HIREQUEST, INC. The following analysis is intended to help the reader understand our results of operations and financial condition, and should be read in conjunction with our consolidated financial statements and the accompanying notes located in Item 8 of this Form 10-K. This Annual Report on Form 10-K, including matters discussed in this Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements relating to our plans, estimates and beliefs that involve important risks and uncertainties. See "Special Note Regarding Forward-Looking Statements" and Item 1A. "Risk Factors" for a discussion of uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied in the forward-looking statements.
This section of this Annual Report on Form 10-K generally discusses 2022 and
2021 items and year-to-year comparisons between 2022 and 2021. Discussions of
2021 items and year-to-year comparisons between 2021 and 2020 that are not
included in this Annual Report on Form 10-K can be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended
Additionally, we use a non-GAAP financial measure and a key performance indicator to evaluate our results of operations. For important information regarding the use of the non-GAAP measure, including a reconciliation to the most comparable GAAP measure, see the section titled "Use of non-GAAP Financial Measure: Adjusted EBITDA" below. For important information regarding the use of the key performance indicator, see the section titled "Key Performance Indicator: System-Wide Sales" below.
Overview
We are a nationwide franchisor of offices providing direct-dispatch, executive
search, commercial staffing, and permanent placement solutions primarily in the
light industrial, blue-collar, executive, managerial, and
administrative segments of the staffing industry. Our franchisees provide
various types of temporary personnel, permanent placements, and recruitment
services through multiple business models under the trade names "HireQuest
Direct," "Snelling," "
? HireQuest Direct focuses on daily-work/daily-pay jobs primarily
for construction and light industrial customers.
? Snelling, and HireQuest focus on longer-term staffing positions in the light
industrial and administrative arenas.
? DriverQuest specializes in both commercial and non-CDL drivers serving a
variety of industries and applications.
? HireQuest Health specializes in skilled personnel in the healthcare and dental
industries.
? Northbound and MRI focus on executive, managerial, and professional
recruitment services, although they also offer short-term consultant services.
As of
The COVID-19 pandemic materially adversely impacted our business in 2020
and 2021 and to a much lesser extent, in 2022. Comparisons between 2022 and 2021
should be viewed through a COVID-19 lens with the understanding that for the
year ended
We finished 2022 with a strong balance sheet. Our assets exceeded liabilities by
over
On a year-over-year basis, we saw a 33.2% increase in our system-wide-sales from
We recorded record profits in 2022. While those were largely driven by the increase in system-wide-sales and resulting royalty revenue, we were also able to maintain our cost structure with selling, general, and administrative expense ("SG&A") in the same proportion as revenue. Even with these results, we believe the sweeping and persistent nature of the COVID-19 pandemic still depressed system-wide sales, resulting revenue, and net income during 2022, and may continue to do so.
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Table of Contents Results of Operations The following table displays our consolidated statements of operations for the years endedDecember 31, 2022 andDecember 31, 2021 (in thousands, except percentages): Year ended December 31, 2022 December 31, 2021 Franchise royalties$ 28,897 93.4 %$ 21,317 94.6 % Service revenue 2,055 6.6 % 1,212 5.4 % Total revenue 30,952 100.0 % 22,529 100.0 % Selling, general and administrative expenses 12,874 41.6 % 13,328 59.2 % Depreciation and amortization 2,040 6.6 % 1,551 6.9 % Income from operations 16,038 51.8 % 7,650 34.0 % Other miscellaneous income (2,047 ) (6.6 )% 4,570 20.3 % Interest income 247 0.8 % 413 1.8 % Interest and other financing expense (368 ) (1.2 )% (157 ) (0.7 )% Net income before income taxes 13,870 44.8 % 12,476 55.4 % Provision for income taxes 1,895 6.1 % 635 2.8 % Net income from continuing operations 11,975 38.7 % 11,841 52.6 % Income from discontinued operations, net of tax 483 1.6 % 9 0.0 % Net income$ 12,458 40.2 %$ 11,850 52.6 % Non-GAAP data Adjusted EBITDA$ 22,045 71.2 %$ 12,324 54.7 % 1. See the definition and reconciliation of Adjusted EBITDA within the immediately following section titled "Use of Non-GAAP Financial Measures: Adjusted EBITDA."
