HireQuest Inc

Previous wording

As of March 31, 2024 we had 428 franchisee-owned offices and 1 company-owned office in 42 states, the District of Columbia, and 13 countries outside of the United States, and we licensed our trade names to 6 offices in California. In addition, on such date, there were 5 MRI locations that provided contract staffing services only. We provide employment for an estimated 80 thousand temporary employees annually working for thousands of clients in many industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, retail, and dental.

Current wording

As of June 30, 2024 we had 413 franchisee-owned offices and 1 company-owned office in 43 states, the District of Columbia, and 13 countries outside of the United States, and we licensed our trade names to 6 offices in California. In addition, on such date, there were 5 MRI locations that provided contract staffing services only. We provide employment for an estimated 80 thousand temporary employees annually working for thousands of clients in many industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, retail, and dental.

Previous wording

The following table displays our consolidated statements of operations for the three-month periods ended March 31, 2024 and March 31, 2023. Percentages reflect the line item as a percentage of total revenue (in thousands, except percentages).

Current wording

The following table displays our consolidated statements of operations for the three-month and six-month periods ended June 30, 2024 and June 30, 2023. Percentages reflect the line item as a percentage of total revenue (in thousands, except percentages).

Previous wording

Total revenue for the three months ended March 31, 2024 was approximately $8.4 million compared to $9.9 million for the three months ended March 31, 2023, a decrease of 14.6%. For the quarter ended March 31, 2024, there was a $19.5 million or 12.7% decrease in underlying system-wide sales when compared to the prior year quarter. Revenue as a percentage of system-wide sales was 6.3% for the three months ended March 31, 2024 versus 6.4% for the three months ended March 31, 2023. The decrease in Total Revenue was primarily driven by a weakening across the board in system-wide sales including a decrease in system-wide sales of $12.3 million in MRI.

Current wording

Total revenue for the three months ended June 30, 2024 was approximately $8.7 million compared to $9.0 million for the three months ended June 30, 2023, a decrease of 3.4%. For the quarter ended June 30, 2024, there was a $10.8 million or 6.9% decrease in underlying system-wide sales when compared to the prior year quarter. Revenue as a percentage of system-wide sales was 5.9% for the three months ended June 30, 2024 compared to 5.7% for three months ended June 30, 2023. The decrease in Total Revenue was primarily driven by a weakening across the board in system-wide sales including a decrease in system-wide sales of $6.0 million in MRI.

Previous wording

Franchise royalties for the three months ended March 31, 2024 were approximately $7.8 million, an decrease of 16.0% from $9.3 million for the three months ended March 31, 2023. Of the $1.5 million net decrease, approximately $1.0 million was related to the decrease in system-wide sales in MRI. Our net effective royalty rate (as a percentage of external system-wide sales) was 5.8% for the three-month period ended March 31, 2024 compared to 6.1% for the three months ended March 31, 2023. Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models under which we operate, as well as incentives we offer during the year. A summary of franchise royalties by brand for the three months ended March 31, 2024 and March 31, 2023 are as follows (in thousands):

Current wording

Franchise royalties for the three months ended June 30, 2024 were approximately $8.2 million, a decrease of $544 thousand or 6.2% from $8.7 million for the three months ended June 30, 2023. Of the $544 thousand net decrease, approximately $398 thousand was related to the decrease in system-wide sales in MRI. Our net effective royalty rate (as a percentage of external system-wide sales) was 5.6% for the three-month period ended June 30, 2024 and for the three months ended June 30, 2023. Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models under which we operate, as well as incentives we offer during the year. A summary of franchise royalties by brand for the three months ended June 30, 2024 and June 30, 2023 are as follows (in thousands):

Previous wording

Service revenue for the three months ended March 31, 2024 was approximately $588 thousand, an increase of $54 thousand from the three months ended March 31, 2023, when service revenue was approximately $534 thousand. Interest income, which is included in service revenue was $185 thousand for the three months ended March 31, 2024 and $254 thousand for the three months ended March 31, 2023. Fluctuations in interest generally follow the mix of aged accounts in our accounts receivable, although relatively few age over 42 days and result in service revenue for us. Many of our franchisees have elected tocharge back accounts early in order to avoid or reduce the interest charge. Therefore, there will not be a proportionally large increase in service revenue even when there is a large increase in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely. We view the imposition of higher interest rates on aged accounts receivable to serve as an incentive for our franchisees to select credit-worthy customers.

