HIREQUEST, INC.
10-Ks and 10-Qs
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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: MARCH 31, 2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission
File Number 000-53088
HIREQUEST, INC.
(Exact
name of registrant as specified in its Charter)
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Delaware
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91-2079472
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(State of incorporation or organization)
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(I.R.S. employer identification no.
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111 Springhall Drive, Goose Creek, SC 29445
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(Address of principal executive offices) (Zip Code)
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Registrant’s telephone number, including area code:
(843)
723-7400
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Securities registered pursuant to Section 12(b) of the
Act:
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Common Stock, $0.001 par value
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HQI
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The NASDAQ Stock Market LLC
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Title
of each class
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Trading
Symbol(s)
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Name of
each exchange on which registered
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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 May 8,
2020: 13,545,123
HireQuest, Inc.
T
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2
P
ART I. FINANCIAL
INFORMATION
I
tem 1. Financial
Statements
HireQuest, Inc.
C
onsolidated Balance
Sheets
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March 31,
2020
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December 31,
2019
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ASSETS
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(unaudited)
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Current
assets
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Cash
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$
10,040,828
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$
4,187,450
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Accounts
receivable
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24,426,333
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28,201,279
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Notes
receivable
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3,492,043
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3,419,458
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Prepaid expenses,
deposits, and other assets
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1,142,614
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188,560
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Prepaid workers'
compensation
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1,353,714
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822,938
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Other
assets
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163,625
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201,440
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Total current
assets
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40,619,157
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37,021,125
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Property and
equipment, net
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2,545,525
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1,900,686
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Notes receivable,
net of current portion and reserve
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6,113,071
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7,990,251
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Total
assets
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$
49,277,753
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$
46,912,062
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
liabilities
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Accounts
payable
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$
242,972
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$
253,845
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Other current
liabilities
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2,248,690
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1,893,846
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Accrued benefits
and payroll taxes
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1,609,918
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1,113,904
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Due to
affiliates
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27,790
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-
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Due to
franchisees
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3,319,107
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3,610,596
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Risk management
incentive program liability
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2,123,117
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1,811,917
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Workers'
compensation claims liability
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2,521,132
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2,327,869
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Total current
liabilities
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12,092,726
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11,011,977
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Workers'
compensation claims liability, net of current portion
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1,642,560
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1,516,633
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Franchisee
deposits
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2,055,493
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1,412,924
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Deferred tax
liability
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1,006,961
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1,688,446
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Total
liabilities
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16,797,740
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15,629,980
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Commitments and
contingencies (Note 8)
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Stockholders'
equity
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Preferred stock -
$0.001 par value, 416,666 shares authorized; none
issued
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-
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-
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Common stock -
$0.001 par value, 30,000,000 shares authorized; 13,536,742 and
13,518,036 shares issued and outstanding, respectively
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13,537
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13,518
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Additional paid-in
capital
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27,907,344
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27,584,610
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Retained
earnings
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4,559,132
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3,683,954
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Total stockholders'
equity
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32,480,013
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31,282,082
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Total liabilities
and stockholders' equity
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$
49,277,753
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$
46,912,062
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See
accompanying notes to consolidated financial
statements.
3
HireQuest, Inc.
C
onsolidated
Statements of Operations
(unaudited)
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Quarter
ended
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March
31, 2020
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March
31, 2019
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Franchise
royalties
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$
3,705,242
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$
3,156,135
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Service
revenue
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414,739
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316,115
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Total
revenue
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4,119,981
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3,472,250
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Selling,
general and administrative expenses
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3,253,372
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1,552,421
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Depreciation
and amortization
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31,814
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14,037
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Income
from operations
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834,795
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1,905,792
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Other
miscellaneous income
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250,709
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28,389
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Interest
and other financing expense
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(11,289
)
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(184,972
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Net income before
income taxes
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1,074,215
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1,749,209
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Provision for
income taxes
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199,037
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51,426
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Income
from continuing operations
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875,178
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1,697,783
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Income from
discontinued operations, net of tax
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-
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19,701
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Net
income
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$
875,178
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$
1,717,484
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Basic earnings per share
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Continuing
operations
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$
0.06
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$
0.17
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Discontinued
operations
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-
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-
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Total
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$
0.06
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$
0.17
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Diluted earnings per share
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Continuing
operations
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$
0.06
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$
0.17
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Discontinued
operations
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-
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-
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Total
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$
0.06
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$
0.17
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See
accompanying notes to consolidated financial
statements.
4
HireQuest, Inc.
C
onsolidated Statements of Changes
in Stockholders’ Equity
(unaudited)
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Common
stock
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Shares
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Par
value
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Additional paid-in
capital
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Retained
earnings
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Total stockholders'
equity
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Balance at December 31,
2018
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9,939,668
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$
9,940
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$
6,938,953
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$
3,973,933
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$
10,922,826
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Net
distributions
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-
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-
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(1,035,807
)
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-
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(1,035,807
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Net income for the
quarter
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-
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-
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-
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1,717,484
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1,717,484
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Balance at March 31,
2019
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9,939,668
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$
9,940
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$
5,903,146
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$
5,691,417
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$
11,604,503
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Balance at December 31,
2019
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13,518,036
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13,518
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27,584,610
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3,683,954
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31,282,082
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Stock-based
compensation
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-
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-
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322,734
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-
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322,734
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Restricted common stock
granted for services
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18,706
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19
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-
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-
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19
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Net income for the
quarter
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-
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-
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-
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875,178
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875,178
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Balance at March 31,
2020
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13,536,742
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$
13,537
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$
27,907,344
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$
4,559,134
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$
32,480,013
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See
accompanying notes to consolidated financial
statements.
5
HireQuest, Inc.
