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; the impact
of any global pandemic including COVID-19; operating results; dividends and
shareholder returns; anticipated benefits of the merger or acquisitions
including those we have completed in 2021; 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 occur, and our actual results may be significantly
different. Therefore, you should not place undue reliance on these
forward-looking statements. Important factors that may cause actual results to
differ materially from those contemplated in any forward-looking statements made
by us include the following: the level of demand and financial performance of
the temporary staffing 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, and 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; natural events such as severe weather, fires, floods, and
earthquakes, or man-made or other disruptions of our operating systems; 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 25, 2021; 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 on-demand labor solutions providers in the
light industrial and blue-collar segments of the staffing industry. We were
formed through the merger between Hire Quest Holdings, LLC ("Hire Quest
Holdings") and Command Center, Inc. We refer to Hire Quest Holdings and its
wholly-owned subsidiary, Hire Quest, LLC, collectively as Legacy HQ. We refer to
this merger, which closed on July 15, 2019, as the Merger. As of March 31, 2021,
we had approximately 210 franchisee-owned offices in 35 states and the District
of Columbia. We also licensed the use of our trademarks to offices in
California. Our franchisees provide employment for an estimated 80,000
individuals annually working for thousands of clients in many industries
including construction, recycling, warehousing, logistics, auctioneering,
manufacturing, disaster cleanup, janitorial, special events, hospitality,
landscaping, and retail.
Recent Developments
Snelling Staffing Acquisition
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 $17.7 million, subject to customary adjustments
for net working capital. 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.
Substantially all of the locations where we assumed franchisor status in this
transaction have subsequently signed our HireQuest Direct franchise agreement.
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In connection with the acquisition, we sold the 10 locations that had been
company-owned by Snelling. Two of these, we sold to franchisees. Four offices
were sold to a third-party purchaser. Four offices were sold to a California
purchaser (the "California Purchaser") and operate as Snelling pursuant to a
license agreement. The aggregate sale price for these locations consisted of (i)
$1.0 million in the form of a promissory note that bears interest at 6.0%, (ii)
the right to receive 1.5% of revenue generated at the Ontario location for the
next 12 months, (iii) the right to receive 2.5% of revenue generated at the
Tracy and Lathrop locations for the next 12 months, (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 are no remaining company-owned
locations at March 31, 2021.
One of the California locations operates pursuant to a license agreement whereby
they license the Snelling trademark and pay us a royalty of 9% of their gross
margin. The California Purchaser will convert the remaining three California
locations to franchisees at which point these franchisees will begin to pay us
9% of their gross margin.
Link Staffing Acquisition
On March 22, 2021, we completed our acquisition of the franchise relationships
and certain other 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 Direct franchise agreement.
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.
COVID-19
The coronavirus pandemic has significantly impacted our operations. With
widespread infection in the United States and abroad, national, state, and local
authorities recommended social distancing and took dramatic action, including
ordering the workforce to stay home, banning all non-essential businesses from
operating, refusing to issue new building permits, and invalidating current
building permits causing work to stop at many of our jobsites. These measures,
while intended to protect human life, have had, and are expected to continue to
have, adverse impacts on our business and the economy as a whole. While most
states have advanced significantly into the reopening process, it is unclear
when, or if, a full economic recovery will occur. It is also unclear whether
businesses will remain open or another broad shutdown will occur. The long-term
effectiveness of economic stabilization efforts, including government payments
to affected citizens and industries, and government vaccination efforts, is also
uncertain.
We entered 2021 with a strong balance sheet. Our current assets exceeded current
liabilities by approximately $16 million. We were able to complete two
acquisitions and significantly increase our franchise base without incurring any
debt at March 31, 2021. We have been able to remain profitable throughout the
pandemic. Still, the sweeping and persistent We entered 2021 with a strong
balance sheet. Our current assets exceeded current liabilities by approximately
$16 million. We were able to complete two acquisitions and significantly
increase our franchise base without incurring any debt at March 31, 2021. We
have been able to remain profitable throughout the pandemic. Still, the sweeping
and persistent nature of the COVID-19 pandemic has depressed our system-wide
sales and resulting franchise royalties. While we did not see major impacts on
system-wide sales and resulting revenue until the final few weeks of the first
quarter of 2020, these depressed sales have continued through our current
quarter. On a month-to-month basis, our system-wide sales have consistently
trended closer to historically normal numbers, however, system-wide sales in the
first quarter of 2021 remained lower than in the first quarter of 2020. We
continue to expect negative impacts on system-wide sales and resulting franchise
royalties in the coming quarters, and potentially into next year. Some of the
depression in sales will be offset by the acquisitions we made in the first
quarter of 2021. It remains unclear how long we will stay at this comparatively
reduced level of sales, and the evolving nature of the pandemic makes reliable
predictions extremely difficult.