Use of Non-GAAP Financial Measures: Adjusted EBITDA
Earnings before interest, taxes, depreciation and amortization, and non-cash
compensation, or adjusted EBITDA, is a non-GAAP measure that represents our net
income before interest expense, income tax expense, depreciation and
amortization, non-cash compensation, costs related to the work opportunity tax
credit ("WOTC") and other charges and gains we consider non-recurring. We
utilize adjusted EBITDA as a financial measure as management believes investors
find it a useful tool to perform more meaningful comparisons and evaluations of
past, present, and future operating results. We believe it is a complement to
net income and other financial performance measures. Adjusted EBITDA is not
intended to represent or replace net income as defined by
However, because adjusted EBITDA excludes depreciation and amortization, it does
not measure the capital we require to maintain or preserve our fixed and
intangible assets. In addition, because adjusted EBITDA does not reflect
interest expense, it does not take into account the total amount of interest we
pay on outstanding debt, nor does it show trends in interest costs due to
changes in our financing or changes in interest rates. Adjusted EBITDA, as
defined by us, may not be comparable to adjusted EBITDA as reported by other
companies that do not define adjusted EBITDA exactly as we define the term.
Because we use adjusted EBITDA to evaluate our financial performance, we
reconcile it to net income, which is the most comparable financial measure
calculated and presented in accordance with
Year ended
December 31, 2022 December 31, 2021
Net income $ 12,458 $ 11,850
Interest expense 368 157
Provision for income taxes 1,895 635
Depreciation and amortization 2,040 1,551
WOTC related costs 601 595
EBITDA 17,362 14,788
Non-cash compensation 1,673 1,628
Acquisition related charges 2,660 (4,399 )
Impairment of notes receivable 350 307
Adjusted EBITDA $ 22,045 $ 12,324
Revenue
Our total revenue consists of franchise royalties, and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect owned locations. Once a company-owned office is sold, disposed of, or otherwise classified as held-for-sale, it would not be reflected in revenue and instead reported as "Income from discontinued operations, net of tax." For a description of our revenue recognition practices, please refer to "Note 1 - Overview and Summary of Significant Accounting Policies - Revenue Recognition," and "Critical Accounting Estimates - Revenue Recognition," which disclosure is incorporated herein by reference.
Total revenue for the year ended
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Table of Contents Franchise Royalties
We charge our franchisees a royalty fee on the basis of one of several models.
Under the HireQuest Direct model, the royalty fee charged ranges from 6% to 8%
of gross billings, depending on volume. Royalty fees are charged at 8% for the
first
Franchise royalties for the year ended
Service Revenue
Service revenue consists of revenue generated from franchisees that are outside of our core services such as license fees and miscellaneous income. This includes interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. As accounts receivable age over 42 days, our franchisees pay us interest on these accounts equal to 0.5% of the amount of the uncollected receivable each 14-day period. Accounts that age over between 42 and 84 days are charged back to the franchisee and no longer incur interest. Some of our franchisees elect to charge back accounts before they age 84 days in order to reduce or avoid the interest charge. Service revenue also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vender programs or IT license blocks. Generally we do not profit from these arrangements as they represent pass-through items, although there may be timing differences. In addition, there are occasionally classification differences where the cost is embedded in selling, general and administrative expenses.
Service revenue for the year ended
Operating expenses
Operating expenses for the year ended
Workers' Compensation
Workers' compensation provided a net benefit of
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Other Selling, General and Administrative Expenses ("SG&A")
Excluding workers' compensation, SG&A for the year ended
Other SG&A also includes a
Depreciation and Amortization
Depreciation and amortization for the year ended
Other income and expense
Other miscellaneous income includes all nonoperating income and expense other
than interest and taxes. For the year ended
The remaining items of other miscellaneous income and expense consist of small
gains and losses resulting from the conversion of Snelling owned stores to
franchises, and gross rents from leasing excess space at our corporate
headquarters. We lease approximately 9,200 square feet of office space in our
headquarters campus to unaffiliated companies. These leases are at the market
rate. Rental income for the year ended
Interest income and expense
Interest income for the year ended
Interest and other financing expense relates primarily to the Revolving Credit
and Term Loan Agreement with Truist. Interest and other financing expense
increased approximately
Provision for income tax
Income tax expense was approximately
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Income from discontinued operations, net of tax
Company-owned offices that have been disposed of by sale, disposed of other than by sale, or are classified as held-for-sale are reported separately as discontinued operations. In addition, a newly acquired business that on acquisition meets the held-for-sale criteria will be reported as discontinued operations. Accordingly, the assets and liabilities, operating results, and cash flows for these businesses are presented separate from our continuing operations, for all periods presented in our consolidated financial statements and footnotes, unless indicated otherwise. The assets and liabilities of a discontinued operation held-for-sale are measured at the lower of the carrying value or fair value less cost to sell.
