HireQuest Inc

Notes to Consolidated Financial Statements

Note1 - Overview and Summary of Significant Accounting Policies

Nature of Business

HireQuest, Inc., together with its subsidiaries, (“HQI,” the “Company,” “we,” us,” or “our”) is a nationwide franchisor of offices providing direct-dispatch, executive search, and commercial staffing solutions primarily in the light industrial and blue-collar segments of the staffing industry and traditional commercial staffing. Our franchisees provide various types of temporary personnel throughtwo primary business models operating under the trade names “HireQuest Direct”, “HireQuest”, “Snelling”, “DriverQuest”, “HireQuest Health”, "TradeCorp", "SearchPath", “Northbound Executive Search”, "Management Recruiters International", "Sales Consultants" and "MRI". HireQuest Direct specializes primarily in unskilled and semi-skilled industrial and construction personnel. HireQuest, Snelling and TradeCorp specialize primarily in skilled and semi-skilled industrial personnel, clerical and administrative personnel, and permanent placement services. DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications. HireQuest Health specializes in skilled personnel in the medical and dental industries. Northbound Executive Search, MRI and SearchPath specialize in executive placement and consultant services.

On* December 4, 2023we completed our acquisition of customer relationships and certain other assets of TEC, The Employment Company (“TEC”) for $9.8 million. TEC has been a premier provider of staffing services to the employers and workers in Northwest and Central Arkansas for over40* years. For additional information related to these transactions, seeNote2* - Acquisitions*.

As of* March 31, 2024*, we had 428 franchisee-owned offices and1 company-owned office in 42 states, the District of Columbia, and13 countries outside of the United States. We are the employer of record to approximately 80 thousand employees annually, who in turn provide services to thousands of clients in various industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, retail, and dental practices. We provide employment, marketing, working capital funding, software, and administrative services to our franchisees.

Basis of Presentation

We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), and with the instructions to Article8 of Regulation S-X. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments of a normal recurring nature that are necessary for a fair presentation of the results for the periods presented.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report filed on Form10-K for the year ended* December 31, 2023*. Results for the interim periods presented arenot necessarily indicative of the results expected for the full year or for any other period.

Consolidation

The consolidated financial statements include the accounts of HQI and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

U.S. GAAP requires the primary beneficiary of a variable interest entity (“VIE”) to consolidate that entity. To be the primary beneficiary of a VIE, an entity must have both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses or the right to receive benefits from the VIE that are significant to the beneficiary. We provide acquisition financing to some of our franchisees that could result in our having to absorb losses. This results in some franchisees being considered VIEs. We have reviewed our relationship with each of these franchisees and determined that we arenot the primary beneficiary of any of these entities. Accordingly, we havenot consolidated these entities.

Foreign Currency Translation

The functional currency of the company and all of its subsidiaries is the United States dollar. Certain franchises located outside the United States* maytransact business in their local currency. As a result, some accounts receivable maybe denominated in currencies other than United States dollar. Assets and liabilities are translated into United States dollars at the exchange rate in effect on the balance sheet date. Royalties received from and expenses charged to non-US franchises are always denominated in United States dollars, and the franchisee bears all foreign exchange risk. Foreign currency translation and re-measurement gains and losses are included in results of operations within other income (expense), net, which waszero during thethree* months ended* March 31, 2024* and* March 31, 2023*.

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Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Actual results could differ from those estimates.

Significant estimates and assumptions underlie our workers’ compensation claim liabilities, our workers’ compensation Risk Management Incentive Program, our deferred taxes, our allowance for credit losses, potential impairment of goodwill and other intangibles, stock-based compensation, and estimated fair value of assets and liabilities acquired.

Accounts Receivable and Allowance for Doubtful Accounts

Accounts receivable consist of amounts due for staffing services provided to customers of franchisees and of accounts receivable originating at company-owned locations. At* March 31, 2024*, and* December 31, 2023*, substantially all of our net accounts receivable were due from customers of franchisees. We own the accounts receivable from staffing services provided by our employees on behalf of the franchisees until they age beyond a date agreed upon with each respective franchisee between42 and84 days. When accounts receivable age beyond the agreed-upon date, they are charged back to our franchisees. Accordingly, we donot record an allowance for doubtful accounts on these accounts receivable because we donot bear the risk of loss. Otherwise, estimates of expected credit losses on accounts receivable over their life would be recorded at inception, based on historical information, current conditions, and reasonable and supportable forecasts.

