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HireQuest, Inc. - Quarter Report: 2022 June (Form 10-Q)

hqi20220628_10q.htm
 

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission File Number 000-53088

 

image01.jpg

 

HIREQUEST, INC.

(Exact name of registrant as specified in its Charter)

 

Delaware

 

91-2079472

(State of incorporation or organization)

 

(I.R.S. employer identification no.

   

111 Springhall Drive, Goose Creek, SC 29445

(Address of principal executive offices) (Zip Code)

   

Registrant’s telephone number, including area code: (843) 723-7400

 

Securities registered pursuant to Section 12(b) of the Act:

 

Common Stock, $0.001 par value

 

HQI

 

The NASDAQ Stock Market LLC

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. Yes ☒     No ☐

 

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). Yes ☒     No ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer ☐, an accelerated filer ☐, a non-accelerated filer ☒, a smaller reporting company ☒, or an emerging growth company ☐ (as defined in Rule 12b-2 of the Exchange Act).

 

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 ☐     No ☒

 

Number of shares of issuer's common stock outstanding at August 8, 2022: 13,814,559

 

 

HireQuest, Inc.

 

Table of Contents

 

PART I. FINANCIAL INFORMATION
     

Item 1.

Financial Statements

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Income

4

 

Consolidated Statements of Changes in Stockholders’ Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.

Controls and Procedures

30

 

PART II. OTHER INFORMATION

     

Item 1.

Legal Proceedings

31

Item 1A.

Risk Factors

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

Item 5.

Other Information

31

Item 6.

Exhibits

31

 

Signatures

32

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

 

HireQuest, Inc.

Consolidated Balance Sheets

 

(in thousands, except par value data)

 

June 30, 2022

  

December 31, 2021

 

ASSETS

 

(unaudited)

     

Current assets

        

Cash

 $1,128  $1,256 

Accounts receivable, net of allowance for doubtful accounts

  45,676   38,239 

Notes receivable

  1,494   1,481 

Prepaid expenses, deposits, and other assets

  1,023   659 

Prepaid workers' compensation

  1,293   369 

Current assets held for sale - discontinued operations

  213   - 

Total current assets

  50,827   42,004 

Property and equipment, net

  4,438   4,454 

Workers’ compensation claim payment deposit

  1,231   948 

Franchise agreements, net

  18,103   18,848 

Other intangible assets, net

  11,265   8,078 

Goodwill

  1,075   - 

Other assets

  432   334 

Notes receivable, net of current portion and reserve

  2,524   2,686 

Total assets

 $89,895  $77,352 

LIABILITIES AND STOCKHOLDERS' EQUITY

        

Current liabilities

        

Accounts payable

 $629  $1,126 

Line of credit

  2,839   171 

Term loans payable

  654   210 

Other current liabilities

  3,296   2,658 

Accrued payroll, benefits, and payroll taxes

  2,381   3,687 

Due to franchisees

  12,254   7,496 

Risk management incentive program liability

  1,945   1,632 

Workers' compensation claims liability

  4,651   4,491 

Total current liabilities

  28,649   21,471 

Term loan payable, net of current portion

  3,645   2,856 

Deferred tax liability

  -   473 

Workers' compensation claims liability, net of current portion

  3,534   3,759 

Franchisee deposits

  2,179   2,058 

Total liabilities

  38,007   30,617 

Commitments and contingencies (Note 8)

          

Stockholders' equity

        

Preferred stock - $0.001 par value, 1,000 shares authorized; none issued

  -   - 

Common stock - $0.001 par value, 30,000 shares authorized; 13,827 and 13,745 shares issued, respectively

  14   14 

Additional paid-in capital

  31,781   30,472 

Treasury stock, at cost - 40 shares

  (146)  (146)

Retained earnings

  20,239   16,395 

Total stockholders' equity

  51,888   46,735 

Total liabilities and stockholders' equity

 $89,895  $77,352 

 

See accompanying notes to consolidated financial statements. 

 

 

 

HireQuest, Inc.

Consolidated Statements of Income

(unaudited)

 

   

Three months ended

   

Six months ended

 

(in thousands, except per share data)

 

June 30, 2022

   

June 30, 2021

   

June 30, 2022

   

June 30, 2021

 

Franchise royalties

  $ 7,220     $ 5,451     $ 13,793     $ 8,710  

Staffing revenue, owned locations

    1,288       -       2,392       -  

Service revenue

    780       256       1,248       399  

Total revenue

    9,288       5,707       17,433       9,109  

Cost of staffing revenue, owned locations

    947       -       1,709       -  

Gross profit

    8,341       5,707       15,724       9,109  

Selling, general and administrative expenses

    3,530       2,041       6,367       5,882  

Depreciation and amortization

    610       366       1,176       699  

Income from operations

    4,201       3,300       8,181       2,528  

Other miscellaneous income (expense)

    1,458       30       (1,922 )     3,811  

Interest income

    54       96       147       231  

Interest and other financing expense

    (109 )     (20 )     (157 )     (25 )

Net income before income taxes

    5,604       3,406       6,249       6,545  

Provision for income taxes

    847       686       934       83  

Net income from continuing operations

    4,757       2,720       5,315       6,462  

Income from discontinued operations, net of tax

    134       -       179       -  

Net income

  $ 4,891     $ 2,720     $ 5,494     $ 6,462  
                                 

Basic earnings per share

                               

Continuing operations

  $ 0.35     $ 0.20     $ 0.39     $ 0.47  

Discontinued operations

    0.01       -       0.01       -  

Total

  $ 0.36     $ 0.20     $ 0.40     $ 0.47  
                                 

Diluted earnings per share

                               

Continuing operations

  $ 0.35     $ 0.20     $ 0.39     $ 0.47  

Discontinued operations

    0.01       -       0.01       -  

Total

  $ 0.36     $ 0.20     $ 0.40     $ 0.47  
                                 

Weighted average shares outstanding

                               

Basic

    13,607       13,611       13,591       13,607  

Diluted

    13,691       13,864       13,686       13,834  

 

See accompanying notes to consolidated financial statements. 

 

 

 

HireQuest, Inc.

Consolidated Statements of Changes in Stockholders Equity

(unaudited)

 

  

Common stock

  

Treasury stock

  

Additional

  

Retained

  

Total stockholders'

 

Six months ended (in thousands)

 

Shares

  

Par value

  

Amount

  

paid-in capital

  

earnings

  

equity

 

Balance at December 31, 2021

  13,745  $14  $(146) $30,472  $16,395  $46,735 

Stock-based compensation

  -   -   -   1,309   -   1,309 

Common stock dividends

  -   -   -   -   (1,650)  (1,650)

Restricted common stock granted for services

  82   -   -   -   -   - 

Net income

  -   -   -   -   5,494   5,494 

Balance at June 30, 2022

  13,827  $14  $(146) $31,781  $20,239  $51,888 
                         

Balance at December 31, 2020

  13,629  $14  $(146) $28,811  $7,685  $36,364 

Stock-based compensation

  -   -   -   569   -   569 

Common stock dividends

  -   -   -   -   (1,497)  (1,497)

Restricted stock granted for services

  44   -   -   -   -   - 

Net income

  -   -   -   -   6,462   6,462 

Balance at June 30, 2021

  13,673  $14  $(146) $29,380  $12,650  $41,898 
                         

Three months ended

                        

Balance at March 31, 2022

  13,823  $14  $(146) $30,951  $16,176  $46,995 

Stock-based compensation

  -   -   -   830   -   830 

Common stock dividends

  -   -   -   -   (828)  (828)

Restricted common stock granted for services

  4   -   -   -   -   - 

Net income

  -   -   -   -   4,891   4,891 

Balance at June 30, 2022

  13,827  $14  $(146) $31,781  $20,239  $51,888 
                         

Balance at March 31, 2021

  13,638  $14  $(146) $29,079  $10,747  $39,694 

Stock-based compensation

  -   -   -   301   -   301 

Common stock dividends

  -   -   -   -   (817)  (817)

Restricted stock granted for services

  35   -   -   -   -   - 

Net income

  -   -   -   -   2,720   2,720 

Balance at June 30, 2021

  13,673  $14  $(146) $29,380  $12,650  $41,898 

 

See accompanying notes to consolidated financial statements.

 

 

 

HireQuest, Inc.

Consolidated Statements of Cash Flows

(unaudited)

 

   

Six months ended

 

(in thousands)

 

June 30, 2022

   

June 30, 2021

 

Cash flows from operating activities

               

Net income

  $ 5,494     $ 6,462  

Income from discontinued operations

    (179 )     -  

Net income from continuing operations

    5,315       6,462  

Adjustments to reconcile net income to net cash used in operations:

               

Depreciation and amortization

    1,176       699  

Non-cash interest

    48       -  

Allowance for losses on notes receivable

    233       -  

Stock based compensation

    1,309       569  

Deferred taxes

    (473 )     (591 )

Loss on disposition of intangible assets

    2,233       1,223  

Bargain purchase gain

    -       (4,959 )

Changes in operating assets and liabilities:

               

Accounts receivable

    (1,437 )     (1,330 )

Prepaid expenses, deposits, and other assets

    (415 )     (513 )

Prepaid workers' compensation

    (924 )     17  

Accounts payable

    (2,012 )     693  

Risk management incentive program liability

    314       693  

Other current liabilities

    312       (576 )

Accrued payroll, benefits and payroll taxes

    (1,433 )     877  

Due to franchisees

    4,758       1,748  

Workers' compensation claim payment deposit

    (284 )     6,909  

Workers' compensation claims liability

    (64 )     (591 )

Net cash provided by operating activities - continuing operations

    8,656       11,330  

Net cash provided by operating activities - discontinued operations

    427       -  

Net cash provided by operating activities

    9,083       11,330  

Cash flows from investing activities

               

Purchase of acquisitions

    (19,063 )     (28,814 )

Purchase of property and equipment

    (90 )     (711 )

Proceeds from the sale of purchased locations

    9,317       997  

Proceeds from the sale of notes receivable

    -       5,261  

Proceeds from payments on notes receivable

    315       331  

Cash issued for notes receivable

    (50 )     (798 )

Investment in intangible asset

    (512 )     (325 )

Net change in franchisee deposits

    121       64  

Net cash used in investing activities

    (9,962 )     (23,995 )

Cash flows from financing activities

               

Proceeds from term loan payable

    -       3,154  

Payments on term loan payable

    (266 )     -  

Payments related to debt issuance

    -       (476 )

Net proceeds from revolving line of credit

    2,667       -  

Proceeds from affiliates

    -       22  

Payment of dividends

    (1,650 )     (1,497 )

Net cash provided by financing activities

    751       1,203  

Net decrease in cash

    (128 )     (11,462 )

Cash, beginning of period

    1,256       13,667  

Cash, end of period

  $ 1,128     $ 2,205  

Supplemental disclosure of non-cash investing and financing activities

               

Notes receivable issued for the sale of intangible assets

    350       1,247  

Amounts payable related to the purchase of acquisition

    1,800       -  

Supplemental disclosure of cash flow information

               

Interest paid

    109       25  

Income taxes paid, net of refunds

    1,469       601  

 

See accompanying notes to consolidated financial statements. 

 

 

HireQuest, Inc.

Notes to Consolidated Financial Statements

 

 

Note 1 - Overview and Summary of Significant Accounting Policies

 

Nature of Business

HireQuest, Inc. (together with its subsidiaries, “HQI, the “Company,” “we,” us,” or “our”) is a nationwide franchisor of offices providing direct-dispatch and commercial staffing solutions in the light industrial and blue-collar segments of the staffing industry and traditional commercial staffing. Our franchisees provide various types of temporary personnel through two business models operating under the trade names “HireQuest Direct”, “HireQuest”, “Snelling”, “LINK Staffing”, “DriverQuest”, “HireQuest Health”, and “Northbound Executive Search”. HireQuest Direct specializes primarily in unskilled and semi-skilled industrial and construction personnel. HireQuest, Snelling, and LINK Staffing specialize primarily in skilled and semi-skilled industrial personnel, clerical and administrative personnel, and permanent placement services. DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications. HireQuest Health specializes in skilled personnel in the medical and dental industries. Northbound Executive Search specializes in executive placement and consultant services in the financial services industry.

 

On January 24, 2022 we completed our acquisition of Temporary Alternatives, Inc. (“Temporary Alternatives”) to acquire three locations in west Texas and New Mexico for $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. On February 21, 2022 we completed our acquisition of  The Dubin Group, Inc., and Dubin Workforce Solutions, Inc. (collectively, “Dubin”). We acquired their staffing operations for $2.5 million, inclusive of a prescribed amount of working capital. Dubin provides executive placement services and commercial staffing in the Philadelphia metropolitan area. On February 28, 2022 we completed our acquisition of Northbound Executive Search, LTD. (“Northbound”) to acquire their operations for $11.4 million, inclusive of a prescribed amount of working capital. Northbound provides executive placement and short-term consultant services primarily to blue-chip clients in the financial services industry. 

 

On March 1, 2021, we completed our acquisition of Snelling Staffing and affiliates (“Snelling”). We acquired substantially all of the operating assets and assumed certain liabilities of Snelling for a purchase price of approximately $17.9 million. On March 22, 2021, we completed our asset acquisition of LINK Staffing and affiliates (“LINK”) in which we acquired all of the franchise relationships and certain other assets of LINK for a purchase price of approximately $11.1 million. On October 1, 2021 we completed our acquisition of Recruit Media, Inc. (“Recruit Media”). We purchased all of the outstanding shares of Recruit Media for approximately $4.4 million, subject to customary representations and warranties. On December 6, 2021 we completed the acquisition of the Dental Power Staffing division from Dental Power International, Inc. ("DPI") for $1.9 million.

 

For additional information related to these transactions, see Note 2 - Acquisitions.

 

As of  June 30, 2022 we had 223 franchisee-owned offices and 2 company owned offices in 38 states and the District of Columbia. We are the employer of record to approximately 75,000 employees annually, who in turn provide services to thousands of clients in various industries including construction, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, retail, and dental practices. We provide employment, marketing, working capital funding, software, and administrative services to our franchisees.

 

Basis of Presentation

We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented.

 

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2021. Results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other period.

