HireQuest, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 29, 2019; year-to-date figures cover the three quarters ended that date. Amounts are in U.S. dollars. HireQuest is a staffing franchisor operating HireQuest Direct and HireQuest brands. Results require caution: the July 15 merger with Command Center was accounted for as a reverse acquisition, and the company-owned branches sold during the quarter are reported as discontinued operations.
Business context and major changes
- The merger issued Legacy HQ owners shares representing 68% of the post-merger company. The company changed its name to HireQuest, Inc. and began trading as HQI.
- By September 29, all branches were franchise-operated: 152 branches across 30 states and the District of Columbia. The company also sold its four California branches to an unaffiliated buyer and said it did not intend to franchise in California in the near future.
- Branch sales and franchise conversions materially affect comparisons. Reported revenue is primarily royalties and service fees, not total staffing sales. Q3 system-wide sales were $74.2 million, including $60.6 million of franchise sales and $13.6 million of company-owned sales reported in discontinued operations.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Three quarters 2019 | Three quarters 2018 |
|---|---|---|---|---|
| Total revenue | $3.38 million | $2.34 million | $10.09 million | $8.79 million |
| Operating income (loss) | ($4.05 million) | $1.06 million | $0.20 million | $4.79 million |
| Continuing-operations income (loss) | ($8.46 million) | $1.07 million | ($4.48 million) | $4.89 million |
| Net income (loss), including discontinued operations | ($7.78 million) | $1.09 million | ($3.75 million) | $4.93 million |
| Basic and diluted EPS | ($0.60) | $0.11 | ($0.34) | $0.50 |
- Q3 revenue rose 44.3%; royalties rose 44.3% to $3.14 million and service revenue rose 45.3% to $241,000. Management attributed growth to newly franchised branches and organic growth at Legacy HQ franchises. Year-to-date revenue increased 14.8%.
- Q3 SG&A was $7.39 million, versus $1.27 million a year earlier. Management cited merger-related professional fees of about $1.8 million, increased compensation costs of about $2.0 million, and rebranding and restructuring costs of about $1.0 million. A roughly $595,000 merger-related restructuring reserve was accrued in the quarter.
- Income from discontinued operations was $683,000 in Q3 and $723,000 year to date. Q3 discontinued operations included $13.55 million revenue and a $394,000 gain on sale.
- The income-tax provision was $4.72 million in Q3 and $4.82 million year to date. It principally reflects the merger-related change from cash- to accrual-basis tax accounting and taxable gains on the sale of intangible assets; the filing describes an additional tax obligation of about $5.6 million payable over four years.
Cash flow, balance sheet, and liquidity
- Cash and restricted cash at September 29 was $1.53 million. Total assets were $58.54 million and total liabilities were $29.48 million. Current assets of $45.77 million exceeded current liabilities of $23.84 million by about $21.93 million.
- Current assets included $35.71 million of accounts receivable and $4.53 million of current notes receivable; long-term notes receivable were $10.50 million. These balances are not equivalent to cash. About 78% of receivables were due from franchise locations; the allowance for receivables from previously company-owned locations was approximately $362,000.
- Operating cash flow was negative $1.20 million overall year to date: negative $7.60 million from continuing operations, partly offset by $6.40 million from discontinued operations. Investing activities provided $1.12 million; financing activities provided $316,000. Cash increased $237,000 from year-end.
- The company had $6.89 million outstanding on its $30 million BB&T revolving facility, which matures May 31, 2024. Approximately $9.8 million of letters of credit for workers’ compensation collateral reduce facility availability. The facility is secured by substantially all operating assets and includes covenants, including a fixed-charge coverage ratio requirement beginning with the four-quarter period ending September 30, 2020.
- HireQuest is effectively self-insured for workers’ compensation claims up to specified deductibles. The balance sheet reports $2.27 million of workers’ compensation claims liabilities, current and long-term combined.
Outlook, risks, and unusual items
- No numeric revenue or earnings guidance is provided. Management expected additional merger and consolidation charges in Q4 2019 and Q1 2020, but anticipated they would be significantly lower than Q3 charges. It expected discontinued-operations income to decline to zero by Q1 2020 following the branch conversions and sales.
- Management identifies integration of the merger, the transition to franchise operations, franchisee financial health and operating standards, staffing-industry demand, customer retention, regulation, and systems disruptions among key risks. A small number of owners control a significant number of franchises.
- Related-party matters warrant attention: certain directors and significant shareholders have interests in franchisees and affiliates, and approximately $2.2 million of buyer notes were transferred to an affiliate in exchange for receivables. A Dock Square consulting agreement could result in up to approximately 1.6 million additional shares, subject to performance and vesting terms.
- Management said disclosure controls were effective, while noting that merger-related integration materially affected internal controls. The filing also reports material weaknesses identified in Legacy HQ’s 2018 audit, including staffing and review controls, journal entries, disclosures, and segregation of duties.
- Legal proceedings were described as not expected to result in material uninsured losses. Results are subject to significant estimates, particularly workers’ compensation liabilities, receivable collectability, and deferred taxes.
Important facts for investors to verify
- Whether merger, restructuring, and tax-related charges recur, and how ongoing profitability compares once transition costs subside.
- Collection timing and credit quality of the large receivable and franchisee-note balances, including the reported $3.0 million post-quarter payment on branch-sale notes and related $300,000 purchase-price discount.
- Actual borrowing availability after letters of credit, compliance with facility covenants, and workers’ compensation claim development.
- Franchisee performance and concentration, including related-party relationships and the ability of newly converted branches to sustain royalty sales.
- Progress in remediating Legacy HQ control weaknesses and integrating financial reporting controls.