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: JUNE 30, 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 August 10,
2020: 13,589,790
HireQuest, Inc.
Table of Contents
PART I. FINANCIAL INFORMATION
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Page
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3
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4
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5
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6
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7
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19
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24
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24
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PART II. OTHER
INFORMATION
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25
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25
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27
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27
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27
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28
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2
PART I. FINANCIAL INFORMATION
I
tem 1. Financial Statements
H
ireQuest, Inc.
Consolidated Balance Sheets
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June
30,
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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$
13,746,445
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$
4,187,450
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Accounts
receivable, net of allowance for doubtful accounts
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19,646,917
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28,201,279
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Notes
receivable
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2,190,431
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3,419,458
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Prepaid expenses,
deposits, and other assets
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1,097,399
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188,560
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Prepaid workers'
compensation
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1,899,899
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822,938
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Other
assets
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-
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201,440
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Total current
assets
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38,581,091
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37,021,125
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Property and
equipment, net
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2,788,683
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1,900,686
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Intangible assets,
net
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23,978
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-
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Notes receivable,
net of current portion and reserve
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6,799,848
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7,990,251
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Total
assets
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$
48,193,600
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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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$
85,359
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$
253,845
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Other current
liabilities
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1,143,872
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1,893,846
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Accrued benefits
and payroll taxes
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1,520,677
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1,113,904
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Due to
franchisees
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2,744,587
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3,610,596
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Risk management
incentive program liability
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2,021,605
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1,811,917
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Workers'
compensation claims liability
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2,884,656
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2,327,869
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Total current
liabilities
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10,400,756
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11,011,977
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Workers'
compensation claims liability, net of current portion
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1,871,457
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1,516,633
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Franchisee
deposits
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1,423,635
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1,412,924
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Deferred tax
liability
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618,376
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1,688,446
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Total
liabilities
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14,314,224
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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, 1,000,000 shares authorized; none
issued
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-
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-
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Common stock -
$0.001 par value, 30,000,000 shares authorized; 13,575,123 and
13,518,036 shares issued and outstanding, respectively
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13,575
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13,518
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Additional paid-in
capital
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28,149,667
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27,584,610
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Retained
earnings
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5,716,134
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3,683,954
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Total stockholders'
equity
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33,879,376
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31,282,082
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Total liabilities
and stockholders' equity
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$
48,193,600
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$
46,912,062
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See
accompanying notes to consolidated financial
statements.
3
H
ireQuest, Inc.
Consolidated Statements of Income
(unaudited)
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Three months ended
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Six months ended
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June 30,
2020
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June 30,
2019
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June 30,
2020
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June 30,
2019
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Franchise
royalties
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$
2,639,287
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$
2,981,420
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$
6,344,529
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$
6,137,556
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Service
revenue
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261,703
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257,245
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676,441
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573,359
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Total
revenue
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2,900,990
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3,238,665
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7,020,970
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6,710,915
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Selling,
general and administrative expenses
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1,931,076
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871,444
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5,184,447
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2,423,865
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Depreciation
and amortization
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32,402
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21,393
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64,215
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35,430
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Income
from operations
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937,512
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2,345,828
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1,772,308
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4,251,620
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Other
miscellaneous income
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288,837
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218,471
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539,545
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246,860
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Interest
and other financing expense
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(17,850
)
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(230,404
)
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(29,139
)
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(415,376
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Net income before
income taxes
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1,208,499
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2,333,895
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2,282,714
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4,083,104
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Provision for
income taxes
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51,497
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48,181
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250,534
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99,606
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Income
from continuing operations
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1,157,002
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2,285,714
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2,032,180
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3,983,498
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Income from
discontinued operations, net of tax
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-
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20,382
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-
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40,083
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Net
income
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$
1,157,002
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$
2,306,096
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$
2,032,180
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$
4,023,581
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Basic earnings per share
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Continuing
operations
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$
0.09
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$
0.23
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$
0.15
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$
0.40
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Discontinued
operations
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-
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-
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-
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-
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Total
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$
0.09
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$
0.23
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$
0.15
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$
0.40
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Diluted earnings per share
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Continuing
operations
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$
0.09
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$
0.23
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$
0.15
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$
0.40
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Discontinued
operations
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-
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-
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-
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-
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Total
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$
0.09
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$
0.23
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$
0.15
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$
0.40
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Weighted average shares outstanding:
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Basic
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13,547,950
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9,939,668
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13,540,599
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9,939,668
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Diluted
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13,549,727
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9,939,668
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13,542,758
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9,939,668
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See
accompanying notes to consolidated financial
statements.
4
H
ireQuest, Inc.
Consolidated Statements of Changes in Stockholders’
Equity
(unaudited)
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Common
stock
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Six months ended
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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, 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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565,057
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-
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565,057
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Restricted
common stock granted for services
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57,087
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57
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-
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-
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57
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Net
income for the quarter or year
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-
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-
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-
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2,032,180
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2,032,180
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Balance
at June 30, 2020
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13,575,123
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$
13,575
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$
28,149,667
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$
5,716,134
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$
33,879,376
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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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(1,785,833
)
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-
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(1,785,833
)
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Net
income for the quarter or year
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-
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-
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-
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4,023,581
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4,023,581
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Balance
at June 30, 2019
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9,939,668
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$
9,940
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$
5,153,120
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$
7,997,514
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$
13,160,574
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Three months ended
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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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$
4,559,132
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$
32,480,013
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Stock-based
compensation
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-
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-
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242,323
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-
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242,323
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Restricted
common stock granted for services
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38,381
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38
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-
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-
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38
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Net
income for the quarter or year
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-
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-
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-
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1,157,002
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1,157,002
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Balance
at June 30, 2020
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13,575,123
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$
13,575
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$
28,149,667
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$
5,716,134
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$
33,879,376
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|
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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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$
5,691,418
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$
11,604,504
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Net
distributions
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-
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-
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(750,026
)
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-
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(750,026
)
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Net
income for the quarter or year
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-
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-
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-
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2,306,096
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2,306,096
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Balance
at June 30, 2019
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9,939,668
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$
9,940
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$
5,153,120
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$
7,997,514
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$
13,160,574
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See
accompanying notes to consolidated financial
statements.
5
H
ireQuest, Inc.