As of
? The assets acquired in the Dental Power Agreement; and
? Certain assets acquired in the Dubin Agreement related to the operations of
the Philadelphia franchise.
We have entered into negotiations to sell the assets associated with the Dental Power Agreement and expect to dispose of these acquired assets in early 2023.
The income from discontinued operations amounts as reported on our consolidated statements of operations was comprised of the following amounts (in thousands):
Year ended
December 31, December 31,
2022 2021
Revenue $ 6,313 $ 231
Cost of staffing services 4,505 171
Gross profit 1,808 60
Selling, general and administrative expense 795 36
Amortization 384 12
Net income before tax 629 12
Provision for income taxes 146 3
Net income $ 483 $ 9
Liquidity and Capital Resources
Overview
Our major source of liquidity and capital is cash generated from our ongoing operations consisting of royalty revenue, service revenue and staffing revenue from owned locations. We also receive principal and interest payments on notes receivable that we issued in connection with the conversion of company-owned offices to franchised offices.
At
Our working capital requirements are driven largely by temporary employee payroll, which is typically daily or weekly, and weekly cash settlements with our franchises. Since collections from accounts receivable lag employee pay our working capital requirements increase as system-wide sales increase, and vice-versa. When the economy contracts, our cash balance tends to increase in the short-term as payroll funding requirements decrease and accounts receivable are converted to cash upon collection. As the economy recovers, our cash balance generally decreases and accounts receivable increase.
We believe that our current cash balance, together with the future cash generated from operations, principal and interest payments on notes receivable, and our borrowing capacity under our line of credit, will be sufficient to satisfy our working capital needs, capital asset purchases, future dividends, and other liquidity requirements associated with our continuing operations for the next 12 months. We also believe that future cash generated from operations, principal and interest payments on notes receivable, and our borrowing capacity under our line of credit, will be sufficient to satisfy our working capital needs, capital asset purchases, future dividends, and other liquidity requirements associated with our continuing operations beyond the next 12 months. Our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors including overall liquidity in the capital or credit markets, the state of the economy and our credit strength as viewed by potential lenders. We cannot provide assurances that we will have future access to the capital or credit markets on acceptable terms.
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Table of Contents Cash Flows Operating Activities
During 2022, net cash generated by operating activities was approximately
Investing Activities
During 2022, net cash used by investing activities was approximately
Financing Activities
During 2022, net cash provided by financing activities was approximately
Capital Resources
Revolving Credit and Term Loan Agreement with Truist
On
The Credit Agreement and other loan documents contain customary representations
and warranties, affirmative, and negative covenants, including without
limitation, those covenants governing indebtedness, liens, fundamental changes,
restricting certain payments including dividends unless certain conditions are
met, transactions with affiliates, investments, engaging in business other than
the current business of the Borrowers and business reasonably related thereto,
sale/leaseback transactions, speculative hedging, and sale of assets. The Credit
Agreement and other loan documents also contain customary events of default
including, without limitation, payment default, material breaches of
representations and warranties, breach of covenants, cross-default on material
indebtedness, certain bankruptcies, certain ERISA violations, material
judgments, change in control, termination or invalidity of any guaranty or
security documents, and defaults under other loan documents. The Credit
Agreement also requires the Borrowers, on a consolidated basis, to comply with a
fixed charge coverage ratio of at least 1.25:1.00 and a leverage ratio of not
more than 3.0:1.0. The obligations under the Credit Agreement and other loan
documents are secured by substantially all of the assets of the Borrowers as
collateral including, without limitation, their accounts and notes receivable,
stock of the Company's subsidiaries, and intellectual property and the real
estate owned by
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The Company utilized the proceeds of the Line of Credit and Term Loan (i) first to pay off its existing credit facility with BB&T, now Truist, and (ii) second, to pay transaction fees and expenses incurred in connection with closing the transactions described above. The Company intends to utilize the proceeds of any loans made under the Line of Credit and the remainder of the Term Loan for working capital, acquisitions, required letters of credit, and general corporate purposes in accordance with the terms of the Credit Agreement.
