HireQuest, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; compared with the three months ended March 31, 2020. HireQuest is a nationwide staffing franchisor. It completed the Snelling and Link acquisitions during the quarter.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $3.40 million | $4.12 million | Down 17.4% |
| Franchise royalties | $3.26 million | $3.71 million | Down 12.0% |
| Service revenue | $144,000 | $415,000 | Lower interest income and sales-based fees |
| Operating income (loss) | ($772,000) | $835,000 | Operating margin: (22.7%) vs. 20.3% |
| Net income | $3.74 million | $875,000 | Includes substantial acquisition-related gains |
| Basic / diluted EPS | $0.28 / $0.27 | $0.06 / $0.06 | — |
| Operating cash flow | $11.86 million | $5.50 million | Included a $7.2 million workers’ compensation deposit release |
| Cash | $1.98 million | $13.67 million at Dec. 31, 2020 | Decrease principally reflects acquisitions |
| Total assets / liabilities | $62.28 million / $22.59 million | $49.10 million / $12.73 million at Dec. 31, 2020 | Assets increased following acquisitions |
System-wide sales were $54.3 million, down 3.8% year over year. SG&A rose 18.1% to $3.84 million, including approximately $1.4 million of acquisition-related expenses and an approximately $892,000 increase in workers’ compensation charges. Depreciation and amortization increased to $333,000 from $32,000, reflecting acquired intangible assets. The reported net margin of 110% is not representative of recurring operating performance.
Liquidity, debt, and capital
Current assets of $34.53 million exceeded current liabilities of $17.86 million by approximately $16.7 million. The company reported no debt at March 31, 2021. Its $30 million Truist credit facility had approximately $15.2 million available for potential borrowing, subject to the agreement; $14.3 million was used for workers’ compensation letters of credit and $500,000 for a paycard letter of credit. The facility matures May 31, 2024, and the company reported compliance with its fixed-charge coverage covenant.
Cash used in investing activities was $22.89 million, primarily reflecting $28.81 million paid for acquisitions, partially offset by $5.26 million from selling notes receivable and approximately $1.0 million from selling locations. The company paid a $0.05 per-share dividend, totaling $680,000, and stated its intention to continue quarterly dividends subject to results and financial position.
Material changes and unusual items
- Snelling acquisition: completed March 1 for approximately $17.7 million. HireQuest recorded a preliminary $4.96 million bargain-purchase gain, citing the seller’s financial position and limited suitable buyers.
- Link acquisition: completed March 22 for approximately $11.1 million, principally for franchise agreements.
- HireQuest sold acquired locations and other assets. The filing reports a $638,000 gain on certain Snelling location sales and an approximately $1.9 million loss associated with Link-acquired assets; overall, it describes a net loss of approximately $1.2 million on asset sales. Miscellaneous income of $3.92 million also included note interest and other items.
- Snelling and Link acquisitions increased the franchise base; 64 net offices were purchased in 2021, and the quarter-end office table reports 208 franchised offices.
- Related-party transaction: Bass Underwriters, partly owned by company insiders, purchased approximately $5.3 million of notes receivable at book value. Proceeds helped finance the acquisitions.
Outlook, risks, and controls
Management gave no specific numerical earnings or revenue guidance. It expects COVID-19-related pressure on system-wide sales and royalties to persist through 2021 and possibly beyond, although monthly sales had been trending closer to historical levels. Management said cash, operating cash generation, and available credit should meet needs for at least 12 months, while noting uncertainty around the pandemic and future access to capital.
Key exposures include staffing demand and franchisee financial health, ongoing pandemic effects, integration of acquisitions, workers’ compensation claims, note collectability, and the availability of credit. The company is effectively self-insured for certain workers’ compensation claims up to policy deductibles; its claims liability was $9.62 million at quarter-end. It reported a $1.6 million allowance for potentially uncollectible notes receivable. Management did not expect material uninsured losses from legal proceedings and reported no material changes to previously disclosed risk factors.
Management concluded disclosure controls were not effective because of a material weakness: insufficient accounting resources to handle technical accounting matters and review acquisition integration. Remediation plans included evaluating additional accounting hires and engaging outside acquisition-accounting professionals.
Important facts for investors to verify
- How much of Q1 net income and miscellaneous income is nonrecurring, particularly the bargain-purchase gain and asset-sale results.
- Post-acquisition revenue, royalty trends, integration costs, and whether preliminary purchase-price allocations change.
- Cash conversion and liquidity after the $7.2 million deposit release; confirm ongoing working-capital needs and actual borrowing availability under the credit facility.
- Workers’ compensation claims development, collateral requirements, and the adequacy of reserves.
- Recoverability of notes receivable and the terms and governance review for the related-party note sale.
- Progress in remediating the material weakness and the office-count figures, which vary across filing disclosures.