Current wording

Service revenue for the three months ended June 30, 2024 was approximately $479 thousand, an increase of $234 thousand from the three months ended June 30, 2023, when service revenue was approximately $245 thousand. Interest income, which is included in service revenue was $189 thousand for the three months ended June 30, 2024 and $209 thousand for the three months ended June 30, 2023. Fluctuations in interest generally follow the mix of aged accounts in our accounts receivable, although relatively few age over 42 days and result in service revenue for us. Many of our franchisees have elected tocharge back accounts early in order to avoid or reduce the interest charge. Therefore, there will not be a proportionally large increase in service revenue even when there is a large increase in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely. We view the imposition of higher interest rates on aged accounts receivable to serve as an incentive for our franchisees to select credit-worthy customers. Service revenue is expected to fluctuate from quarter-to-quarter.

Previous wording

Operating expenses for the three months ended March 31, 2024 were approximately $6.3 million compared to $6.5 million for the three months ended March 31, 2023, a decrease of 3.4% or $224 thousand. The decrease primarily relates to a reduction in compensation and benefits related to a 9.8% reduction in headcount. Overall, operating expenses represented 4.7% of system-wide-sales in the three months ended March 31, 2024 versus 4.3% of system-wide sales in the three months ended March 31, 2023.

Current wording

Operating expenses for the three months ended June 30, 2024 were approximately $6.0 million compared to $6.3 million for the three months ended June 30, 2023, a decrease of 5.4% or $340 thousand. The decrease primarily relates to a reduction in compensation and benefits of $469 thousand related to an 8.9% reduction in headcount. Overall, operating expenses represented 4.1% of system-wide-sales in the three months ended June 30, 2024 versus 4.0% of system-wide sales in the three months ended June 30, 2023.

Previous wording

Workers' compensationexpensewas approximately $572 thousand for the three months ended March 31, 2024, an increase of $387 thousand when compared to a netexpenseof approximately $185 thousand recorded in the three months ended March 31, 2023. Our workers' compensation reserves provide benefits following a workplace injury. Benefits are usually statutory in nature and are generally provided in partial or complete replacement of the injured worker’s recourse to the liability system. Payments may include medical treatment, rehabilitation, lost wages, and survivor benefits. Workers compensation rating is typically based on job classification, and our workers fall in hundreds of classifications. Annually, we use third-party actuaries to ensure that the overall ratings are sound, that individual insurer rates are adequate, and that individual risks receive a fair rate that reflects both the characteristics of the job classification and the Company's risk experience. The company pays premiums, actual claims, and establishes reserves for future claims. In turn we charge our franchises a percentage of payroll as determined by our workers' compensation carrier, plus or minus certain incentives and charges we provide for good or bad workers' compensation claims history. The overall charge is an estimate of the fully developed future costs and may not always coincide with the actual costs we incur resulting in expense or benefit in a given period. Over the long-term, our workers' compensation expense should equal the amounts we collect from franchisees and essentially be a pass-through cost. In the short-term, we cannot accurately predict the effects of workers' compensation in specific future periods, and historical trends are not indicative of future results.

Current wording

Workers' compensationexpensewas approximately $547 thousand for the three months ended June 30, 2024, a decrease of $143 thousand when compared to a netexpenseof approximately $690 thousand recorded in the three months ended June 30, 2023. Our workers' compensation reserves provide benefits following a workplace injury. Benefits are usually statutory in nature and are generally provided in partial or complete replacement of the injured worker’s recourse to the liability system. Payments may include medical treatment, rehabilitation, lost wages, and survivor benefits. Workers compensation rating is typically based on job classification, and our workers fall in hundreds of classifications. Annually, we use third-party actuaries to ensure that the overall ratings are sound, that individual insurer rates are adequate, and that individual risks receive a fair rate that reflects both the characteristics of the job classification and the Company's risk experience. The company pays premiums, actual claims, and establishes reserves for future claims. In turn we charge our franchises a percentage of payroll as determined by our workers' compensation carrier, plus or minus certain incentives and charges we provide for good or bad workers' compensation claims history. The overall charge is an estimate of the fully developed future costs and may not always coincide with the actual costs we incur resulting in expense or benefit in a given period. Over the long-term, our workers' compensation expense should equal the amounts we collect from franchisees and essentially be a pass-through cost. In the short-term, we cannot accurately predict the effects of workers' compensation in specific future periods, and historical trends are not indicative of future results.