Consolidated Statements of Cash Flows
(unaudited)
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Six months ended
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June 30,
2020
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June 30,
2019
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Cash flows from operating activities
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Net
income
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$
2,032,180
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$
4,023,580
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Loss
from discontinued operations
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-
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(40,083
)
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Net
income from continuing operations
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2,032,180
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3,983,497
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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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64,215
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35,430
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Allowance
for losses on notes receivable
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1,598,673
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-
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Stock
based compensation
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565,114
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-
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Deferred
taxes
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(1,070,070
)
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-
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Gain
on disposition of property and equipment
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-
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(189,591
)
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Changes
in operating assets and liabilities:
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Accounts
receivable
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8,554,362
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199,059
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Prepaid
expenses, deposits, and other assets
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(908,839
)
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(24,693
)
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Prepaid
workers' compensation
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(1,076,961
)
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(758,410
)
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Accounts
payable
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(168,486
)
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(35,752
)
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Risk
management incentive program liability
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209,688
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361,202
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Other
current liabilities
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(787,765
)
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89,162
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Accrued
benefits and payroll taxes
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406,773
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356,425
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Due
to franchisees
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(866,009
)
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1,442,586
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Workers'
compensation claims liability
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911,611
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-
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Net
cash provided by operating activities - continuing
operations
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9,464,486
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5,458,915
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Net
cash provided by (used in) operating activities - discontinued
operations
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201,440
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(3,911,066
)
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Net
cash provided by operating activities
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9,665,926
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1,547,849
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Cash flows from investing activities
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Purchase
of property and equipment
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(952,212
)
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(261,064
)
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Proceeds
from the sale of property and equipment
|
-
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563,795
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Purchase
of intangible assets
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(23,978
)
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-
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Proceeds
from payments on notes receivable
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1,002,858
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-
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Cash
issued for notes receivable
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(182,101
)
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(24,505
)
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Net
change in franchisee deposits
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10,711
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704,800
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Net
cash (used in) provided by investing activities
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(144,722
)
|
983,026
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Cash flows from financing activities
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|
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Payments
to affiliates
|
-
|
(2,025,062
)
|
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Proceeds
from affiliates
|
37,791
|
-
|
|
Net
distributions to Legacy HQ members
|
-
|
(1,785,833
)
|
|
Net
cash provided by (used in) financing activities
|
37,791
|
(3,810,895
)
|
|
Net increase (decrease) in cash
|
9,558,995
|
(1,280,020
)
|
|
Cash, beginning of period
|
4,187,450
|
1,291,317
|
|
Cash, end of period
|
$
13,746,445
|
$
11,297
|
|
Supplemental disclosure of cash flow information
|
|
-
|
|
Interest
paid
|
29,139
|
415,376
|
|
Income
taxes paid
|
1,665,099
|
-
|
See
accompanying notes to consolidated financial
statements.
6
H
ireQuest, Inc.
Notes 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 (“U.S. 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 U.S.
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. Results for the interim
periods presented 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 are 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.
U.S. GAAP requires the primary beneficiary of a variable interest
entity (“VIE”) to consolidate that entity. To be the
primary beneficiary of a VIE, an entity must have both the power to
direct the activities that most significantly impact the
VIE’s economic performance, and the obligation to absorb
losses or the right to receive benefits from the VIE that are
significant to the beneficiary. We provide acquisition financing to
some of our franchisees that could result in our having to absorb
losses. This results in some franchisees being considered VIEs. We
have reviewed our relationship with each of these franchisees and
determined that we are not the primary beneficiary of any of these
entities. Accordingly, 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. As a result, it is not
currently possible to ascertain the overall impact of COVID-19 on
our business. However, the pandemic has had a material adverse
effect on our business and results of operations. If the pandemic
continues to be a severe worldwide health crisis, the disease could
have a material adverse effect on our future 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 and Allowance for Doubtful
Accounts
Accounts receivable consist of amounts due for labor services from
customers of franchisees and of previously company-owned offices.
At June 30, 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 until they age beyond 84 days. When accounts receivable
age beyond 84 days, they are charged back to our franchisees.
Accordingly, we do not record an allowance for doubtful accounts on
these accounts receivable.
For labor services originally provided by company-owned offices, we
record accounts receivable at face value less an allowance for
doubtful accounts. We determine the allowance for doubtful
accounts based on historical write-off experience, the age of the
receivable, other qualitative factors and extenuating
circumstances, and current economic data which represents our best
estimate of the amount of 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 $129,000 and $168,000 at June 30, 2020
and December 31, 2019, respectively.
Revenue Recognition
Our primary source of revenue comes from royalty fees based on the
operation of our franchised offices. Royalty fees from our
HireQuest Direct business model are based on a percentage of sales
for services our franchisees provide to customers, which ranges
from 6% 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 incentives earned or credits granted under
these programs. These incentives and credits are provided to
encourage new office development, 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:
|
|
Three
months ended
|
Six
months ended
|
||
|
|
June
30,
2020
|
June
30,
2019
|
June
30,
2020
|
June
30,
2019
|
|
HireQuest
Direct
|
$
2,468,581
|
$
2,756,048
|
$
6,029,984
|
$
5,646,762
|
|
HireQuest
|
170,706
|
225,372
|
314,545
|
490,794
|
|
Total
|
$
2,639,287
|
$
2,981,420
|
$
6,344,529
|
$
6,137,556
|
Service revenue, which forms the other component of our total
revenue, consists of interest we charge our franchisees on overdue
customer accounts receivable and other fees for optional services
we provide. We recognize interest income based on the effective
interest rate applied to the outstanding principal balance of
overdue accounts. We recognize revenue from optional services
as we provide them.
8
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 have
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. We make adjustments as
necessary on an ongoing basis. If the actual costs of the claims
exceed the amount estimated, we may incur additional
charges.
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 refunding
our franchisees a portion of the premium they 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 offices. 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 office 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 $1.6
million and $-0- at June 30, 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.
We use the
Black-Scholes valuation model to determine the value of option
awards.
Intangible Assets – Internal Use Software
We capitalize costs to develop or purchase computer software for
internal use which are incurred during the application development
stage. These costs include fees paid to third-parties for
development services and payroll costs for employees' time spent
developing the software. We expense costs incurred during the
preliminary project stage along with post-implementation stages as
we incur them.
Capitalized development costs will be amortized on a straight-line
basis over the estimated useful life of the software. The
capitalization and ongoing assessment of recoverability of
development costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological and economic feasibility, and estimated economic
life.
Earnings per Share
We calculate basic earnings per share by dividing net income or
loss available to common stockholders by the weighted average
number of common shares outstanding. 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 June 30,
2020 totaled approximately 29,000.