For specific MRI franchisees we share in the risk of loss on accounts receivable up to the credit limit set for each specific client. For contract staffing services provided by MRI offices and for our company-owned office, we record accounts receivable at face value less an allowance for doubtful accounts. We determine the allowance for doubtful accounts based on historical write-off experience, the age of the receivable, other qualitative factors and extenuating circumstances, and current economic data which represents our best estimate of the amount of expected credit losses on these accounts receivable, if any. We review the allowance for doubtful accounts periodically and evaluate how conditions that existed during the historical charge-off period* maydiffer from our current expectations and accordingly mayrevise our estimate of expected credit losses. Our allowance for doubtful accounts on company-owned and other applicable accounts receivable was approximately $266 thousand and $199 thousand at March 31, 2024*, and* December 31, 2023*, respectively.

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 6.0% to 8.0%. Royalty fees from our HireQuest business line, including HireQuest franchisees, DriverQuest franchisees, the Northbound franchisee, the HireQuest Health franchisees, and Snelling and LINK franchisees who executed new franchise agreements upon closing, are 4.5% of the payroll we fund plus 18.0% of the gross margin for the territory. The MRI franchisees with a lower royalty scale generally pay a flat annual fee plus a percentage-based royalty. For contract staffing, MRI franchisees pay a royalty that ranges from 20% to 25% of payroll, depending on sales volume. Some customers that utilize qualified independent contractors cause the franchisee to pay a royalty that ranges from 4% to 10% of contractor payments, depending on sales volume. Royalty fees from the Snelling and SearchPath franchise agreements assumed andnot renegotiated at closing range from 5.0% to 8.0% of sales for services our franchisees provide to customers. Our franchisees are responsible for taking customer orders, providing customers with services, establishing the prices charged for services, and controlling other aspects related to providing service to customers prior to the service being transferred to the customer, such as determining which temporary employees to dispatch to the customer and establishing pay rates for the temporary employees. Accordingly, we present revenue from franchised locations on a net basis as agent as opposed to a gross basis as principal.

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 donot 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 other than with MRI franchise royalties, which are billed on a monthly 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 rarely require payment prior to the delivery of service. Substantially all of our contracts include payment terms of30 days or less and are short-term in nature. Because of our payment terms with our customers, there areno significant contract assets or liabilities. We donot extend payment terms beyondone year.

Below are summaries of our franchise royalties disaggregated by business model (in thousands):

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Service revenue, which forms the other component of our total revenue, consists of interest we charge our franchisees on overdue customer accounts receivable, trademark license fees, and other fees for optional services we provide. We recognize interest income based on the effective interest rate applied to the outstanding principal balance of overdue accounts. License fees are charged to some locations that utilize our intellectual property that arenot franchisees. License fees are 9.0% of the gross margin for the location and are recognized when earned. We recognize revenue from optional services as we provide them.

Advertising fund revenue includes contributions to our National Advertising Fund by franchisees. Revenue related to these contributions is based on a percentage of sales of certain franchised locations and is recognized as earned.

Notes Receivable

Notes receivable from franchisees consist primarily of amounts due to us related to the financing of franchised locations. We report notes receivable from franchisees 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 flow, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets* may**not* be recoverable. When a note receivable is deemed impaired, we discontinue accruing interest and only recognize interest income when payment is received.

The following table summarizes our allowance for credit losses at* December 31, 2022and changes during the year ended December 31, 2023*, and changes during thethree months ended* March 31, 2024*.

Some of our notes receivable have contingent consideration based on a percentage of specified system-wide sales that exceed certain thresholds. Notes with contingent consideration are recorded at fair value when originated. Probability of payment is reflected in the fair value, as is the time value of money. Subsequent changes in the recorded amount of contingent consideration are recognized during period in which the change was recognized.

Intangible Assets

Intangible assets acquired are initially recorded at fair value. We test our finite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of the assets* maynot* be recoverable. We test our indefinite-lived intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of the assets* maynot* be recoverable. If the carrying value exceeds the fair value, we recognize an impairment in an amount equal to the excess,not to exceed the carrying value. Management uses considerable judgment to determine key assumptions, including projected revenue, royalty rates and appropriate discount rates. There wereno intangible asset impairment charges during thethree months ended* March 31, 2024* or* March 31, 2023*.

Finite-lived intangible assets are amortized using the straight-line method over their estimated useful lives, which ranges from 5 to 15 years. Our finite-lived intangible assets include acquired franchise agreements, acquired customer relationships, acquired customer lists, internally developed software, and purchased software. Our indefinite-lived intangible assets include acquired domain names and acquired trade names. For additional information related to significant additions to intangible assets, seeNote2* - Acquisitions*.