Previous wording

Compensation-related expenses include wages, payroll taxes, benefits, and stock-based compensation, and continue to be the largest component of operating expenses. Compensation and benefits for the three months ended March 31, 2024 was approximately $3.0 million compared to $3.6 million for the three months ended March 31, 2023, a decrease of 15.7% primarily due to a 9.8% reduction in headcount.

Current wording

Compensation-related expenses include wages, payroll taxes, benefits, and stock-based compensation, and continue to be the largest component of operating expenses. Compensation and benefits for the three months ended June 30, 2024 was approximately $2.7 million compared to $3.1 million for the three months ended June 30, 2023, a decrease of 15.0% primarily due to an 8.9% reduction in headcount.

Previous wording

Other SG&A was $2.0 million for the three months ended March 31, 2024 , a decrease of $67 thousand or 3.2% from $2.1 million for the three months ended March 31, 2023 primarily related to decreases in computer expenses and professional fees.

Current wording

Other SG&A was $2.1 million for the three months ended June 30, 2024, an increase of 274 thousand or 15.1% from $1.8 million for the three months ended June 30, 2023primarily related to increased marketing expenses.

Previous wording

Overall, excluding workers' compensation and depreciation and amortization, operating expenses decreased 11.1%, versus a 16.0% decrease in franchise royalties. March 31, 2024

Current wording

Overall, excluding workers' compensation and depreciation and amortization, operating expenses decreased 3.9% or $194 thousand for the three months ended June 30, 2024 compared to the three months ended June 30, 2023

Previous wording

Depreciation and amortization for the three months ended March 31, 2024 was approximately $698 thousand compared to $697 thousand for the three months ended March 31, 2023.

Current wording

Depreciation and amortization for the three months ended June 30, 2024 was approximately $697 thousand compared to $700 thousand for the three months ended June 30, 2023.

Previous wording

Interest and other financing expense relates primarily to the Credit Agreement with Bank of America, N.A. Interest and other financing expense decreased from $540 thousand for the three months ended March 31, 2023 to $243 thousand for the three months ended March 31, 2024. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. Due to the MRINetwork Acquisition in the fourth quarter of 2022, coupled with the subsequent working capital needs, we carried a larger balance on our line of credit for the quarter ended March 31, 2023 than the quarter ended March 31, 2024. The decrease in interest expense is consistent with the decrease in the outstanding line of credit balance.

Current wording

Interest and other financing expense relates primarily to the Credit Agreement with Bank of America, N.A. Interest and other financing expense decreased from $314 thousand for the three months ended June 30, 2023 to $253 thousand for the three months ended June 30, 2024. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. The decrease in interest expense is consistent with the decrease in the outstanding line of credit balance.

Previous wording

Income tax expense was approximately$340 thousand for the three months ended March 31, 2024. We estimate an annual projected effective tax rate ("ETR") for the year to determine income tax expense or benefit in the interim periods. The estimated annual ETR does not include tax effects from significant unusual or infrequently occurring items. Such items are accounted for discretely during the period in which they occur. The ETR is primarily driven by the federal Work Opportunity Tax Credit ("WOTC"), which is included as part of income tax expense because it can be claimed only on the income tax return and can be realized only through the existence of taxable income. Other significant items affecting our tax rate are windfall tax deductions related to stock-based compensation, and overall limits on executive compensation. Our net ETR for the three months ended March 31, 2024 was 16.7%.