We use the treasury stock method to calculate the diluted common
shares outstanding which were as follows:
|
|
Three months ended
|
Six months ended
|
||
|
|
June 30,
2020
|
June 30,
2019
|
June 30,
2020
|
June 30,
2019
|
|
Weighted
average number of common shares used in basic net income per common
share
|
13,547,950
|
9,939,668
|
13,540,599
|
9,939,668
|
|
Dilutive
effects of stock options
|
1,777
|
-
|
2,159
|
-
|
|
Weighted
average number of common shares used in diluted net income per
common share
|
13,549,727
|
9,939,668
|
13,542,758
|
9,939,668
|
9
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 is reviewed for
impairment at least annually.
|
|
|
Fair value
|
|
|
|
Level
|
June 30,
2020
|
December 31,
2019
|
|
Cash
|
1
|
$
13,746,445
|
$
4,187,450
|
|
Notes
receivable
|
2
|
8,990,279
|
11,409,709
|
|
Accounts
receivable
|
2
|
19,646,917
|
28,201,279
|
Discontinued Operations
During the third quarter of 2019, we sold substantially all of the
offices we acquired in the Merger with Command Center. Accordingly,
we present the assets and liabilities, operating results, and cash
flows for these 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.
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.
10
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 2019-12, Income Taxes (Topic
740): Simplifying the Accounting for Income Taxes. The standard 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, or 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 July 15, 2019.
The following table summarizes the estimated fair values of the
identifiable assets acquired and liabilities assumed as of the
acquisition date:
|
Closing
share price on July 15, 2019
|
$
5.76
|
|
Common
stock
|
4,677,487
|
|
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
)
|
|
Purchase
price allocation
|
$
26,942,325
|
11
Note 3 – Discontinued Operations
Prior to September 2019, we operated a number of company-owned
offices. Subsequently, all of these company-owned offices were
sold, the vast majority becoming franchisees, and we now no longer
operate any company-owned offices. Operating results from
company-owned offices 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:
|
|
Three months ended
|
Six months ended
|
||
|
|
June 30,
2020
|
June 30,
2019
|
June 30,
2020
|
June 30,
2019
|
|
Revenue
|
$
-
|
$
202,579
|
$
-
|
$
382,326
|
|
Cost of staffing
services
|
-
|
170,960
|
-
|
320,248
|
|
Gross
profit
|
-
|
31,619
|
-
|
62,078
|
|
SG&A
|
-
|
4,443
|
-
|
8,634
|
|
Net
income before tax
|
-
|
27,176
|
-
|
53,444
|
|
Provision
for income taxes
|
-
|
6,794
|
-
|
13,361
|
|
Net
income
|
$
-
|
$
20,382
|
$
-
|
$
40,083
|
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. Franchise
royalties from sold locations that subsequently became franchisees
for the three months ended June 30, 2020 and June 30, 2019 were
approximately $570,000 and $-0-, respectively. For the six months
ended June 30, 2020 and June 30, 2019, these franchise royalties
were approximately $1.4 million and $-0-,
respectively.
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; Insurance Technologies,
Inc.; and a number of our franchisees.
Hire Quest Financial LLC (“HQF”)
Richard Hermanns, our 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 June 30, 2020 and December 31, 2019, HQI was not
indebted to HQF for any amount. We do not have any current or
planned business dealings with HQF.
Hirequest Insurance Company (“HQ Ins.”)
Mr. Hermanns, his wife, 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.
Premiums invoiced by HQ Ins. to HQI and Legacy HQ for workers
compensation deductible reimbursement insurance during the quarters
ended June 30, 2020 and June 30, 2019 were $-0- and approximately
$1.8 million, respectively. Premiums invoiced by HQ Ins. to HQI and
Legacy HQ for workers compensation deductible reimbursement
insurance during the two quarters ended June 30, 2020 and June 30,
2019 were $-0- and approximately $3.6 million, respectively. We do
not have any current or planned business dealings with HQ Ins.
other than cooperating to close Legacy HQ's workers' compensation
claims.
12
Brave New World Services, LLC, (“BNW”) formerly known
as Hire Quest LTS, LLC
Mr. Jackson and Mr. Hermanns' son-in-law collectively own a
majority of BNW.
Historically, BNW employed the personnel at Legacy HQ headquarters.
HQI terminated this relationship on July 15, 2019 upon the closing
of the Merger. Amounts invoiced by BNW to HQI and Legacy HQ for
payroll services during the three months ended June 30, 2020 and
June 30, 2019 were $-0- and approximately $11,000, respectively.
Amounts invoiced by BNW to HQI and Legacy HQ for payroll services
during the six months ended June 30, 2020 and June 30, 2019 were
$-0- and approximately $17,000, respectively. We do not have any
current or planned business dealing with BNW.
Jackson Insurance Agency ("Jackson Insurance") and Bass
Underwriters, Inc. ("Bass")
Mr. Jackson owns a majority of Jackson Insurance. An immediate
family member, owns the remainder. 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 continued to broker these same policies
for HQI. Jackson Insurance also brokers certain insurance policies
on behalf of some of our franchisees, including the franchisees
containing significant ownership interests of Mr. Jackson and
immediate family members of Mr. Hermanns.
Jackson Insurance and Bass did not invoice HQI or Legacy HQ for
premiums, taxes, or fees during the quarter ended June 30, 2020 or
June 30, 2019. Premiums, taxes, and fees invoiced by Jackson
Insurance and Bass to HQI and Legacy HQ for these insurance
policies during the six months ended June 30, 2020 and June 30,
2019 were approximately $662,000 and $240,000, respectively.
Jackson Insurance and Bass do not retain the majority of the
premiums invoiced to HQI and Legacy HQ, but they do retain a
commission of approximately 9% - 15% of premiums.
Insurance Technologies, Inc. ("Insurance
Technologies")
Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of
them, collectively own a majority of Insurance Technologies, an IT
development and security firm. On October 24, 2019, HQI entered
into an agreement with Insurance Technologies to add certain
cybersecurity protections to our existing information technology
systems and to assist in developing future information technology
systems within our HQ Webconnect software. This arrangement was
reviewed and approved by the Audit Committee of our Board of
Directors.
During the three months ended June 30, 2020, Insurance Technologies
invoiced HQI approximately $50,000 for services provided pursuant
to this agreement. Insurance Technologies invoiced HQI
approximately $101,000 during the six months ended June 30,
2020.
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 June 30, 2020 that operated 48 of our 136
offices.