C
onsolidated Statements of
Cash Flows
(unaudited)
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Quarter
ended
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March
31, 2020
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March
31, 2019
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Cash flows from operating activities
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Net
income
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$
875,178
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$
1,717,484
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Income
from discontinued operations
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-
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(19,701
)
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Net
income from continuing operations
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875,178
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1,697,783
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Adjustments
to reconcile net income to net cash used in
operations:
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Depreciation
and amortization
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31,814
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14,037
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Allowance
for losses on notes receivable
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1,447,340
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-
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Stock
based compensation
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322,752
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-
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Deferred
taxes
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(681,485
)
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-
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Changes
in operating assets and liabilities:
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Accounts
receivable
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3,774,946
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(1,120,599
)
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Prepaid
expenses, deposits, and other assets
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(954,054
)
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(208,874
)
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Prepaid
workers' compensation
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(530,776
)
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-
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Due
from affiliates
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-
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143,022
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Accounts
payable
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(10,873
)
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(12,411
)
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Risk
management incentive program liability
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311,200
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-
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Other
current liabilities
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354,844
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-
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Accrued
benefits and payroll taxes
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496,014
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278,621
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Due
to franchisees
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(291,489
)
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1,357,824
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Workers'
compensation claims liability
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319,191
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-
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Net
cash provided by operating activities - continuing
operations
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5,464,602
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2,149,403
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Net
cash provided by (used in) operating activities - discontinued
operations
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37,815
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(531,828
)
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Net
cash provided by operating activities
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5,502,417
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1,617,575
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Cash flows from investing activities
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Purchase
of property and equipment
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(676,653
)
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(158,036
)
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Proceeds
from the sale of property and equipment
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-
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13,815
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Proceeds
from payments on notes receivable
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438,410
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-
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Cash
issued for notes receivable
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(81,155
)
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(11,000
)
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Net
change in franchisee deposits
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642,569
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1,030,553
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Net
cash provided by investing activities
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323,171
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875,332
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Cash flows from financing activities
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Net
change in line of credit
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-
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743,453
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Payments
to affiliates
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-
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(3,093,177
)
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Proceeds
from affiliates
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27,790
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-
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Net
distributions to HQ, LLC members
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-
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(1,035,807
)
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Net
cash provided by (used in) financing activities
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27,790
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(3,385,531
)
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Net increase (decrease) in cash
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5,853,378
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(892,624
)
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Cash, beginning of period
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4,187,450
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1,291,317
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Cash, end of period
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$
10,040,828
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$
398,693
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Supplemental disclosure of cash flow information
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Interest
paid
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11,289
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30,283
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Income
taxes paid
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2,464
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-
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See
accompanying notes to consolidated financial
statements.
6
HireQuest, Inc.
N
otes to Consolidated Financial
Statements
Note 1 – Basis of Presentation and Summary of Significant
Accounting Policies
HireQuest, Inc. (“HQI,” the “Company,”
“we,” us,” or “our”) is a nationwide
franchisor of on-demand labor solution providers in the light
industrial and blue-collar segments of the staffing industry.
Through our franchisees, we provide various types of temporary
personnel via two business models operating under the trade names
“HireQuest Direct,” and “HireQuest.”
HireQuest Direct specializes primarily in unskilled and
semi-skilled industrial and construction personnel. HireQuest
specializes primarily in skilled and semi-skilled industrial
personnel as well as clerical and administrative
personnel.
Basis of Presentation
We have prepared the accompanying consolidated financial
statements in accordance with accounting principles generally
accepted in the United States of America (“GAAP”) for
interim financial reporting and rules and regulations of the
Securities and Exchange Commission (“SEC”).
Accordingly, certain information and footnote disclosures normally
included in financial statements prepared in accordance with GAAP
have been condensed or omitted. 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, 2019. The results of
operations for the quarter ended March 31, 2020 are not necessarily
indicative of the results expected for the full year, or for any
other period.
HQI is the product of a merger between Command Center, Inc.
(“Command Center”), and Hire Quest Holdings, LLC,
(“Hire Quest Holdings”). We refer to Hire Quest
Holdings collectively with its wholly owned subsidiary, Hire Quest,
LLC, as “Legacy HQ.” We refer to this merger, which
closed on July 15, 2019, as the “Merger.” Upon the
closing of the Merger, all of the ownership interests in Legacy HQ
were converted into the right to receive an aggregate number of
shares representing 68% of the total shares of the Company’s
common stock outstanding immediately after the Merger. Because
the Legacy HQ security holders received a majority of the equity
securities and voting rights of the combined company upon the
closing of the Merger, Legacy HQ is considered to be the accounting
acquirer. This means that Legacy HQ will allocate the purchase
price to the fair value of Command Center’s assets acquired
and liabilities assumed on the acquisition date. This also means
that Legacy HQ’s historical financial statements replace
Command Center’s historical financial statements following
the completion of the Merger, and the results of operations of both
companies will be included in our financial statements for all
periods subsequent to the Merger. For additional information
related to the Merger, see
Note 2 –
Acquisitions
.
Consolidation
The consolidated financial statements include the accounts of
HQI and all of its wholly owned subsidiaries. Intercompany balances
and transactions have been eliminated.
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 it.
We provide acquisition financing to some of our franchisees that
could result in us having to absorb losses which results in some of
them being considered a VIE. We have reviewed our relationship with
these franchisees and determined that we are not the primary
beneficiary of any of these entities. Accordingly, these entities
have not been consolidated.
COVID-19 Pandemic
In December 2019, a novel strain of coronavirus disease
("COVID-19") was first reported in Wuhan, China. Less than four
months later, on March 11, 2020, the World Health Organization
declared COVID-19 a pandemic. The extent of COVID-19's effect on
our operational and financial performance and the collectability of
our notes receivable will depend on future developments, including
the duration, spread, and intensity of the pandemic, all of which
are uncertain and difficult to predict considering the rapidly
evolving landscape. As a result, it is not currently possible to
ascertain the overall impact of COVID-19 on our business. However,
if the pandemic continues to evolve into a severe worldwide health
crisis, the disease could have a material adverse effect on the
Company's business, results of operations, financial condition, and
cash flows.
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.
Accounts receivable consist of amounts due for labor services from
customers of franchisees and of previously company-owned offices.
At March 31, 2020 and December 31, 2019, substantially all of our
accounts receivable were due from customers of
franchisees.
We own the accounts receivable from labor services provided by our
franchisees. Accounts receivable that age beyond 84 days are
charged back to our franchisees. Accordingly, we do not record an
allowance for doubtful accounts on these accounts
receivable.
For labor services provided by previously company-owned offices, we
record accounts receivable at face value less an allowance for
doubtful accounts. We determine the allowance for doubtful
accounts based on historical write-off experience, the age of the
receivable, other qualitative factors and extenuating
circumstances, and current economic data which represents our best
estimate of the amount of 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 accounts receivable generated by company-owned
offices was approximately $99,000 and $168,000 at March 31, 2020
and December 31, 2019, respectively.
8
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 line are based on a percentage of sales
for services our franchisees provide to customers which ranges from
6% to 8%. Royalty fees from our HireQuest business line are 4.5% of
the payroll we fund plus 18% of the gross margin for the territory.