Intangible assets internally developed are measured at cost. We capitalize costs to develop or purchase computer software for internal use which are incurred during the application development stage. These costs include fees paid tothird parties for development services and payroll costs for employees' time spent developing the software. We expense costs incurred during the preliminary project stage and the post-implementation stage. Capitalized development costs are amortized on a straight-line basis over the estimated useful life of the software. The capitalization and ongoing assessment of recoverability of development costs requires considerable judgment by management with respect to certain external factors, including, butnot limited to, technological and economic feasibility, and estimated economic life.

The table below reflects information related to our intangible assets (in thousands).

Impairment - Intangible Assets

Indefinite-lived intangible assets are tested annually for impairment during thefourth quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate the Indefinite-lived intangible asset is more likely thannot impaired. Such indicators* may*include a deterioration in macroeconomic conditions; a significant increase in cost factors; negative overall financial performance (including a decline in our expected future cash flows); entity-specific changes in key personnel, strategy or customers; and industry considerations including competition, legal, regulatory, contractual or asset-specific factors, among others. The occurrence of these indicators could have a significant impact on the recoverability of the indefinite-lived intangible and could have a material impact on our consolidated financial statements. For purposes of our impairment test, the assessment of indefinite-lived intangibles is performed at the asset level.

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Impairment of indefinite-lived intangibles is determined using atwo-step process. Thefirst step involves assessing qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if we determine, based on the qualitative assessment, that it is more likely thannot that an indefinite-lived intangible asset's fair value is less than its carrying amount. Otherwise,no further impairment testing is required. The qualitative assessment* maybe performed onnone,* some, or all of our indefinite-lived intangible assets. Alternatively, we can bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test.

Goodwill

Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business combinations. Goodwill is measured for impairment at least annually, or whenever events and circumstances arise that indicate an impairment* mayexist. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. We test for goodwill impairment at the reporting unit level. In assessing the value of goodwill, assets and liabilities are assigned to a reporting unit and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. At March 31, 2024* we had a single reporting unit. There wereno changes to our goodwill during thethree months ended* March 31, 2024*.

Impairment - Goodwill

Goodwill is tested annually for impairment during thethird quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely thannot impaired. Such indicators* may*include a sustained, significant decline in our stock price; a decline in our expected future cash flows; significant disposition activity; a significant adverse change in the economic or business environment; and the testing for recoverability of a significant asset group, among others. The occurrence of these indicators could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.

For purposes of our impairment test, we operate as a single reporting unit. Determining the fair value of a reporting unit when performing a quantitative impairment test involves the use of significant estimates and assumptions by management. Different judgments relating to the determination of reporting units could significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.

When evaluating goodwill for impairment, we have the option tofirst assess qualitative factors to determine whether it is more likely thannot the fair value of a reporting unit is less than its carrying value. Qualitative factors include macroeconomic conditions, industry and market conditions, and overall company financial performance. If, after assessing these events and circumstances, we determine that it is more likely thannot the fair value of the reporting unit is greater than its carrying amount, a quantitative impairment test isnot necessary. If necessary, the quantitative impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the carrying value,no impairment of goodwill is deemed necessary. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, up to the carrying value of the goodwill.

Marketing and Advertising

We expense advertising and marketing costs as we incur them. These costs were approximately $329 thousand and $206 thousand during thethree months ended* March 31, 2024* and* March 31, 2023*, respectively. These costs are included in general and administrative expenses.

Some of our MRI franchisees are required to pay an advertising fee equal to 0.5% -1.0% of total net sales, which supports national advertising designed to build brand awareness and drive traffic for both potential customers and potential candidates. The national advertising effort is administered by us, with franchisees providing input. Some examples include subscriptions to various job boards, the creation of digital content for social media, supporting investments in marketing-related software, and purchasing video and print media.

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Earnings per Share

We calculate basic earnings per share by dividing net income or loss available to common stockholders by the weighted average number of common shares outstanding. We donot include the impact of any potentially dilutive common stock equivalents in our basic earnings per share calculations. Diluted earnings per share reflect the potential dilution of securities that could share in our earnings through the conversion of common shares issuable via outstanding stock options and unvested restricted shares, except where their inclusion would be anti-dilutive. Outstanding common stock equivalents at* March 31, 2024* and* March 31, 2023* totaled approximately 165 thousand and 192 thousand, respectively.

We use the treasury stock method to calculate the diluted common shares outstanding which were as follows (in thousands):

Fair Value Measures

Fair value is the price that would be received to sell an asset, or paid to transfer a liability, in the principal or most advantageous market for the asset or liability in an ordinary transaction between market participants on the measurement date. Our policy on fair value measures requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The policy establishes a fair value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The policy prioritizes the inputs intothree levels that* may*be used to measure fair value:

Level1: Applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level2: Applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

Level3: Applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.