Transactions regarding the Worlds Franchisees are summarized
below:
|
|
Three months
ended
|
Six months
ended
|
||
|
|
June
30,
2020
|
June
30,
2019
|
June
30,
2020
|
June
30,
2019
|
|
Franchisee
royalties
|
$
1,089,020
|
$
1,659,716
|
$
2,462,895
|
$
3,293,498
|
Balances regarding the Worlds Franchisees are summarized
below:
|
|
June
30,
2020
|
December
31,
2019
|
|
Due
to franchisee
|
$
773,247
|
$
993,495
|
|
Risk
management incentive program
|
988,817
|
1,027,960
|
13
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 June 30, 2020, $9.1 million was utilized by outstanding
letters of credit that secure our obligations to our workers’
compensation insurance carrier and $1.0 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
.
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 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 June
30, 2020 the effective interest rate was 1.44%. 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, Legacy HQ terminated its deductible
reimbursement policy with HQ Ins. We assumed the primary
responsibility for all claims up to the deductible occurring on or
after July 15, 2019. The primary responsibility of all claims
occurring before July 15, 2019 remains with HQ Ins. We assumed the
Legacy HQ policy with ACE.
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 a letter 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.
14
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 were authorized
to grant awards for up to 500,000 shares of our common stock over
the 10-year life of the plan. In June 2020, our stockholders
approved a new stock incentive plan (the “2019 Plan”)
that replaced the 2016 Plan. Under the terms of the 2019 Plan, we
are authorized to grant awards for up to 1.5 million shares of our
common stock over the 10-year life of the plan. Outstanding awards
under the 2016 Plan remain in effect according to the terms of the
plan and the award documents.
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. During 2020, we issued
19,612 shares valued at approximately $115,000 under this program.
During 2019, we issued 1,639 shares valued at approximately $10,000
under this program.
In June 2020, we issued 30,000 shares of restricted common stock
pursuant to the 2019 Plan valued at approximately $188,000 to
non-employee members of our Board of Directors for services. These
shares vest equally over the following three months.
In April 2020, we issued 8,381 shares of restricted common stock
pursuant to the 2016 Plan valued at approximately $53,000 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.
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
vested equally over the following three months, and the remaining
1,688 shares vest on the second anniversary of the grant date. 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
vested 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 vested 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 on June 14, 2020, the day before
our annual stockholder meeting, and the remainder vesting in equal
portions on each of the first two anniversaries of that
date.
The following table summarizes our restricted stock outstanding at
December 31, 2019, and changes during the six months ended June 30,
2020.
|
|
Shares
|
Weighted average grant date price
|
|
Non-vested,
December 31, 2019
|
255,634
|
$
7.18
|
|
Granted
|
57,087
|
6.48
|
|
Vested
|
(27,705
)
|
6.48
|
|
Non-vested,
June 30, 2020
|
285,016
|
7.10
|
15
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 26,000 and 24,000 stock options vested at
June 30, 2020 and December 31, 2019, respectively .
The following table summarizes our stock options outstanding at
December 31, 2019, and changes during the six months ended June 30,
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
|
$
3.76
|
|
Granted
|
-
|
-
|
-
|
|
Forfeited
|
-
|
-
|
-
|
|
Exercised
|
-
|
-
|
-
|
|
Outstanding,
June 30, 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 six months
ended June 30, 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
|
(2,187
)
|
5.50
|
3.05
|
|
Non-vested,
June 30, 2020
|
3,229
|
5.47
|
2.98
|
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 $6.19 at June 30,
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
|
4.22
|
$
26,984
|
|
Exercisable
|
25,936
|
7.41
|
3.78
|
6,997
|
At June 30, 2020, there was unrecognized stock-based compensation
expense totaling approximately $1.1 million relating to non-vested
options and restricted stock grants that will be recognized over
the next 3.2 years.
Note 8 – Commitments and Contingencies
Franchise Acquisition Indebtedness
New franchisees financed the purchase of several offices with
promissory notes. In some instances, this financing resulted in
certain franchises being considered VIEs. We have determined that
we are not required to consolidate these entities because we do not
have the power to direct these entities’ daily operations. If
these franchises default on these notes, we bear the risk of loss
of the outstanding balance on these notes, less what we could
recoup from the potential resale of the repossessed office. The
balance due from the franchises determined to be VIEs on June 30,
2020 and December 31, 2019 was approximately $2.3 million and $2.5
million, respectively.
16
Legal Proceedings
From time to time, we are involved in various legal and
administrative proceedings. Based on information currently
available to us, we do not expect material uninsured losses to
arise from any of these matters. We believe the outcome of
these matters, even if determined adversely, will not have a
material adverse effect on our business, financial condition or
results of operations. There have been no material changes in our
legal proceedings as of June 30, 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 the tax environment changes
.
Our effective tax rate for the three and six months ended June
30, 2020 was 4.5
%
and 12.3%, respectively. The bulk of 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 result from state income taxes, certain
non-deductible expenses, and tax effects of stock-based
compensation.
Our effective tax rate for the three and six months ended June
30, 2019 was 2.1
%
and 2.5%, respectively. The bulk of the difference between the
statutory federal income tax rate of 21.0% and our
effective income tax rate results primarily from the Company being
a pass-through entity before the Merger on July 15,
2019.
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 office assets. Notes
outstanding net of allowance for losses were approximately $9.0
million and $11.4 million as of June 30, 2020 and December 31,
2019, respectively.
Notes receivable bear interest at a fixed rate between 6.0% and
10.0%. Notes are generally secured by the assets of each office and
the ownership interests in the franchise. We report interest income
on notes as other miscellaneous income in our consolidated
statements of operations. This interest income was approximately
$176,000 and $3,000 during the three months ended June 30, 2020 and
June 30, 2019, respectively, and approximately $374,000 and $3,000
in the six months ended June 30, 2020 and June 30, 2019,
respectively.
We estimate the allowance for losses for franchisees separately
from the allowance for losses from non-franchisees because of the
level of detailed sales information available to us with respect to
the former. 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 $1.6 million as of June 30, 2020 for potentially
uncollectible notes receivable. There were no notes receivable in
default as of June 30, 2020.
The following table summarizes changes in our notes receivable
balance to franchisees:
|
Balance
as of December 31, 2019
|
$
9,702,471
|
|
Notes
issued
|
54,524
|
|
Accrued
interest
|
40,793
|
|
Payments
received
|
(916,074
)
|
|
Change
in valuation allowance
|
(405,314
)
|
|
Balance
as of June 30, 2020
|
$
8,476,400
|
17
The following table summarizes changes in our notes receivable
balance to non-franchisees:
|
Balance
as of December 31, 2018
|
$
1,707,238
|
|
Accrued
interest
|
86,785
|
|
Payments
received
|
(86,785
)
|
|
Change
in valuation allowance
|
(1,193,359
)
|
|
Balance
as of June 30, 2020
|
$
513,879
|
Note 11 - Subsequent Events
In July 2020, we issued 8,874 shares of restricted common stock
pursuant to the 2019 Plan valued at approximately $55,000 to
certain members of our Board of Directors for their services in
lieu of cash compensation. Of these 8,874 shares, 7,396 shares vest
equally over the following three months, and the remaining 1,478
shares vest on the second anniversary of the date of grant. Also in
July 2020, we issued 6,468 shares of restricted common stock
pursuant to our share purchase match program valued at
approximately $40,000.