We present revenue on a net basis as agent as opposed to a gross
basis as principal. We recognize revenue when we satisfy our
performance obligations. Our performance obligations take the form
of a franchise license and promised services. Promised services
consist primarily of paying temporary employees, completing all
payroll related statutory 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. Royalty fees are
reduced to reflect any royalty incentives earned or granted under
these programs. These incentives and credits are provided to
drive new location development, to encourage organic growth, and to
limit workers' compensation exposure. We present franchise royalty
fees net of these incentives and credits.
Below are summaries of our franchise royalties disaggregated by
brand:
|
|
March 31, 2020
|
March 31, 2019
|
|
HireQuest
Direct
|
$
3,561,403
|
$
2,890,714
|
|
HireQuest
|
143,839
|
265,421
|
|
Total
|
$
3,705,242
|
$
3,156,135
|
Service revenue consists of interest we charge our franchisees on
overdue customer accounts receivable and other fees for optional
services we provide. Interest income is recognized based on the
effective interest rate applied to the outstanding principal
balance. Revenue for optional services is recognized as
services are provided.
Workers’ Compensation Claims Liability
We maintain reserves for workers’ compensation claims based
on their estimated future cost. These reserves include claims that
have been reported but not settled, as well as claims that been
incurred but not reported. Annually, we engage an independent
actuary to estimate the future costs of these claims. Quarterly, we
use development factors provided by an independent actuary to
estimate the future costs of these claims. Adjustments are made as
necessary. If the actual cost of the claims exceeds the amount
estimated, additional charges may be incurred.
Workers’ Compensation Risk Management Incentive Program
(“RMIP”)
Our RMIP is designed to incentivize our franchises to keep our
temporary employees safe and control their exposure to large
workers’ compensation claims. We accomplish this by paying
our franchisees an amount equivalent to a percentage of the premium
our franchises pay for workers’ compensation insurance if
they keep their workers’ compensation loss ratios below
specified thresholds.
Notes Receivable
Notes receivable consist primarily of amounts due to us related to
the financing of franchised locations. We report notes receivable
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 franchisees
and record provisions for estimated losses when we believe it is
probable that our franchisees will be unable to make their required
payments. Our allowance for losses on notes receivable was
approximately $1.4 million and $-0- at March 31, 2020 and December
31, 2019, respectively.
Stock-Based Compensation
Periodically, we issue restricted common shares or options to
purchase our common shares to our officers, directors, or
employees. We measure compensation costs for equity awards at their
fair value on their grant date and expense these costs over the
service period on a straight-line basis.
The fair value of stock awards is based on
the quoted price of our common stock on the grant date.
T
he
fair value of option awards is determined using the Black-Scholes
valuation model.
9
Earnings per Share
We calculate basic earnings (loss) 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 (loss) 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, except where their inclusion would be
anti-dilutive. Outstanding common stock equivalents at December 31,
2019 totaled approximately 29,000.
Diluted common shares outstanding were calculated using the
treasury stock method and are as follows:
|
|
Quarter Ended
|
|
|
|
March 30, 2020
|
March 30, 2019
|
|
Weighted
average number of common shares used in basic net income per common
share
|
13,533,247
|
9,939,668
|
|
Dilutive
effects of stock options
|
1,753
|
-
|
|
Weighted
average number of common shares used in diluted net income per
common share
|
13,535,000
|
9,939,668
|
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 and cash equivalents, 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 outstanding principal
balance, net of estimates for losses, and are reviewed for
impairment at least annually.
|
|
|
Fair
value
|
|
|
|
Level
|
March
30, 2020
|
December
31, 2019
|
|
Cash
|
1
|
$
10,040,828
|
$
4,187,450
|
|
Notes
receivable
|
2
|
9,605,114
|
11,409,709
|
|
Accounts
receivable
|
2
|
24,426,333
|
28,201,279
|
Discontinued Operations
During the quarter ended September 29, 2019, we sold substantially
all of the offices acquired in the Merger with Command Center.
Accordingly, we present the assets and liabilities, operating
results, and cash flows for these businesses and previously
company-owned offices as discontinued operations, separate from our
continuing operations, for all periods presented in our
consolidated financial statements and footnotes, unless
indicated otherwise.
10
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued guidance on lease accounting. The
new guidance continues to classify leases as either finance or
operating, but results in the lessee recognizing most operating
leases on the balance sheet as right-of-use assets and lease
liabilities. This guidance was effective for annual and interim
periods beginning after December 15, 2018, with early adoption
permitted. In July 2018, the FASB amended the standard to provide
transition relief for comparative reporting, allowing companies to
adopt the provisions of the new standard using a modified
retrospective transition method on the adoption date, with a
cumulative-effect adjustment to retained earnings recorded on the
date of adoption. We have elected to adopt the standard using the
transition relief provided in the July amendment.
We have elected the three practical expedients allowed for
implementation of the new standard, but have not utilized the
hindsight practical expedient. Accordingly, we did not reassess: 1)
whether any expired or existing contracts are or contain leases; 2)
the lease classification for any expired or existing leases; or 3)
initial direct costs for any existing leases.
As a result of adopting this guidance, we recognized a right-of-use
asset, and corresponding lease liability, of approximately $200,000
adopted as of January 1, 2019. The adoption of this guidance did
not have a material impact on expense recognition. The deferred
rent liability, which was the difference between the straight-line
lease expense and cash paid, reduced the right-of-use asset upon
adoption.
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.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes
(Topic 740): Simplifying the Accounting for Income Taxes
(“ASU 2019-12”). ASU 2019-12 was issued as a means
to reduce the complexity of accounting for income taxes for those
entities that fall within the scope of the accounting
standard. The guidance is to be applied using a prospective
method, excluding amendments related to franchise taxes, which
should be applied on either a retrospective basis for all periods
presented or a modified retrospective basis through a
cumulative-effect adjustment to retained earnings as of the
beginning of the fiscal year of adoption. We are currently
evaluating the impacts of adoption of the new guidance to our
consolidated financial statements.
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, and cash
flows.
Note 2 – Acquisitions
On July 15, 2019, Command Center completed its acquisition of
Legacy
HQ
in accordance with the terms of the Agreement and Plan of
Merger dated April 8, 2019. Upon the closing of the Merger, all of
the membership interests in Hire Quest Holdings, LLC were converted
into the right to receive 68% of the Company’s common stock
outstanding immediately after the closing, or 9,939,668
shares.