 

Consolidation

The consolidated financial statements include the accounts of HQI and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

 

U.S. GAAP requires the primary beneficiary of a variable interest entity (“VIE”) to consolidate that entity. To be the primary beneficiary of a VIE, an entity must have both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that are significant to the beneficiary. We provide acquisition financing to some of our franchisees that could result in our having to absorb losses. This results in some franchisees being considered VIEs. We have reviewed our relationship with each of these franchisees and determined that we are not the primary beneficiary of any of these entities. Accordingly, we have not consolidated these entities.

 

7

 

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.

 

Significant estimates and assumptions underlie our workers’ compensation claim liabilities, our workers’ compensation risk management incentive program accrual, our deferred taxes, the reserve for losses on notes receivable, and the estimated fair value of assets acquired and liabilities assumed, including goodwill.

 

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due for labor services from customers of franchisees, accounts receivable purchased in acquisitions, and accounts receivable originating at, or attributable to, company-owned locations. We own the accounts receivable from labor services provided by our franchisees until they age beyond a date agreed upon with each respective franchisee between 42 and 84 days. When accounts receivable age beyond the agreed-upon date, or are otherwise deemed uncollectable, they are charged back to our franchisees. Accordingly, we do not record an allowance for doubtful accounts on these accounts receivable.

 

For staffing services provided by company-owned offices, and for purchased accounts receivable, we record accounts receivable at face value less an allowance for doubtful accounts. We determine the allowance for doubtful accounts based on historical write-off experience, the age of the receivable, other qualitative factors and extenuating circumstances, and current economic data which represents our best estimate of the amount of probable losses on these accounts receivable, if any. We review the allowance for doubtful accounts periodically and write off past due balances when it is probable that the receivable will not be collected. Our allowance for doubtful accounts on company-owned and purchased accounts receivable was approximately $58 thousand and $26 thousand at June 30, 2022,and  December 31, 2021, respectively.

 

Revenue Recognition

Our primary source of revenue comes from royalty fees based on the operation of our franchised offices. Royalty fees from our HireQuest Direct business model are based on a percentage of sales for services our franchisees provide to customers, which ranges from 6.0% to 8.0%. Royalty fees from our HireQuest business line, including HireQuest franchisees, DriverQuest franchisees, the Northbound franchisee, the HireQuest Health franchisees, and Snelling and LINK franchisees who executed new franchise agreements upon closing, are 4.5% of the payroll we fund plus 18.0% of the gross margin for the territory. Royalty fees from the Snelling and LINK franchise agreements assumed and not renegotiated at closing range from 5.0% to 8.0% of sales for services our franchisees provide to customers. Our franchisees are responsible for taking customer orders, providing customers with services, establishing the prices charged for services, and controlling other aspects related to providing service to customers prior to the service being transferred to the customer, such as determining which temporary employees to dispatch to the customer and establishing pay rates for the temporary employees. Accordingly, we present revenue from franchised locations on a net basis as agent as opposed to a gross basis as principal. With company owned locations, we control the conditions under which we provide services to customers. Accordingly, we present revenue from owned locations on a gross basis as principal.

 

For franchised locations, we recognize revenue when we satisfy our performance obligations. Our performance obligations primarily take the form of a franchise license and promised services. Promised services consist primarily of paying temporary employees, completing all statutory payroll related obligations, and providing workers' compensation insurance on behalf of temporary employees. Because these performance obligations are interrelated, we do not consider them to be individually distinct and therefore account for them as a single performance obligation. Because our franchisees receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Franchise royalties are billed on a weekly basis. We also offer various incentive programs for franchisees including royalty incentives, royalty credits, and other support initiatives. These incentives and credits are provided to encourage new office development and organic growth, and to limit workers' compensation exposure. We present franchise royalty fees net of these incentives and credits.

 

For owned locations, we account for revenue when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Revenue derived from owned locations is recognized at the time we satisfy our performance obligation. Our contracts have a single performance obligation, which is the transfer of services. Because our customers receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Revenue from owned locations is reported net of customer credits, discounts, and taxes collected from customers that are remitted to taxing authorities. Our customers are invoiced every week and we rarely require payment prior to the delivery of service. Substantially all of our contracts include payment terms of 30 days or less and are short-term in nature. Because of our payment terms with our customers, there are no significant contract assets or liabilities. We do not extend payment terms beyond one year.

 

Below are summaries of our franchise royalties disaggregated by business model (in thousands):

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 

HireQuest Direct model

 $4,417  $3,006  $7,949  $5,912 

HireQuest, Snelling, DriverQuest, HireQuest Health, and Northbound

  2,803   2,445   5,844   2,798 

Total

 $7,220  $5,451  $13,793  $8,710 

 

8

 

Service revenue, which forms the other component of our total revenue, consists of interest we charge our franchisees on overdue customer accounts receivable, trademark license fees, and other fees for optional services we provide. We recognize interest income based on the effective interest rate applied to the outstanding principal balance of overdue accounts. Trademark license fees are charged to some locations that utilize our intellectual property that are not franchisees. Trademark license fees are 9.0% of the gross margin for the location and are recognized when earned. We recognize revenue from optional services as we provide them.

 

Notes Receivable

Notes receivable from franchisees consist primarily of amounts due to us related to the financing of franchised locations. We report notes receivable from franchisees at the principal balance outstanding less an allowance for losses. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. Notes receivable are generally secured by the assets of each location and the ownership interests in the franchise. We monitor the financial condition of our debtors and record provisions for estimated losses when we believe it is probable that our debtors will be unable to make their required payments. We evaluate the potential impairment of notes receivable based on various analyses, including estimated discounted future cash flows, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When a note receivable is deemed impaired, we discontinue accruing interest and only recognize interest income when payment is received. Our allowance for losses on notes receivable was approximately $405 thousand at  June 30, 2022 and December 31, 2021.

 

Notes receivable from non-franchisees consist primarily of amounts due to us from the sale of non-core assets acquired after an acquisition. We report notes receivable from non-franchisees at the principal balance outstanding less an allowance for losses. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. Notes receivable are generally unsecured. We monitor the financial condition of our debtors and evaluate the potential impairment of notes receivable based on various analyses, including estimated discounted future cash flows, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When a note receivable is deemed impaired, we discontinue accruing interest and only recognize interest income when payment is received. Our impairment reserve on notes receivable from non-franchisees was approximately $1.7 million and $1.5 million at  June 30, 2022 and December 31, 2021, respectively.

 

Intangible Assets

Intangible assets acquired are recorded at fair value. We test our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets  may not be recoverable. We test our indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of the assets  may not be recoverable. If the carrying value exceeds the fair value, we recognize an impairment in an amount equal to the excess, not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. There were no intangible asset impairment charges in 2022 or 2021. 

 

Finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives, which ranges from 7 to 15 years. Our finite-lived intangible assets include acquired franchise agreements, acquired customer lists, internally developed software, and purchased software. Our indefinite-lived intangible assets include acquired domain names and trade names. For additional information related to significant additions to intangible assets, see Note 2 - Acquisitions

 

Intangible assets internally developed are measured at cost. We capitalize costs to develop or purchase computer software for internal use which are incurred during the application development stage. These costs include fees paid to third parties for development services and payroll costs for employees' time spent developing the software. We expense costs when incurred during the preliminary project stage and the post-implementation stage. Capitalized development costs will be amortized on a straight-line basis over the estimated useful life of the software. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological and economic feasibility, and estimated economic life.

 

The table below reflects information related to our intangible assets (in thousands). 

 

   

June 30, 2022

  

December 31, 2021

 
 

Estimated useful life

 

Gross

  

Accumulated amortization

  

Net

  

Gross

  

Accumulated amortization

  

Net

 

Finite-lived intangible assets:

                        

Franchise agreements

15 years

 $19,916  $(1,813) $18,103  $19,916  $(1,068) $18,848 

Customer lists

10 years

  3,462   (108)  3,354   2,089   (239)  1,850 

Purchased software

7 years

  3,200   (343)  2,857   3,200   (114)  3,086 

Internally developed software

7 years

  1,428   -   1,428   916   -   916 

Total finite-lived intangible assets

  28,006   (2,264)  25,742   26,121   (1,421)  24,700 

Indefinite-lived intangible assets:

                        

Domain name

Indefinite

  2,226   -   2,226   2,226   -   2,226 

Trade name

Indefinite

  1,400   -   1,400   -   -   - 

Total intangible assets

 $31,632  $(2,264) $29,368  $28,347  $(1,421) $26,926 

 

Goodwill

 

Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business combinations. Goodwill is measured for impairment at least annually, or whenever events and circumstances arise that indicate an impairment may exist. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. We test for goodwill impairment at the reporting unit level. In assessing the value of goodwill, assets and liabilities are assigned to a reporting unit and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. At June 30, 2022 we had a single reporting unit.

 

The table below summarizes our goodwill at December 31, 2021 and changes during the six months ended June 30, 2022 (in thousands):

 

Goodwill balance at December 31, 2021

 $- 

Goodwill recorded on acquisition of Temporary Alternatives

  375 

Goodwill recorded on acquisition of Dubin

  200 

Goodwill recorded on acquisition of Northbound

  500 

Goodwill balance at June 30, 2022

 $1,075 

 

9

 

Earnings per Share

We calculate basic earnings per share by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding. We do not include the impact of any potentially dilutive common stock equivalents in our basic earnings per share calculations. Diluted earnings per share reflect the potential dilution of securities that could share in our earnings through the conversion of common shares issuable via outstanding stock options and unvested restricted shares, except where their inclusion would be anti-dilutive. Outstanding common stock equivalents at  June 30, 2022 and  June 30, 2021 totaled approximately 193 thousand and 328 thousand, respectively.

 

We use the treasury stock method to calculate the diluted common shares outstanding which were as follows (in thousands):

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 

Weighted average number of common shares used in basic net income per common share

  13,607   13,611   13,591   13,607 

Dilutive effects of unvested restricted stock and stock options

  84   253   95   227 

Weighted average number of common shares used in diluted net income per common share

  13,691   13,864   13,686   13,834 

 

Fair Value Measures

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an ordinary transaction between market participants on the measurement date. Our policy on fair value measures requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The policy establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The policy prioritizes the inputs into three levels that may be used to measure fair value:

 

Level 1: Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities. 

 

Level 2: Applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

 

Level 3: Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

 

The carrying amounts of cash, accounts receivable, accounts payable and all other current liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the net book value and balances are reviewed for impairment at least annually. The fair value of the term loan payable approximates its carrying value. The fair value of impaired notes receivable are determined based on estimated future payments discounted back to present value using the notes effective interest rate.

 

  

June 30, 2022

 

(in thousands)

  Total   Level 1   Level 2   Level 3 

Cash

 $1,128  $1,128  $-  $- 

Notes receivable

  3,946   -   3,946   - 

Accounts receivable

  45,676   -   45,676   - 

Notes receivable - impaired

  72   -   -   72 

Total assets at fair value

 $50,822  $1,128  $49,622  $72 
                 

Term loans payable

 $4,299  $-  $4,299  $- 

Line of credit

  2,839   -   2,839   - 

Total liabilities at fair value

 $7,138  $-  $7,138  $- 

 

  

December 31, 2021

 

(in thousands)

  Total   Level 1   Level 2   Level 3 

Cash

 $1,256  $1,256  $-  $- 

Notes receivable

  4,027   -   4,027   - 

Accounts receivable

  38,239   -   38,239   - 

Notes receivable - impaired

  140   -      140 

Total assets at fair value

 $43,662  $1,256  $42,266  $140 
                 

Term loan payable

 $3,066  $-  $3,066  $- 

Line of credit

  171   -   171   - 

Total liabilities at fair value

 $3,237  $-  $3,237  $- 

 

For additional information related to our impaired notes receivable, see Note 10 - Notes Receivable. 

 

10

 

Discontinued Operations

Company-owned offices that have been disposed of by sale, disposed of other than by sale, or are classified as held-for-sale, are reported separately as discontinued operations. In addition, a newly acquired business that, upon acquisition, meets the held-for-sale criteria will be reported as discontinued operations. Accordingly, the assets and liabilities, operating results, and cash flows for these businesses are presented separate from our continuing operations for all periods presented in our consolidated financial statements and footnotes, unless indicated otherwise. The assets and liabilities of a discontinued operation held for sale are measured at the lower of the carrying value or fair value less cost to sell.

 

Savings Plan

We have a savings plan that qualifies under Section 401(k) of the Internal Revenue Code. Under our 401(k) plan, eligible employees  may contribute a portion of their pre-tax earnings, subject to certain limitations. As a benefit, we match 100% of each employee’s first 3% of contributions, then 50% of each employee’s contribution beyond 3%, up to a maximum match of 4% of the employee’s eligible earnings. Matching expense related to our savings plan totaled approximately $17 thousand and $16 thousand during the three months ended   June 30, 2022 and  June 30, 2021, respectively. Matching expense totaled approximately $30 thousand and $27 thousand during the six months ended   June 30, 2022 and  June 30, 2021, respectively. 

 

Reclassification

Certain prior year amounts have been reclassified for consistency with the current year presentation. These reclassifications had no effect on the reported results of operations.

 

Recently Issued Accounting Pronouncements  

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The standard significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today's “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. This guidance is effective for annual periods beginning after December 15, 2022, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2018, and interim periods therein. We are currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures.

 

We do not expect other accounting standards that the FASB or other standards-setting bodies have issued to have a material impact on our financial position, results of operations, or cash flows. 

 

 

Note 2 - Acquisitions

 

Business Combinations

 

Snelling Staffing

On March 1, 2021, we completed our acquisition of certain assets of Snelling in accordance with the terms of the Asset Purchase Agreement dated January 29, 2021 (the “Snelling Agreement”). Snelling is a 67-year-old staffing company headquartered in Richardson, TX. Pursuant to the Snelling Agreement, HQ Snelling Corporation (“HQ Snelling”), our wholly-owned subsidiary, acquired substantially all of the operating assets and assumed certain liabilities of the sellers for a purchase price of approximately $17.9 million. Also on March 1, 2021, HQ Snelling entered into the First Amendment to the Purchase Agreement, pursuant to which HireQuest, Inc. agreed to advance $2.1 million to the sellers at closing so the seller could facilitate payment on behalf of HQ Snelling to settle accrued payroll liabilities HQ Snelling assumed pursuant to the Snelling Agreement. Where we assumed franchisor status in this transaction, locations converting to the HireQuest model have subsequently signed our HireQuest franchise agreement but will continue to operate under the Snelling tradename.