The carrying amounts of cash, accounts receivable, accounts payable, the line of credit and all other current assets and liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the amortized cost basis as adjusted by an allowance for credit losses as we believe the stated interest rates reflects the prevailing market rates given our unique collateral position and the scarce capital resources willing to finance a franchise. The fair value of the term loan payable approximates its carrying value because current rates for similar borrowings donot have a material impact.

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Discontinued Operations

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, upon 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.

Recently Issued Accounting PronouncementsNot Yet Adopted**

In* March 2020,the FASB issued ASU2020*-04, Reference Rate Reform ("Topic848"), Facilitation of the Effects of Reference Rate Reform on Financial Reporting. On* December 21, 2022,the FASB issued ASU2022*-06, Reference Rate Reform ("Topic848"), Deferral of the Sunset Date of Topic848**, which extends the period of time financial statement preparers can utilize the reference rate reform relief guidance contained in ASU2022-04. The guidance provides optional practical expedients to ease the potential burden in accounting for contract modifications and hedge accounting related to reference rate reform. The provisions apply only to those transactions that reference the London Inter-Bank Offered Rate ("LIBOR") or another reference rate expected to be discontinued due to reference rate reform. On* February 28, 2023the Company refinanced its credit agreement and a term loan that each referenced LIBOR into a replacement line of credit that references the Bloomberg Short-Term Bank Yield Index ("BSBY"), therefore the optional expedient isno* longer relevant to the Company’s financial statements and related disclosures.

In* October 2023,the FASB issued ASU2023*-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. In U.S. Securities and Exchange Commission ("SEC") ReleaseNo. 33-10532, Disclosure Update and Simplification, issued* August 17, 2018,the SEC referred certain of its disclosure requirements that overlap with, but require incremental information to, U.S. GAAP to the FASB for potential incorporation into the FASB ASU. The ASU is the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. ASU2023*-06 is the result of the Board’s decision to incorporate into the Codification14 of the27 disclosures referred by the SEC. Since we are already subject to the SEC’s existing disclosure requirements, the effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The adoption of this new guidance isnot expected to have a significant impact on the Company's financial statements and related disclosures.

In* November 2023,FASB issued ASU2023*-07, Segment Reporting ("Topic280"): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an interim and annual basis, primarily regarding significant segment expenses and information used to assess segment performance. This ASU is effective for fiscal years beginning after* December 15, 2023,and interim periods beginning after December 15, 2024.Retrospective application is required for all periods presented. The adoption of this new guidance isnot* expected to have a significant impact on the Company's financial statements and related disclosures.

In* December 2023,the FASB issued ASU2023*-09, Income Taxes ("Topic740") - Improvements to Income Tax Disclosures, which requires enhancements and further transparency to certain income tax disclosures, primarily to the tax rate reconciliation and income taxes paid. This ASU is effective for fiscal years beginning after* December 15, 2024,on a prospective basis with retrospective application permitted. The adoption of this new guidance isnot* expected to have a significant impact on the Company's financial statements and related disclosures.

There areno other new accounting pronouncements, issued or effective during the fiscal year, that are expected to have a significant impact on our financial statements and related disclosures.

Note2 - Acquisitions

Asset Acquisitions

TEC, The Employment Company

On* December 4, 2023we completed our acquisition of the customer relationships and certain other assets of TEC in accordance with the terms of the Asset Purchase Agreement dated October 23, 2023 (the “TEC Agreement”). TEC was a premier provider of industrial staffing services to the employers in Northwest and Central Arkansas for over40* years.

The following table summarizes the estimated fair values of the identifiable assets acquired as of the acquisition date:

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We determined the TEC transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the customer relationships. Accordingly,no pro forma financial information is presented.

Franchise royalties attributable to the acquiree of approximately $347 thousand are included in our consolidated statement of income for thethree months ended* March 31, 2024*.

Immediately after the acquisition, we sold all of the assets acquired. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the assets was approximately $7.6 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $2.1 million related to incentives given to the purchasers of the TEC assets by HQI which is reflected on the line item, "Other miscellaneous expense," in our consolidated statement of income for the year ended* December 31, 2023.*

Note3 - Related Party Transactions

Prior to entering into a new related party transaction which is disclosable pursuant to Item404 of Regulation S-K, the Audit Committee reviews and monitors all relevant information available. In addition, the Audit Committee reviews a summary of related parties and related party transactions on a quarterly basis. The Audit Committee, in its sole discretion,* mayapprove the related party transaction only if it determines, in good faith and under all circumstances, that the transaction is in the best interests of the Company and its shareholders. The Audit Committee, in its sole discretion, may*also impose conditions as it deems appropriate on the Company or the related party in connection with the approval of the related party transaction.

Several significant shareholders and directors of HQI own portions of Jackson Insurance Agency, Bass Underwriters, Inc., Insurance Technologies, Inc., and a number of our franchisees (in whole or in part).

Jackson Insurance Agency ("Jackson Insurance") and Bass Underwriters, Inc. ("Bass")

Edward Jackson, a member of our Board and significant stockholder, and a member of Mr. Jackson’s immediate family own Jackson Insurance. Mr. Jackson, Richard Hermanns, our CEO, Chairman of our Board, and largest stockholder, and irrevocable trusts set up by each of them, collectively own a majority of Bass, a large managing general agent.

Jackson Insurance and Bass brokered property, casualty, general liability, and cybersecurity insurance for a series of predecessor entities prior to the2019 merger with Command Center. Since* July 15, 2019,*they have continued to broker these same policies for HQI. Jackson Insurance also brokers certain insurance policies on behalf of some of our franchisees, including the Worlds Franchisees (defined below).

During thethree months ended* March 31, 2024* and* March 31, 2023*, Jackson Insurance and Bass invoiced HQI approximately $1.3 million and $4 thousand, respectively, for premiums, taxes, and fees related to these insurance policies. Jackson Insurance and Bass retain a commission of approximately 9% -15% of premiums.

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Insurance Technologies, Inc. ("Insurance Technologies")

Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of them, collectively own a majority of Insurance Technologies, an IT development and security firm. On* October 24, 2019,*HQI entered into an agreement with Insurance Technologies to add certain cybersecurity protections to our existing information technology systems and to assist in developing future information technology systems within our HQ Webconnect software. In addition, Insurance Technologies assisted with the IT diligence and integration process with respect to the Snelling and LINK acquisitions.

During thethree months ended* March 31, 2024* and* March 31, 2023*, Insurance Technologies invoiced HQI approximately $124 thousand and $67 thousand, respectively, for services provided pursuant to this agreement.

The Worlds Franchisees

Mr. Jackson and immediate family members of Mr. Hermanns have significant ownership interests in certain of our franchisees (the “Worlds Franchisees”). There were 35 Worlds Franchisees at* March 31, 2024* that operated 69 of our 428 franchisee-owned offices.

Other transactions regarding the Worlds Franchisees are summarized below (in thousands):

Balances regarding the Worlds Franchisees are summarized below (in thousands):

Note4 - Line of Credit and Term Loans

Revolving Credit Agreement with Bank of America, N.A.

On* February 28, 2023the Company and all of its subsidiaries as borrowers entered into a Revolving Credit Agreement (the "Credit Agreement") with Bank of America, N.A. for a $50,000,000 revolving facility (the “Senior Credit Facility”), which includes a $20,000,000 sublimit for the issuance of standby letters of credit. The Company also has aone*-time right, upon at leastten Business Days’ prior written notice to the bank to increase the maximum amount of the Senior Credit Facility to $60 million. As of* March 31, 2024* this hasnot been exercised. The Senior Credit Facility provides for certain financial covenants including maintaining an Asset Coverage Ratio of at least 1.0:1.0 at all times; maintaining a Total Funded Debt to Adjusted EBITDA Rationot exceeding 3.0:1.0; and maintaining, on a consolidated basis, a Fixed Charge Coverage Ratio of at least 1.25:1.0. As of* March 31, 2024* we were in compliance with all financial covenants.

Interest will accrue on the outstanding balance of the line of credit at a variable rate equal to (a) the BSBY Daily Floating Rate (as defined in the Credit Agreement) plus a margin between 1.00% and 1.75% per annum. In each case, the applicable margin is determined by the Company's Total Funded Debt to Adjusted EBITDA, as defined in the Credit Agreement. At* March 31, 2024* the effective interest rate was approximately 6.6%. The Senior Credit Facility will mature on* February 28, 2028.As part of this refinancing we recorded a loss on debt extinguishment of approximately $310 thousand during thethree* months ended* March 31, 2023,*which is reflected on the line item, "Interest and other financing expense," in our consolidated statement of income.

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 Company and all of its subsidiaries and business reasonably related thereto, and sale/leaseback transactions. 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 obligations under the Credit Agreement and other loan documents are secured by substantially all of the assets of the Company and all of its subsidiaries as collateral including, without limitation, their accounts and notes receivable, intellectual property and the real estate owned by HQ Real Property Corporation.

At* March 31, 2024*, approximately $9.2 million of availability under the Senior Credit Facility was utilized by outstanding letters of credit that secure our obligations to our workers’ compensation insurance carrier, and $500 thousand was utilized by a letter of credit that secures our paycard funding account. For additional information related to the letter of credit securing our workers’ compensation obligations seeNote5* - Workers’ Compensation Insurance and Reserves*.

Revolving Credit and Term Loan Agreement with Truist Bank

On* June 29, 2021the Borrowers entered into a Revolving Credit and Term Loan Agreement with Truist Bank, as Administrative Agent, and the lenders from time to time made a party thereto (the "Truist Credit Agreement"), pursuant to which the lenders extended the Borrowers (i) a $60 million revolving line of credit with a $20 million sublimit for letters of credit (the "Truist Line of Credit") and (ii) a $3,153,500 term loan (the "Truist Term Loan"). Under the agreement, Truist Bank could also make Swingline Loans available in its discretion. The Truist Credit Agreement replaced the Company's prior $30 million credit facility with BB&T, now Truist. The Truist Credit Agreement provided for a borrowing base on the Truist Line of Credit that was derived from the Borrowers' accounts receivable subject to certain reserves and other limitations. Interest accrued on the outstanding balance of the Truist Line of Credit at a variable rate equal to (a) the LIBOR Index Rate plus a margin between 1.25% and 1.75% per annum or (b) the then applicable Base Rate, as that term was defined in the Truist Credit Agreement plus a margin between 0.25% and 0.75% per annum. In each case, the applicable margin was determined by the Company's Average Excess Availability on the Truist Line of Credit, as defined in the Truist Credit Agreement. Interest accrued on the Truist Term Loan at a variable rate equal to (a) the LIBOR Index Rate plus 2.0% per annum or (b) the then applicable Base Rate plus 1.0% per annum. In addition to interest on outstanding principal under the Truist Credit Agreement, the Borrowers paid a commitment fee on the unused portion of the Truist Line of Credit in an amount equal to 0.25% per annum. All loans made pursuant to the Truist Line of Credit were to mature on June 29, 2026.The Truist Term Loan was due to be paid in equal monthly installments based upon a15*-year amortization of the original principal amount of the Truist Term Loan and was payable in monthly installments with the remaining principal balance due and payable in full on the earlier of the date of termination of the commitments on the Truist Line of Credit and* June 29, 2036.*

The Company utilized the proceeds of the Truist Term Loan (i)first to pay off its prior credit facility, and (ii) second, to pay transaction fees and expenses incurred in connection with closing certain acquisitions.

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Term Loan

In connection with the Northbound acquisition, we entered into an amortizing term loan from the seller for $1.5 million scheduled to mature on* March 1, 2025that bears interest at 4.0%. The Northbound term loan is unsecured and subordinated to the Senior Credit Facility. The Northbound term loan is payable in 36 monthly installments beginning on April 1, 2022until March 1, 2025.We may*prepay the Northbound term loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment.

The following table provides the estimated future maturities of term loans as of* March 31, 2024* (in thousands):

Note5 - Workers’** Compensation Insurance and Reserves**

Since* July 15, 2019*we have obtained our workers’ compensation insurance through Chubb Limited and ACE American Insurance Company (collectively, “ACE”) in all states in which we operate other than monopolistic jurisdictions. The ACE policies are large deductible policies where we have primary responsibility for all claims made. ACE provides insurance for covered losses and expenses in excess of $500,000 per incident. Under these large deductible programs we are largely self-insured. Per our contractual agreements with ACE we must provide a collateral deposit of $9.2 million, which we accomplish by providing a letter of credit under our agreement with Bank of America. For workers’ compensation claims originating in the monopolistic jurisdictions of North Dakota, Ohio, Washington, and Wyoming, we pay workers’ compensation insurance premiums and obtain full coverage under mandatory state administered programs. Our liability associated with claims in these jurisdictions is limited to premium payments based upon the amount of payroll paid, or hours worked, within each jurisdiction. Accordingly, our consolidated financial statements reflect only the mandated workers’ compensation insurance premium liability for workers’ compensation claims in these jurisdictions.

Prior to* July 15, 2019,one of our predecessor entities ("Legacy HQ") also obtained its workers’ compensation insurance through ACE in all states in which it operated other than monopolistic jurisdictions. The ACE policy was a high deductible policy pursuant to which Legacy HQ had primary responsibility for all claims with ACE providing insurance for covered losses and expenses in excess of $500 thousand per incident. In addition to the ACE policy, Legacy HQ purchased a deductible reimbursement insurance policy from Hirequest Insurance Company (“HQ Ins.”), an independent captive insurer, to cover losses up to the $500 thousand deductible with ACE. This resulted in Legacy HQ effectively being fully insured until the merger with Command Center. Effective July 15, 2019,*Legacy HQ terminated its deductible reimbursement policy with HQ Ins.

Command Center, the predecessor entity that acquired Legacy HQ in2019, also obtained its workers’ compensation insurance through ACE. Pursuant to Command Center’s most recent policy, which expired on* March 1, 2020,ACE provided insurance for covered losses and expenses in excess of$500* thousand per incident. Command Center’s ACE policy included aone-time obligation for the Company to pay any single claim filed under the Command Center policy within a policy year that exceeds*$500* thousand (if any), but only up to*$750* thousand for that claim. All other claims within the policy year were subject to the*$500* thousand deductible. Effective* July 15, 2019,*in connection with the merger with Command Center, we assumed all of the workers’ compensation claims of Command Center.

Note6 - Stockholders’** Equity**

Dividend

Historically, we have paid a quarterly dividend. We intend to continue to pay a quarterly dividend based on our business results and financial position. The following common share dividends were paid during2024 and2023 (total paid in thousands):

Note7 - Stock Based Compensation

Employee Stock Incentive Plan

In* December 2019,our Board approved the2019* HireQuest, Inc. Equity Incentive Plan (the*“2019* Plan”). Subject to adjustment in accordance with the terms of the2019 Plan,no more than 1.5 million shares of common stock are available in the aggregate for the grant of awards under the2019 Plan.No more than 1 million shares* maybe issued in the aggregate pursuant to the exercise of incentive stock options. In addition,no more than 250 thousand shares maybe issued in the aggregate to any employee or consultant, andno* more than 50 thousand shares* maybe issued in the aggregate to any non-employee director, in anytwelve*-month period.** Shares of common stock available for distribution under the Plan mayconsist, in whole or in part, of authorized and unissued shares, treasury shares or shares reacquired by the Company in any manner. The2019 Plan was approved by our shareholders in* June 2020*and became effective as of that date.

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In* September 2019,our Board approved a share purchase match program to encourage ownership and further align the interests of key employees and directors with those of our shareholders. Under this program, we will match 20% of any shares of our common stock purchased on the open market by or granted in lieu of cash compensation to key employees and directors up to $25 thousand in aggregate value per individual within any calendar year. These shares vest on thesecond* anniversary of the date on which the matched shares were purchased if the individual is still employed by the Company or still serves as a director and certain other vesting criteria are met. During thefirst three months of2024, we issued 863 shares valued at approximately $12 thousand under this program. During thefirst**three months of2023, we issued 1,655 thousand shares valued at approximately $29 thousand under this program.

In thefirst three months of2024, we issued 5,174 shares of restricted common stock pursuant to the2019 Plan valued at approximately $69 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these,4,311 shares vested equally over thethree months post grant. The remaining 863 shares were issued pursuant to our share purchase match program.

In thefirst three months of2023, we issued 2,364 shares of restricted common stock pursuant to the2019 Plan valued at approximately $52 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these,1,970 shares vested equally over thethree months post grant. The remaining 394 shares were issued pursuant to our share purchase match program.

Also in thefirst three months of2023, we issued 5,000 shares of restricted common stock pursuant to the2019 Plan valued at approximately $79 thousand to a key employee for services in lieu of cash compensation which vest over 4 years. Also in thefirst three months of2023, we issued 1,261, shares of restricted common stock pursuant to the2019 Plan to members of our Board of Directors valued at approximately $20 thousand that vest over 2 years.

The following table summarizes our restricted stock outstanding at* December 31, 2023*, and changes during thethree months ended* March 31, 2024* (number of shares in thousands).

Stock options that were outstanding at Command Center were deemed to be issued on the date of the merger with Legacy HQ. Outstanding awards continue to remain in effect according to the terms of the Command Center2008 Plan, the Command Center2016 Plan, and the corresponding award documents. There were approximately 13 thousand stock options vested at* March 31, 2024* and* December 31, 2023*.

The following table summarizes our stock options outstanding at* December 31, 2023*, and changes during thethree months ended* March 31, 2024* (number of shares in thousands).

There wereno non-vested stock options outstanding at* March 31, 2024* or at* December 31, 2023*.

The following table summarizes information about our outstanding stock options, and reflects the intrinsic value recalculated based on the closing price of our common stock of $12.95 at* March 31, 2024* (number of shares and intrinsic value in thousands).

At* March 31, 2024*, there was unrecognized stock-based compensation expense totaling approximately $1.3 million relating to non-vested restricted stock grants that will be recognized over the next 3.7 years.

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Note8 - Commitments and Contingencies

Franchise Acquisition Indebtedness

New franchisees financed the purchase of several offices with promissory notes. In some instances, this financing resulted in certain franchises being considered VIEs. We have determined that we arenot required to consolidate these entities because we donot have the power to direct these entities’ daily operations. If these franchises default on these notes, we bear the risk of loss of the outstanding balance on these notes, less what we could recoup from the potential resale of the repossessed office(s). The balance due from the franchises determined to be VIEs was approximately $7.9 million and $8.2 million on* March 31, 2024* and* December 31, 2023*, respectively.

Legal Proceedings

From time to time, we are involved in various legal and administrative proceedings. Based on information currently available to us, we donot expect material uninsured losses to arise from any of these matters. We believe the outcome of these matters, even if determined adversely, willnot have a material adverse effect on our business, financial condition or results of operations. There have beenno material changes in our legal proceedings as of* March 31, 2024*.

Note9 - Income Tax

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, butnot limited to, the expected operating income for the year and changes in tax law and tax rates. The accounting estimates used to compute the provision for income taxes* maychange as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes.*

Our effective tax rate for continuing operations during thethree months ended* March 31, 2024* and* March 31, 2023* was 16.7% and 19.1%, respectively. The primary reason for the difference between the statutory federal income tax rate of 21.0% and our effective income tax rate results from the federal Work Opportunity Tax Credit, which is designed to encourage employers to hire workers from certain targeted groups with higher-than-average unemployment rates. Other differences result from state income taxes, certain non-deductible expenses, and tax effects of stock-based compensation.

We use an intra-period tax allocation to allocate total income tax expense or benefit to the different components of continuing operations and discontinued operations. This allocation uses a with and without methodology to determine income tax expense for discontinued operations. Tax (expense) benefit allocated to discontinued operations was $(24) thousand and $99 thousand for thethree months ended* March 31, 2024* and* March 31, 2023*, respectively.

Note10 - Discontinued Operations

In connection with the Dubin acquisition, certain assets acquired are still owned by us and classified as held-for-sale. When we acquired Dubin, there weretwo business lines. Dubin Workforce Solutions specialized in temporary labor assignments. The Dubin Group focused on permanent recruiting. We immediately sold the assets of Dubin Workforce Solutions to a new franchisee. There wasnot a franchisee identified for the Dubin Group portion of the business, however, we began marketing the franchise and classified it as held-for-sale immediately upon acquisition. We entered into an employment agreement with the seller to continue managing the business as a Company-owned location while it was held-for-sale. During2023, we actively solicited but didnot receive any reasonable offers to purchase the assets and, in response, have adjusted the price. The franchise continues to be actively marketed at a price that is reasonable given its results of operation. We expect to complete a sale of these assets within the next12 months.

When we acquired Dental Power in2021, we used the platform to build a customer base in the dental-oriented sector of the staffing industry to increase revenue opportunities under the HireQuest Health brand. Once we acquired MRI in* December 2022,there were a number of natural buyers within the MRI Network. At that time we reclassified Dental Power to held-for-sale. On March 1, 2023,we agreed to sell the Dental Power assets to an MRI franchisee, who will continue to operate the business as part of their franchise. The sale agreement calls for proceeds of $2 million payable over 5 years with a market rate of interest. We recognized a gain of approximately $340 thousand in thefirst* quarter of2023 upon completion of the transaction.

Intangible assets associated with discontinued operations consist of a customer list with a net carrying value of approximately $891 thousand on* March 31, 2024* and* December 31, 2023*.

The net (loss) income from discontinued operations as reported on our consolidated statements of operations was comprised of the following amounts (in thousands):

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Note11 - Notes Receivable

Notes from Franchisees

Several franchisees borrowed funds from us primarily to finance the initial purchase price of office assets, including intangible assets.

Notes outstanding, net of allowance for losses, were approximately $9.2 million and 9.6 million as of* March 31, 2024* and* December 31, 2023*, respectively. Notes receivable generally bear interest at a fixed rate between 6.0% and 10.0%. Notes receivable are generally secured by the assets of each office and the ownership interests in the franchise. We report interest income on notes receivable as interest income in our consolidated statements of income. Interest income was approximately $136 thousand and $46 thousand during thethree months ended* March 31, 2024* and* March 31, 2023*, respectively.

We estimate the allowance for credit losses for franchisees separately from the allowance for credit losses from non-franchisees because of the level of detailed sales information available to us with respect to our franchisees. Based on our review of available collateral historical information, current conditions, and reasonable and supportable forecasts, we have established an allowance of approximately $623 thousand as of* March 31, 2024* and* December 31, 2023*, for credit losses from franchisees.

The following table summarizes our notes receivable balance to franchisees (in thousands):

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