At
On
Key Performance Indicator: System-Wide Sales
We refer to total sales generated by our franchisees as "franchise sales." For any period prior to their conversion to franchises, we refer to sales at company-owned and operated offices as "company-owned sales." In turn, we refer to the sum of franchise sales and company-owned sales as "system-wide sales." In other words, system-wide sales include sales at all offices, whether owned and operated by us or by our franchisees. System-wide sales is a key performance indicator, although we do not record system-wide sales as revenue. Management believes that information on system-wide sales is important to understanding our financial performance because those sales are the basis on which we calculate and record much of our franchise royalty revenue, are directly related to all other royalty revenue and service revenue and are indicative of the financial health of our franchisee base. Management uses system-wide sales to benchmark current operating levels to historic operating levels. System-wide sales should not be considered as an alternative to revenue.
During 2022, nearly all of our offices were franchised with the only exception
being
Year ended
December 31, December 31,
2022 2021
Franchise sales $ 465,917 $ 354,265
Company-owned sales 6,313 231
System-wide sales $ 472,230 $ 354,496 System-wide sales were
Number of Offices
We examine the number of offices we open and close every year. The number of offices is directly tied to the amount of royalty and service revenue we earn. In 2022, we added 218 offices on a net basis by opening or acquiring 223 and closing 5. In 2021, we added 78 offices on a net basis by opening or acquiring 79 and closing 1.
The following table accounts for the number of offices opened and closed in 2022 and 2021.
Franchised offices,December 31, 2020 139 Purchased in 2021 (net of sold locations) 65 Opened in 2021 14 Closed in 2021 (1 ) Franchised offices,December 31, 2021 217 Purchased in 2022 (net of sold locations) 207 Opened in 2022 16 Closed in 2022 (5 )
Franchised offices,
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Table of Contents Seasonality
Our revenue fluctuates quarterly and is generally higher in the second and third quarters of our year. Some of the industries in which we operate are subject to seasonal fluctuation. Many of the jobs filled by employees are outdoor jobs that are generally performed during the warmer months of the year. As a result, in an average year, activity increases in the spring and continues at higher levels through summer, then begins to taper off during fall and through winter.
Critical Accounting Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations are based upon our financial statements, which have been prepared in
accordance with
A critical accounting estimate is an estimate that: (i) is made in accordance with generally accepted accounting principles, (ii) involves a significant level of estimation uncertainty and (iii) has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations.
On an ongoing basis we evaluate our estimates, including, but not limited to, those related to our workers' compensation claim liabilities, our Risk Management Incentive Program, our deferred taxes, our notes receivable allowance for losses, and estimated fair value of assets and liabilities acquired. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management's most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Revenue Recognition
Our primary source of revenue comes from royalty fees based on the operation of
our franchised offices. Royalty fees from our HireQuest Direct business model
are based on a percentage of sales for services our franchisees provide to
customers, which ranges from 6% to 8%. Royalty fees from our
For franchised locations, we recognize revenue when we satisfy our performance obligations. Our performance obligations primarily take the form of a franchise license and promised services. Promised services consist primarily of paying temporary employees, completing all statutory payroll related obligations, and providing workers' compensation insurance on behalf of temporary employees. Because these performance obligations are interrelated, we do not consider them to be individually distinct and therefore account for them as a single performance obligation. Because our franchisees receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Franchise royalties are billed on a weekly basis. We also offer various incentive programs for franchisees including royalty incentives, royalty credits, and other support initiatives. These incentives and credits are provided to encourage new office development and organic growth, and to limit workers' compensation exposure. We present franchise royalty fees net of these incentives and credits.
For owned locations, we account for revenue when both parties to the contract have approved the contract, the rights and obligations of the parties are identified, payment terms are identified, and collectability of consideration is probable. Revenue derived from owned locations is recognized at the time we satisfy our performance obligation. Our contracts have a single performance obligation, which is the transfer of services. Because our customers receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Revenue from owned locations is reported net of customer credits, discounts, and taxes collected from customers that are remitted to taxing authorities. Our customers are invoiced every week and we do not require payment prior to the delivery of service. Substantially all of our contracts include payment terms of 30 days or less and are short-term in nature. Because of our payment terms with our customers, there are no significant contract assets or liabilities. We do not extend payment terms beyond one year.