We accounted for the Merger as a reverse acquisition. As such,
Legacy HQ is considered the accounting acquirer and Legacy HQ's
historical financial statements replace Command Center’s
historical financial statements following the completion of the
Merger. The results of operations of both companies are included in
our financial statements for all periods beginning July 15,
2019.
The fair value of the purchase consideration is calculated based on
the Company's stock price as it is considered to be more reliable
than the fair value of the membership interests of Legacy HQ, a
private company. Consideration is calculated based on the Company's
closing share price of $5.76 on Nasdaq on July 15,
2019.
11
The following table summarizes the estimated fair values of the
identifiable assets acquired and liabilities assumed as of the
acquisition date. These estimates are preliminary, pending final
evaluation of certain assets and liabilities, and therefore are
subject to revisions that may result in adjustment to the values
presented below:
|
Common
stock
|
4,677,487
|
|
Closing
share price on July 15, 2019
|
$
5.76
|
|
Stock
consideration
|
$
26,942,325
|
|
|
|
|
Accounts
receivable
|
$
10,480,907
|
|
Cash
and cash equivalents
|
5,376,543
|
|
Identifiable
intangible assets
|
17,015,857
|
|
Other
current assets
|
725,453
|
|
Property,
plant and equipment, net
|
281,186
|
|
Right-of-use
asset
|
1,642,695
|
|
Current
liabilities
|
(3,124,081
)
|
|
Lease
liabilities
|
(1,624,461
)
|
|
Deferred
tax liability
|
(2,930,947
)
|
|
Other
liabilities
|
(900,827
)
|
|
Preliminary
purchase price allocation
|
$
26,942,325
|
Prior to September 2019, we operated a number of company-owned
offices. Subsequently, all owned offices were sold. The vast
majority of these offices became franchisees. As a result, we no
longer operate any company owned offices and operating results from
company-owned locations are included in our consolidated financial
statements as discontinued operations. The income from discontinued
operations as reported on our consolidated statements of operations
was comprised of the following amounts:
|
|
Quarter
ended
|
|
|
|
March
31, 2020
|
March
31, 2019
|
|
Revenue
|
$
-
|
$
179,747
|
|
Cost of staffing
services
|
-
|
149,288
|
|
Gross
profit
|
-
|
30,459
|
|
SG&A
|
-
|
4,190
|
|
Net
income before tax
|
-
|
26,269
|
|
Provision
for income taxes
|
-
|
6,567
|
|
Net
income
|
$
-
|
$
19,701
|
We continue to be involved with the offices we sold through
franchise agreements. The term of our franchise agreements is five
years, subject to renewal at the end of the current term. For the
quarter ended March 31, 2020 and March 31, 2019, approximately
$783,000 and $-0- is included in royalty revenue in our
consolidated statement of operations that originated from sold
locations that subsequently became franchisees.
12
Note 4 – Related Party Transactions
Some significant shareholders of HQI also own portions of Hire
Quest Financial, LLC; Hirequest Insurance Company; Brave New World
Services, LLC, formerly known as Hire Quest LTS, LLC; Jackson
Insurance Agency, Bass Underwriters, Inc. and its related entities;
Insurance Technologies, Inc.; and a number of our
franchisees.
Hire Quest Financial LLC (“HQF”)
Richard Hermanns, our President, CEO, Chairman of our Board, and
most significant stockholder, and Edward Jackson, a member of our
Board and a significant stockholder, own a majority of HQF, a
financial services entity.
On July 14, 2019, Legacy HQ conveyed approximately $2.2 million of
accounts receivable to HQF. These transfers were used to pay down
intercompany debt obligations. The intercompany debt was entirely
extinguished prior to the Merger between Legacy HQ and Command
Center. At March 31, 2020 and December 31, 2019, HQI was not
indebted to HQF for any amount. We currently have no business
dealings with HQF.
Hirequest Insurance Company (“HQ Ins.”)
Mr. Hermanns, his adult daughter, a trust established for the
benefit of his children, and Mr. Jackson, collectively own a
majority of HQ Ins., a North Carolina protected cell captive
insurance company. Effective March 1, 2010, Hire Quest, LLC
purchased a deductible reimbursement insurance policy from HQ Ins.
to cover losses up to the $500,000 per claim deductible on the Hire
Quest, LLC high-deductible workers’ compensation policy
originally obtained through AIG and, later, through ACE American
Insurance Company. Hire Quest, LLC terminated its policy with HQ
Ins. on July 15, 2019 upon the closing of the Merger.
For additional information related to our
workers’ compensation insurance, see
Note 6 – Workers’
Compensation Insurance and
Reserves.
Premiums invoiced by HQ Ins. to Legacy HQ for workers compensation
deductible reimbursement insurance during the quarters ended March
31, 2020 and March 31, 2019 were approximately $-0- and $1.8
million, respectively. We currently have no business dealings with
HQ Ins. other than cooperating to close Legacy HQ's workers'
compensation claims.
Brave New World Services, LLC, formerly known as Hire Quest LTS
(“HQ LTS”)
Mr. Jackson and Mr. Hermanns' son-in-law collectively own a
majority of HQ LTS.
Historically, HQ LTS employed the personnel at Legacy HQ
headquarters. HQI terminated this relationship on July 15, 2019
upon the closing of the Merger. HQ LTS invoiced us approximately
$7,000 during the quarter ended March 31, 2019. We currently have
no business dealings with HQ LTS.
Jackson Insurance Agency ("Jackson Insurance") and Bass
Underwriters, Inc. ("Bass")
Mr. Jackson owns a majority of Jackson Insurance. Mr. Jackson, Mr.
Hermanns, and irrevocable trusts set up by each of them,
collectively own a majority of Bass, a large managing general
agent. Jackson Insurance and Bass brokered Legacy HQ's property,
casualty, general liability, and cybersecurity insurance prior to
the Merger. Since July 15, 2019, they have brokered these same
policies for the Company. Jackson Insurance also brokers certain
insurance policies on behalf of some of our franchisees, including
the Worlds Franchisees.
Premiums, taxes, and fees invoiced by Jackson Insurance and Bass
for the Company's 2020 polices were approximately $561,000 in the
first quarter of 2020. These entities invoiced Hire Quest, LLC
approximately $240,000 in the first quarter of 2019. Jackson
Insurance and Bass do not retain the majority of the premiums, but
they do retain a commission of approximately 9% - 15% of premiums
depending on the market.
Insurance Technologies, Inc. ("Insurance
Technologies")
Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of
them, collectively are the majority owners of Insurance
Technologies, an IT development and security firm. On October 24,
2019, the Company 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. Insurance Technologies invoiced the Company approximately
$50,000 in the first quarter of 2020 pursuant to this
agreement.
