HireQuest, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; compared with Q1 2022. Amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted.
Business context
HireQuest is a nationwide staffing and recruiting franchisor. At quarter-end, it reported approximately 440 franchisee-owned offices and one company-owned office. Its December 2022 MRI acquisition expanded its executive search and contract staffing businesses and materially affected year-over-year comparisons.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $9.857 million | $7.043 million | Up 40.0% |
| Franchise royalties | $9.323 million | $6.575 million | Up 41.8% |
| Operating income | $3.316 million | $3.889 million | Down 14.7% |
| Operating margin | 33.6% | 55.2% | Down 21.6 percentage points |
| Continuing-operations net income | $2.318 million | $0.491 million | Up |
| Net income, including discontinued operations | $2.630 million | $0.603 million | Up |
| Diluted EPS | $0.19 | $0.04 | Up |
| Adjusted EBITDA | $4.581 million | $5.274 million | Down 13.1% |
Revenue growth reflected a 51.9% increase in system-wide sales to $153.5 million, substantially driven by MRI. Management attributed $46.2 million of the $52.5 million increase in system-wide sales to MRI, $4.2 million to other acquisitions, and the remainder to organic growth. MRI’s lower royalty economics meant revenue grew more slowly than system-wide sales; the net effective royalty rate declined to 6.2% from 6.6%.
SG&A increased to $5.844 million from $2.655 million, principally reflecting MRI-related compensation, staffing, and other operating costs. Management said it was working to reduce redundancies and expected several quarters would be needed to realize potential MRI cost synergies. Adjusted EBITDA declined despite higher GAAP net income, in part because Q1 2022 included $3.681 million of net acquisition-related charges, while Q1 2023 included a $340,000 acquisition-related gain excluded from Adjusted EBITDA.
Cash flow, debt, and liquidity
- Cash was $8.207 million at March 31, 2023, up from $3.049 million at year-end 2022.
- Operating cash flow was $390,000, compared with $5.443 million in Q1 2022. Continuing-operations operating cash flow was $418,000 versus $4.940 million. The filing attributes the weaker current-period conversion partly to cash-using working-capital changes.
- Investing activities provided $37,000, compared with $9.290 million used in Q1 2022. Financing activities provided $4.731 million, including $8.672 million in net revolving-credit proceeds, offset partly by $2.977 million in term-loan payments and $833,000 in dividends.
- At quarter-end, the company had $21.214 million outstanding on its revolving line of credit and $1.017 million in term loans. The new Bank of America facility is a $50 million revolver maturing in February 2028; reported availability was approximately $19.1 million, subject to eligible collateral and covenant compliance. The effective rate was approximately 6.1%.
- Current assets were $59.634 million and current liabilities were $44.893 million, implying working capital of approximately $14.7 million. The MD&A separately states approximately $16.4 million; the filing text does not reconcile this difference.
- The company paid a $0.06-per-share quarterly dividend. Management stated that cash, operating cash generation, note collections, and credit availability should meet liquidity needs for at least the next 12 months, while cautioning that financing access and borrowing costs depend on market conditions.
Material changes, outlook, and risks
- Credit refinancing: On February 28, 2023, HireQuest replaced its Truist credit agreement with the Bank of America facility. It reported a debt-extinguishment loss; the statements show $310,000, while MD&A describes $318,000.
- Discontinued operations: The company agreed to sell Dental Power assets to an MRI franchisee for $2 million payable over five years at a market interest rate, recognizing a $340,000 gain in Q1. Remaining Dubin assets were still held for sale; management expected their sale within 12 months.
- Workers’ compensation: Expense was approximately $185,000 versus a $613,000 net benefit in Q1 2022, partly because of claim resolutions and a prior-period reserve. Management cautioned that this expense is difficult to predict.
- Outlook: No specific revenue, earnings, or Adjusted EBITDA guidance was provided. Management expects elevated borrowing costs as interest rates rise, and said high inflation could affect acquisition activity if prolonged. It did not believe inflation had materially affected results to date.
- Liquidity and operating risks: The company disclosed exposure to cash balances above FDIC insurance limits, although it had no deposits at Silicon Valley Bank or Signature Bank. Other cited risks include staffing-market demand, franchisee and customer performance, recessionary conditions, acquisition integration, cyber and technology disruptions, and access to credit.
- Controls and contingencies: Disclosure controls were not effective at quarter-end because a previously reported material weakness in accounting resources and review procedures remained. Management described remediation efforts and said the weakness would not be considered remediated until controls operate effectively for a sufficient period and are tested. The company said it did not expect material uninsured losses from pending legal matters.
Important facts for investors to verify
- Reconcile the MD&A working-capital figure of $16.4 million with balance-sheet current assets less current liabilities of approximately $14.7 million.
- Confirm the debt-extinguishment expense amount: $310,000 in the statements versus $318,000 in MD&A.
- Track MRI integration costs, realized cost synergies, organic growth, and the effect of recruitment mix on royalty rates and margins.
- Monitor operating cash conversion, borrowing levels, credit-facility availability, interest expense, and compliance with the facility’s financial covenants.
- Follow progress in remediating the material weakness and the sale of the remaining Dubin held-for-sale assets.