Workers' Compensation Claims Liability
We maintain reserves for workers' compensation claims based on their estimated
future cost. These reserves include claims that have been reported but not
settled, as well as claims that have been incurred but not reported. Our
estimated workers' compensation claims liability was
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Workers' compensation Risk Management Incentive Program ("RMIP")
Our RMIP is designed to incentivize our franchises to keep our temporary employees safe and control exposure to large workers' compensation claims. We accomplish this by paying our franchisees an amount equivalent to a percentage of the amount they pay for workers' compensation insurance if they keep their workers' compensation loss ratios below specified thresholds.
Notes Receivable
Notes receivable consist primarily of amounts due to us related to the financing of franchised locations. We report notes receivable at the principal balance outstanding less an allowance for losses. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. Notes receivable are generally secured by the assets of each location and the ownership interests in the franchise. We monitor the financial condition of our debtors and record provisions for estimated losses when we believe it is probable that our debtors will be unable to make their required payments. We evaluate the potential impairment of notes receivable based on various analyses, including estimated discounted future cash flows, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When a specific note receivable is deemed impaired, we discontinue accruing interest and only recognize interest income when payment is received.
Two of our notes receivable have contingent consideration. The Arizona Note is
based on a percentage of system-wide sales from various
Our allowance for losses on notes receivable was approximately
To estimate fair value, we may use both a discounted cash flow and a market valuation approach. The discounted cash flow approach uses cash flow projections and a discount rate to calculate the fair value of each reporting unit while the market approach relies on market multiples of similar companies. The key assumptions used for the discounted cash flow approach include projected revenues and profit margins, changes in working capital, and the current discount and tax rates. For the market approach, we select a group of peer companies that we believe are best representative of each reporting unit.
Annual assessments are conducted in the context of information that is
reasonably available to us as of the date of the assessment including our best
estimates of future sales volumes and prices; labor cost and availability;
operational efficiency, and the then current discount rates and tax rates. We
will perform our next annual goodwill impairment tests as of
Other intangible assets are recorded at cost or, when acquired as a part of a business combination, at estimated fair value. These assets include customer relationships, technology-related assets, trademarks, and other intellectual property. Intangible assets that have definite lives are amortized using a method that reflects the pattern in which the economic benefits of the assets are consumed or the straight-line method over estimated useful lives of 5 to 15 years. Intangible assets with indefinite lives are subject to at least annual impairment testing, which are conducted each calendar year in the fourth quarter.. The impairment testing compares the fair value of the intangible asset with its' carrying amount using the relief from royalty method or the comparable sales method, depending on the asset. The relief from royalty method uses cash flow projections and a discount rate to calculate the fair value of intellectual property while the comparable sales approach relies on recent sales of similar assets by unrelated companies. The key assumptions used for the relief from royalty method include projected revenues and profit margins, an assumed royalty rate, and the current discount and tax rates. For the comparable sales approach, we rely on public reports of recent sales that we believe are best representative of each asset being evaluated.
The test completed as of October1, 2022 indicated no impairment. Interim tests may be required if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying value or change the useful life of the asset. Many of the factors used in assessing fair value are outside the control of management, and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments.
Business Combinations
We account for business acquisitions under the acquisition method of accounting by recognizing identifiable tangible and intangible assets acquired, liabilities assumed, and non-controlling interests in the acquired business at their fair values. We record the portion of the purchase price that exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, if any, as goodwill. Any gain on a bargain purchase is recognized immediately. We recognize identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognized by the acquiree prior to the acquisition. We expense acquisition related costs as we incur them. Any contingent consideration is measured at fair value at the date of acquisition. Contingent consideration is remeasured at fair value each reporting period with subsequent changes in the fair value of the contingent consideration recognized during the period.
Asset Acquisitions
When we purchase a group of assets in a transaction that is not accounted for as
a business combination, usually because the group of assets does not meet the
definition of a business, we account for the transaction using a cost
accumulation model, with the cost of the acquisition allocated to the acquired
assets based on their relative fair values.
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