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To date, our franchisees have closed or consolidated 13 offices at least, in
part, due to the financial impacts of COVID-19. Of these closures, 11 were in
metropolitan areas where our franchisees still maintain at least one office that
we expect can service customers of the closed or consolidated offices. The other
two offices did not historically produce significant amounts of system-wide
sales or resulting revenue. It is possible that other offices may still be
forced to close. Some of our franchisees may experience economic hardship or
even failure. In general, those franchisees whose businesses are oriented
towards construction, manufacturing, logistics, or waste services have been less
impacted to date than those whose businesses are more focused on hospitality,
catering, special events, or auto auction services.
As discussed more fully below, we have reduced liquidity since December 31, 2020
as we used cash to complete two acquisitions. As a result, our cash balance
decreased by approximately $11.7 million through the first quarter of 2021 from
$13.7 million at year end to $2.0 million. When combined with our borrowing
capacity under our line of credit and absence of debt, we expect that we have
sufficient liquidity to continue our operations for the foreseeable future, even
under the current circumstances presented by COVID-19. That said, the impact of
the COVID-19 crisis on availability of capital or credit is difficult to predict
and may be significant.
Any of the above factors, or other cascading effects of the COVID-19 pandemic
that are not currently foreseeable, could materially negatively impact our
revenue, net income, and other results of operations, reduce system-wide sales,
cause office closings or cause us to lose franchisees, and impact our liquidity
position, possibly significantly. The duration of any such impacts cannot be
predicted at this time.
Results of Operations
Financial Summary
The following table displays our consolidated statements of operations for the
interim periods ended March 31, 2021 and March 31, 2020 (in thousands, except
percentages). Percentages reflect the line item as a percentage of total
revenue.
Three months ended
March 31, 2021 March 31, 2020
Franchise royalties $3,259 95.8% $3,705 89.9%
Service revenue 144 4.2% 415 10.1%
Total revenue 3,403 100.0% 4,120 100.0%
Selling, general and administrative expenses 3,842 112.9% 3,253 79.0%
Depreciation and amortization
333 9.8% 32 0.8%
Income (loss) from operations (772) -22.7% 835 20.3%
Other miscellaneous income 3,916 115.1% 251 6.1%
Interest and other financing expense (5) -0.1% (11) -0.3%
Net income before income taxes
3,140 92.3% 1,074 26.1%
Provision (benefit) for income taxes (602) -17.7% 199 4.8%
Net income
$3,742 110.0% $875 21.2%
Three Months Ended March 31, 2021
Franchise Royalties
Franchise royalties for the three months ended March 31, 2021 were approximately
$3.3 million, a decrease of 12.0% from $3.7 million for the three months ended
March 31, 2020. This decrease in royalties was due to decreased activity due to
COVID-19 in 2021, as we did not experience significant decreased economic
activity last year until the final few weeks of the first quarter. The effect of
this decreased activity more than offset the $32,000 positive impact of
additional franchise royalties received in the first quarter 2021 as a result of
our recent acquisitions. While system-wide sales, and resulting franchise
royalties, have been slowly approaching historical levels on a month-over-month
basis since the beginning of April of last year, we expect decreased royalty
revenue to persist throughout 2021, and perhaps beyond, relative to pre-pandemic
levels.
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Service Revenue
Service revenue consists of interest we charge our franchisees on overdue
customer accounts receivable, trademark license fees, 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 receivable are charged
back to the franchisee at a date agreed upon between the Company and the
respective franchisee between 42 and 84 days, at which time they are no longer
charged interest.
Service revenue for the three months ended March 31, 2021 was approximately
$144,000, a decrease from approximately $415,000 for the three months ended
March 31, 2020. This decrease was due to lower interest income and lower
system-wide sales-based fees.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended March 31, 2021 were approximately $3.8
million, an increase of 18.1% from $3.3 million for the three months ended March
31, 2020. This increase is primarily related to acquisition-related expenses of
approximately $1.4 million. In addition, we saw a relative increase in charges
related to workers' compensation of approximately $892,000, and an increase in
computer related costs of approximately $89,000. These increases were partially
offset by a decrease in professional fees of $130,000 and the absence of the
$1.4 million note impairment incurred last year.
