HireQuest, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. HireQuest is a nationwide franchisor of temporary staffing offices. At quarter-end it had 135 franchisee-owned offices in 30 states and the District of Columbia.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $4.12 million | $3.47 million |
| Operating income | $0.83 million | $1.91 million |
| Net income | $0.88 million | $1.72 million |
| Diluted EPS | $0.06 | $0.17 |
| Operating cash flow from continuing operations | $5.46 million | $2.15 million |
- Franchise royalties were $3.71 million, up 17.4%; service revenue was $0.41 million, up $0.10 million. Reported revenue increased 18.7% overall.
- SG&A rose 109.6% to $3.25 million, including a $1.4 million reserve for potentially uncollectible notes receivable. Other increases included stock compensation and legal and professional fees; lower workers’ compensation costs partly offset them.
- Operating margin was 20.3%, versus 54.9% in Q1 2019; net margin was 21.2%, versus 49.5%. The sharp decline chiefly reflects the notes reserve and higher SG&A. Other miscellaneous income was $251,000, including approximately $198,000 of interest on franchisee notes.
- Cash was $10.04 million at March 31, up from $4.19 million at year-end. Current assets were $40.62 million and current liabilities $12.09 million, or approximately $28.5 million of working capital.
- Operating cash flow improved, supported by a $3.77 million decrease in accounts receivable and noncash reserve and stock-compensation charges. Management attributed higher cash partly to reduced temporary payroll funding needs as activity weakened.
- No line-of-credit borrowings were outstanding. Of the $30 million Truist facility, $10.1 million supported letters of credit and $19.9 million remained potentially available. The facility matures May 2024 and is subject to covenants, including a fixed-charge coverage ratio test beginning with the four quarters ending September 30, 2020.
- Notes receivable, net, were $9.61 million, down from $11.41 million at year-end; the company recorded an approximately $1.4 million allowance. Total liabilities were $16.80 million and stockholders’ equity was $32.48 million.
Changes and comparability
- System-wide sales rose 18.7% to $56.46 million. Management said much of the increase reflected offices added through the July 2019 merger, including approximately $783,000 of royalty revenue from former company-owned locations now franchised.
- The merger is accounted for as a reverse acquisition, with Legacy HQ as the accounting acquirer. The comparison therefore is not a like-for-like measure of organic growth. Company-owned offices were sold in 2019 and are presented as discontinued operations; Q1 2020 had no company-owned sales.
- The company had 147 franchised offices at December 31, 2019; 13 were closed or consolidated and one opened during Q1, leaving 135 at March 31.
Outlook, risks and contingencies
- COVID-19 reduced activity and revenue in the final weeks of Q1; the decline continued into April and May. Management reported sales stabilizing at a reduced level in late April but expected lower system-wide sales and revenue in Q2 and possibly beyond. The duration and overall impact were uncertain; no numerical revenue or earnings guidance was provided.
- Thirteen offices had closed or consolidated at least partly because of COVID-19. Management warned of potential further closures, franchisee hardship or failure, and additional adverse effects on sales, earnings, and liquidity. Hospitality, catering, events, and auto auction activity were particularly affected.
- Management said cash, operating cash generation, note collections, and available borrowing capacity should cover working-capital needs for at least 12 months, while cautioning that credit availability could be affected by the crisis. It also said it was reducing SG&A and corporate payroll.
- Workers’ compensation claims are a significant estimate and exposure: the company is effectively self-insured up to policy deductibles and had approximately $9.1 million of letters of credit securing obligations to its carrier. The filing reported no loans in default at quarter-end.
- Management did not expect material uninsured losses from legal proceedings; it reported no material changes in legal proceedings or risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether post-quarter system-wide sales, royalty revenue, and franchise-office closures confirm or improve on the pandemic-related outlook.
- Whether the $1.4 million notes-receivable allowance proves adequate, particularly for franchisee borrowers and the California-office purchaser, and whether collections remain current.
- How much of operating cash flow and the cash increase reflects temporary working-capital timing rather than recurring earnings, and whether liquidity and credit availability remain sufficient.
- The comparability of growth figures given the reverse merger, acquired offices, and discontinued company-owned operations.
- Related-party relationships and transactions: certain significant shareholders have interests in insurance, technology, and franchise entities; 20 related-party franchisees operated 48 offices at quarter-end.