13
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 20 Worlds
Franchisees at March 31, 2020 that operated 48 of our 135
offices.
Balances regarding the Worlds Franchisees are summarized
below:
|
|
March 31,
2020
|
December 31,
2019
|
|
Due
to franchisee
|
$
1,034,194
|
$
993,495
|
|
Risk
management incentive program
|
1,186,135
|
1,027,960
|
Transactions regarding the Worlds Franchisees are summarized
below:
|
|
Quarter
ended
|
|
|
|
March 31,
2020
|
March 31,
2019
|
|
Franchisee
royalties
|
$
1,373,876
|
$
1,633,782
|
Note 5 – Line of Credit
In July 2019, we entered into an agreement with Branch Banking and
Trust Company, now Truist Bank (“Truist”), for a $30
million line of credit with a $15 million sublimit for letters of
credit. At March 31, 2020, $9.1 million was utilized by outstanding
letters of credit that secure our obligations to our workers’
compensation insurance carrier, $1 million was utilized by a letter
of credit that secures our paycard funding account, leaving $19.9
million potentially available under the agreement for additional
borrowings. For additional information related to the letter of
credit securing our workers’ compensation obligations
see
Note 6 – Workers’
Compensation Insurance and Reserves.
This line of credit is scheduled to mature on May 31, 2024.
Outstanding borrowings under the loan agreement currently bear
interest at a variable rate equal to the Daily One Month London
Interbank Offering Rate (“LIBOR”) plus a margin between
1.25% and 1.75%. The margin is determined based on the value of our
net collateral, which is equal to our total collateral plus
unrestricted cash less the outstanding balance, if any, under the
loan agreement. At March 31, 2020 the effective interest rate was
2.5%. A non-use fee of between 0.125% and 0.250% 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 events of default and
negative covenants, including but not limited to those governing
indebtedness, liens, fundamental changes, transactions with
affiliates, and sales of assets. This agreement requires us to
comply with a fixed charge coverage ratio of at least 1.10:1.00,
which will be tested quarterly, on a rolling four quarter basis,
commencing with the four quarters ending September 30, 2020. Our
obligations under this agreement are subject to acceleration upon
the occurrence of an event of default as defined in the loan
agreement.
Note 6 – 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 $500,000 per
incident. In addition to the ACE policy, Legacy HQ purchased a
deductible reimbursement insurance policy from HQ Ins. to cover
losses up to the $500,000 deductible with ACE. This resulted in
Legacy HQ effectively being fully insured during this time period.
Effective July 15, 2019, we terminated our deductible reimbursement
policy with HQ Ins. and have assumed the primary responsibility for
all claims up to the deductible occurring on or after July 15,
2019. The primary responsibility of all claims occurring before
July 15, 2019 remains with HQ Ins. We assumed the Legacy HQ policy
with ACE.
14
Command Center 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 $500,000 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 $500,000
(if any), but only up to $750,000 for that claim. All other claims
within the policy year were subject to the $500,000
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 $9.1 million, which we
accomplished by providing letters of credit under our agreement
with Truist.
For workers’ compensation claims originating in the
monopolistic jurisdictions of Washington, North Dakota, Ohio, 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 7 – Stock Based Compensation
Employee Stock Incentive Plan
In November 2016, our stockholders approved a stock incentive plan
(the “2016 Plan”) under which we are authorized to
grant awards for up to 500,000 shares of our common stock over the
10-year life of the plan.
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 key employees and directors up to
$25,000 in aggregate value per individual within any one-year
period. These shares vest on the second anniversary of the date on
which the matched shares were purchased.
In January 2020, we issued 10,124 shares of restricted common stock
pursuant to the 2016 Plan valued at approximately $70,000 to
certain members of our Board of Directors for their services in
lieu of cash compensation. Of these 10,124 shares, 8,436 shares
vest equally over the following three months, and the remaining
1,688 shares vest on the second anniversary of the date of grant.
Also in January 2020, we issued 8,582 shares of restricted common
stock pursuant to our share purchase match program valued at
approximately $59,000.
In November 2019, we issued 9,833 shares of restricted common stock
pursuant to the 2016 Plan valued at approximately $59,000 to
certain members of our Board of Directors for their services in
lieu of cash compensation. Of these 9,833 shares, 8,194 shares vest
equally over the following three months, and the remaining 1,639
shares vest on the second anniversary of the date of grant. Also in
November of 2019, we issued 4,202 shares of restricted common stock
pursuant to the 2016 Plan valued at $25,000 to an employee in lieu
of cash for a bonus, which vest equally over the following three
months.
In September 2019, we issued 160,000 shares of restricted common
stock to certain key employees pursuant to the 2016 Plan valued at
approximately $1.1 million for services, and to encourage
retention. These shares vest over four years, with 50% vesting on
September 1, 2021, and 6.25% vesting each quarter thereafter for
the next eight quarters. Also in September 2019, we issued 90,000
shares of restricted common stock pursuant to the 2016 Plan valued
at $648,000 for services to non-employee members of our Board of
Directors. These shares vest equally over approximately three years
with the first vesting occurring the day before our annual
stockholder meeting to be held in 2020, and the remainder vesting
in equal portions on each of the first two anniversaries of that
date.
15
The following table summarizes our restricted stock outstanding at
December 31, 2019, and changes during the quarter ended March 31,
2020.
|
|
Shares
|
Weighted
average grant date price
|
|
Non-vested,
December 31, 2019
|
255,634
|
$
7.18
|
|
Granted
|
18,706
|
7.15
|
|
Vested
|
(14,057
)
|
6.69
|
|
Non-vested,
March 31, 2020
|
260,283
|
7.32
|
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 2016 Plan, and the corresponding award documents.
There were approximately 24,000 stock options vested at March 31,
2020 and December 31, 2019.
The following table summarizes our stock options outstanding at
December 31, 2019, and changes during the quarter ended March 31,
2020:
|
|
Number of shares underlying options
|
Weighted average exercise price per share
|
Weighted average grant date fair value
|
|
Outstanding,
December 31, 2019
|
29,165
|
$
7.20
|
$
3.46
|
|
Granted
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Outstanding,
March 31, 2020
|
29,165
|
7.20
|
3.76
|
The following table summarizes our non-vested stock options
outstanding at December 31, 2019, and changes during the quarter
ended March 31, 2020:
|
|
Number of shares underlying options
|
Weighted average exercise price per share
|
Weighted average grant date fair value
|
|
Non-vested,
December 31, 2019
|
5,416
|
$
5.48
|
$
3.01
|
|
Granted
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Vested
|
-
|
-
|
-
|
|
Non-vested,
March 31, 2020
|
5,416
|
5.48
|
3.01
|
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 $5.97 at March 31,
2020:
|
|
Number
of shares underlying options
|
Weighted
average exercise price per share
|
Weighted
average remaining contractual life (years)
|
Aggregate
intrinsic value
|
|
Outstanding
|
29,165
|
$
7.20
|
4.47
|
$
36,171
|
|
Exercisable
|
23,749
|
7.59
|
3.64
|
32,334
|
At March 31, 2020, there was unrecognized stock-based compensation
expense totaling approximately $1.3 million relating to non-vested
options and restricted stock grants that will be recognized over
the next 3.3 years.
16
Note 8 – Commitments and Contingencies
Franchise Acquisition Indebtedness
We financed the purchase of several offices by new franchisees with
notes receivable. 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 on March 31,
2020 and December 31, 2019 was approximately $2.5
million.
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 March 31, 2020.
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 as the tax environment changes.
For additional information related to our notes
receivable, see
Note 10 – Notes
Receivable.
Our effective tax rate for the quarter ended March 31,
2020 was 18.5%. The difference between the statutory federal
income tax rate of 21.0% and our effective income tax
rate results primarily from the federal Work Opportunity Tax
Credit. This tax credit is designed to encourage employers to hire
workers from certain targeted groups with higher than average
unemployment rates. Other differences between the statutory federal
income tax rate of 21.0% and our effective tax rate
result from state income taxes, certain non-deductible expenses,
and tax effects of stock-based compensation.
Note 10 – Notes Receivable
Some franchisees, as well as the purchaser of our previously owned
California locations, have borrowed funds from us primarily to
finance the initial purchase price of sold locations. Notes
outstanding were approximately $9.6 million and $11.4 million as of
March 31, 2020 and December 31, 2019, respectively, net of
allowance for losses.
Notes receivable bear interest at a fixed rate between 6.0% and
10.0%. Notes are generally secured by the assets of each location
and the ownership interests in the franchisee. Interest income on
franchisee notes is reported in other miscellaneous income in
our consolidated statements of operations and was
approximately $198,000 and $-0- in the quarters ended March 31,
2020 and March 31, 2019, respectively.
We estimate the allowance for loss for franchisees discretely from
the allowance for loss from non-franchisees because of the level of
detailed sales information available to us. There have been no
historic losses for either segment.
Based on our review of the financial condition of the borrowers,
the underlying collateral value, and the potential future impact of
COVID-19 on certain borrowers’ economic performance and
estimated future cash flows, we have established an allowance of
approximately $1.4 million as of March 31, 2020 for potentially
uncollectible notes receivable. There were no loans in default as
of March 31, 2020.
17
The following table summarizes changes in our notes receivable
balance to franchisees:
|
Balance
as of December 31, 2019
|
$
9,702,471
|
|
Notes
issued
|
38,000
|
|
Payments
received
|
(438,410
)
|
|
Change
in valuation allowance
|
(366,472
)
|
|
Balance
as of March 31, 2020
|
$
8,935,589
|
The following table summarizes changes in our notes receivable
balance to non-franchisees:
|
Balance
as of December 31, 2019
|
$
1,707,238
|
|
Accrued
interest
|
43,155
|
|
Total
unpaid balance
|
1,750,393
|
|
Change
in valuation allowance
|
(1,080,868
)
|
|
Balance
as of March 31, 2020
|
$
669,525
|
Note 11 - Subsequent Events
Issuance of Common Stock
In April 2020, we issued 8,381 shares of restricted common stock
pursuant to the 2016 Plan valued at approximately $52,000 to
certain members of our Board of Directors for their services in
lieu of cash compensation. Of these 8,381 shares, 6,985 shares vest
equally over the following three months, and the remaining 1,396
shares vest on the second anniversary of the date of
grant.
18
I
tem 2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q for the quarter ended March 31,
2020 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 the novel coronavirus disease
(“COVID-19”); operating results; anticipated benefits
of the merger with Command Center, Inc., or the conversion to the
franchise model; 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 including, without limitation,
successful integration following the merger with Command Center,
Inc.; 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; and the factors discussed in the “Risk
Factors” section and elsewhere in our most recent Annual
Report on Form 10-K which we filed with the SEC on March 30,
2020.
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, 2020, we had 135 franchisee-owned offices in 30 states
and the District of Columbia. We 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.
19
COVID-19
The recent coronavirus pandemic has already had, and we expect it
to continue to have, a significant impact on our operations. In
March 2020, infections of the novel coronavirus disease
("COVID-19") had become pandemic with persons testing positive in
all fifty states and the District of Columbia. With widespread
infection in the United States and abroad, national, state, and
local authorities recommended social distancing and have taken
dramatic action including, without limitation, 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 serious adverse
impacts on domestic and foreign economies of uncertain duration.
The effectiveness of economic stabilization efforts, including
government payments to affected citizens and industries, is
uncertain. Most economists are predicting the United States will
soon enter, or may already have entered, a recession.
We entered 2020 prepared for a potential economic downturn with a
strong balance sheet. Our assets exceeded liabilities by more than
$30 million. In the first quarter of 2020, we significantly
improved our already-strong cash position to $10 million. The
sweeping nature of the COVID-19 pandemic makes it extremely
difficult to predict how our business operations will be affected
in the long term. But the likely overall impact of the pandemic is
viewed as highly negative to the general economy. The COVID-19
outbreak has negatively impacted our operations and revenue as well
as those of our franchisees. While we did not see major impacts on
system-wide sales and resulting revenue until the final few weeks
of the first quarter, these depressed sales have continued into
April and May. Our system-wide sales appeared to be consistent for
the last few weeks of April, however, they were lower than
system-wide sales in March, and we expect negative impacts on
system-wide sales and resulting revenue in the second quarter and,
perhaps, beyond. What remains unclear and difficult to predict is
the length of time we will stay at this comparatively reduced level
of sales.
To date, our franchisees have closed or consolidated 13 offices at
least, in part, due to the potential 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 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, or auto auction services. We have
witnessed a significant drop in the amount of hospitality, event
service, catering, and auto auction business that our franchisees
do. Our other lines of business may suffer in the future as
well. For example, in a small number of jurisdictions our customers
have been declared non-essential businesses causing business to
slow extensively. Some of our other customers may choose
voluntarily to close their worksites. To date, however, our
business remails open, and we continue to provide key services to
essential businesses.
In response to current economic conditions, we are taking
appropriate measures to control and reduce selling, general, and
administrative expense ("SG&A"). In addition, we placed a
reserve of $1.4 million on the promissory notes we hold from our
franchisees and the purchasers of our previously owned California
offices. We calculated the reserve based on our review of the
financial condition of the borrowers and of the underlying
collateral. This reserve arose directly out of the impacts of
COVID-19. We believed such a reserve would assist us in dealing
with non-payment or delayed payment of portions of these
notes.
As discussed more fully below, our already strong liquidity
position has improved since December 31, 2019 because of decreased
funding requirements for temporary employees which has caused our
accounts receivable to be converted to cash upon collection. We
increased our cash balance approximately $5.8 million in the first
quarter of 2020 from $4.2 million at year end to $10.0 million.
When combined with our borrowing capacity under our line of credit
and lack 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.
20
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
The following table displays our consolidated statements of
operations for the quarters ended March 31, 2020 and March 31, 2019
(in thousands, except percentages). Sales and expenses at
company-owned offices are reflected on the line item, “Income
from discontinued operations, net of tax.”
|
|
Quarter
ended
|
|||
|
|
March
31, 2020
|
March
31, 2019
|
||
|
Franchise
royalties
|
$
3,705
|
89.9
%
|
$
3,156
|
90.9
%
|
|
Service
revenue
|
415
|
10.1
%
|
316
|
9.1
%
|
|
Total
revenue
|
4,120
|
100.0
%
|
3,472
|
100.0
%
|
|
Selling,
general and administrative expenses
|
3,253
(1)
|
79.0
%
|
1,552
|
44.7
%
|
|
Depreciation
and amortization
|
32
|
0.7
%
|
14
|
0.4
%
|
|
Income
(loss) from operations
|
835
|
20.3
%
|
1,906
|
54.9
%
|
|
Other
miscellaneous income
|
251
|
6.1
%
|
28
|
0.8
%
|
|
Interest
and other financing expense
|
(11
)
|
(0.3
%)
|
(185
)
|
(5.3
%)
|
|
Net income before
income taxes
|
1,074
|
26.1
%
|
1,749
|
50.4
%
|
|
Provision (benefit)
for income taxes
|
199
|
4.9
%
|
51
|
1.5
%
|
|
Income
(loss) from continuing operations
|
875
|
21.2
%
|
1,698
|
48.9
%
|
|
Income from
discontinued operations, net of tax
|
-
|
0.0
%
|
20
|
0.6
%
|
|
Net income
(loss)
|
$
875
|
21.2
%
|
$
1,717
|
49.5
%
|
1.
Includes
a reserve of approximately $1.4 million on notes
receivable.
Quarter Ended March 31, 2020
Franchise Royalties
We charge our franchisees a royalty fee on gross billings to
customers based on one of two models: the HireQuest Direct model or
the HireQuest model. Under the HireQuest Direct model, the royalty
fee charged ranges from 6% to 8% of gross billings. Royalty fees
are charged at 8% for the first $1,000,000 of annual billing, with
the royalty fee dropping ½ of 1% for every $1,000,000 of
annual billing thereafter until the royalty fee is 6%. The smaller
royalty fee is charged only on the incremental billing, resulting
in an actual royalty fee at a blended rate between 6% and 8%. Under
this model, we grant our franchisees credits for low margin
business. Under the HireQuest model, the royalty fee is 4.5% of the
temporary payroll we fund plus 18% of the gross margin for the
territory.
Franchise royalties for the quarter ended March 31, 2020 were
approximately $3.7 million, an increase of 17.4% from $3.2 million
for the quarter ended March 31, 2019. Of this increase,
approximately $783,000 arose from the offices acquired through the
Merger. Royalty revenue during the last few weeks of the first
quarter 2020 was negatively impacted by decreased activity related
to COVID-19. This negative impact
continued
into the second quarter. We expect decreased royalty revenue in the
second quarter, and perhaps, beyond when compared to historical
levels.
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 are no longer charged interest.
21
Service revenue for the quarter ended March 31, 2020 was
approximately $415,000, an increase of $99,000 from approximately
$316,000 in the first quarter of 2019. This increase is largely
related to an increase in interest charged on overdue customer
accounts receivable.
Selling, General, and Administrative Expenses
(“SG&A”)
SG&A for the quarter was approximately $3.3 million, an
increase of 109.6% from $1.6 million in the first quarter of 2019.
The majority of this increase is due to a $1.4 million reserve
placed on notes receivable we issued to finance the sale of offices
acquired in the Merger. This reserve is directly related to the
negative impact COVID-19 has had on the economy, the financial
condition of our borrowers, and the value of the underlying
collateral. We also had an increase in stock-based compensation of
approximately $323,000, an increase in legal and professional fees
of $282,000 primarily as a result of increased auditor and legal
fees related to SEC filings, and increased compensation costs of
approximately $147,000. These increased costs were offset by a
decrease in workers’ compensation costs of approximately
$702,000.
In the last few weeks of the first quarter, we significantly cut
our payroll costs at our corporate headquarters to partially offset
our expectation of decreased revenue resulting from
COVID-19.
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 issued in connection with the sale of
offices acquired in the in the Merger. In addition, we have the
capacity to borrow under our line of credit with
Truist.
On March 31, 2020, our current assets exceeded our current
liabilities by approximately $28.5 million. Our current assets
included approximately $10.0 million of cash and $24.4 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 $3.3 million due
to our franchisees, $2.5 million related to our workers’
compensation claims liability, and $2.1 million due in relation to
our risk management incentive program.
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 witnessed this in the first
quarter of 2020 as COVID-19 decreased our temporary payroll
requirements. Our cash balance rose from $4.2 million at the end of
2019 to $10.0 million at the end of the first quarter.
We believe that our current cash balance, together with the future
cash generated from operations, principal and interest payments on
notes receivable, and our borrowing capacity under our line of
credit with Truist, will provide adequate resources to meet our
working capital needs and cash requirements 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.
Operating Activities
Net cash provided by operating activities from continuing
operations for the quarter ended March 31, 2020 was approximately
$5.5 million. Operating activity for the quarter 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 offset by an increase in prepaid expenses,
deposits, and other assets of approximately $954,000. Net cash
provided by operating activities from continuing operations for the
quarter ended March 31, 2019 was approximately $2.1 million.
