HireQuest, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. HireQuest is a nationwide franchisor of temporary staffing offices serving light industrial, blue-collar and related markets. It had 136 franchised offices in 30 states and the District of Columbia at quarter-end; it no longer operated company-owned offices. The July 2019 merger with Command Center was accounted for as a reverse acquisition, with Legacy HQ as the accounting acquirer, which affects comparability with 2019.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Total revenue | $2.90 million | $3.24 million | $7.02 million | $6.71 million |
| Operating income | $0.94 million | $2.35 million | $1.77 million | $4.25 million |
| Net income | $1.16 million | $2.31 million | $2.03 million | $4.02 million |
| Diluted EPS | $0.09 | $0.23 | $0.15 | $0.40 |
| Operating margin | 32.3% | 72.4% | 25.2% | 63.4% |
- Q2 revenue decreased 10.4% year over year, while first-half revenue increased 4.6%. Franchise royalties fell 11.5% in Q2 but rose 3.4% for the first half; service revenue was approximately flat in Q2 and up 18.0% for the first half.
- Non-GAAP system-wide sales were $44.1 million in Q2, down 15.2% year over year. First-half system-wide sales were $100.5 million, up 1.0%, reflecting merger-related additions that largely offset pandemic-related declines.
- SG&A increased to $1.93 million in Q2 from $0.87 million, and to $5.18 million for the first half from $2.42 million. The first-half increase included a roughly $1.6 million allowance for potentially uncollectible notes, higher public-company and technology costs, and stock-based compensation.
- Cash and cash equivalents were $13.75 million at June 30, versus $4.19 million at year-end 2019. First-half operating cash flow was $9.46 million from continuing operations ($9.67 million including discontinued operations), substantially supported by an $8.55 million reduction in accounts receivable. Investing cash flow was negative $0.14 million; financing cash flow was positive $0.04 million.
- Current assets were $38.58 million and current liabilities $10.40 million, yielding working capital of approximately $28.18 million. Total assets were $48.19 million and total liabilities $14.31 million.
- The company reported no outstanding borrowings on its $30 million Truist credit line. Letters of credit used $10.1 million, leaving $19.9 million potentially available for additional borrowing. The facility matures May 31, 2024; its fixed-charge coverage covenant begins quarterly testing for the four quarters ending September 30, 2020.
- Net notes receivable were approximately $8.99 million, after an allowance of approximately $1.6 million. No notes were reported in default at June 30. The effective tax rate was 4.5% for Q2 and 12.3% for the first half, with the Work Opportunity Tax Credit a principal reason for the difference from the statutory rate.
Changes, outlook and risks
- Management said COVID-19 materially harmed business and results. System-wide sales declined sharply beginning in late March, stabilized at a lower level during Q2 and had been slowly improving since April. Management expected sales and resulting revenue to remain below historical levels in Q3 and likely beyond, and anticipated lower royalty revenue for the remainder of 2020, possibly longer. It did not provide numerical guidance.
- Thirteen offices had closed or consolidated during the first half, while two opened; the office count fell from 147 at year-end to 136. Management said 11 closures were in markets still serviced by other offices, but additional closures and franchisee distress remained possible. Construction, manufacturing, logistics and waste-oriented franchisees had been less affected to date than hospitality, catering, events and auto-auction businesses.
- Management reduced corporate payroll and other expenses in response to lower activity. It stated that cash, expected operating cash flow, note repayments and available credit should cover working-capital and cash needs for at least 12 months, while cautioning that pandemic effects and future access to credit were uncertain.
- Key risks include the duration and severity of COVID-19, reduced customer demand, franchisee failures or delayed royalty payments, collectability and collateral value of notes receivable, workers’ compensation claims, and access to financing. The company is effectively self-insured for workers’ compensation claims up to policy deductibles and provides approximately $9.1 million of collateral through a letter of credit.
- Legal proceedings were described as routine, with no material changes and no expected material uninsured losses. The filing disclosed related-party connections involving insurance brokers, a technology provider and franchisees with significant ownership interests held by company insiders or their families.
- Subsequent to quarter-end, the board authorized a one-year repurchase program for up to 1 million shares. Through August 10, the company had repurchased 1,922 shares for approximately $12,000.
Important facts for investors to verify
- Whether the gradual sales improvement continued and whether the expected Q3 and later COVID-19 effects materialized.
- Subsequent performance and repayment capacity of franchisee and California-office-purchaser borrowers, including whether the $1.6 million notes allowance proves adequate.
- Workers’ compensation reserve development, collateral requirements and compliance with the credit facility’s covenant once testing begins.
- The sustainability of cash generation: first-half operating cash flow benefited substantially from collecting receivables as staffing volume and payroll-funding needs declined.
- Comparability of reported periods given the reverse acquisition, merger-related office additions and the transition to an entirely franchised model.
- The MD&A states current assets improved from $46.9 million to $48.2 million, but the balance sheet reports current assets of $38.6 million at June 30, 2020 and total assets of $48.2 million. The filing text does not reconcile this apparent inconsistency.