Effective July 2020, our Board of Directors authorized a one-year
repurchase plan for up to 1 million shares of our common stock.
Through August 10, 2020, we have repurchased
1,922
shares of common stock at an aggregate price of
approximately $12,000
, resulting in an average share price of
$6.20
per share. These shares will be held in
treasury.
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 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 (a non-GAAP
financial measure), 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; the factors discussed in the “Risk
Factors” section herein and in our most recent Annual Report
on Form 10-K which we filed with the SEC on March 30, 2020; and the
other factors discussed in this Quarterly Report and our Annual
Report.
Any forward-looking statement made by us in this Quarterly Report
on Form 10-Q is based only on information currently available to us
and speaks only as of the date on which it is made. The Company
disclaims any obligation to update or revise any forward-looking
statement, whether written or oral, that may be made from time to
time, based on the occurrence of future events, the receipt of new
information, or otherwise, except as required by law.
Overview
We are a nationwide franchisor of on-demand labor solutions
providers in the light industrial and blue-collar segments of the
staffing industry. We were formed through the merger between Hire
Quest Holdings, LLC (“Hire Quest Holdings”) and Command
Center, Inc. We refer to Hire Quest Holdings and its wholly owned
subsidiary, Hire Quest, LLC, collectively as Legacy HQ. We refer to
this merger, which closed on July 15, 2019 as the Merger. As of
June 30, 2020, we had 136 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 coronavirus pandemic has significantly impacted our operations.
With widespread infection in the United States and abroad,
national, state, and local authorities recommended social
distancing and took dramatic action, including ordering the
workforce to stay home, banning all non-essential businesses from
operating, refusing to issue new building permits, and invalidating
current building permits causing work to stop at many of our
jobsites. These measures, while intended to protect human life,
have had, and are expected to continue to have, serious adverse
impacts on our business and the economy as a whole. While several
states have begun the reopening process, it is unclear when, or if,
a full economic recovery will occur. The long-term effectiveness of
economic stabilization efforts, including government payments to
affected citizens and industries, is also uncertain.
We entered 2020 with a strong balance sheet. Our assets exceeded
liabilities by more than $28 million. In the first six months of
2020, we significantly improved our liquidity position, primarily
by converting accounts receivable into cash. Current assets
improved from $46.9 million on December 31, 2019 to $48.2 million
on June 30, 2020. We have remained profitable throughout the first
six months of 2020. Still, the sweeping and persistent nature of
the COVID-19 pandemic depressed our system-wide sales and resulting
revenue. 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 through our second
quarter. On a month-to-month basis, our system-wide sales have
consistently increased since April, however, they were lower than
system-wide sales in the second quarter of 2019, and we expect
negative impacts on system-wide sales and resulting revenue in the
third quarter, and likely beyond. It remains unclear how long we
will stay at this comparatively reduced level of sales, and the
evolving nature of the pandemic makes reliable predictions
extremely difficult.
To date, our franchisees have closed or consolidated 13 offices at
least, in part, due to the financial impacts of COVID-19. Of these
closures, 11 were in metropolitan areas where our franchisees still
maintain at least one office that we expect can service customers
of the closed or consolidated offices. The other two offices did
not historically produce significant amounts of system-wide sales
or resulting revenue. It is possible that other offices may still
be forced to close. Some of our franchisees may experience
economic hardship or even failure. In general, those franchisees
whose businesses are oriented towards construction, manufacturing,
logistics, or waste services have been less impacted to date than
those whose businesses are more focused on hospitality, catering,
special events, or auto auction services.
In response to depressed economic conditions, we took measures to
control and reduce selling, general, and administrative expense
("SG&A"). In addition, we placed a reserve of $1.6 million on
the promissory notes we hold from our franchisees and the purchaser
of our previously owned California offices.
As discussed more fully below, our already strong liquidity
position has improved since December 31, 2019 because of decreased
funding requirements for temporary employees and the decrease in
our accounts receivable balance as amounts are collected and
converted to cash. We increased our cash balance approximately $9.5
million in the first half of 2020 from $4.2 million at year end to
$13.7 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.
Any of the above factors, or other cascading effects of the
COVID-19 pandemic that are not currently foreseeable, could
materially negatively impact our revenue, net income, and other
results of operations, reduce system-wide sales, cause office
closings or cause us to lose franchisees, and impact our liquidity
position, possibly significantly. The duration of any such impacts
cannot be predicted at this time.
Results of Operations
Financial Summary
The following table displays our consolidated statements of
operations for the interim periods ended June 30, 2020 and June 30,
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.”
20
|
|
Three months ended
|
Six months ended
|
||||||
|
|
June 30, 2020
|
June 30, 2019
|
June 30, 2020
|
June 30, 2019
|
||||
|
Franchise
royalties
|
$
2,639
|
91.0
%
|
$
2,981
|
92.1
%
|
$
6,345
|
90.4
%
|
$
6,138
|
91.5
%
|
|
Service
revenue
|
262
|
9.0
%
|
257
|
7.9
%
|
676
|
9.6
%
|
573
|
8.5
%
|
|
Total
revenue
|
2,901
|
100.0
%
|
3,239
|
100.0
%
|
7,021
|
100.0
%
|
6,711
|
100.0
%
|
|
Selling,
general and administrative expenses
|
1,931
|
66.6
%
|
871
|
26.9
%
|
5,184
|
73.8
%
|
2,424
|
36.1
%
|
|
Depreciation
and amortization
|
32
|
1.1
%
|
21
|
0.7
%
|
64
|
0.9
%
|
35
|
0.5
%
|
|
Income
from operations
|
938
|
32.3
%
|
2,346
|
72.4
%
|
1,772
|
25.2
%
|
4,252
|
63.4
%
|
|
Other
miscellaneous income
|
289
|
10.0
%
|
218
|
6.7
%
|
540
|
7.7
%
|
247
|
3.7
%
|
|
Interest
and other financing expense
|
(18
)
|
-0.6
%
|
(230
)
|
-7.1
%
|
(29
)
|
-0.4
%
|
(415
)
|
-6.2
%
|
|
Net
income before income taxes
|
1,208
|
41.7
%
|
2,334
|
72.1
%
|
2,283
|
32.5
%
|
4,083
|
60.8
%
|
|
Provision
for income taxes
|
51
|
1.8
%
|
48
|
1.5
%
|
251
|
3.6
%
|
100
|
1.5
%
|
|
Income
from continuing operations
|
1,157
|
39.9
%
|
2,286
|
70.6
%
|
2,032
|
28.9
%
|
3,983
|
59.4
%
|
|
Income from
discontinued
operations
, net of
tax
|
-
|
0.0
%
|
20
|
0.6
%
|
-
|
0.0
%
|
40
|
0.6
%
|
|
Net
income
|
$
1,157
|
39.9
%
|
$
2,306
|
71.2
%
|
$
2,032
|
28.9
%
|
$
4,024
|
60.0
%
|
Three Months Ended June 30, 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 additional
$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 three months ended June 30, 2020 were
approximately $2.6 million, a decrease of 11.5% from $3.0 million
for the quarter ended June 30, 2019. Approximately $570,000 of
royalties in the second quarter are attributable to the offices
acquired through the Merger. Royalty revenue throughout the entire
second quarter of 2020 was negatively impacted by decreased
economic activity related to COVID-19, though system-wide sales,
and resulting franchise royalties, have been slowly increasing
since the beginning of April.
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.
Service revenue for the three months ended June 30, 2020 was
approximately $262,000, essentially equal to approximately $257,000
for the three months ended June 30, 2019.
Selling, General, and Administrative Expenses
SG&A expenses for the three months ended June 30, 2020 were
approximately $1.9 million, an increase of 121.6% from $871,000 for
the three months ended June 30, 2019. Approximately $293,000 of
this increase was related to increased costs associated with being
a public company and includes stock-based compensation. As COVID-19
continues to have a negative impact on our franchises’
performance, we increased the reserve on our notes receivable by
approximately $151,000. We also had increased computer related
service and consulting costs of approximately $116,000. Finally,
there was a negative difference of approximately $495,000 related
to charges associated with changes in workers’ compensation
estimates and RMIP accruals that in 2019.
21
Miscellaneous Income
Miscellaneous income for the three months ended June 30, 2020 was
approximately $289,000, an increase of 32.2% from $218,000 for the
three months ended June 30, 2019. In 2020, miscellaneous income was
comprised primarily of interest income on notes receivable, while
in 2019 it was related to gains on the sale of property. The
increase during the three months ended June 30, 2020 is directly
correlated to the increase in our notes receivable.
Six Months Ended June 30, 2020
Franchise Royalties
Franchise royalties for the six months ended June 30, 2020 were
approximately $6.3 million, an increase of 3.4% from $6.1 million
for the six months ended June 30, 2019. Included in this increase
are approximately $1.4 million of royalties attributable to the
offices acquired through the Merger. Royalty revenue in the last
few weeks of March 2020 began to be negatively impacted by
decreased activity related to COVID-19. This negative
impact
continued
throughout the second quarter and into the third quarter. We expect
decreased royalty revenue for the remainder of 2020, and perhaps
beyond, relative to historical levels.
Service Revenue
Service revenue for the six months ended June 30, 2020 was
approximately $676,000, an increase of 18.0% from approximately
$573,000 for the six months ended June 30, 2019. This increase is
related to the increase in franchised offices due to the
Merger.
Selling, General, and Administrative Expenses
SG&A exxpenses for the six months ended June 30, 2020 were
approximately $5.2 million, an increase of 113.9% from $2.4 million
for the six months ended June 30, 2019. The majority of this
increase is due to a $1.6 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 costs related to being a public company of
approximately $650,000, which includes stock-based compensation, an
increase in computer related service and consulting costs of
approximately $238,000, an increase in compensation costs of
approximately $144,000, and an increase in legal and professional
fees of $106,000. These increased costs were offset by a decrease
in workers’ compensation costs of approximately $206,000. In
the last few weeks of the first quarter, and again during the
beginning of the second quarter, we cut payroll costs at our
corporate headquarters due to decreased volume resulting from
COVID-19 to partially offset decreases in revenue.
Miscellaneous Income
Miscellaneous income for the six months ended June 30, 2020 was
approximately $540,000, an increase of 118.6% from $247,000 for the
six months ended June 30, 2019. In 2020, miscellaneous income was
comprised primarily of interest income on notes receivable, while
in 2019 approximately $190,000 of this amount was related to gains
on the sale of property. The increase during the six months ended
June 30, 2020 is directly correlated to the increase in our notes
receivable.
Liquidity and Capital Resources
Our major source of liquidity and capital is cash generated from
our ongoing operations. We also receive principal and interest
payments on notes receivable, most of which were issued in
connection with the sale of offices acquired in the Merger. In
addition, we have the capacity to borrow under our line of credit
with Truist.
On June 30, 2020, our current assets exceeded our current
liabilities by approximately $28.2 million. Our current assets
included approximately $13.7 million of cash and $19.6 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 $2.9 million
related to our workers’ compensation claims liability, $2.7
million due to our franchisees on upcoming settlement statements,
and $2.0 million accrued 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
half of 2020 as COVID-19 decreased our temporary payroll
requirements and our cash balance rose from $4.2 million at the end
of 2019 to $13.7 million at the end of the second
quarter.
22
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 six months ended June 30, 2020 was approximately
$9.5 million. Operating activity for the six months included net
income of approximately $2.0 million, a decrease in accounts
receivable of approximately $8.6 million, and an increase in our
allowance for losses on notes receivable of approximately $1.6
million. These provisions were offset by an increase in prepaid
workers’ compensation of approximately $1.1 million, a
decrease in deferred taxes of approximately $1.1 million, and an
increase in prepaid expenses, deposits, and other assets of
approximately $909,000. Net cash provided by operating activities
from continuing operations for the six months ended June 30, 2019
was approximately $5.5 million. Operating activity for the six
months ended June 30, 2019 included net income from continuing
operations of approximately $4.0 million and an increase of
approximately $1.4 million due our franchisees. These provisions
were offset by a decrease in prepaid workers’ compensation of
approximately $758,000.
Investing Activities
Net cash used by investing activities for the six months ended June
30, 2020 was approximately $145,000. Investing activity for the six
months included approximately $976,000 related to the ongoing
construction a new building adjacent to our corporate headquarters
and cash issued for notes receivable of approximately $182,000.
These uses were offset by net payments received on notes receivable
of approximately $1.0 million. Net cash provided by investing
activities for the six months ended June 30, 2019 was approximately
$983,000 and was primarily due to an increase in franchisee
deposits of $705,000 and proceeds from the sale of property of
approximately $564,000. These provisions were offset by the
purchase of property and equipment of approximately
$261,000.
Financing Activities
Net cash provided by financing activities for the six months ended
June 30, 2020 was approximately $38,000 and was due to an increase
in amounts due from affiliates. Net cash used by financing
activities for the six months ended June 30, 2019 was approximately
$3.8 million and was due to payments to affiliates of approximately
$2.0 million and distributions to Legacy HQ members of
approximately $1.8 million.
Non-GAAP Financial Measure: System-Wide Sales
We refer to total sales generated by our franchisees as
“franchise sales.” We refer to sales at company-owned
and operated offices as “company-owned sales.”
Company-owned sales 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 company-owned sales as
“system-wide sales.” In other words, system-wide sales
include sales at all offices, whether owned and operated by us or
by our franchisees. System-wide sales is a non-GAAP financial
measure. While we do not record system-wide sales as revenue,
management believes that information on system-wide sales is
important to understanding our financial performance because those
sales are the basis on which we calculate and record 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 our franchisee base.
System-wide sales are not intended to represent revenue as defined
by U.S. 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 half of 2020, all of our offices were franchised.
As such, system-wide sales for the three and six months ended June
30, 2020 were all derived from franchised offices. The following
table reflects our system-wide sales broken into its components for
the periods indicated:
|
|
Three months ended
|
Six Months ended
|
||
|
|
June 30,
2020
|
June 30,
2019
|
June 30,
2020
|
June 30,
2019
|
|
Franchise
sales
|
$
44,073,695
|
$
51,758,168
|
$
100,536,300
|
$
99,142,642
|
|
Company-owned
sales
|
-
|
202,579
|
-
|
382,326
|
|
System-wide
sales
|
$
44,073,695
|
$
51,960,747
|
$
100,536,300
|
$
99,524,968
|
23
System-wide sales were $44.1 million for the second quarter of
2020, down $7.9 million or 15.2% compared to the second quarter of
2019. The decrease in system-wide sales is a direct result of
COVID-19.
System-wide sales were $100.1 million during the first half of
2020, up $1.0 million or 1.0% compared to the first half of 2019.
This increase in system-wide sales is related to the offices added
in the Merger, but is almost entirely offset by the negative
impacts of COVID-19. In the closing weeks of the first quarter of
2020, we experienced a substantial decline in week-over-week
system-wide sales. This depressed level of system-wide sales
compared to historical averages continued through the second
quarter and into the third quarter. The week-over-week system-wide
sales stabilized at a decreased level in the second quarter and
began to slowly recover; however, we expect system-wide sales to be
lower than historical averages in the third 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. Our franchisees opened one office in the
second quarter and did not close or consolidate
any.
The following table accounts for the number of offices opened and
closed or consolidated in the first half of 2020.
|
Franchised
Offices, December 31, 2019
|
147
|
|
Closed
in 2020
|
(13
)
|
|
Opened
in 2020
|
2
|
|
Franchised
Offices, June 30, 2020
|
136
|
Office
closures and consolidations in the first quarter of 2020 were
largely related to the economic impacts of COVID-19. These closures
were mostly in metropolitan areas still serviced by other offices,
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.
Off-Balance Sheet Arrangements
We do
not engage in any off-balance sheet financing
arrangements.
I
tem 3. Quantitative and Qualitative
Disclosures about Market Risk
We are
a “smaller reporting company” as defined by Rule 12b-2
of the Exchange Act, and, as such, are not required to provide the
information required by this Item.
I
tem 4. Controls and
Procedures
Under
the supervision and with the participation of our management,
including the Chief Executive Officer and Chief Financial Officer,
we have evaluated the effectiveness of our disclosure controls and
procedures as required by Exchange Act Rule 13a-15(b) as of the end
of the period covered by this report. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded
that these disclosure controls and procedures are effective as of
the end of such period. There were no changes in our internal
control over financial reporting during the
three months
ended June 30, 2020 that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting.
24
PART 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
Our business, financial condition, and operating results can be
affected by a number of factors, whether currently known or
unknown, including but not limited to those described in Part I,
Item 1A of our most recent annual report on Form 10-K under the
heading “Risk Factors,” any one or more of which could,
directly or indirectly, cause our actual financial condition and
operating results to vary materially from past, or from anticipated
future, financial condition and operating results. Any of these
factors, in whole or in part, could materially and adversely affect
our business, financial condition, operating results, and stock
price. Except as set forth below, there have been no material
changes to our risk factors since we filed our Form 10-K with the
SEC on March 30, 2020.
The coronavirus pandemic is a serious threat to health and economic
well-being affecting our franchisees, employees, customers and the
overall economy.
On
March 11, 2020, the World Health Organization announced that
infections of COVID-19 had become pandemic, and on March 13, 2020,
the President of the United States announced a National Emergency
relating to the disease. Since March 13, state and local
authorities have taken dramatic action including, without
limitation, ordering the workforce to stay home, banning all
non-essential businesses from operating, implementing shelter in
place orders, refusing to issue new building permits, and
invalidating current building permits causing work to stop. There
has been widespread infection in the United States and abroad, with
a resulting catastrophic impact on human lives, including those of
our franchisees and employees, and the economy as a whole,
including our customers. In addition to the actions described
above, national, state, and local authorities have recommended
social distancing and imposed quarantine and isolation measures on
large portions of the population and additional mandatory business
closures. These measures, while intended to protect human life,
have had serious adverse impacts on our business and domestic and
foreign economies. They have caused our system-wide sales and
resulting revenue to decline. The extent and duration of this
decline is uncertain. The ultimate and long-term effectiveness of
economic stabilization efforts, including government payments to
affected citizens and industries, such as the CARES Act and
Paycheck Protection Program, is uncertain.
The
sweeping and evolving 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 overall economic impact of the
pandemic has been highly negative to the general economy. Our
operations have been disrupted by customers decreasing the amount
of orders they place for temporary employees, safety measures we
and our franchisees have put in place to prevent spread of the
virus, and in other ways. The COVID-19 outbreak has had a negative
impact on our operations, system-wide sales, and revenue as well as
those of our franchisees. 13 of our franchised offices have closed
or consolidated into other existing offices at least, in part, due
to the impact of COVID-19. It is possible that additional offices
may be forced to close. Some of our franchisees have experienced
economic hardship including loss of customers or business. A small
number of franchisees, as well as the purchaser of our California
offices, have experienced difficulty in repaying their financing
obligations to us, causing us to set aside a reserve of $1.6
million for that purpose as of June 30, 2020. Others may experience
economic hardship or even failure. If there were to be a resurgence
in the virus and infections in the second half of the year, we may
be forced to temporarily or permanently close other offices. Our
customers may choose to voluntarily close their
worksites.