Operating activity for the first quarter of 2019 included net
income from continuing operations of approximately $1.7 million and
an increase of approximately $1.4 million due our franchisees.
These provisions were offsets by a decrease in accounts payable of
approximately $1.1 million.
22
Investing Activities
Net cash provided by investing activities for the quarter ended
March 31, 2020 was approximately $323,000. Investing activity for
the first quarter of 2020 included an increase in franchisee
deposits of approximately $643,000 and payments on notes receivable
of approximately $438,000, which were offset by the purchase of
property and equipment of approximately $677,000. Net cash provided
by investing activities for the quarter ended March 31, 2019 was
approximately $875,000 and was primarily due an increase in
franchisee deposits.
Financing Activities
Net cash provided by financing activities the quarter ended March
31, 2020 was approximately $28,000 and was due to an increase in
amounts due from affiliates. Net cash used by financing activities
for the quarter ended March 31, 2019 was approximately $3.3 million
and was primarily due to payments to affiliates of approximately
$3.1 million.
System-Wide Sales
We refer to total sales generated by our franchisees as
“franchise sales.” We refer to offices that we owned
and operated as “company-owned offices.” Sales at
company-owned offices are reflected net of costs, expenses, and
taxes associated with those sales on our financial statements as
“Income from discontinued operations, net of tax.” We
refer to the sum of franchise sales and sales at company-owned
offices 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
non-GAAP measure. While we do not record franchise sales as
revenue, management believes that information on system-wide sales
is important to understanding the Company’s financial
performance because those sales are the basis on which we calculate
and record franchise royalty revenue, are directly related to
interest charged on overdue accounts, which we record under service
revenue, and are indicative of the financial health of the
franchisee base. System-wide sales are not intended to represent
revenue as defined by GAAP, and such information should not be
considered as an alternative to revenue or any other measure of
performance prescribed by U.S. GAAP.
During the first quarter of 2020, all of our offices were
franchised. Accordingly, system-wide sales for the first quarter of
2020 were all produced at franchised offices. The following table
reflects our system-wide sales broken into its components for the
periods indicated:
|
|
March 31,
2020
|
March 31,
2019
|
|
Franchise
sales
|
$
56,462,605
|
$
47,384,474
|
|
Company-owned
sales
|
-
|
179,747
|
|
System-wide
sales
|
$
56,462,605
|
$
47,564,221
|
System-wide sales were $56.4 million in the first quarter of 2020,
up $8.9 million or 18.7% over the first quarter of 2019. The
increase in system-wide sales arose largely from the offices added
in July 2019 via the Merger. In the closing weeks of the first
quarter of 2020, we experienced a decline in week-over-week
system-wide sales. This decline has continued into the second
quarter. The week-over-week system-wide sales appeared to stabilize
at a decreased level in the last few weeks of April. We expect
system-wide sales to be lower in the second quarter, and perhaps,
beyond.
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.
The following table accounts for the number of offices opened and
closed or consolidated in the first quarter of 2020.
|
Franchised
Offices, December 31, 2019
|
147
|
|
Closed
or consolidated in 2020
|
(13
)
|
|
Opened
in 2020
|
1
|
|
Franchised
Offices, March 31, 2020
|
135
|
23
Office
closures and consolidations in the first quarter of 2020 were
largely related to the economic impacts of COVID-19. Of the 13
closures or consolidations, 11 were in metropolitan areas where our
franchisees still maintain one or multiple offices. The remaining 2
offices, Findlay, OH and Flagstaff, AZ, did not historically
produce significant amounts of system-wide sales and resulting
revenue. Accordingly, we do not expect such closures and
consolidations in-and-of themselves to have a material impact on
our system-wide sales, revenue, or other results of operations. It
is difficult to predict whether the impacts of COVID-19 will cause
more closures. A franchisee opened one office in Rock Hill, South
Carolina.
I
tem 3. Quantitative and Qualitative
Disclosures about Market Risk
We are
a “smaller reporting company” as defined by Regulation
S-K and, as such, we are not required to provide the information
contained in this item pursuant to Regulation S-K.
I
tem 4. Controls and
Procedures
(a)
Evaluation of disclosure controls
and procedures.
Our Chief Executive Officer and our Chief
Financial Officer evaluated our disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended, the Exchange Act), prior to
the filing of this Form 10-Q. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that, as of
March 31, 2020, our disclosure controls and procedures were
effective.
(b)
Changes in internal controls over
financial reporting.
There have not been any changes in our
internal control over financial reporting during quarter ended
March 31, 2020, which have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
P
ART II. OTHER
INFORMATION
I
tem 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.
I
tem 1A. Risk Factors
There
have been no material changes from the risk factors we previously
disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2019 filed with the Securities and Exchange Commission
on March 30, 2020.
I
tem 2. Unregistered Sales of Equity
Securities and Use of Proceeds
Recent Sales of Unregistered Securities
We did not issue any unregistered securities during the quarter
ended March 31, 2020.
Purchase of Equity Securities by the Issuer and Affiliated
Purchasers
We did
not purchase any of our own securities during the quarter ended
March 31, 2020.
I
tem 5. Other Information
None.
24
I
tem 6. Exhibits
|
Exhibit No.
|
|
Description
|
|
|
Certification of Chief Executive Officer - § 302 Certification
(filed herewith).
|
|
|
|
Certification of Chief Financial Officer - § 302 Certification
(filed herewith).
|
|
|
|
Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. § 1350, as adopted in § 906
of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
|
101.INS
|
|
XBRL Instance Document (filed herewith).
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema Document (filed
herewith).
|
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase Document (filed
herewith).
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase Document (filed
herewith).
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase Document (filed
herewith).
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase Document (filed
herewith).
|
25
S
IGNATURES
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
|
|
|
|
May 11,
2020
|
|
|
Richard
Hermanns
|
|
|
|
Date
|
|
| President and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Cory
Smith
|
|
|
|
May 11,
2020
|
|
|
Cory
Smith
|
|
|
|
Date
|
|
| Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
26
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsNote 1 Basis Of Presentation and Summary Of Significant Accounting PoliciesNote 2 AcquisitionsNote 3 Discontinued OperationsNote 4 Related Party TransactionsNote 6 Workers Compensation Insurance and ReservesNote 5 Line Of CreditNote 7 Stock Based CompensationNote 8 Commitments and ContingenciesNote 9 Income TaxNote 10 Notes ReceivableNote 11 - Subsequent EventsItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 5. Other InformationItem 6. Exhibits