 

The following table summarizes the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date. From the date of acquisition through December 31, 2021, adjustments to the fair value of assets acquired and liabilities assumed were adjusted in conjunction with the net working capital reconciliation. These adjustments included an increase in accounts receivable of approximately $1.1 million, a decrease in other current assets of approximately $9 thousand, an increase in current liabilities of approximately $77 thousand, an increase in other liabilities of approximately $217 thousand, and an increase in the bargain purchase gain of approximately $662 thousand. No adjustments were made during 2022.

 

The following table summarizes the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

Cash consideration

 $17,851 
     

Accounts receivable

 $13,418 

Workers' compensation deposit

  7,200 

Franchise agreements

  11,034 

Customer lists

  1,690 

Other current assets

  100 

Workers' compensation claims liability

  (4,891)

Accrued payroll

  (2,100)

Current liabilities

  (740)

Other liabilities

  (2,239)

Bargain purchase

  (5,621)

Purchase price allocation

 $17,851 

 

11

 

The bargain purchase is attributable to the financial position of the seller and because there were few suitable potential buyers. This gain is included in the line item, “Other miscellaneous income (expense),” in our consolidated statement of income.

 

The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Snelling had occurred on January 1, 2020, (b) all of Snelling’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred.  The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $681 thousand and approximately $1.9 million is included in our consolidated statement of income for the three and six months ended June 30, 2022, respectively. 

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 

Total revenue

 $9,288  $5,706  $17,433  $9,920 

Net income

  4,891   2,856   5,494   3,853 

Basic earnings per share

 $0.36  $0.21  $0.40  $0.28 

Basic weighted average shares outstanding

  13,607   13,611   13,591   13,607 

Diluted earnings per share

 $0.36  $0.21  $0.40  $0.28 

Diluted weighted average shares outstanding

  13,691   13,864   13,686   13,834 

 

These calculations reflect increased amortization expense, increased payroll expense, the elimination of gains associated with the transaction, the elimination of transaction related costs, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2020.

 

In connection with the acquisition, we sold the 10 locations that had been company-owned by Snelling located in Bakersfield, CA; Albany, NY; Arlington Heights, IL; Amherst, NY; Dallas, TX; Hayward, CA; Hoffman Estates, IL; Lathrop, CA; Ontario, CA; and Tracy, CA. Two of these locations were sold to franchisees. Four locations were sold to a third-party purchaser. Four offices were sold to a California purchaser (the “California Purchaser”) and operate under the Snelling name pursuant to a license agreement with us. The aggregate sale price for these 10 locations consisted of (i) $1.0 million in the form of a promissory note that bears interest at 6.0% per annum, (ii) the right to receive 1.5% of revenue generated at the Ontario location for the next 12 months, subject to certain conditions being satisfied (the "California Conditions"), (iii) the right to receive 2.5% of revenue generated at the Tracy and Lathrop locations for the next 12 months, subject to the California Conditions, (iv) the right to receive 2.0% of revenue generated at the Princeton location for the next 36 months, and (v) approximately $1 million in cash. There were no remaining company-owned locations at March 31, 2021. One of the California locations operates pursuant to a license agreement whereby the California Purchaser licenses the Snelling trademark and pays us a royalty of 9% of their gross margin. In conjunction with the sale of assets acquired in this transaction, we recognized a gain of approximately $638 thousand which is reflected on the line item, "Other miscellaneous income," in our consolidated statement of income.

 

Temporary Alternatives

On January 24, 2022 we completed our acquisition of certain assets of Temporary Alternatives in accordance with the terms of an Asset Purchase Agreement dated  January 10, 2022, including three locations in West Texas and New Mexico for $7.0 million, inclusive of a prescribed amount of working capital. Temporary Alternatives is a staffing division of dmDickason Personnel Services, a family-owned company based in El Paso, TX. The acquisition of Temporary Alternatives will expand our national footprint into West Texas and grow our franchise base. 

 

The fair values of the assets acquired were determined based on information available to us. From the date of acquisition through June 30, 2022, the fair value of assets acquired were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in customer lists of approximately $375 thousand, a decrease in accounts receivable of approximately $3 thousand, and the recognition of approximately $375 thousand of goodwill. The following table summarizes the revised values of the identifiable assets acquired as of the acquisition date (in thousands). 

 

Cash consideration

 $6,707 

Net working capital payable

  336 

Total consideration

 $7,043 
     

Customer lists

 $4,000 

Accounts receivable

  2,668 

Goodwill

  375 

Purchase price allocation

 $7,043 

 

Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Temporary Alternatives. Goodwill is deductible for income tax purposes.

 

The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Temporary Alternatives had occurred on January 1, 2021, (b) all of Temporary Alternative’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred.  The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $141 thousand and approximately $190 thousand is included in our consolidated statement of income for the three and six months ended June 30, 2022, respectively. 

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 

Total revenue

 $9,288  $5,984  $17,431  $9,665 

Net income

  4,590   2,916   6,237   6,854 

Basic earnings per share

 $0.34  $0.21  $0.46  $0.50 

Basic weighted average shares outstanding

  13,607   13,611   13,591   13,607 

Diluted earnings per share

 $0.34  $0.21  $0.46  $0.50 

Diluted weighted average shares outstanding

  13,691   13,864   13,686   13,834 

 

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.

 

12

 

In connection with the acquisition, we sold certain assets related to the operations of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was approximately $2.9 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.1 million which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income. The franchisee is a related party - see Note 3 - Related Party Transactions for more information regarding the Worlds Franchisees. We provisionally recognized a loss of approximately $1.5 million. Subsequently, 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 the loss of approximately $375 thousand, which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income for the three months ended  June 30, 2022.

 

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 $2.5 million, inclusive of a prescribed amount of working capital. Dubin provides executive placement services and commercial staffing in the Philadelphia metro area. The acquisition of Dubin will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base. 

 

The fair values of the assets acquired were determined based on information available to us. From the date of acquisition through June 30, 2022, the fair value of assets acquired were adjusted in conjunction with a third-party valuation. These adjustments included an increase in customer relationships of approximately $972 thousand, a decrease in customer lists of approximately $772 thousand, and the recognition of approximately $200 thousand of goodwill. The following table summarizes the revised values of the identifiable assets acquired as of the acquisition date (in thousands):

 

Cash consideration

 $2,100 

Note payable & net working capital payable

  362 

Total consideration

 $2,462 
     

Customer relationships

 $1,600 

Customer lists

  200 

Accounts receivable

  462 

Goodwill

  200 

Purchase price allocation

 $2,462 

 

Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Dubin. Goodwill is deductible for income tax purposes.

 

The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Dubin had occurred on January 1, 2021, (b) all of Dubin’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred.  The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $47 thousand and approximately $53 thousand is included in our consolidated statement of income for the three and six months ended June 30, 2022, respectively. 

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 

Total revenue

 $9,288  $7,407  $17,785  $10,564 

Net income

  4,386   3,738   5,466   6,953 

Basic earnings per share

 $0.32  $0.27  $0.40  $0.51 

Basic weighted average shares outstanding

  13,607   13,611   13,591   13,607 

Diluted earnings per share

 $0.32  $0.27  $0.40  $0.50 

Diluted weighted average shares outstanding

  13,691   13,864   13,686   13,834 

 

These calculations reflect increased amortization expense, increased payroll expense, increased SG&A expense, the elimination of losses associated with the transaction, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2021.

 

In connection with the acquisition, we divided Dubin into separate businesses and sold certain assets related to the operations of one of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was $350 thousand. In conjunction with the sale of assets acquired in this transaction, we recognized a gain of approximately $150 thousand which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income. We provisionally recognized a loss of approximately $478 thousand. Subsequently, 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 the loss of approximately $628 thousand, which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income for the three months ended  June 30, 2022. The elimination of the provisional loss resulted in a net gain for the six months ended  June 30, 2022.

 

The remaining assets related to the operations of the other acquired locations have not been sold and as of June 30, 2022 are classified as available-for-sale and the operating results are reported as “Income from discontinued operations, net of tax.” We are actively working to sell these assets. In the meantime, we operate the Philadelphia Snelling franchise as company-owned. The income from discontinued operations amounts as reported on our consolidated statements of income is comprised of the following amounts (in thousands):

 

  

Three months ended

  

Six months ended

 
  June 30, 2022  June 30, 2022 

Revenue

 $426  $580 

Cost of staffing services

  248   330 

Gross profit

  178   250 

SG&A

  1   14 

Net income before tax

  177   236 

Provision for income taxes

  43   57 

Net income

 $134  $179 
 
13

 

Northbound Executive Search

On February 28, 2022 we completed our acquisition of certain assets of Northbound Executive Search, LTD (“Northbound”) in accordance with the terms of an Asset Purchase Agreement dated  January 25, 2022, for approximately $11.4 million, inclusive of a prescribed amount of working capital. Northbound provides executive placement and short-term consultant services primarily to blue chip clients in the financial services industry. The acquisition of Northbound will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base.

 

The fair values of the assets acquired and the liabilities assumed were determined based on information available to us. From the date of acquisition through June 30, 2022, the fair value of assets acquired and liabilities assumes were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in customer relationships of approximately $389 thousand, a decrease in trade name of approximately $111 thousand, an increase in accounts receivable of approximately $308 thousand, a decrease in other current assets of approximately $34 thousand, an increase in other current liabilities of approximately $79 thousand, and the recognition of approximately $500 thousand of goodwill. The following table summarizes the revised values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):

 

Cash consideration

 $9,858 

Note payable

  1,500 

Total consideration

 $11,358 
     

Customer relationships

 $7,700 

Trade name

  1,400 

Accounts receivable

  3,331 

Other current assets

  94 

Goodwill

  500 

Current liabilities assumed

  (1,667)

Purchase price allocation

 $11,358 

 

Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Northbound. Goodwill is deductible for income tax purposes.

 

The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Northbound had occurred on January 1, 2021, (b) all of Northbound's operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred.  The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $351 thousand and approximately $451 thousand is included in our consolidated statement of income for the three and six months ended June 30, 2022, respectively. 

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 

Total revenue

 $9,288  $5,972  $17,621  $9,573 

Net income

  4,579   2,918   6,547   6,806 

Basic earnings per share

 $0.34  $0.21  $0.48  $0.50 

Basic weighted average shares outstanding

  13,607   13,611   13,591   13,607 

Diluted earnings per share

 $0.34  $0.21  $0.48  $0.49 

Diluted weighted average shares outstanding

  13,691   13,864   13,686   13,834 

 

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 $1.5 million scheduled to mature on March 1, 2025 that bears interest at 4.0%. The term loan is unsecured and subordinated to our senior instruments (Truist line of credit and Truist term loan). The Northbound term loan is payable in 36 monthly installments beginning on April 1, 2022 until March 1, 2025. We  may prepay the Northbound term loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment.

 

Immediately after the acquisition, we sold certain assets related to the operations of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate ale price for the operating assets was $6.4 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.3 million which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income. The franchisee is a related party - see Note 3 - Related Party Transactions for more information regarding the Worlds Franchisees. We provisionally recognized a loss of approximately $1.7 million. Subsequently, 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 the loss of approximately $389 thousand, which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income for the three months ended  June 30, 2022.


Asset Acquisitions

 

LINK Staffing

On March 22, 2021, we completed our acquisition of the franchise relationships and similar assets of LINK in accordance with the terms of the Asset Purchase Agreement dated February 12, 2021 (the "LINK Agreement"). LINK is a family-owned staffing company headquartered in Houston, TX. Pursuant to the LINK Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired franchise agreements for approximately 35 locations, and other assets of LINK Staffing for a purchase price of $11.1 million. Substantially all of the locations where we assumed franchisor status in this transaction have subsequently signed our HireQuest franchise agreement and all but one operate under the Snelling tradename. The following table summarizes the estimated fair values of the identifiable assets acquired as of the acquisition date (in thousands):

 

Cash consideration

 $11,123 
     

Franchise agreements

  10,886 

Notes receivable

  237 

Purchase price allocation

 $11,123 

 

14

 

We determined the LINK transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the franchise agreements. Accordingly, no pro forma financial information is presented.

 

We assigned six of the franchise agreements we purchased in the transaction, all located in California, to the California Purchaser. These six franchisees operate pursuant to a LINK trademark sublicense agreement whereby they pay us 9% of the gross margin of their offices in exchange for a sublicense to utilize the LINK tradename. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.9 million which is reflected on the line item, "Other miscellaneous income," in our consolidated statement of income.

 

Recruit Media

On October 1, 2021 we completed our acquisition of Recruit Media in accordance with the Stock Purchase Agreement dated October 1, 2021 (the “Recruit Agreement”). Pursuant to the Recruit Agreement, we purchased all of the outstanding shares of Recruit Media for approximately $4.4 million, subject to customary representations and warranties. Recruit Media was a pre-revenue IT company whose intellectual property will allow us to accelerate improvements to our platform. The following table summarizes the values of the identifiable assets acquired as of the acquisition date (in thousands):

 

Cash consideration

 $3,283 

Liabilities assumed

  1,044 

Transaction costs

  23 

Total consideration

 $4,350 
     

Purchased software

  3,200 

Domain name

  2,226 

Deferred tax liability

  (1,076)

Purchase price allocation

 $4,350 

 

We determined the Recruit Media transaction was an asset acquisition for accounting purposes as it did not meet the definition of a business. Accordingly, no pro forma financial information is presented.

 

Dental Power

On December 6, 2021, we completed our acquisition of the Dental Power Staffing division (“Dental Power”) in accordance with the terms of the Asset Purchase Agreement dated November 2, 2021 (the "Dental Power Agreement") for $1.9 million. DPI is a 46-year-old dental staffing company headquartered in Carrboro, North Carolina. Dental Power is a provider of temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S. The addition of Dental Power brings additional resources and experience to HQI that will help expedite growth into a new staffing vertical.

 

The following table summarizes the values of the identifiable assets acquired as of the acquisition date (in thousands):

 

Cash consideration

 $1,480 

Contingent consideration

  382 

Total consideration

 $1,862 
     

Customer lists

 $1,862 

 

The contingent consideration consists of estimated future payments based on the achievement of performance metrics over the following 3 years.

 

We determined the Dental Power transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the customer list. Accordingly, no pro forma financial information is presented.

 

 

Note 3 - Related Party Transactions

 

Prior to entering into a related party transaction which is disclosable pursuant to Item 404 of Regulation S-K, the Audit Committee reviews all relevant information available. The Audit Committee, in its sole discretion, may approve the related party transaction only if it determines, in good faith and under all circumstances, that the transaction is in the best interests of the Company and its shareholders. The Audit Committee, in its sole discretion, may also impose conditions as it deems appropriate on the Company or the related party in connection with the approval of the related party transaction.

 

Several significant shareholders and directors of HQI also own portions of Jackson Insurance Agency, Bass Underwriters, Inc., Insurance Technologies, Inc., and a number of our franchisees (in whole or in part).

 

Jackson Insurance Agency ("Jackson Insurance") and Bass Underwriters, Inc. ("Bass")

Edward Jackson, a member of our Board and significant stockholder, and a member of Mr. Jackson’s immediate family own Jackson Insurance. Mr. Jackson, Richard Hermanns, our CEO, Chairman of our Board, and most significant stockholder, and irrevocable trusts set up by each of them, collectively own a majority of Bass, a large managing general agent.

 

In March of 2021, we sold approximately $5.3 million of notes receivable to Bass, without recourse. Virtually all of the notes sold to Bass originated from the sale of branch locations acquired in the 2019 merger with Command Center, Inc. These notes were sold at their current outstanding principal value. The proceeds from the sale of these notes were used to help finance the Snelling and LINK transactions.

 

Jackson Insurance and Bass brokered property, casualty, general liability, and cybersecurity insurance for a series of predecessor entities (“Legacy HQ”) prior to the merger with Command Center, Inc. (the “Merger”). Since July 15, 2019, they have continued to broker these same policies for HQI. Jackson Insurance also brokers certain insurance policies on behalf of some of our franchisees, including the Worlds Franchisees (defined below).

 

15

 

During the three months ended  June 30, 2022 and June 30, 2021, Jackson Insurance and Bass invoiced HQI approximately $145 thousand and $0, respectively, for premiums, taxes, and fees related to these insurance policies. During the six months ended  June 30, 2022 and June 30, 2021, Jackson Insurance and Bass invoiced HQI approximately $252 thousand and $584 thousand, respectively, for premiums, taxes, and fees related to these insurance policies. Jackson Insurance and Bass retain a commission of approximately 9% - 15% of premiums.

 

Insurance Technologies, Inc. ("Insurance Technologies")

Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of them, collectively own a majority of Insurance Technologies, an IT development and security firm. On October 24, 2019, HQI entered into an agreement with Insurance Technologies to add certain cybersecurity protections to our existing information technology systems and to assist in developing future information technology systems within our HQ Webconnect software. In addition, Insurance Technologies assisted with the IT diligence and integration process with respect to the Snelling and LINK acquisitions.

 

During the three months ended June 30, 2022 and June 30, 2021, Insurance Technologies invoiced HQI approximately $27 thousand and $90 thousand, respectively, for services provided pursuant to this agreement. During the six months ended June 30, 2022 and June 30, 2021, Insurance Technologies invoiced HQI approximately $37 thousand and $193 thousand, respectively, for services provided pursuant to this agreement. We have retained a full time CIO since June, 2021 and thus spending pursuant to this agreement decreased significantly beginning in the third quarter of 2021.

 

The Worlds Franchisees

Mr. Jackson and immediate family members of Mr. Hermanns have significant ownership interests in certain of our franchisees (the “Worlds Franchisees”). There were 25 Worlds Franchisees at  June 30, 2022 that operated 64 of our 225 offices. Concurrent with the acquisitions of Temporary Alternatives and Northbound, we sold a portion of the assets acquired to entities partially owned by the Worlds Franchisees.  The two franchises and four locations from these acquisitions are included in the numbers above. Gross proceeds from the sale of Temporary Alternatives was $2.9 million and we recognized a loss of $1.1 million. Gross proceeds from the sale of Northbound was $6.4 million and we recognized a loss of $1.3 million.

 

Concurrent with the Snelling acquisition in 2021 we sold the Princeton, NJ assets acquired to an entity partially owned by the Worlds Franchisees. Gross proceeds from the sale of Princeton was $81 thousand and we recognized a gain of $81 thousand.

 

Other transactions regarding the Worlds Franchisees are summarized below (in thousands):

 

  

Three months ended

  

Six months ended

 
  

June 30, 2022

  

June 30, 2021

  

June 30, 2022

  

June 30, 2021

 

Franchisee royalties

 $2,181  $1,164  $4,265  $2,777 

 

Balances regarding the Worlds Franchisees are summarized below (in thousands):

 

  

June 30, 2022

  

December 31, 2021

 

Due to franchisee

 $2,118  $535 

Risk management incentive program liability

  593   703 

 

 

Note 4 - Line of Credit and Term Loans

 

In June 2021, we entered into a loan agreement with Truist Bank (“Truist”) for a $60 million revolving line of credit with a $20 million sublimit for letters of credit and a $3.2 million term loan. The credit facilities are set up to facilitate a syndication of lenders with Truist acting as the administrative agent. The line of credit is subject to a borrowing base that is derived from our accounts receivable, subject to certain reserves and other limitations. Under the agreement, Truist may also make swingline loans available in its discretion. As of June 30, 2022, Truist remains the only lender.

 

All loans made under the line of credit are scheduled to mature on June 29, 2026. The line of credit and swingline loans bear interest at a variable rate equal to: (a) for LIBOR index rate loans, the Daily One Month London Interbank Offering Rate, (“LIBOR”) plus a margin between 1.25% and 1.75% per annum or; (b), for base rate loans, the then applicable base rate plus a margin between 0.25% and 0.75% per annum. The margin is determined based on our average excess availability, which is generally equal to our total collateral less the outstanding balance, if any, under the loan agreement. At  June 30, 2022 the effective interest rate was approximately 3.4%. A non-use fee of 0.25% accrues on the unused portion of the line of credit. As collateral for repayment of any and all obligations under this agreement, we granted Truist a security interest in substantially all of our operating assets and the operating assets of our subsidiaries. This agreement, and other loan documents, contain customary representations and warranties, affirmative and negative covenants, including without limitation, those covenants governing indebtedness, liens, fundamental changes, restrictions on certain payments, including dividends, unless certain conditions are met, transactions with affiliates, investments, and the sale of assets. This agreement requires us to comply with a fixed charge coverage ratio of at least 1.25:1.00, and a leverage ratio of not more than 3.0:1.0, tested monthly on a rolling twelve-month basis. At  June 30, 2022 we were in compliance with these covenants. Our obligations under this agreement are subject to acceleration upon the occurrence of an event of default as defined in the loan agreement.

 

At June 30, 2022, approximately $10.7 million of availability under the line of credit was utilized by outstanding letters of credit that secure our obligations to our workers’ compensation insurance carrier, $500 thousand was utilized by a letter of credit that secures our paycard funding account, and approximately $200 thousand was utilized as a reserve against the Northbound term loan. The Truist loan agreement replaces our prior $30 million line of credit. For additional information related to the letter of credit securing our workers’ compensation obligations see Note 5 - Workers Compensation Insurance and Reserves.

 

The Truist term loan is scheduled to mature on June 29, 2036 and bears interest at a variable rate equal to LIBOR plus a margin of 2.0%. At  June 30, 2022 the effective interest rate was approximately 3.7%. The term loan will be paid in equal monthly installments based upon a 15-year amortization of the original principal amount of the term loan, provided that any remaining principal balance is due and payable in full on the earlier of the date of termination of the commitments on the line of credit and June 29, 2036. The term loan is collateralized by all real property owned by us. The proceeds of approximately $3.2 million were used to pay off our prior credit facility and to pay transaction related fees and expenses. The loan agreement contains hardwired mechanics for the replacement of LIBOR with a rate based upon the secured overnight financing rate (“SOFR”) published by the Federal Reserve Bank of New York or a successor administrator upon LIBOR’s cessation or other benchmark transition event set forth in the loan agreement, together with a spread adjustment.

 

The Truist line of credit and the Truist term loan are cross collateralized, cross defaulted and coterminous.

 

In connection with the Northbound acquisition, we entered into an amortizing term loan from the seller for $1.5 million scheduled to mature on March 1, 2025 that bears interest at 4.0%. The Northbound term loan is unsecured and subordinated to our senior instruments (Truist line of credit and Truist term loan). The Northbound term loan is payable in 36 monthly installments beginning on April 1, 2022 until March 1, 2025. We  may prepay the Northbound term loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment.

 

16

 
 

Note 5 - Workers Compensation Insurance and Reserves

 

Beginning in March 2014, Legacy HQ obtained its workers’ compensation insurance through Chubb Limited and ACE American Insurance Company (collectively, “ACE”), in all states in which it operated, other than monopolistic jurisdictions. The ACE policy was a high deductible policy pursuant to which Legacy HQ had primary responsibility for all claims with ACE providing insurance for covered losses and expenses in excess of $500 thousand per incident. In addition to the ACE policy, Legacy HQ purchased a deductible reimbursement insurance policy from Hirequest Insurance Company (“HQ Ins.”), a captive insurer, to cover losses up to the $500 thousand deductible with ACE. This resulted in Legacy HQ effectively being fully insured during this time period. Effective July 15, 2019, Legacy HQ terminated its deductible reimbursement policy with HQ Ins. We assumed the primary responsibility for all claims up to the deductible occurring on or after July 15, 2019. The primary responsibility for all claims occurring before July 15, 2019 remains with HQ Ins.

 

Command Center, the predecessor entity that acquired Legacy HQ in 2019, also obtained its workers’ compensation insurance through ACE. Pursuant to Command Center’s most recent policy, which expired on March 1, 2020, ACE provided insurance for covered losses and expenses in excess of $500 thousand per incident. Command Center’s ACE policy included a one-time obligation for the Company to pay any single claim filed under the Command Center policy within a policy year that exceeds $500 thousand (if any), but only up to $750 thousand for that claim. All other claims within the policy year were subject to the $500 thousand deductible. Effective July 15, 2019, in connection with the Merger, we assumed all of the workers’ compensation claims of Command Center. We also assumed Command Center’s workers’ compensation policy with ACE.

 

Under these high deductible programs, we are effectively self-insured. Per our contractual agreements with ACE, we must provide collateral deposits of approximately $10.7 million, which we accomplished by providing a letter of credit under our agreement with Truist. For workers’ compensation claims originating in the monopolistic jurisdictions of North Dakota, Ohio, Washington, and Wyoming, we pay workers’ compensation insurance premiums and obtain full coverage under mandatory state administered programs. Our liability associated with claims in these jurisdictions is limited to premium payments based upon the amount of payroll paid within each jurisdiction. Accordingly, our consolidated financial statements reflect only the mandated workers’ compensation insurance premium liability for workers’ compensation claims in these jurisdictions.

 

 

Note 6 - Stockholders Equity

 

Dividend

In the third quarter of 2020, we initiated the payment of a quarterly dividend and intend to continue to pay a quarterly dividend, based on our business results and financial position. The following common share dividends were paid during 2022 and 2021 (total paid in thousands):

 

Declaration date

 

Dividend

   

Total paid

 

March 1, 2021

  $ 0.05     $ 680  

June 1, 2021

    0.06       817  

September 1, 2021

    0.06       822  

December 1, 2021

    0.06       822  

March 1, 2022

    0.06       822  

June 1, 2022

    0.06       827  

 

 

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 1.5 million shares of common stock are available in the aggregate for the grant of awards under the 2019 Plan. No more than 1 million shares may be issued in the aggregate pursuant to the exercise of incentive stock options. In addition, no more than 250 thousand shares may be issued in the aggregate to any employee or consultant, and no more than 50 thousand shares may be issued in the aggregate to any non-employee director in any twelve-month period. Shares of common stock available for distribution under the Plan may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares reacquired by the Company in any manner. The 2019 Plan was approved by our shareholders in June 2020 and became effective as of that date.

 

In September 2019, our Board approved a share purchase match program to encourage ownership and further align the interests of key employees and directors with those of our shareholders. Under this program, we will match 20% of any shares of our common stock purchased on the open market by or granted in lieu of cash compensation to key employees and directors up to $25 thousand in aggregate value per individual within any calendar year. These shares vest on the second anniversary of the date on which the matched shares were purchased if the individual is still employed by the Company and certain other vesting criteria are met. During the first six months of 2022, we issued approximately 6 thousand shares valued at approximately $97 thousand under this program. During the first six months of 2021, we issued approximately 4 thousand shares valued at approximately $61 thousand under this program.

 

In the first six months of 2022, we have issued 7,776 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $138 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these, 6,480 shares vested equally over the following three months. The remaining 1,296 shares were issued pursuant to our share purchase match program. 

 

Also in the first six months of 2022, we have issued 44,871 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $764 thousand to key employees for their services in lieu of cash compensation. Of these, 41,066 shares vested equally over the following three months. The remaining 3,805 shares were issued pursuant to our share purchase match program. In addition, we issued 28,735 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $537 thousand to the vast majority of our workforce for services and to encourage retention. These shares vest on the first anniversary of the date of grant. 

 

17

 

In the first six months of 2021, we issued 42,211 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $845 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these, 40,176 shares vested equally over the following three months. The remaining 2,035 shares were issued pursuant to our share purchase match program. Also in the first six months of 2021, we issued 2,280 shares of restricted common stock to certain Board members and employees pursuant to our share purchase match program valued at approximately $34 thousand.

 

The following table summarizes our restricted stock outstanding at December 31, 2021, and changes during the six months ended June 30, 2022 (number of shares in thousands).

 

  

Shares

  

Weighted average grant date price

 

Non-vested, December 31, 2021

  196  $11.26 

Granted

  82   17.68 

Vested

  (98)  12.14 

Non-vested, June 30, 2022

  180   13.73 

 

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 13 thousand stock options vested at  June 30, 2022 and December 31, 2021.

 

The following table summarizes our stock options outstanding at December 31, 2021, and changes during the six months ended June 30, 2022 (number of shares in thousands).

 

  

Number of shares underlying options

  

Weighted average exercise price per share

  

Weighted average grant date fair value

 

Outstanding, December 31, 2021

  13  $5.47  $2.98 

Granted

  -   -   - 

Outstanding, June 30, 2022

  13   5.47   2.98 

 

There were no non-vested stock options outstanding at June 30, 2022 or at  December 31, 2021.

 

The following table summarizes information about our outstanding stock options, and reflects the intrinsic value recalculated based on the closing price of our common stock of $14.09 at June 30, 2022 (number of shares in thousands). 

 

  

Number of shares underlying options

  

Weighted average exercise price per share

  

Weighted average remaining contractual life (years)

  

Aggregate intrinsic value

 

Outstanding and exercisable

  13  $5.47   5.7  $111 

 

At June 30, 2022, there was unrecognized stock-based compensation expense totaling approximately $1.4 million relating to non-vested restricted stock grants that will be recognized over the next 3.4 years.

 

18

 
 

Note 8 - Commitments and Contingencies

 

Franchise Acquisition Indebtedness

New franchisees financed the purchase of several offices with promissory notes. In some instances, this financing resulted in certain franchises being considered VIEs. We have determined that we are not required to consolidate these entities because we do not have the power to direct these entities’ daily operations. If these franchises default on these notes, we bear the risk of loss of the outstanding balance on these notes, less what we could recoup from the potential resale of the repossessed office. The balance due from the franchises determined to be VIEs was approximately $3.1 million and $2.9 million on  June 30, 2022 and December 31, 2021, respectively.

 

Legal Proceedings

From time to time, we are involved in various legal and administrative proceedings. Based on information currently available to us, we do not expect material uninsured losses to arise from any of these matters. We believe the outcome of these matters, even if determined adversely, will not have a material adverse effect on our business, financial condition or results of operations. There have been no material changes in our legal proceedings as of June 30, 2022.

 

Note 9 - Income Tax

 

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year and changes in tax law and tax rates. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes.

 

Our effective tax rate for continuing operations during the three months ended  June 30, 2022 and  June 30, 2021 was 15.1% and 20.1%, respectively. Our effective tax rate for continuing operations during the six months ended  June 30, 2022 and  June 30, 2021 was 14.9% and 1.3%, respectively. The bulk of the difference between the statutory federal income tax rate of 21.0% and our effective income tax rate results from the bargain purchase gain, which is recorded net of deferred taxes and is treated as a permanent difference, and the federal Work Opportunity Tax Credit, which is designed to encourage employers to hire workers from certain targeted groups with higher-than-average unemployment rates. Other differences result from state income taxes, certain non-deductible expenses, and tax effects of stock-based compensation.

 

We use an intra-period tax allocation is to allocate total income tax expense (or benefit) to the different components of continuing operations and discontinued operations.  This allocation uses a with and without methodology to determine income tax expense for discontinued operations. Tax expense allocated to discontinued operations was $43 thousand for the three months ended June 30, 2022, and $57 thousand for the six months ended June 30, 2022.  There were no discontinued operations in 2021.

 

Note 10 - Notes Receivable

 

Notes from Franchisees

Several franchisees borrowed funds from us primarily to finance the initial purchase price of office assets, including intangible assets.

 

Notes outstanding, net of allowance for losses, were approximately $4.0 million and $3.9 million as of  June 30, 2022 and December 31, 2021, respectively. Notes receivable generally bear interest at a fixed rate between 6.0% and 10.0%. Notes receivable are generally secured by the assets of each office and the ownership interests in the franchise. We report interest income on notes receivable as other miscellaneous income in our consolidated statements of operations. Interest income was approximately $54 thousand and $96 thousand during the three months ended  June 30, 2022 and June 30, 2021, respectively. Interest income was approximately $147 thousand and $231 thousand during the six months ended  June 30, 2022 and June 30, 2021, respectively.

 

We estimate the allowance for losses for franchisees separately from the allowance for losses from non-franchisees because of the level of detailed sales information available to us with respect to the former. Based on our review of the financial condition of the borrowers, the underlying collateral value, and the potential future impact of  the economy on certain borrowers’ economic performance and estimated future cash flows, we have established an allowance of approximately $405 thousand as of  June 30, 2022 and  December 31, 2021 for potentially uncollectible notes receivable from franchisees.

 

The following table summarizes our notes receivable balance to franchisees (in thousands):

 

  

June 30, 2022

  

December 31, 2021

 

Note receivable

 $4,352  $4,268 

Allowance for losses

  (405)  (405)

Notes receivable, net

 $3,947  $3,863 

 

19

 

Notes from Non-Franchisees

In connection with the Snelling acquisition, we sold certain California locations that had been company-owned by Snelling to the California purchaser (the “California Purchaser”). These locations are permitted to operate under the Snelling trademark pursuant to a license agreement paying us a royalty of 9% of their gross margin. The aggregate sale price for these locations consisted of cash, a promissory note that bears interest at 6.0% per annum, plus the right to receive a portion of revenue generated, subject to certain conditions being satisfied (the "California Conditions"). Similarly, in connection with the LINK acquisition, we assigned certain franchise agreements we purchased in the transaction, all located in California, to the California Purchaser. These franchisees operate pursuant to a LINK trademark sublicense agreement whereby they pay us 9% of the gross margin of their offices in exchange for a sublicense to utilize the LINK tradename. 

 

During 2020, the California Purchaser experienced significant economic hardships due to the impacts of COVID-19 and the related government mandates in the state. As a result, we restructured a portion of the notes receivable in an effort to increase the probability of repayment. We granted near-term payment concessions to help the debtor attempt to improve its financial condition so it may eventually be able to repay the amount due. During the three months ended  June 30, 2022 we have been asked to provide a third forbearance agreement and avoid foreclosure action.  We are currently negotiating the terms and conditions related to that agreement. As part of the forbearance we will likely have to forgive additional payments due on the notes. After reviewing the potential outcomes, we recorded an additional impairment of approximately $233 thousand at June 30, 2022, bringing the note balance down to approximately $71 thousand, which we expect to collect before the end of 2022.

 

For notes to non-franchisees, we recognized interest income on this note of approximately $-0- and $96 thousand during the three months ended  June 30, 2022 and June 30, 2021, respectively. We recognized interest income on this note of approximately $41 thousand and $231 thousand during the six months ended  June 30, 2022 and June 30, 2021, respectively.

 

The following table summarizes our non-franchisee note receivable balance that has been deemed impaired (in thousands):

 

  

June 30, 2022

  

December 31, 2021

 

Note receivable

 $1,805  $1,805 

Allowance for losses

  (1,734)  (1,501)

Notes receivable, net

 $71  $304 

 

20

 
 

Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021. The financial position, results of operations, cash flows and other information included herein are not necessarily indicative of the financial position, results of operations and cash flows that may be expected in future periods. See "Special Note Regarding Forward-Looking Statements" below for a discussion of uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additionally, we use a non-GAAP financial measure and a key performance indicator to evaluate our results of operations. For important information regarding the use of such non-GAAP measure, including a reconciliation to the most comparable GAAP measure, see the section titled "Use of Non-GAAP Financial Measure: Adjusted EBITDA" below. For important information regarding the use of such key performance indicator, see the section titled “Key Performance Indicator: System-Wide Sales” below.

 

Special Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q and other documents incorporated herein by reference include, and our officers and other representatives may sometimes make or provide, certain estimates and other forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act, including, among others, statements with respect to future revenue, franchise sales, system-wide sales, and the growth thereof; net income and Adjusted EBITDA (a Non-GAAP Financial Measure); the impact of any global pandemic including COVID-19; operating results; dividends and shareholder returns; anticipated benefits of mergers or acquisitions; intended office openings or closings; expectations of the effect on our financial condition of claims and litigation; strategies for customer retention and growth; strategies for risk management; and all other statements that are not purely historical and that may constitute statements of future expectations. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and similar references to future periods.

 

While we believe these statements are accurate, forward-looking statements are not historical facts and are inherently uncertain. They are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. We cannot assure you that these expectations will materialize, and our actual results may be significantly different. Therefore, you should not place undue reliance on these forward-looking statements. Important factors that may cause actual results to differ materially from those contemplated in any forward-looking statements made by us include the following: the level of demand and financial performance of the temporary staffing industry; the financial performance of our franchisees; our and our franchisees’ customers’ ability to navigate successfully the challenges posed by current global supply disruptions and inflation, including with respect to energy prices; the impacts of COVID-19 or other diseases or pandemics; changes in customer demand; the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones, the level of service failures that could lead customers to use competitors’ services; significant investigative or legal proceedings including, without limitation, those brought about by the existing regulatory environment or changes in the regulations governing the temporary staffing industry and those arising from the action or inaction of our franchisees and temporary employees; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses; disruptions to our technology network including computer systems and software whether resulting from a cyber-attack or otherwise; natural events such as severe weather, fires, floods, and earthquakes, or man-made or other disruptions of our operating systems or the economy including by war; the factors discussed in the “Risk Factors” section in our most recent Annual Report on Form 10-K, which we filed with the SEC on March 15, 2022; and the other factors discussed in this Quarterly Report and our Annual Report.

 

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. The Company disclaims any obligation to update or revise any forward-looking statement, whether written or oral, that may be made from time to time, based on the occurrence of future events, the receipt of new information, or otherwise, except as required by law.

 

 

Overview

We are a nationwide franchisor of offices providing direct-dispatch and commercial staffing solutions in the light industrial and blue-collar segments of the staffing industry and traditional commercial staffing. Our franchisees provide various types of temporary personnel through two business models operating under the trade names “HireQuest Direct”, “HireQuest”, “Snelling”, “LINK Staffing”, “DriverQuest”, “HireQuest Health”, and “Northbound Executive Search”. HireQuest Direct specializes primarily in unskilled and semi-skilled industrial and construction personnel. HireQuest, Snelling, and LINK specialize primarily in skilled and semi-skilled industrial personnel, clerical and administrative personnel, and permanent placement services. DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications. HireQuest Health specializes in skilled personnel in the medical and dental industries. Northbound Executive Search specializes in executive placement and consultant services in the financial services industry. As of June 30, 2022 we had 223 franchisee-owned offices and 2 company owned offices in 38 states and the District of Columbia. We provide employment for an estimated 75,000 temporary employees annually working for thousands of clients in many industries including construction, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, and retail.

 

The COVID-19 pandemic materially adversely impacted our business in 2020 and, to a much lesser extent, into 2021. Comparisons between 2022 and 2021 should be viewed through a COVID-19 lens with the understanding that for the six-month period ended June 30, 2021 our revenues and expenses were impacted by COVID and lower than they otherwise would have been. A full economic recovery has been slow to occur, and it is uncertain if businesses will remain fully open, or another broad shutdown will occur due to a variant or new strain. The long-term effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, and government vaccination efforts, is also uncertain. Also affecting comparisons between 2022 and 2021 were the acquisitions consummated in 2021 and 2022 as described below.

 

Recent Developments

 

The Snelling Acquisition

On March 1, 2021, we completed our acquisition of certain assets of Snelling Staffing ("Snelling") in accordance with the terms of the Asset Purchase Agreement dated January 29, 2021 (the “Snelling Agreement”). At the time of acquisition, Snelling Staffing was a 67-year-old staffing company headquartered in Richardson, TX. Pursuant to the Snelling Agreement, HQ Snelling Corporation (“HQ Snelling”), our wholly-owned subsidiary, acquired approximately 47 offices and substantially all of the operating assets, and assumed certain liabilities of the sellers for a purchase price of $17.9 million, subject to customary adjustments for net working capital plus further adjustment of $7.2 million of collateral released to the sellers by their workers' compensation insurer (the "Snelling Acquisition"). Also on March 1, 2021, HQ Snelling entered into the First Amendment to the Purchase Agreement, pursuant to which HireQuest, Inc. agreed to advance $2.1 million to be paid to the sellers at closing to be used to pay accrued payroll liabilities that HQ Snelling assumed pursuant to the Snelling Agreement. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist Bank ("Truist").

 

The LINK Acquisition

On March 22, 2021, we completed our acquisition of the franchise relationships and certain other assets of LINK Staffing (“LINK”) in accordance with the terms of the Asset Purchase Agreement dated February 12, 2021 (the "LINK Agreement"). At the time of acquisition LINK was a family-owned staffing company headquartered in Houston, TX. Pursuant to the LINK Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired approximately 35 franchised offices, customer lists and contracts, and other assets of LINK for a purchase price of $11.1 million (the "LINK Acquisition"). We funded this acquisition with existing cash on hand.

 

The Recruit Media Acquisition

On October 1, 2021 we completed our acquisition of Recruit Media, Inc. (“Recruit Media”) in accordance with the terms of the Stock Purchase Agreement dated October 1, 2021 (the “Recruit Agreement”). Pursuant to the Recruit Agreement, we purchased all of the outstanding shares of common stock of Recruit Media for approximately $4.4 million. Recruit Media is a tuck-in acquisition whose intellectual property compliments our technological structure, allowing us to accelerate improvements to our platform. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.

 

The Dental Power Acquisition

On December 6, 2021 we completed our acquisition of the Dental Power Staffing division ("Dental Power") of Dental Power International, Inc. (“DPI”) in accordance with the terms of a definitive agreement, dated November 2, 2021, for approximately $1.9 million. DPI is a 46-year-old dental staffing company headquartered in Carrboro, North Carolina with long-standing client relationships in the dental industry. providing temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S. As of June 30, 2022, all of the operations acquired from DPI remain company owned. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.

 

The Temporary Alternatives Acquisition

On January 24, 2022 we completed our acquisition of certain assets of Temporary Alternatives in accordance with the terms of the Asset Purchase Agreement dated  January 10, 2022 , including three locations in West Texas and New Mexico for approximately $7.0 million, inclusive of a prescribed amount of working capital. Temporary Alternatives is a staffing division of dmDickason Personnel Services, a family-owned company based in El Paso, TX. The acquisition of Temporary Alternatives will expand our national footprint into West Texas and grow our franchise base, and we immediately entered into a franchise agreement and sold the non-working capital assets acquired. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.

 

The Dubin Acquisition

On February 21, 2022 we completed our acquisition of the staffing operations of The Dubin Group, Inc., and Dubin Workforce Solutions, Inc. (collectively “Dubin”) in accordance with the terms of an Asset Purchase Agreement dated January 19, 2022  for approximately $2.5 million, inclusive of a prescribed amount of working capital. Dubin provides executive placement services and commercial staffing in the Philadelphia metro area. The acquisition of Dubin will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base. We funded this acquisition with existing cash on hand, deferred purchase payments, and a draw on our existing line of credit with Truist. We divided Dubin into separate businesses and sold certain customer related assets of one of the acquired locations to a new franchisee. The remaining assets related to the operations of the other acquired locations have not been sold and as of June 30, 2022 are classified as available-for-sale. In the meantime, we operate the Philadelphia Snelling franchise as company-owned.

 

The Northbound Acquisition

On February 28, 2022 we completed our acquisition of certain assets of Northbound Executive Search, LTD (“Northbound”) in accordance with the terms of an Asset Purchase Agreement dated January 25, 2022, for approximately $11.4 million, inclusive of a prescribed amount of working capital. Northbound provides executive placement and short-term consultant services primarily to blue chip clients in the financial services industry. The acquisition of Northbound will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base, and we immediately entered into a franchise agreement and sold the customer-related assets acquired. We funded this acquisition with existing cash on hand, seller financing of $1.5 million, and a draw on our existing line of credit with Truist.

 

 

Results of Operations

 

Financial Summary

The following table displays our consolidated statements of operations for the interim periods ended June 30, 2022 and June 30, 2021. Percentages reflect the line item as a percentage of total revenue (in thousands, except percentages).

 

   

Three months ended

   

Six months ended

 
   

June 30, 2022

   

June 30, 2021

   

June 30, 2022

   

June 30, 2021

 

Franchise royalties

  $ 7,220       77.7 %   $ 5,451       95.5 %   $ 13,793       79.1 %   $ 8,710       95.6 %

Staffing revenue, owned locations

    1,288       13.9 %     -       0.0 %     2,392       13.7 %     -       0.0 %

Service revenue

    780       8.4 %     256       4.5 %     1,248       7.2 %     399       4.4 %

Total revenue

    9,288       100.0 %     5,707       100.0 %     17,433       100.0 %     9,109       100.0 %

Cost of staffing revenue, owned locations

    947       10.2 %     -       0.0 %     1,709       9.8 %     -       0.0 %

Gross profit

    8,341       89.8 %     5,707       100.0 %     15,724       90.2 %     9,109       100.0 %

Selling, general and administrative expenses

    3,530       38.0 %     2,041       35.8 %     6,367       36.5 %     5,882       64.6 %

Depreciation and amortization

    610       6.6 %     366       6.4 %     1,176       6.7 %     699       7.7 %

Income from operations

    4,201       45.2 %     3,300       57.8 %     8,181       46.9 %     2,528       27.8 %

Other miscellaneous income

    1,458       15.7 %     30       0.5 %     (1,922 )     (11.0 )%     3,811       41.8 %

Interest income

    54       0.6 %     96       1.7 %     147       0.8 %     231       2.5 %

Interest and other financing expense

    (109 )     (1.2 )%     (20 )     (0.4 )%     (157 )     (0.9 )%     (25 )     (0.3 )%

Net income before income taxes

    5,604       60.3 %     3,406       59.7 %     6,249       35.8 %     6,545       71.9 %

Provision for income taxes

    847       9.1 %     686       12.0 %     934       5.4 %     83       0.9 %

Net income from continuing operations

    4,757       51.2 %     2,720       47.7 %     5,315       30.5 %     6,462       70.9 %

Income from discontinued operations, net of tax

    134       1.4 %     -       0.0 %     179       1.0 %     -       0.0 %

Net income

  $ 4,891       52.7 %   $ 2,720       47.7 %   $ 5,494       31.5 %   $ 6,462       70.9 %

Non-GAAP data

                                                               

Adjusted EBITDA

  $ 5,913       63.7 %   $ 4,407       77.2 %   $ 11,220       64.4 %   $ 5,940       65.2 %

 

Use of Non-GAAP Financial Measure: Adjusted EBITDA

 

Earnings before interest, taxes, depreciation and amortization, and non-cash compensation, or Adjusted EBITDA, is a non-GAAP measure that represents our net income before interest expense, income tax expense, depreciation and amortization, non-cash compensation, compliance costs related to the work opportunity tax credit (“WOTC”) and other charges we consider unusual and/or non-recurring. We utilize Adjusted EBITDA as a financial measure as management believes investors find it a useful tool to perform more meaningful comparisons and evaluations of past, present, and future operating results. We believe it is a complement to net income and other financial performance measures. Adjusted EBITDA is not intended to represent or replace net income as defined by U.S. GAAP and should not be considered as an alternative to net income or any other measure of performance prescribed by U.S. GAAP. We use Adjusted EBITDA to measure our financial performance because we believe interest, taxes, depreciation and amortization, non-cash compensation, WOTC-related costs and other non-recurring charges bear little or no relationship to our operating performance. By excluding interest expense, Adjusted EBITDA measures our financial performance irrespective of our capital structure or how we finance our operations. By excluding taxes on income, we believe Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding factors that are beyond our control. By excluding depreciation and amortization expense, Adjusted EBITDA measures the financial performance of our operations without regard to their historical cost. By excluding non-cash compensation, Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the value of our restricted stock and stock option awards. By excluding WOTC related costs, Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the costs associated with qualifying for this tax credit. In addition, by excluding certain non-recurring charges, Adjusted EBITDA provides a basis for measuring financial performance without such items. In addition, our Credit Agreement requires us to comply with a fixed charge coverage ratio and a leverage ratio, both of which include Adjusted EBITDA substantially as defined above. For all of these reasons, we believe that Adjusted EBITDA provides us, and investors, with information that is relevant and useful in evaluating our business.

 

However, because Adjusted EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed and intangible assets. In addition, because Adjusted EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt, nor does it show trends in interest costs due to changes in our financing or changes in interest rates. Adjusted EBITDA, as defined by us, may not be comparable to Adjusted EBITDA as reported by other companies that do not define Adjusted EBITDA exactly as we define the term. Because we use Adjusted EBITDA to evaluate our financial performance, we reconcile it to net income, which is the most comparable financial measure calculated and presented in accordance with U.S. GAAP below (in thousands).

 

 

   

Three months ended

   

Six months ended

 
   

June 30, 2022

   

June 30, 2021

   

June 30, 2022

   

June 30, 2021

 

Net income

  $ 4,891     $ 2,720     $ 5,494     $ 6,462  

Interest expense

    109       20       157       25  

Provision for income taxes

    847       686       934       83  

Depreciation and amortization

    610       366       1,176       699  

WOTC related costs

    163       146       295       239  

EBITDA

    6,620       3,938       8,056       7,508  

Non-cash compensation

    364       301       610       569  

Acquisition related charges, net

    (1,304 )     168       2,321       (2,137 )

Impairment of notes receivable

    233       -       233       -  

Adjusted EBITDA

  $ 5,913     $ 4,407     $ 11,220     $ 5,940  

 

Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021

 

Gross Profit

Our total revenue consists of franchise royalties, staffing revenue with respect to our owned locations, and service revenue. Gross profit includes total revenue less the cost of staffing services at owned locations. Once a company-owned office is sold, disposed of, or otherwise classified as available-for-sale, it would not be reflected in gross profit and instead reported as “Income from discontinued operations, net of tax.”

 

Gross profit for the three months ended June 30, 2022 was approximately $8.3 million compared to $5.7 million for the three months ended June 30, 2021, an increase of 46.2%. Gross profit as a percentage of system-wide sales was 6.9% for the three months ended June 30, 2022 versus 6.4% for the three months ended June 30, 2021.  The 60-basis point improvement was primarily due to increased service revenue and the Gross Profit from the company owned locations.

 

Franchise Royalties

Franchise royalties for the three months ended June 30, 2022 were approximately $7.2 million, an increase of 32.5% from $5.5 million for the three months ended June 30, 2021. This increase is consistent with the 33.7% increase in underlying system-wide-sales for the quarter ended June 30, 2022 compared to the prior year quarter. Approximately $418 thousand of this increase in royalties was due to the Snelling, LINK, Northbound, Temporary Alternatives and Dubin acquisitions and approximately $1.4 million was due to organic growth. Our net effective royalty rate (as a percentage of external system-wide sales) held steady at 6.1% for the three-month period ended June 30, 2022 and 2021.  Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models we operate under, as well as incentives we offer during the year. A summary of franchise royalties for the three months ended June 30, 2022 and June 30, 2021 are as follows (in thousands):

 

   

Three months ended

 
   

June 30, 2022

   

June 30, 2021

 

Franchise royalties from pre-existing locations

  $ 4,673     $ 3,322  

Franchise royalties from 2021 acquisitions

    2,008       2,129  

Franchise royalties from 2022 acquisitions

    539       -  

Franchise royalties

  $ 7,220     $ 5,451  

 

Service Revenue

Service revenue consists of interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. Direct costs to provide certain services are reflected as a reduction in service revenue. As accounts receivable age over 42 days, our franchisees pay us interest on these accounts equal to 0.5% of the amount of the uncollected receivable each 14-day period. Accounts that age over 84 days are charged back to the franchisee and no longer incur interest. Some of our franchisees elect to charge back accounts that age over 42 days in order to avoid the interest charge. In addition to royalty fees, we also charge a license fee to some locations that utilize our intellectual property that are not franchisees. License fees are 9% of the gross margin for the location. We have no employees and provide no services at the licensed locations.

 

Service revenue for the three months ended June 30, 2022 was approximately $780 thousand, an increase of $524 thousand from the three months ended June 30, 2021, when service revenue was approximately $256 thousand. This increase was largely due to the growth in the number of franchisee locations and corresponding service-related fees. Due to the timing of certain services and the related costs to provide them, we have incurred a disproportionate amount of service revenue in the three months ended June 30, 2022 and do not expect the same trend to continue in the next two quarters. The remaining increase relates to interest and follows the overall increase in accounts receivable, although relatively few age over 42 days and result in service revenue for us. Many of our franchisees have elected to charge back accounts early in order to avoid the interest charge. Therefore, there will not be a proportionally large increase in service revenue even when there is a large increase in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely. The Company does not strive to increase interest on aged accounts receivable.

 

Staffing Revenue, Owned Locations

Following the December 2021 acquisition of Dental Power, we have a platform to build a customer base in the dental-oriented sector of the staffing industry, which we expect will benefit our entire system by increasing revenue opportunities under the HireQuest Health brand. As of June 30, 2022, all of the operations acquired from DPI remain company owned, but franchisees in 19 locations are operating under the HireQuest Health banner. Although we may franchise Dental Power operations in the future, we currently have no firm plans in place to do so. For the three months ended June 30, 2022, staffing revenue from owned locations was $1.3 million. We had no company owned locations during the three months ended June 30, 2021.  

 

Selling, General, and Administrative Expenses

SG&A expenses for the three months ended June 30, 2022 were approximately $3.5 million, an increase from $2.0 million for the three months ended June 30, 2021. The increase in SG&A expenses primarily relates to salaries and benefits, which increased $766 thousand as a result of additional headcount to keep pace with growth in system-wide sales as a result of the 2021 and 2022 acquisitions, plus organic growth. In addition, Compensation expense in the three months ended June 30, 2022 includes an accrual of approximately $303 thousand for executive bonuses. There was no such accrual in the three months ended June 30, 2021. Compensation-related expenses remain by far the largest component of SG&A.

 

For the three months ended June 30, 2022, SG&A also includes a $233 thousand impairment charge related to notes receivable due from non-franchisees. During 2020, the California Purchaser experienced significant economic hardships due to the impacts of COVID-19 and the related government mandates in the state. As a result, we restructured a portion of the notes receivable in an effort to increase the probability of repayment. We granted near-term payment concessions to help the debtor attempt to improve its financial condition so it may eventually be able to repay the amount due. During the three months ended June 30, 2022 we were asked to provide a third forbearance agreement and avoid foreclosure action.  We are currently negotiating the terms and conditions related to that agreement. As part of the forbearance we will likely have to forgive additional payments due on the notes. After reviewing the potential outcomes, we recorded an additional impairment of approximately $233 thousand at June 30, 2022, bringing the note balance down to approximately $71 thousand, which we expect to collect before the end of 2022.

 

 

Other Income and Expense

Other income and expense consists of depreciation, amortization, interest income, rent received from sub-tenants, and other non-operating income and expense.  
 
Depreciation and amortization
Depreciation and amortization for the three months ended June 30, 2022 was approximately $610 thousand compared to $366 thousand for the three months ended June 30, 2021. We own our corporate headquarters, a building of approximately 15,000 square feet, in Goose Creek, South Carolina. This building serves as our base of operations for nearly all of the employees who provide franchisee support functions. In late 2021, we completed the construction of a 10,000 square foot building adjacent to our corporate headquarters and a supporting parking lot. Depreciation increased by approximately $19 thousand in the three months ended June 30, 2022 due to this addition. The remaining increase of $225 thousand was primarily due to additional amortization stemming from acquisitions. We acquired $21.9 million of franchise agreements and $9.0 million of other intangibles in acquisitions during 2021 and $14.9 million of other intangibles in acquisitions during 2022 (excluding Goodwill). Of the $23.9 million in other intangibles over the two years, only $3.6 million are indefinite lived and not amortized. Future years will continue to have significant amortization expense until the underlying intangibles are disposed of, impaired or fully amortized. Future acquisitions are expected to further increase tangible and intangible assets on our balance sheet, and correspondingly increase depreciation and amortization.
 
Other income and expense
For the three months ended June 30, 2022, other miscellaneous income was approximately $1.5 million, compared to income of $30 thousand for the three months ended June 30, 2021. In the three months ended June 30, 2022, we recognized approximately $1.4 million in gains resulting from the conversion of the Temporary Alternatives, Dubin and Northbound acquisitions to franchises. The gain is actually a partial reversal of the $3.6 million loss recognized in the first quarter of 2022 due to valuation adjustments as the accounting for those transactions was being finalized.
 
The remaining other miscellaneous income for the three months ended June 30, 2022, and income for the three months ended June 30, 2021, is primarily gross rents from leasing excess space at our corporate headquarters to third parties. We lease approximately 3,220 square feet of office space in our headquarters to unaffiliated companies. These leases are at the market rate. Rental income for the three months ended June 30, 2022 is higher than the three months ended June 30, 2021 after completion of the new building adjacent to our corporate headquarters.
 
Interest income and expense
Interest income for the three months ended June 30, 2022 was approximately $54 thousand compared to $96 thousand for the three months ended June 30, 2021. Interest income represents interest related to the financing of franchised locations, and one note to the California Purchaser. The decrease is primarily related to stopping the accrual of interest on the impaired notes to non-franchisees.
 
Interest and other financing expense relates primarily to the Revolving Credit and Term Loan Agreement with Truist. Interest and other financing expense increased from $20 thousand at June 30, 2021 to $109 thousand at June 30, 2022. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. Due to the acquisitions in the first quarter of 2022, we carried a larger balance on our line of credit for most of the quarter ended June 30, 2022.
 
Provision for income tax
Income tax expense was approximately $847 thousand for the three months ended June 30, 2022. We estimate an annual projected effective tax rate (ETR) for the year to determine income tax expense (benefit) in the interim periods. The estimated annual ETR does not include tax effects from significant unusual or infrequently occurring items. Such items are accounted for discretely during the period in which they occur. The ETR is primarily driven by the federal Work Opportunity Tax Credit, which is included as part of income tax expense because it can be claimed only on the income tax return and can be realized only through the existence of taxable income. Other significant items affecting our tax rate are  and windfall tax deductions related to stock-based compensation, overall limits on executive compensation.  Our ETR for the three months ended June 30, 2022 was 15.1%.
 
Income tax expense for the three months ended June 30, 2021 was approximately $686 thousand. The annual ETR included the non-taxable bargain purchase gain recognized in 2021. Bargain purchase gains are recorded net of deferred taxes, and are treated as permanent differences, resulting in a lower ETR in the period recorded. Our ETR for the three months ended June 30, 2021 was 20.1%.
 
Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
 
Gross Profit
Our total revenue consists of franchise royalties, staffing revenue with respect to our owned locations, and service revenue. Gross profit includes total revenue less the cost of staffing services at owned locations. Once a company-owned office is sold, disposed of, or otherwise classified as available-for-sale, it would not be reflected in gross profit and instead reported as “Income from discontinued operations, net of tax.”
 
Gross profit for the six months ended June 30, 2022 was approximately $15.7 million compared to $9.1 million for the six months ended June 30, 2021, an increase of 72.6%. This increase is consistent with the 51.6% increase in underlying system-wide-sales for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. In addition, the net effective royalty rate was higher in the six months ended June 30, 2022 than it was in the six months ended June 30, 2021. Gross profit as a percentage of system-wide sales was 7.1% for the six-month period ended June 30, 2022 versus 6.2% for the six months ended June 30, 2021. The 90-basis point improvement was primarily due to increased service revenue and the Gross Profit from the company-owned location.
 
Franchise Royalties
Franchise royalties for the six months ended  June 30, 2022 were approximately $13.8 million, an increase of 58.4% from $8.7 million for the six months ended June 30, 2021. Approximately $3.3 million of this increase in royalties was due to th e Snelling and LINK acquisitions and approximately $1.8 million was due to organic growth. Our net effective royalty rate (as a percentage of external system-wide sales) increased from 6.0% for the six months ended June 30, 2021 to 6.3% for the six months ended June 30, 2022.  Our net effective royalty rate will fluctuate due to mix of business among the various royalty models we offer and will generally be higher in the early portion of the year until volume related discounted rates become effective. A summary of franchise royalties for the six months ended  June 30, 2022 and  June 30, 2021 are as follows (in thousands):
 
   

Six months ended

 
   

June 30, 2022

   

June 30, 2021

 

Franchise royalties from pre-existing locations

  $ 8,400     $ 6,553  

Franchise royalties from 2021 acquisitions

    4,699       2,157  

Franchise royalties from 2022 acquisitions

    694       -  

Franchise royalties

  $ 13,793     $ 8,710  

 

Service Revenue

Service revenue consists of interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. Direct costs to provide certain services are reflected as a reduction in Service Revenue. As accounts receivable age over 42 days, our franchisees pay us interest on these accounts equal to 0.5% of the amount of the uncollected receivable each 14-day period. Accounts that age over 84 days are charged back to the franchisee and no longer incur interest. Some of our franchisees elect to charge back accounts that age over 42 days in order to avoid the interest charge. In addition to royalty fees, we also charge a license fee to some locations that utilize our intellectual property that are not franchisees. License fees are 9% of the gross margin for the location. We have no employees and provide no services at the licensed locations. These license fees are included in service revenue.
 
Service revenue for the six months ended  June 30, 2022 was approximately $1.2 million, an increase from approximately $399 thousand for the six months ended June 30, 2021. This increase was largely due to the introduction of trademark license fees after the March 2021 Acquisitions. In addition, we experienced strong growth in the number of franchisee locations and the related service-related fees. Due to the timing of certain services and the related costs to provide them, we have incurred a disproportionate amount of service revenue in the first half of 2022 and do not expect the same trend to continue in the last two quarters. The remaining increase relates to interest and follows the overall increase in accounts receivable, although relatively few age over 42 days and result in service revenue for us. In addition, for the six months ended June 30, 2022, several franchisees elected to charge back accounts early in order to avoid the interest charge. Therefore, there will not be a proportionally large increase in service revenue even when there is a large increase in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely. The Company does not strive to increase interest on aged accounts receivable.
 
Staffing Revenue, Owned Locations
Following the December 2021 acquisition of Dental Power, we have a platform to build a customer base in the dental-oriented sector of the staffing industry, which we expect will benefit our entire system by increasing revenue opportunities under the HireQuest Health brand. As of June 30, 2022, all of the operations acquired from DPI remain company owned.  Although we may franchise these operations in the future, we currently have no firm plans in place to do so. For the six months ended June 30, 2022, staffing revenue from owned locations was approximately $2.4 million. We had no company owned locations during the six months ended June 30, 2021.  
 
Selling, General, and Administrative Expenses 
SG&A expenses for the six months ended  June 30, 2022 were approximately $6.4 million, an increase of 8.3% from $5.9 million for the six months ended June 30, 2021. The increase in SG&A expenses primarily relates to salaries and benefits, which increased approximately $590 thousand as a result of additional headcount to keep pace with growth in system-wide sales as a result of the 2021 and 2022 acquisitions, plus the organic growth. In addition, compensation expense in the six months ended  June 30, 2022 includes an accrual of approximately $657 thousand for executive bonuses. There was no such accrual in the six months ended June 30, 2021, although the six months ended June 30, 2021  includes the entire 2020 executive bonus of $1.1 million. We have historically recognized discretionary bonuses in the first quarter of the fiscal year following the year to which the bonus related.  Beginning in the fourth quarter of 2021, we changed our methodology and now recognize the expense during the year to which the bonus relates, resulting in the accrual described in the preceding sentence.
 
For the six months ended  June 30, 2022, SG&A also includes a $233 thousand impairment charge related to notes receivable due from non-franchisees. During 2020, the California Purchaser experienced significant economic hardships due to the impacts of COVID-19 and the related government mandates in the state. As a result, we restructured a portion of the notes receivable in an effort to increase the probability of repayment. We granted near-term payment concessions to help the debtor attempt to improve its financial condition so it may eventually be able to repay the amount due. During the three months ended June 30, 2022 we were asked to provide a third forbearance agreement and avoid foreclosure action.  We are currently negotiating the terms and conditions related to that agreement. As part of the forbearance we will likely have to forgive additional payments due on the notes. After reviewing the potential outcomes, we recorded an additional impairment of approximately $233 thousand at June 30, 2022 , bringing the note balance down to approximately $71 thousand, which we expect to collect before the end of 2022. 
 
These increases were offset by a decrease in SG&A expenses relating to a reduction in workers compensation expenses of approximately $602 thousand, primarily as a result of aggressive claims management and lower experience rates. The reduction in workers compensation expenses is mostly a reflection of our efforts to reduce the long-tail exposure from Snelling pre-acquisition claims. In addition, the six months ended June 30, 2021 included acquisition-related expenses of approximately $1.6 million. Acquisition-related expenses for the six months ended June 30, 2022 were only $88  thousand.
 
Other income and expense
Other income and expense consists of depreciation, amortization, interest income, rent received from sub-tenants, and other non-operating income and expense.  
 
Depreciation and amortization
Depreciation and amortization for the six months ended June 30, 2022 was approximately $1.2 million, compared to $699 thousand for the six months ended June 30, 2021. We own our corporate headquarters, a building of approximately 15,000 square feet, in Goose Creek, South Carolina. This building serves as our base of operations for nearly all of the employees who provide franchisee support functions. In late 2021, we completed the construction of a 10,000 square foot building adjacent to our corporate headquarters and a supporting parking lot. Depreciation increased by approximately $39 thousand in the six months ended June 30, 2022 due to this addition. The remaining increase of $438 thousand was primarily due to additional amortization stemming from acquisitions. We acquired $21.9 million of franchise agreements and $9.0 million of other intangibles in acquisitions during 2021 and $14.9 million of other intangibles in acquisitions during the six months ended June 30, 2022. Of the $14.9 million in other intangibles, only $3.7 million are indefinite lived and not amortized. Future years will continue to have significant amortization expense until the underlying intangibles are disposed of, impaired or fully amortized. Future acquisitions are expected to further increase tangible and intangible assets on our balance sheet, and correspondingly increase depreciation and amortization.
 
Other income and expense
For the six months ended June 30, 2022, other miscellaneous income (loss) was a loss of approximately $1.9 million, compared to income of $3.8 million for the six months ended June 30, 2021. In the six months ended June 30, 2022, we recognized approximately $2.2 million in losses resulting from the conversion of the Temporary Alternatives, Dubin and Northbound acquisitions to franchises.
 
The remaining increase of other miscellaneous income during the six months ended  June 30, 2022 represents gross rents from leasing excess space at our corporate headquarters to third parties. We lease approximately 3,220 square feet of office space in our headquarters to unaffiliated companies. These leases are at the market rate.  Rental income for the six months ended June 30, 2022 is higher than the six months ended June 30, 2021 after completion of the new building adjacent to our corporate headquarters.
 
Other miscellaneous income in the six months ended June 30, 2021 includes a bargain purchase gain of approximately $4.9 million from the Snelling acquisition (adjusted to $5.6 million in later quarters), which is recorded net of deferred taxes. This gain was partially offset by losses during the six months ended June 30, 2021 on the transfer of unwanted assets acquired in the LINK transaction of approximately $1.9 million.  The remaining items of other miscellaneous income consist of small gains and losses resulting from the conversion of Snelling owned stores to franchises, and gross rents from leasing excess space at our corporate headquarters to third parties. 
 
Interest income and expense
Interest income for the six months ended June 30, 2022 was approximately $147 thousand compared to $231 thousand for the six months ended June 30, 2021. Interest income represents interest related to the financing of franchised locations, and one note to the California Purchaser. The decrease is consistent with a decrease in principal related to the financing of franchised locations. In March  2021, we sold approximately $5.3 million of notes receivable to Bass for no gain or loss in order to mitigate credit risk and potential future losses. In addition, during the six months ended June 30, 2022 we stopped accruing interest on the impaired notes receivable from non-franchisees.
 
Interest and other financing expense relates primarily to the Revolving Credit and Term Loan Agreement with Truist. Interest and other financing expense increased from $25 thousand at June 30, 2021 to $157 thousand at June 30, 2022. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. Due to the acquisitions in the six months ended June 30, 2022, we carried a larger balance on our line of credit for most of the period.
 
Provision for income tax
Income tax expense was approximately $934 thousand for the six months ended June 30, 2022. We estimate an annual projected effective tax rate (ETR) for the year to determine income tax expense (benefit) in the interim periods. The estimated annual ETR does not include tax effects from significant unusual or infrequently occurring items. Such items are accounted for discretely during the period in which they occur. The ETR is primarily driven by the federal Work Opportunity Tax Credit, which is included as part of income tax expense because it can be claimed only on the income tax return and can be realized only through the existence of taxable income. Other significant items affecting our tax rate are  and windfall tax deductions related to stock-based compensation, overall limits on executive compensation.  Our ETR for the six months ended June 30, 2022 was 14.9%.
 
Income tax expense for the six months ended June 30, 2021 was approximately $83 thousand. The tax expense includes the non-taxable bargain purchase gain recognized in 2021. Bargain purchase gains are recorded net of deferred taxes, and are treated as permanent differences, resulting in a lower ETR in the period recorded. We do not expect that benefit to reoccur, but generally expect that our effective tax rate will be significantly lower than statutory rates due to ongoing Work Opportunity Tax Credits and stock-based compensation.
 
Liquidity and Capital Resources
 
Overview
Our major source of liquidity and capital is cash generated from our ongoing operations consisting of royalty revenue, staffing revenue from owned locations, and service revenue. We also receive principal and interest payments on notes receivable that we issued in connection with the conversion of company-owned or acquired offices to franchised offices. In addition, we have the capacity to borrow under our line of credit with Truist, (see "Revolving Credit and Term Loan Agreement with Truist" below). 
 
On June 30, 2022, our current assets exceeded our current liabilities by approximately $22.2 million. Our current assets included approximately $1.1 million of cash and $45.7 million of net accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements. We used approximately $19.1 million of cash during the six months ended June 30, 2022 for acquisitions. Our largest current liabilities as of June 30, 2022 included approximately $12.3 million due to our franchisees on pending settlement statements, $4.7 million related to our workers’ compensation claims liability, and $2.8 million of borrowings under our line of credit.
 

 

Our working capital requirements are driven largely by temporary employee payroll, which is typically daily or weekly, and weekly cash settlements with our franchises. Since collections from accounts receivable lag employee pay our working capital requirements increase as system-wide sales increase, and vice-versa. When the economy contracts, our cash balance tends to increase in the short-term as payroll funding requirements decrease and aged accounts receivable are converted to cash upon collection. As the economy recovers, our cash balance generally decreases and accounts receivable increase.

 

We believe that our current cash balance, together with the future cash generated from operations, and our borrowing capacity under our line of credit, will be sufficient to satisfy our working capital needs, capital asset purchases, and other liquidity requirements associated with our continuing operations for the next 12 months. We also believe that future cash generated from operations, principal and interest payments on notes receivable, and our borrowing capacity under our line of credit, will be sufficient to satisfy our working capital needs, capital asset purchases, future dividends, and other liquidity requirements associated with our continuing operations beyond the next 12 months.

 

Our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors including overall liquidity in the capital or credit markets, the state of the economy and our credit strength as viewed by potential lenders. We cannot provide assurances that we will have future access to the capital or credit markets on acceptable terms. We expect our borrowing costs to increase as the Federal Reserve raises its benchmark interest rates in an effort to bring down inflation.

 

Operating Activities

During the six months ended June 30, 2022, cash generated by continuing operating activities was approximately $8.7 million and included net income of approximately $5.3 million, adjusted by non-cash items including a net loss on the sale of intangible assets acquired of approximately $2.2 million, depreciation and amortization in the amount of $1.2 million, and stock-based compensation of $1.3 million. These provisions were partially offset by changes in operating assets and liabilities requiring cash of approximately $1.2 million. During the six months ended June 30, 2021, cash generated by operating activities was approximately $11.3 million and included net income of approximately $6.5 million, adjusted by non-cash items including a net loss on the sale of intangible assets acquired of approximately $1.2 million, depreciation and amortization in the amount of $700 thousand, and stock-based compensation of $569 thousand.  These provisions were partially offset by a bargain purchase gain recognized in relation to an acquisition of approximately $5.0 million, and changes in operating assets and liabilities requiring cash of approximately $1.0 million. Cash for the six months ended June 30, 2021 was also boosted by the return of a workers’ compensation claim deposit of approximately $7.2 million which was acquired in the Snelling transaction

 

Investing Activities

During the six months ended June 30, 2022, cash used by investing activities was approximately $10.0 million and included cash paid for acquisitions of approximately $19.1 million. This use was partially offset by the proceeds from the sale of purchased locations of approximately $9.3 million. During the six months ended June 30, 2021, cash used by investing activities was approximately $24.0 million and included cash paid for acquisitions of approximately $28.8 million. This use was offset by proceeds from the sale of notes receivable of approximately $5.3 million and the sale of purchased locations of approximately $1.0 million.

 

Financing Activities

During the six months ended June 30, 2022, cash provided by financing activities was approximately $751 thousand and included net proceeds from our revolving line of credit of approximately $2.7 million. This provision was offset by the payment of approximately $1.6 million in dividends and net payments on our term loan of $266 thousand. During 2021, cash provided by financing activities was approximately $1.2 million and included initiation of the term loan of approximately $3.2 million offset by the payment of dividends totaling approximately $1.5 million, and debt issuance costs of $476 thousand related to establishing our line of credit.

 

Revolving Credit and Term Loan Agreement with Truist

On June 29, 2021 the Company and all of its subsidiaries as borrowers (collectively, the "Borrowers") entered into a Revolving Credit and Term Loan Agreement with Truist Bank, as Administrative Agent, and the lenders from time to time made a party thereto (the "Credit Agreement"), pursuant to which the lenders extended the Borrowers (i) a $60 million revolving line of credit with a $20 million sublimit for letters of credit (the "Line of Credit") and (ii) a $3,153,500 term loan (the "Term Loan"). Truist Bank may also make Swingline Loans available in its discretion. The Credit Agreement replaced the Company's prior $30 million credit facility with BB&T, now Truist. The Credit Agreement provides for a borrowing base on the Line of Credit that is derived from the Borrowers' accounts receivable subject to certain reserves and other limitations. Interest will accrue on the outstanding balance of the Line of Credit at a variable rate equal to (a) the LIBOR Index Rate plus a margin between 1.25% and 1.75% per annum or (b) the then applicable Base Rate, as that term is defined in the Credit Agreement plus a margin between 0.25% and 0.75% per annum. In each case, the applicable margin is determined by the Company's Average Excess Availability on the Line of Credit, as defined in the Credit Agreement. Interest will accrue on the Term Loan at a variable rate equal to (a) the LIBOR Index Rate plus 2.0% per annum or (b) the then applicable Base Rate plus 1.0% per annum. In addition to interest on outstanding principal under the Credit Agreement, the Borrowers will pay a commitment fee on the unused portion of the Line of Credit in an amount equal to 0.25% per annum. All loans made pursuant to the Line of Credit mature on June 29, 2026. The Term Loan will be paid in equal monthly installments based upon a 15-year amortization of the original principal amount of the Term Loan and will be payable in monthly installments with the remaining principal balance due and payable in full on the earlier of the date of termination of the commitments on the Line of Credit and June 29, 2036.

 

The Credit Agreement and other loan documents contain customary representations and warranties, affirmative, and negative covenants, including without limitation, those covenants governing indebtedness, liens, fundamental changes, restricting certain payments including dividends unless certain conditions are met, transactions with affiliates, investments, engaging in business other than the current business of the Borrowers and business reasonably related thereto, sale/leaseback transactions, speculative hedging, and sale of assets. The Credit Agreement and other loan documents also contain customary events of default including, without limitation, payment default, material breaches of representations and warranties, breach of covenants, cross-default on material indebtedness, certain bankruptcies, certain ERISA violations, material judgments, change in control, termination or invalidity of any guaranty or security documents, and defaults under other loan documents. The Credit Agreement also requires the Borrowers, on a consolidated basis, to comply with a fixed charge coverage ratio of at least 1.25:1.00 and a leverage ratio of not more than 3.0:1.0. The obligations under the Credit Agreement and other loan documents are secured by substantially all of the assets of the Borrowers as collateral including, without limitation, their accounts and notes receivable, stock of the Company's subsidiaries, and intellectual property and the real estate owned by HQ Real Property Corporation.

 

The Company utilized the proceeds of the Term Loan (i) first to pay off its prior credit facility, and (ii) second, to pay transaction fees and expenses incurred in connection with closing the transactions described above. The Company intends to utilize the proceeds of any loans made under the Line of Credit and the remainder of the Term Loan for working capital, acquisitions, required letters of credit, and general corporate purposes in accordance with the terms of the Credit Agreement. On March 1, 2022, our workers' compensation provider agreed to reduce the required collateral deposit from $14.3 million to $10.7 million. The collateral is currently accomplished by delivering letters of credit under the Credit Agreement.

 

At June 30, 2022, availability under the line of credit was approximately $27.0 million based on eligible collateral, less letter of credit reserves, bank product reserves, and current advances.

 

 

Economy and Inflation

 

Many leading economists predict high rates of inflation will continue through 2022. We do not believe inflation has had a material effect on our Company’s results of operations as inflation generally results in higher rates per hour that can offset any slowdown in organic growth opportunities. This might not be the case if inflation continues to grow. A prolonged period of high inflation may also impact our ability to carry out our acquisition strategy. On the other hand, if business conditions deteriorate, it may be easier for us to identify an acquisition candidate.

 

In late 2019, there was an outbreak of a new strain of coronavirus (COVID) first identified in Wuhan, Hubei Province, China, which has since spread globally. On March 11, 2020, the World Health Organization declared COVID a pandemic. Further, the COVID outbreak has resulted in government authorities around the world implementing numerous measures to try to reduce the spread of COVID, such as travel bans and restrictions, quarantines, “shelter-in-place,” “stay-at-home,” total lock-down orders, business limitations or shutdowns and similar orders. As a result, the COVID pandemic has negatively impacted the global economy, disrupted global supply chains and workforce participation, and created significant volatility and disruption of financial markets.

 

More recently, more contagious variants of COVID, such as the Delta and Omicron variants, have emerged and spread globally, which has caused some governments to reimplement various measures, or impose new restrictions, in an effort to lessen the spread of COVID and its variants. While we do not expect COVID to impact our operations, it could impact our acquisition strategy, positively or negatively. The extent to which new opportunities are presented to us will depend on future developments, which remain highly uncertain and cannot be predicted with confidence.

 

Key Performance Indicator: System-Wide Sales

 

We refer to total sales generated by our franchisees as “franchise sales.” For any period prior to their conversion to franchises, we refer to sales at company-owned and operated offices as “company-owned sales.” In turn, we refer to the sum of franchise sales and company-owned sales as “system-wide sales.” In other words, system-wide sales include sales at all offices, whether owned and operated by us or by our franchisees. In addition, system-wide sales includes sales at company-owned offices that are classified as discontinued operations. System-wide sales is a key performance indicator, although we do not record system-wide sales as revenue. Management believes that information on system-wide sales is important to understanding our financial performance because those sales are the basis on which we calculate and record much of our franchise royalty revenue, are directly related to all other royalty revenue and service revenue and are indicative of the financial health of our franchisee base. Management uses system-wide sales to benchmark current operating levels to historic operating levels. System-wide sales should not be considered as an alternative to revenue.

 

During the six months ended June 30, 2022, nearly all of our offices were franchised with the only exceptions being the Dental Power location acquired in the fourth quarter of 2021 and a portion of the Dubin operations acquired in the first quarter of 2022. The Dubin operations are presented in the consolidated financial statements as discontinued operations because they are considered held-for-sale. During the six months ended June 30, 2021, all of our offices were franchised. The following table reflects our system-wide sales broken into its components for the periods indicated. Percentages indicate the change in system-wide sales relative to the comparable prior period (in thousands, except percentages).

 

   

Three months ended

   

Six months ended

 
   

June 30, 2022

   

June 30, 2021

   

Change

   

June 30, 2022

   

June 30, 2021

   

Change

 

System-wide sales

  $ 120,032     $ 89,744       33.7 %   $ 221,065     $ 145,849       51.6 %

 

Approximately $36.4 million of system-wide sales during the three months ended June 30, 2022 was due to the 2021 acquisitions, and approximately $8.4 million was due to the 2022 acquisitions.  For the six months ended June 30, 2022, approximately $68.6 million was due to the 2021 acquisitions and approximately $10.6 million was due to the 2022 acquisitions. For the three and six months ended June 30, 2021 approximately $31.8 million and $38.5 million was due to the 2021 acquisitions, respectively.

 

Number of Offices

 

We examine the number of offices we open and close every period. The number of offices is directly tied to the amount of royalty and service revenue we earn. Our franchisees opened four offices in the first quarter of 2022 and did not close any.

 

The following table accounts for the number of offices opened and closed or consolidated in the first three months of 2022.

 

Offices, December 31, 2020

    139  

Purchased in 2021 (net of sold locations)

    65  

Opened in 2021

    14  

Closed in 2021

    (1 )

Offices, December 31, 2021

    217  

Opened in 2022

    8  

Purchased in 2022

    3  

Closed in 2022

    (3 )

Offices, June 30, 2022

    225  

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and, as such, are not required to provide the information required by this Item.

 

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, management concluded that these disclosure controls and procedures were not effective as of the end of such period as a result of the material weakness disclosed below.

 

As previously reported, we identified a material weakness in our internal control over financial reporting as we did not have sufficient accounting resources available to handle the volume of technical accounting issues and provide adequate review functions. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

 

Notwithstanding the material weakness, which still existed as of June 30, 2022, the Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded that the consolidated financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.

 

Management Plans to Remediate Material Weakness

On December 1, 2021 we hired David S. Burnett as CFO. We believe that the addition of Mr. Burnett materially strengthened our internal control over financial reporting. Management continues to take action to remediate the material weakness in internal control over financial reporting, including hiring additional staff in the accounting department and engaging third party professionals with the appropriate technical expertise.

 

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated as soon as possible. We have made significant progress towards remediation and continue to implement our remediation plan for the material weakness in internal control over financial reporting described above. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.

 

Changes in internal control over financial reporting

 

Other than efforts to remediate the material weakness described above, there was no change to the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2022 and that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time we are involved in various legal and administrative proceedings. Based on information currently available to us, we do not expect material uninsured losses to arise from any of these matters. We believe the outcomes of these proceedings, even if determined adversely, will not have a material adverse effect on our business, financial condition, results of operations, or liquidity and capital resources.

 

Item 1A. Risk Factors

 

Our business, financial condition, and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below and in Part I, Item 1A of our most recent annual report on Form 10-K which we filed with the SEC on March 15, 2022 under the heading Risk Factors, any one or more of which could, directly or indirectly, cause our actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition, operating results, and stock price. Except as set forth below, there have been no material changes to the risk factors included in our Form 10-K for the year ended December 31, 2021, filed with the SEC on March 15, 2022.

 

If our goodwill is impaired, we will record a non-cash charge to our results of operations and the amount of the charge may be material. At least annually, or whenever events or circumstances arise indicating impairment may exist, we review goodwill for impairment as required by generally accepted accounting principles in the United States. The estimated fair value of our goodwill could change if there are future changes in our capital structure, cost of debt, interest rates, capital expenditure levels, ability to perform at levels that were forecasted or a permanent change to our market capitalization. In the future, we may need to reduce the carrying amount of goodwill by taking a non-cash charge to our results of operations. Such a charge would have the effect of reducing goodwill with a corresponding impairment expense and may have a material effect upon our reported results. The additional expense may reduce our reported profitability or increase our reported losses in future periods and could negatively affect the market for our securities, our ability to obtain other sources of capital, and may generally have a negative effect on our future operations.

 

Our results of operations could be adversely affected by economic and political conditions globally and the effects of these conditions on our and our franchisees customers businesses and levels of business activity. The Russian invasion of Ukraine and the resulting economic sanctions imposed by the United States and other countries, along with certain international organizations, have impacted the global economy, including by exacerbating inflationary pressures created by COVID-related supply chain disruptions, and given rise to potential global security issues that may adversely affect international business and economic conditions. Although we have no operations in Russia or Ukraine, certain of our or our franchisees’ customers may have been or may in the future be impacted by these events. The ongoing effects of the hostilities and sanctions may not be limited to Russia and Russian companies and may spill over to and negatively impact other regional and global economic markets. A prolonged conflict may result in increased inflation, rising energy prices and an even more constrained supply chain, and thus may exacerbate the inflationary global economic environment. At this time, the extent and duration of the military action, resulting sanctions and future economic and market disruptions, and resulting effects on the Company, are impossible to predict

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit No.

 

Description

31.1

 

Certification of Richard Hermanns, Chief Executive Officer of HireQuest, Inc. pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

31.2

 

Certification of David S. Burnett, Chief Financial Officer of HireQuest, Inc. pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)

32.1

 

Certification of Richard Hermanns, Chief Executive Officer of HireQuest, Inc., and David S. Burnett, Chief Financial Officer of HireQuest, Inc., pursuant to 18 U.S.C. Section 1350, as adopted in Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)

101.INS

 

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)

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.

 

/s/ Richard Hermanns

 

August 9, 2022

 

Richard Hermanns

 

Date

 

President and Chief Executive Officer

     
       
       
       

/s/ David S. Burnett

 

August 9, 2022

 

David S. Burnett

 

Date

 

Chief Financial Officer

     

 

32