HireQuest, Inc. — 2020 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2020; fourth-quarter results are unaudited. HireQuest is a franchisor of temporary staffing offices, principally in light industrial and blue-collar markets. All 139 offices at year-end were franchised. Revenue is primarily franchise royalties; system-wide sales are franchisee sales and are not Company revenue. The 2019 comparison includes the merger and transition of company-owned offices to franchises, so comparability is affected.
Financial results and position
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Revenue | $13.81 million | $15.88 million | Down 13.0% |
| Franchise royalties | $12.79 million | $14.67 million | Down 12.8% |
| System-wide sales | $210.9 million | $241.6 million | Down 12.7%; all 2020 sales were from franchises |
| Operating income | $4.98 million | $2.78 million | Operating margin 36.1% vs. 17.5% |
| Net income (loss) | $5.36 million | $(0.29) million | 2020 diluted EPS $0.39; 2019 diluted loss per share $0.03 |
| Operating cash flow | $10.88 million | $4.96 million | 2020 benefited from a $6.86 million decrease in receivables |
| Cash | $13.67 million | $4.19 million | Up $9.48 million |
| Current assets / liabilities | $38.97 million / $9.46 million | $37.02 million / $11.01 million | 2020 working capital: $29.51 million |
| Debt and credit availability | No borrowings reported at year-end | — | $30 million Truist facility; $9.6 million used for letters of credit, leaving about $20.4 million available |
Revenue fell amid COVID-19-related demand weakness, while operating income rose largely because 2019 included merger-related and other nonrecurring costs. Net income also reflects lower income-tax expense: 2019 included a substantial one-time charge related to the merger and tax-status conversion. The Company recorded a $1.60 million allowance for potential losses on notes receivable in 2020. Reported net income margin was 38.8% in 2020 versus a 1.8% net loss margin in 2019; the prior-year comparison is affected by the unusual tax charge and discontinued operations.
Fourth quarter: Revenue was $3.41 million, down from $5.87 million in Q4 2019. Operating income was $1.21 million versus $2.42 million; net income was $1.36 million versus $3.46 million. Q4 2019 included a $1.40 million income-tax benefit and discontinued-operations loss, so the net-income comparison is not directly indicative of underlying operating trends.
Material changes and management commentary
- System-wide sales fell 12.7% for the year. Management reported the year-over-year sales decline peaked at 38% early in the pandemic and narrowed to 16% by year-end.
- HireQuest ended 2020 with 139 offices, down net eight from 147: five opened and 13 closed. Most closures were attributed at least partly to COVID-19; 11 were in areas still served by another office.
- Operating cash flow improved substantially, supported by collections and lower payroll funding needs as sales declined. Cash rose despite $1.36 million of dividends and $1.42 million of property and equipment purchases.
- The Company paid two quarterly dividends of $0.05 per share in 2020 and said it intended to continue quarterly payments subject to results, financial position, and Board discretion. A share repurchase plan was authorized; 23,638 shares were repurchased in 2020 for about $146,000.
Outlook, risks, contingencies, and unusual items
- Management expected COVID-19 to continue adversely affecting system-wide sales and revenue in the first and second quarters of 2021 and likely beyond; it gave no quantified earnings or revenue guidance and said duration and recovery were difficult to predict.
- The Company said cash, operating cash flow, note collections, and available credit should be sufficient for at least the next 12 months. This outlook is subject to pandemic impacts and access to credit; management was negotiating an expanded facility, but none had been finalized at filing.
- Key risks include staffing demand and worker availability, franchisee financial health and repayment of loans, workers’ compensation claims and collateral requirements, employment and franchise regulation, customer retention, seasonality, competition, cybersecurity, and reliance on key personnel.
- Workers’ compensation claims liability was $4.58 million at year-end, an actuarial estimate and a critical audit matter. Notes receivable were $8.07 million before the $1.60 million allowance; the allowance assessment was also a critical audit matter. The $30 million Truist facility requires a minimum 1.10:1.00 fixed-charge coverage ratio; the Company reported compliance at year-end.
- Subsequent to year-end, HireQuest acquired Snelling assets for $17.3 million, subject to adjustments and additional collateral arrangements, and Link franchise relationships and assets for $11.1 million. Snelling was funded with cash and a draw on the credit facility; Link was funded with cash. Purchase accounting was not complete when reported.
- In March 2021, a subsidiary agreed to sell approximately $5.3 million of franchisee notes to Bass Underwriters, a related party. The filing says the transaction was approved by disinterested directors and was without recourse to the seller.
- On March 23, 2021, the Board approved one-time acquisition-related cash bonuses of $500,000 for the CEO, $100,000 for the Chief Legal Officer, and $10,000 for the CFO.
- Management reported no expected material uninsured losses from existing legal proceedings. The auditor gave an unmodified opinion on the financial statements; it did not audit internal control over financial reporting.
Important facts for investors to verify
- Whether system-wide sales and royalty revenue recovered from the pandemic-related decline, and how the acquisitions affect growth, margins, and cash needs.
- Actual collections and collateral recovery on notes receivable, including the $1.60 million allowance and any restructured or impaired franchisee loans.
- Workers’ compensation claim development, reserve adequacy, and continued availability of required collateral and insurance.
- Post-acquisition purchase accounting, integration results, financing usage, and any working-capital requirements for Snelling and Link.
- Terms, fairness, and related-party governance for the $5.3 million note sale to Bass, as well as the acquisition transaction bonuses.
- Whether future dividends remain supportable under operating performance, credit-facility covenants, and capital needs.