Any of
the above factors, or other cascading effects of the coronavirus
pandemic that are not currently foreseeable, could materially
increase our costs, severely 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. We expect COVID-19 will continue
to negatively impact customer demand throughout 2020, and perhaps
beyond. While we expect some recovery in some markets in the second
half of the year, the impact of COVID-19 on our sales and revenue
will likely still be significant. We do not yet know the full
extent of the impact of COVID-19 on our business, financial
condition and results of operations.
25
Difficult political or market conditions, natural disasters, global
pandemics, or other unpredictable matters could affect our business
in many ways including by reducing the amount of available
temporary employees, reducing the amount of customer projects, or
harming the overall economy which could materially reduce our
revenue, earnings and cash flow and adversely affect our financial
condition.
Our
business is linked to conditions in the overall economy, such as
those impacting the ability of our customers to obtain financing,
the availability of temporary employees, changes in laws, and
catastrophic events such as fires, floods, earthquakes, tornadoes,
hurricanes, and pandemics. In particular, the outbreak of COVID-19
has materially affected our business by decreasing activity in the
economy overall and negatively impacting the industries our
customers are in, especially hospitality, event staffing, auto
auctioneering, and similar industries. While we have encouraged our
franchisees to implement specific policies which the CDC has
suggested could help decrease the spread of COVID-19, and we have
not experienced a significant number of infections among our
employees, it is possible that COVID-19 could infect a large number
of temporary employees removing them from the available worker
pool. To date, we have experienced a decline in system-wide sales
and resulting revenue due to decreased economic activity. Our
franchisees have closed or consolidated 13 offices at least in part
due to the negative impacts of the coronavirus. These factors are
unpredictable and outside of our control. They may affect the level
and volatility of securities prices and the liquidity and value of
investments, including investments in our common
stock.
Our operating and financial results and growth strategies are
closely tied to the success of our franchisees.
With
all of our offices being operated by franchisees, we are dependent
on the financial success and cooperation of our franchisees. We
have limited control over how our franchisees’ businesses are
run, and the inability of franchisees to operate successfully could
adversely affect our operating and financial results through
decreased royalty payments or otherwise. If our franchisees incur
too much debt, if their operating expenses increase, or if economic
or sales trends deteriorate (including as a result of the global
pandemic caused by COVID-19) such that they are unable to operate
profitably or repay existing debt, it could result in their
financial distress, including insolvency or bankruptcy. To date, a
small number of franchisees have had difficulty in servicing the
debts they owe to us as a result of the financial impacts of
COVID-19. We have placed a reserve on the notes receivable from
those franchisees in the amount of approximately $405,000. In
addition, franchisees have closed or consolidated 13 offices at
least in part due to the impact of COVID-19. If a significant
franchisee or a significant number of franchisees become
financially distressed, our operating and financial results could
be impacted through reduced or delayed royalty payments. A
franchisee bankruptcy could have a substantial negative impact on
our ability to collect payments due under such franchisee’s
franchise agreement. Our success also depends on the willingness
and ability of our franchisees to be incentivized to deliver
excellent customer service, resolve any issues efficiently, and
ensure customer retention. In addition, our success depends on the
willingness and ability of our franchisees to implement major
initiatives, which may include financial investment. Our
franchisees may be unable to successfully implement strategies that
we believe are necessary for their further growth, which in turn
may harm our growth prospects and financial condition.
Our results of operations may be significantly affected by the
ability of certain franchisees and the purchaser of our California
offices to repay their loans to us.
Lending money to our franchisees for startup costs and short-term
funding is an essential part of our business. While most of our
franchisees have historically repaid their loans to us, for various
reasons, a small number have not, and there is no guarantee that
our franchisees will continue to repay their loans in the
future.
We extended, for us,
unprecedented levels of purchase financing loans in 2019 in
connection with the Merger and subsequent sales and conversions of
company-owned offices to franchises. In addition,
the
purchaser of our California office assets financed the transaction
by providing us a note for $1.8 million.
As a result of the negative impacts of COVID-19, a
small number of our franchisees
and the California purchaser
have already had difficulty in
repaying their debts to us. To that end, we placed a reserve of
approximately
$1.6 million on our notes
receivable
. The risk of non-payment is
affected, among other things, by:
●
The
overall condition and results of operations of the particular
franchise or operating entity;
●
Changes
in economic conditions that impact specific franchisees, the
California purchaser, our industry, or the overall
economy;
●
The
amount and duration of the loan;
●
Credit
risks of a particular borrower; and
●
In
terms of collateral, the value of the franchised business or
California operations and any individual guarantee we have or have
not obtained.
Our
borrowers
’ ability to
repay their loans usually depends upon their successful operation
of their business and income stream. Loans we ex
tend
to finance the purchase of
office assets
typically are our
largest and riskiest loans; however, given their historical role in
driving growth in our overall size and revenue streams, we intend
to continue those lending efforts. At June 30, 2020, our loans
receivable from franchisees and from the
California
purchaser
, net of an approximately
$1.6 million reserve, constituted 18.7% of our assets. If our
franchisees or the California purchaser do not repay these loans,
it may negatively impact our overall financial condition and
results of operations.
26
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 three
months ended June 30, 2020.
Purchase of Equity Securities by the Issuer and Affiliated
Purchasers
We did
not purchase any of our own securities during the
three months
ended June 30,
2020.
I
tem 5. Other Information
None.
I
tem 6. Exhibits
|
Exhibit No.
|
|
Description
|
|
|
HireQuest, Inc. 2019 Equity Incentive Plan (incorporated by
reference to Appendix A to the Company’s Definitive Proxy
Statement on Schedule 14A, filed with the SEC on April 29,
2020).
|
|
|
|
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).
|
27
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.
Dated:
August 11, 2020
|
/
s/ Richard
Hermanns
|
|
/s/ Cory
Smith
|
|
|
Richard
Hermanns
|
|
Cory
Smith
|
|
|
President and Chief Executive
Officer
|
|
Chief Financial
Officer
|
|
28
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 5 Line Of CreditNote 6 Workers Compensation Insurance and ReservesNote 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