Current wording

Income tax expense was approximately $557 thousand for the three months ended June 30, 2024. We estimate an annual projected effective tax rate ("ETR") for the year to determine income tax expense or benefit in the interim periods. The estimated annual ETR does not include tax effects from significant unusual or infrequently occurring items. Such items are accounted for discretely during the period in which they occur. The ETR is primarily driven by the federal Work Opportunity Tax Credit ("WOTC"), which is included as part of income tax expense because it can be claimed only on the income tax return and can be realized only through the existence of taxable income. Other significant items affecting our tax rate are windfall tax deductions related to stock-based compensation, and overall limits on executive compensation. Our net ETR for the three months ended June 30, 2024 was 21.2%.

Previous wording

Income tax expense for the three months ended March 31, 2023 was approximately $547 thousand. Our net ETR for the three months ended March 31, 2023 was 19.1%. The increase in the net ETR is driven by mix of our revenue, particularly the addition of MRINetwork as the increase in executive, managerial and professional recruiting does not generate Work Opportunity Tax Credits at the same levels as staffing services.

Current wording

Income tax expense for the three months ended June 30, 2023 was approximately $465 thousand. Our net ETR for the three months ended June 30, 2023 was 18.5%. The increase in the net ETR is driven by mix of our revenue, particularly the addition of MRINetwork as the increase in executive, managerial and professional recruiting does not generate Work Opportunity Tax Credits at the same levels as staffing services.

Previous wording

For the three months ended March 31, 2024, other miscellaneous income was approximately $37 thousand, compared to other miscellaneous income * * of $43 thousand for the three months ended March 31, 2023. The income represents gross rents from leasing excess space at our corporate headquarters to a third-party tenant. We leased approximately 6,000 square feet of office space in our headquarters campus to an unaffiliated company.

Current wording

For the six months ended June 30, 2024, other miscellaneous income was approximately $76 thousand, compared to other miscellaneous income * * of $142 thousand for the six months ended June 30, 2023. The income represents gross rents from leasing excess space at our corporate headquarters to a third-party tenant. We leased approximately 6,000 square feet of office space in our headquarters campus to an unaffiliated company.

Previous wording

Interest income for the three months ended March 31, 2024 was approximately $136 thousand compared to $46 thousand for the three months ended March 31, 2023. Interest income represents interest related to the financing of franchised locations.

Current wording

Interest income for the six months ended June 30, 2024 was approximately $287 thousand compared to $114 thousand for the six months ended June 30, 2023. Interest income represents interest related to the financing of franchised locations.

Previous wording

At March 31, 2024, our current assets exceeded our current liabilities by approximately $18.0 million. Our current assets included approximately $1.6 million of cash and $47.7 million of net accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements. Our largest current liabilities as of March 31, 2024 included approximately $10.1 million due to our franchisees on pending settlement statements, $3.8 million related to our workers’ compensation claims liability, and $16.1 million of borrowings under our line of credit.

Current wording

At June 30, 2024, our current assets exceeded our current liabilities by approximately $20.6 million. Our current assets included approximately $0.6 million of cash and $49.9 million of net accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements. Our largest current liabilities as of June 30, 2024 included approximately $10.6 million due to our franchisees on pending settlement statements, $3.9 million related to our workers’ compensation claims liability, and $15.7 million of borrowings under our line of credit.

Previous wording

During the three months ended March 31, 2024, cash used by continuing operating activities was approximately $0.9 million and included net income from continuing operations of approximately $1.6 million, adjusted by non-cash items (primarily depreciation, stock-based compensation, and amortization ) of approximately $1.2 million. These provisions were offset by changes in operating assets and liabilities requiring cash of approximately $3.8 million, including an increase in accounts receivable of $3.4 million. During the three months ended March 31, 2023, cash generated by operating activities was approximately $0.4 million and included net income from continuing operations of approximately $2.6 million, adjusted by non-cash items of approximately $1.5 million. These provisions were partially offset by changes in operating assets and liabilities requiring cash of approximately $3.4 million.

