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;
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.
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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 commercial 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
March 31, 2022 we had 224 franchisee-owned offices and 2 company owned office in
38 states and the District of Columbia. We provide employment for an estimated
75 thousand 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 the first quarter of 2021. Comparisons between 2022
and 2021 should be viewed through a COVID-19 lens with the understanding that
for the quarter ended March 31, 2021 our revenues and expenses were
significantly lower than they otherwise would have been. A full economic
recovery has been slow to occur, and it is uncertain if businesses will remain
fully open, or another broad shutdown will occur due to a variant or new strain.
The long-term effectiveness of economic stabilization efforts, including
government payments to affected citizens and industries, and government
vaccination efforts, is also uncertain. Also affecting comparisons between 2022
and 2021 were the acquisitions consummated in 2021 and 2022 as described below.
Recent Developments
The Snelling 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.
The Dental Power Acquisition
On December 6, 2021 we completed our acquisition of the Dental Power Staffing
division of Dental Power International, Inc. ("Dental Power") in accordance with
the terms of a definitive agreement, dated November 2, 2021, for
approximately $1.9 million. Dental Power is a 46-year-old dental staffing
company headquartered in Carrboro, North Carolina with long-standing client
relationships in the dental industry. providing temporary, long-term contract,
and direct-hire staffing services to dental practices across the U.S. As of
March 31, 2022, all of the operations acquired from Dental Power remain company
owned.
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 $5.25 million, inclusive of a prescribed amount of working
capital. Temporary Alternatives is a staffing division of dmDickason Personnel
Services, a family-owned company based in El Paso, TX. The acquisition of
Temporary Alternatives will expand our national footprint into West Texas and
grow our franchise base.
The Dubin Acquisition
On February 21, 2022 we completed our acquisition of the staffing operations of
The Dubin Group, Inc., and Dubin Workforce Solutions, Inc. ("Dubin") in
accordance with the terms of an Asset Purchase Agreement dated January 19, 2022
for approximately $2.4 million, inclusive of a prescribed amount of working
capital. Dubin provides executive placement services and commercial staffing in
the Philadelphia metro area. The acquisition of Dubin will help expedite growth
into a new staffing vertical, expand our national footprint, and grow our
franchise base.
The Northbound Acquisition
On February 28, 2022 we completed our acquisition of certain assets of
Northbound Executive Search, LTD ("Northbound") in accordance with the terms of
an Asset Purchase Agreement dated January 25, 2022, for approximately $11.0
million, inclusive of a prescribed amount of working capital. Northbound
provides executive placement and short-term consultant services primarily to
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.
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Results of Operations
Financial Summary
The following table displays our consolidated statements of operations for the
interim periods ended March 31, 2022 and March 31, 2021. Percentages reflect the
line item as a percentage of total revenue.
Three months ended
(in thousands, except percentages) March 31, 2022 March 31, 2021
Franchise royalties $ 6,573 80.7 % $ 3,259 95.8 %
Staffing revenue, owned locations 1,104 13.6 % - 0.0 %
Service revenue 468 5.7 % 144 4.2 %
Total revenue 8,145 100.0 % 3,403 100.0 %
Cost of staffing revenue, owned
locations (762 ) (9.4 )% - 0.0 %
Gross profit 7,383 90.6 % 3,403 100.0 %
Selling, general and administrative
expenses 2,838 34.8 % 3,842 112.9 %
Depreciation and amortization 566 6.9 % 333 9.8 %
Income from operations 3,979 48.9 % (772 ) (22.7 )%
Other miscellaneous income (3,379 ) (41.5 )% 3,781 111.1 %
Interest income 93 1.1 % 136 4.0 %
Interest and other financing expense (48 ) (0.6 )% (5 ) (0.1 )%
Net income before income taxes 645 7.9 % 3,140 92.3 %
Provision for income taxes 87 1.1 % (602 ) (17.7 )%
Income from continuing operations 558 6.9 % 3,742 110.0 %
Income from discontinued operations, net
of tax 45 0.6 % - 0.0 %
Net income $ 603 7.4 % $ 3,742 110.0 %
Non-GAAP data
Adjusted EBITDA $ 5,307 71.9 % $ 1,533 45.0 %
Use of Non-GAAP Financial Measure: Adjusted EBITDA
Earnings before interest, taxes, depreciation and amortization, and non-cash
compensation, or adjusted EBITDA, is a non-GAAP measure that represents our net
income before interest expense, income tax expense, depreciation and
amortization, non-cash compensation, costs related to the work opportunity tax
credit ("WOTC") and other charges we consider non-recurring. We utilize adjusted
EBITDA as a financial measure as management believes investors find it a useful
tool to perform more meaningful comparisons and evaluations of past, present,
and future operating results. We believe it is a complement to net income and
other financial performance measures. Adjusted EBITDA is not intended to
represent or replace net income as defined by U.S. GAAP and should not be
considered as an alternative to net income or any other measure of performance
prescribed by U.S. GAAP. We use adjusted EBITDA to measure our financial
performance because we believe interest, taxes, depreciation and amortization,
non-cash compensation, WOTC-related costs and other non-recurring charges bear
little or no relationship to our operating performance. By excluding interest
expense, adjusted EBITDA measures our financial performance irrespective of our
capital structure or how we finance our operations. By excluding taxes on
income, we believe adjusted EBITDA provides a basis for measuring the financial
performance of our operations excluding factors that are beyond our control. By
excluding depreciation and amortization expense, adjusted EBITDA measures the
financial performance of our operations without regard to their historical cost.
By excluding non-cash compensation, adjusted EBITDA provides a basis for
measuring the financial performance of our operations excluding the value of our
restricted stock and stock option awards. By excluding WOTC related costs,
adjusted EBITDA provides a basis for measuring the financial performance of our
operations excluding the costs associated with qualifying for this tax credit.
In addition, by excluding certain non-recurring charges, adjusted EBITDA
provides a basis for measuring financial performance without such extraordinary
items. In addition, our Credit Agreement requires us to comply with a fixed
charge coverage ratio and a leverage ratio, both of which include adjusted
EBITDA substantially as defined above. For all of these reasons, we believe that
adjusted EBITDA provides us, and investors, with information that is relevant
and useful in evaluating our business.
However, because adjusted EBITDA excludes depreciation and amortization, it does
not measure the capital we require to maintain or preserve our fixed and
intangible assets. In addition, because adjusted EBITDA does not reflect
interest expense, it does not take into account the total amount of interest we
pay on outstanding debt, nor does it show trends in interest costs due to
changes in our financing or changes in interest rates. Adjusted EBITDA, as
defined by us, may not be comparable to adjusted EBITDA as reported by other
companies that do not define adjusted EBITDA exactly as we define the term.
Because we use adjusted EBITDA to evaluate our financial performance, we
reconcile it to net income, which is the most comparable financial measure
calculated and presented in accordance with U.S. GAAP.
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Three months ended
(in thousands) March 31, 2022 March 31, 2021
Net income $ 603 $ 3,742
Interest expense 48 5
Provision for income taxes 87 (602 )
Depreciation and amortization 566 333
WOTC related costs 132 92
EBITDA 1,436 3,570
Non-cash compensation 246 268
Non-recurring acquisition related charges, net 3,625 (2,305 )
Adjusted EBITDA $ 5,307 $ 1,533
Three Months Ended March 31, 2022 Compared to the Three Months Ended March 31,
2021
Gross Profit
Our total revenue consists of franchise royalties, staffing revenue with respect
to our owned locations, and service revenue. Gross profit includes total revenue
less the cost of staffing services at owned locations. Once a company-owned
office is sold, disposed of, or otherwise classified as available-for-sale, it
would not be reflected in gross profit and instead reported as "Income from
discontinued operations, net of tax."
Gross profit for the three months ended March 31, 2021 was approximately
$7.4 million compared to $3.4 million for the three months ended March 31, 2021,
an increase of 117.0%. This increase is consistent with the 81.5% increase in
underlying system-wide-sales for the quarter ended March 31, 2022 compared to
the prior year quarter. Gross profit as a percentage of system-wide sales was
7.3% for the three-month ended March 31, 2022 versus 6.1% for the three months
ended March 31, 2021. The 120-basis point improvement was primarily due to
increased service revenue and the Gross Profit from the company owned location,
as well as an increase in our net effective royalty rate for the quarter.
Franchise Royalties
Franchise royalties for the three months ended March 31, 2022 were approximately
$6.6 million, an increase of 101.7% from $3.3 million for the three months ended
March 31, 2021. Approximately $2.8 million of this increase in royalties was due
to the Snelling and Link acquisitions and approximately $328 thousand was due to
organic growth this year as the negative effects of COVID-19 were less
pronounced in the quarter ended March 31, 2022 than in the prior year quarter.
Our net effective royalty rate (as a percentage of external system-wide sales)
increased from 5.8% for the three months ended March 31, 2021 to 6.6% for the
three months ended March 31, 2022. Our net effective royalty rate will
fluctuate due to mix of business among the various royalty models we offer.
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. 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 three months ended March 31, 2022 was approximately $468
thousand, an increase from approximately $144 thousand for the three months
ended March 31, 2021. This increase was largely due to the introduction of
trademark license fees after the 2021 Acquisitions. The remaining increase
follows the overall increase in accounts receivable, although relatively few age
over 42 days and result in service revenue for us. In addition, for the quarter
ended March 31, 2022, more franchisees elected to charge back accounts early in
order to avoid the interest charge. Therefore, there will not be a
proportionally large increase in service revenue even when there is a large
increase in accounts receivable. We pride ourselves on maintaining quality,
creditworthy customers who pay timely. The Company does not strive to increase
interest on aged accounts receivable.
Staffing Revenue, Owned Locations
Following the December 2021 acquisition of Dental Power, we have a platform to
build a customer base in the dental-oriented sector of the staffing industry,
which we expect will benefit our entire system by increasing revenue
opportunities under the HireQuest Health brand. As of March 31, 2022, all of the
operations acquired from Dental Power remain company owned. Although we may
franchise these operations in the future, we currently have no firm plans in
place to do so. For the three months ended March 31, 2022, staffing revenue from
owned locations was $1.1 million. We had no company owned locations during the
three-months ended March 31, 2021.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended March 31, 2022 were approximately $2.8
million, a decrease of 26.1% from $3.8 million for the three months ended March
31, 2021. The decrease in SG&A expenses relates to a reduction in workers
compensation expenses of approximately $818 thousand, primarily as a result of
aggressive claims management and lower experience rates. The reduction in
workers compensation expenses is mostly a reflection of our efforts to reduce
the long-tail exposure from Snelling pre-acquisition claims.
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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 March 31, 2022 was
approximately $566 thousand compared to $333 thousand for the three months ended
March 31, 2021. We own our corporate headquarters, a building of approximately
15 thousand square feet, in Goose Creek, South Carolina. This building serves as
our base of operations for nearly all of the employees who provide franchisee
support functions. In late 2021, we completed the construction of a 10 thousand
square foot building adjacent to our corporate headquarters and a supporting
parking lot. Depreciation increased by approximately $20 thousand in the three
months ended March 31, 2022 due to this addition. The remaining increase of $233
thousand was primarily due to additional amortization stemming from
acquisitions. We acquired $21.9 million of franchise agreements and $9.0 million
of other intangibles in acquisitions during 2021 and $3.2 million of other
intangibles in acquisitions during the three months ended March 31, 2022. Of the
$12.2 million in other intangibles, only $3.7 million are indefinite lived
and not amortized. Future years will continue to have significant amortization
expense until the underlying intangibles are disposed of, impaired or fully
amortized. Future acquisitions are expected to further increase tangible and
intangible assets on our balance sheet, and correspondingly increase
depreciation and amortization.
Other income and expense
For the three months ended March 31, 2022, other miscellaneous income was a loss
of approximately $3.4 million, compared to income of $3.8 million for the three
months ended March 31, 2021. In the three months ended March 31, 2022, we
recognized approximately $3.6 million in losses resulting from the conversion of
the Temporary Alternatives, Dubin and Northbound acquisitions to franchises. A
portion of the Dubin assets acquired have not been converted to a franchise yet.
These assets meet the held for sale criteria, and are presented on the balance
sheet at their fair value less cost to sell. The operating results from this
portion off the Dubin assets are reported as "Income from discontinued
operations, net of tax". The remaining items of other miscellaneous income is
primarily gross rents from leasing excess space at our corporate headquarters to
third parties. We lease approximately 3,220 square feet of office space in our
headquarters to unaffiliated companies. These leases are at the market rate.
Other miscellaneous income in the months ended March 31, 2021 includes a bargain
purchase gain of approximately $4.9 million from the Snelling acquisition
(adjusted to $5.6 million in later quarters), which is recorded net of deferred
taxes. This gain was partially offset by losses during the three months ended
March 31, 2021 on the transfer of unwanted assets acquired in the Link
transaction of approximately $1.9 million. The remaining items of other
miscellaneous income consist of small gains and losses resulting from the
conversion of Snelling owned stores to franchises, and gross rents from leasing
excess space at our corporate headquarters to third parties.
Interest income for the three months ended March 31, 2022 was approximately $93
thousand compared to $136 thousand for the three months ended March 31, 2021.
Interest income represents interest related to the financing of franchised
locations, and one note to the California Purchaser. The decrease is consistent
with a decrease in principal related to the financing of franchised locations
from approximately $8.1 million, which was the balance for most of Q1 2021,
versus $4.5 million at March 31, 2022. In March 2021, we sold approximately
$5.3 million of notes receivable to Bass for no gain or loss in order to
mitigate credit risk and potential future losses.
Interest and other financing expense relates primarily to the Revolving Credit
and Term Loan Agreement with Truist. Interest and other financing expense
increased from $5 thousand at March 31, 2021 to $48 thousand at March 31, 2022.
Interest and other financing expense will fluctuate as we utilize the line of
credit for acquisitions or other short-term liquidity needs.
Provision for income tax
Income tax expense was approximately $87 thousand for the three months ended
March 31, 2022. We estimate an annual projected effective tax rate (ETR) for the
year to determine income tax expense (benefit) in the interim periods. The
estimated annual ETR does not include tax effects from significant unusual or
infrequently occurring items. Such items are accounted for discretely during the
period in which they occur. The ETR is primarily driven by the federal Work
Opportunity Tax Credit, which is included as part of income tax expense because
it can be claimed only on the income tax return and can be realized only through
the existence of taxable income. Other significant items affecting our tax rate
are and windfall tax deductions related to stock-based compensation, overall
limits on executive compensation. Our ETR for the three months ended March 31,
2022 was 11.1%.
Income tax benefit for the three months ended March 31, 2021 was approximately
$602 thousand. The tax benefit 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 loctions,
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 March 31, 2022, our current assets exceeded our current liabilities by
approximately $18.9 million. Our current assets included approximately $1.8
million of cash and $41.3 million of net accounts receivable, which our
franchisees have billed to customers and which we own in accordance with our
franchise agreements. We used approximately $18.8 million of cash during the
three months ended March 31, 2022 for acquisitions. Our largest current
liabilities as of March 31, 2022 included approximately $8.2 million related to
our workers' compensation claims liability, $8.2 million due to our franchisees
on pending settlement statements, and $5.5 million of borrowings under our line
of credit.
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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 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.
Operating Activities
During the three months ended March 31, 2022, cash generated by operating
activities was approximately $5.1 million and included net income of
approximately $558 thousand, a net loss on the sale of intangible assets
acquired of approximately $3.6 million, an increase in other current liabilities
of approximately $684 thousand, and an increase in accounts receivable of
approximately $2.6 million. These provisions were partially offset by an
increase in accounts payable and accrued expenses of approximately $2.6 million.
During the three months ended March 31, 2021, cash generated by operating
activities was approximately $11.9 million and included net income of
approximately $3.7 million, a decrease in accounts receivable of approximately
$4.0 million, the return of a workers' compensation claim deposit of
approximately $7.2 million which was acquired in the Snelling transaction, and a
net loss on the sale of intangible assets acquired of approximately $1.2
million. These provisions were partially offset by a gain recognized in relation
to an acquisition of approximately $5.0 million.
Investing Activities
During the three months ended March 31, 2022, cash used by investing activities
was approximately $9.3 million and included cash paid for acquisitions of
approximately $18.5 million. This use was partially offset by the proceeds
from the sale of purchased locations of approximately $9.3 million. During the
three months ended March 31, 2021, cash used by investing activities was
approximately $22.9 million and included cash paid for acquisitions of
approximately $28.8 million. This use was offset by proceeds from the sale of
notes receivable of approximately $5.3 million and the sale of purchased
locations of approximately $1.0 million.
Financing Activities
During the three months ended March 31, 2022, cash provided by financing
activities was approximately $4.4 million and included net proceeds from our
revolving line of credit of approximately $5.3 million. This provision was
offset by the payment of approximately $823 thousand in dividends. During
2021, cash used by financing activities was approximately $668 thousand and
included the payment of a dividend of approximately $680 thousand offset
slightly by payments on term loans.
Revolving Credit and Term Loan Agreement with Truist
On June 29, 2021 the Company and all of its subsidiaries as borrowers
(collectively, the "Borrowers") entered into a Revolving Credit and Term Loan
Agreement with Truist Bank, as Administrative Agent, and the lenders from time
to time made a party thereto (the "Credit Agreement"), pursuant to which the
lenders extended the Borrowers (i) a $60 million revolving line of credit with a
$20 million sublimit for letters of credit (the "Line of Credit") and (ii) a
$3,153,500 term loan (the "Term Loan"). Truist Bank may also make Swingline
Loans available in its discretion. The Credit Agreement replaced the Company's
prior $30 million credit facility with BB&T, now Truist. The Credit Agreement
provides for a borrowing base on the Line of Credit that is derived from the
Borrowers' accounts receivable subject to certain reserves and other
limitations. Interest will accrue on the outstanding balance of the Line of
Credit at a variable rate equal to (a) the LIBOR Index Rate plus a margin
between 1.25% and 1.75% per annum or (b) the then applicable Base Rate, as that
term is defined in the Credit Agreement plus a margin between 0.25% and 0.75%
per annum. In each case, the applicable margin is determined by the Company's
Average Excess Availability on the Line of Credit, as defined in the Credit
Agreement. Interest will accrue on the Term Loan at a variable rate equal to (a)
the LIBOR Index Rate plus 2.0% per annum or (b) the then applicable Base Rate
plus 1.0% per annum. In addition to interest on outstanding principal under the
Credit Agreement, the Borrowers will pay a commitment fee on the unused portion
of the Line of Credit in an amount equal to 0.25% per annum. All loans made
pursuant to the Line of Credit mature on June 29, 2026. The Term Loan will be
paid in equal monthly installments based upon a 15-year amortization of the
original principal amount of the Term Loan and will be payable in monthly
installments with the remaining principal balance due and payable in full on the
earlier of the date of termination of the commitments on the Line of Credit and
June 29, 2036.
The Credit Agreement and other loan documents contain customary representations
and warranties, affirmative, and negative covenants, including without
limitation, those covenants governing indebtedness, liens, fundamental changes,
restricting certain payments including dividends unless certain conditions are
met, transactions with affiliates, investments, engaging in business other than
the current business of the Borrowers and business reasonably related thereto,
sale/leaseback transactions, speculative hedging, and sale of assets. The Credit
Agreement and other loan documents also contain customary events of default
including, without limitation, payment default, material breaches of
representations and warranties, breach of covenants, cross-default on material
indebtedness, certain bankruptcies, certain ERISA violations, material
judgments, change in control, termination or invalidity of any guaranty or
security documents, and defaults under other loan documents. The Credit
Agreement also requires the Borrowers, on a consolidated basis, to comply with a
fixed charge coverage ratio of at least 1.25:1.00 and a leverage ratio of not
more than 3.0:1.0. The obligations under the Credit Agreement and other loan
documents are secured by substantially all of the assets of the Borrowers as
collateral including, without limitation, their accounts and notes receivable,
stock of the Company's subsidiaries, and intellectual property and the real
estate owned by HQ Real Property Corporation.
The Company utilized the proceeds of the Term Loan (i) first to pay off its
prior credit facility, and (ii) second, to pay transaction fees and expenses
incurred in connection with closing the transactions described above. The
Company intends to utilize the proceeds of any loans made under the Line of
Credit and the remainder of the Term Loan for working capital, acquisitions,
required letters of credit, and general corporate purposes in accordance with
the terms of the Credit Agreement. On March 1, 2022, our workers' compensation
provider agreed to reduce the required collateral deposit from $14.3 million to
$10.7 million. The collateral is currently accomplished by delivering letters of
credit under the Credit Agreement.
At March 31, 2022, availability under the line of credit was approximately $19.2
million based on eligible collateral, less letter of credit reserves, bank
product reserves, and current advances.
25
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Table of Contents
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 three months ended March 31, 2022, nearly all of our offices were
franchised with the only exceptions being the Dental Power location acquired in
the fourth quarter of 2021 and a portion of the Dubin operations acquired in the
first quarter of 2022. The Dubin operations are presented in the consolidated
financial statements as discontinued operations because they are considered
held-for-sale. During the three months ended March 31, 2021, 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.
Three months ended
(in thousands, except percentages) March 31, 2022 March 31, 2021 Change
System-wide sales
$ 101,032 $ 56,105 80.1 %
* In our Form 10-Q for the period ended March 31, 2021, we reported system-wide
sales of $54.3 million for the period ended March 31, 2021. Starting with the
second quarter of 2021, we updated the calculation of system-wide sales to
include franchisees that manage their own payroll and billing at the local
level. Including these franchisees or the period ended March 31, 2021 resulted
in an updated system-wide sales amount of $56.1 million.
Number of Offices
We examine the number of offices we open and close every period. The number of
offices is directly tied to the amount of royalty and service revenue we earn.
Our franchisees opened four offices in the first quarter of 2022 and did not
close any.
The following table accounts for the number of offices opened and closed or
consolidated in the first three months of 2022.
Franchised offices, December 31, 2020 139
Purchased in 2021 (net of sold locations) 65
Opened in 2021 14
Closed in 2021 (1 )
Franchised offices, December 31, 2021 217
Opened in 2022 4
Purchased in 2022 3
Franchised offices, March 31, 2022 224
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