Miscellaneous Income
Miscellaneous income for the three months ended March 31, 2021 was approximately
$3.9 million, an increase of approximately $3.7 million, from $251,000 for the
three months ended March 31, 2020. This increase is primarily due to a bargain
purchase gain of approximately $4.9 million recognized as part of the Snelling
transaction. This gain was partially offset by a net loss of approximately $1.2
million in relation to the sale of acquired assets.
Liquidity and Capital Resources
Our major source of liquidity and capital is cash generated from our ongoing
operations. We also receive principal and interest payments on notes receivable,
most of which were issued in connection with the sale of offices we acquired in
the merger with Command Center. We also sold approximately $5.3 million of these
notes at face value to Bass in the first quarter of 2021 to generate cash for
our two acquisitions. In addition, we have the capacity to borrow under our line
of credit with Truist.
On March 31, 2021, our current assets exceeded our current liabilities by
approximately $16.7 million. Our current assets included approximately $2.0
million of cash and $29.7 million of accounts receivable, which our franchisees
have billed to customers and which we own in accordance with our franchise
agreements. Our largest current liabilities include approximately $7.6 million
related to our workers' compensation claims liability, $4.2 million due to our
franchisees on upcoming settlement statements, and $3.2 million in accrued
benefits and payroll taxes.
In July 2019, we entered into an agreement with Truist, for a $30 million line
of credit with a $15 million sublimit for letters of credit. At March 31, 2021,
approximately $14.3 million was utilized by outstanding letters of credit that
secure our obligations to our workers' compensation insurance carrier and
$500,000 was utilized by a letter of credit that secures our paycard funding
account, leaving $15.2 million available under the agreement for potential
additional borrowings, subject to availability under the terms of the 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, which disclosure is incorporated herein by reference. For
additional information related to our line of credit see Note 4 - Line of
Credit, which disclosure is incorporated herein by reference.
Our working capital requirements are driven largely by temporary employee
payroll and accounts receivable from customers. Since receipts lag employee pay
- which is typically daily or weekly - 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.
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 at least 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. The impact of the COVID-19 crisis on availability
of capital or credit is difficult to predict and may be significant.
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Operating Activities
During 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. During 2020, cash provided by operating activities was approximately
$5.5 million and included net income of approximately $875,000, a decrease in
accounts receivable of approximately $3.8 million and an increase in our
allowance for losses on notes receivable of approximately $1.4 million. These
provisions were partially offset by an increase in prepaid expenses, deposits,
and other assets of approximately $954,000 and an increase in prepaid workers'
compensation of approximately $531,000.
Investing Activities
During 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.
During 2020, cash provided by investing activities was approximately $323,000
and included an increase in franchisee deposits of approximately $643,000 and
proceeds from notes receivable of approximately $438,000. These provisions were
partially offset by the purchase of property and equipment of approximately
$677,000.
Financing Activities
During 2020, cash used by financing activities was approximately $668,000 and
included the payment of a dividend of approximately $680,000. During 2020, cash
provided by financing activities was approximately $28,000.
Key Performance Indicator: System-Wide Sales
We refer to total sales generated by our franchisees as "franchise sales." For
the 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. System-wide sales is a key performance
indicator. While 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, 2021 and March 31, 2020, all of our
offices were franchised. As such, system-wide sales for the three months ended
March 31, 2021 and March 31, 2020 were all derived from franchised offices.
System-wide sales were $54.3 million for the three months ended March 31, 2021,
down $2.2 million, or 3.8% compared to the three months ended March 31, 2020.
The decrease in system-wide sales is primarily a result of the effects of
COVID-19 as we did not start to experience the negative impacts until the final
few weeks of the first quarter of 2020.
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 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 2021.
Franchised offices, December 31, 2020 139
Closed in 2020 -
Opened in 2020 5
Purchased in 2021 (net of sold locations) 64
Franchised offices, March 31, 2021 208
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Off-Balance Sheet Arrangements
We do not engage in any off-balance sheet financing arrangements.
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HIREQUEST, INC. 
