, food and services. If these impacts continue to affect us and/or our clients, particularly in the industrial/manufacturing and construction sectors, demand for our labor may decrease, which would decrease gross billings and therefore our royalty revenue. Furthermore, sustained increases in the consumer price index has and will likely continue to put upward pressure on wages. If we are unable to match or exceed wages offered by other potential employers to our temporary employees, we may suffer from employee attrition. At this time, the ultimate 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 |
|
| 10.1 | Employment Agreement effective September 1, 2023 by and among HQ LTS Corporation, HireQuest, Inc., and John McAnnar (incorporated by reference to the Company's Current Report on Form 8-K, filed with the SEC on September 1, 2023) | |
| 31.1 |
||
| 31.2 |
||
| 32.1 |
||
| 101.INS |
Inline XBRL Instance Document (filed herewith) |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document (filed herewith) |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith) |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith) |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith) |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith) |
|
| 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 |
November 8, 2023 |
||
| Richard Hermanns |
Date |
||
| President and Chief Executive Officer |
|||
| /s/ David S. Burnett |
November 8, 2023 | ||
| David S. Burnett |
Date |
||
| Chief Financial Officer |