Current wording

During the six months ended June 30, 2024, cash used by continuing operating activities was approximately $0.7 million and included net income from continuing operations of approximately $3.8 million, adjusted by non-cash items (primarily depreciation, stock-based compensation, and amortization ) of approximately $2.3 million. These provisions were offset by changes in operating assets and liabilities requiring cash of approximately $6.8 million, including an increase in accounts receivable of $5.7 million. During the six months ended June 30, 2023, cash used by operating activities was approximately $0.2 million and included net income from continuing operations of approximately $4.4 million, adjusted by non-cash items of approximately $2.8 million. These provisions were partially offset by changes in operating assets and liabilities requiring cash of approximately $7.3 million.

Previous wording

During the three months ended March 31, 2024, cash generated by investing activities was approximately $213 thousand, primarily from payments on notes receivable. During the three months ended March 31, 2023, cash used by investing activities was approximately $37 thousand.

Current wording

During the six months ended June 30, 2024, cash generated by investing activities was approximately $445 thousand, primarily from payments on notes receivable. During the six months ended June 30, 2023, cash generated by investing activities was approximately $229 thousand.

Previous wording

During the three months ended March 31, 2024, cash provided by financing activities was approximately $1.0 million and included net proceeds from our revolving line of credit of approximately $2.0 million. These proceeds were offset by approximately $0.8 million in dividends. During 2023, cash provided by financing activities was approximately $4.7 million and included net proceeds from our revolving line of credit of approximately $8.7 million offset by the payment of dividends totaling approximately $0.8 million and payments on our term loan of approximately $2.9 million.

Current wording

During the six months ended June 30, 2024, cash used by financing activities was approximately $0.4 million and included net proceeds from our revolving line of credit of approximately $1.6 million. These proceeds were offset by approximately $1.7 million in dividends. During 2023, cash used by financing activities was approximately $1.0 million and included net proceeds from our revolving line of credit of approximately $4.0 million offset by the payment of dividends totaling approximately $1.7 million and payments on our term loan of approximately $3.1 million.

Previous wording

At March 31, 2024, availability under the Senior Credit Facility was approximately $24.2 million based on eligible collateral, less letter of credit reserves, bank product reserves, and current advances, assuming continued covenant compliance. Our all-in-rate of borrowing was 6.6% and is repriced daily. On October 23, 2023, we entered into an agreement to acquire certain assets of TEC Staffing Services, Inc. ("TEC") for approximately $9.8 million. On December 4, 2023 the Company closed on the acquisition of certain assets of TEC. The Company sold these assets for $7.6 million to buyers who will operate as Snelling franchises.

Current wording

At June 30, 2024, availability under the Senior Credit Facility was approximately $24.6 million based on eligible collateral, less letter of credit reserves, bank product reserves, and current advances, assuming continued covenant compliance. Our all-in-rate of borrowing was 6.6% and is repriced daily. On October 23, 2023, we entered into an agreement to acquire certain assets of TEC Staffing Services, Inc. ("TEC") for approximately $9.8 million. On December 4, 2023 the Company closed on the acquisition of certain assets of TEC. The Company sold these assets for $7.6 million to buyers who will operate as Snelling franchises.

Previous wording

three months ended March 31, 2024, nearly all of our offices were franchised with the only exceptions being a portion of the Dubin operations acquired in the first quarter of 2022. The following table reflects our system-wide sales broken into its components for the periods indicated. The Dubin operations are presented in the consolidated financial statements as discontinued operations because they are considered held-for-sale, but their system-wide sales are reflected along with all other offices in the table below. Percentages indicate the change in system-wide sales relative to the comparable prior period (in thousands, except percentages):

Current wording

For the six months ended June 30, 2024, nearly all of our offices were franchised with the only exceptions being a portion of the Dubin operations acquired in the first quarter of 2022. The following table reflects our system-wide sales broken into its components for each period indicated. The Dubin operations are presented in the consolidated financial statements as discontinued operations because they are considered held-for-sale, but their system-wide sales are reflected along with all other offices in the table below. Percentages indicate the change in system-wide sales relative to the comparable prior period (in thousands, except percentages):

Previous wording

The following table accounts for the number of offices opened and closed or consolidated during the three month ended March 31, 2024:

Current wording

The following table accounts for the number of offices opened and closed or consolidated during the six month ended June 30, 2024: