HireQuest Inc

Previous wording

While we believe these statements are accurate, forward-looking statements are not historical facts and are inherently uncertain. They are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. We cannot assure you that these expectations will occur, and our actual results may be significantly different. Therefore, you should not place undue reliance on these forward-looking statements. Important factors that may cause actual results to differ materially from those contemplated in any forward-looking statements made by us include the following: the level of demand and financial performance of the temporary staffing and permanent placement industry; the financial performance of our franchisees; our and our franchisees’ customers’ ability to navigate successfully the challenges posed by the current instability of the financial markets; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses including without limitation, successful integration following the acquisitions of the MRI Network, Selling Staffing, LINK, Recruit Media, Dental Power, Dubin, Temporary Alternatives, Inc. and subsequent or smaller acquisitions; the impacts of COVID-19 or other diseases or pandemics; the overall economic environment including the impact of any potential recession; changes in customer demand; the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones: the level of service failures that could lead customers to use competitors’ services; workers' compensation expenses that fluctuate from period to period based on the mix of classifications, the level of payroll, recent claims resolution and cumulative experience; significant investigative or legal proceedings including, without limitation, those brought about by the existing regulatory environment or changes in the regulations governing the temporary staffing industry and those arising from the action or inaction of our franchisees and temporary employees; disruptions to our technology network including computer systems and software whether resulting from a cyber-attack or otherwise; natural events such as severe weather, fires, floods, and earthquakes, or man-made or other disruptions of our operating systems or the economy including by war; the factors discussed in the “Risk Factors” section below and in our most recent Annual Report on Form 10-K, which we filed with the SEC on March 21, 2023; and the other factors discussed in this Quarterly Report and our Annual Report.

Current wording

While we believe these statements are accurate, forward-looking statements are not historical facts and are inherently uncertain. They are based only on our current beliefs, expectations, and assumptions regarding the future of our business, future plans and strategies, projections, anticipated events and trends, the economy, and other future conditions. We cannot assure you that these expectations will occur, and our actual results may be significantly different. Therefore, you should not place undue reliance on these forward-looking statements. Important factors that may cause actual results to differ materially from those contemplated in any forward-looking statements made by us include the following: the level of demand and financial performance of the temporary staffing and permanent placement industry; the financial performance of our franchisees; our and our franchisees’ customers’ ability to navigate successfully the challenges posed by the current instability of the financial markets; strategic actions, including acquisitions and dispositions and our success in integrating acquired businesses including without limitation, successful integration following the acquisitions of the MRI Network, Selling Staffing, LINK, Recruit Media, Dental Power, Dubin, Temporary Alternatives, Inc. and subsequent or smaller acquisitions; the impacts of COVID-19 or other diseases or pandemics; the overall economic environment including the impact of any potential recession; changes in customer demand; the extent to which we are successful in gaining new long-term relationships with customers or retaining existing ones: the level of service failures that could lead customers to use competitors’ services; workers' compensation expenses that fluctuate from period to period based on the mix of classifications, the level of payroll, recent claims resolution and cumulative experience; significant investigative or legal proceedings including, without limitation, those brought about by the existing regulatory environment or changes in the regulations governing the temporary staffing industry and those arising from the action or inaction of our franchisees and temporary employees; disruptions to our technology network including computer systems and software whether resulting from a cyber-attack or otherwise; natural events such as severe weather, fires, floods, and earthquakes, or man-made or other disruptions of our operating systems or the economy including by war; the factors discussed in the “Risk Factors” section below and in our most recent Annual Report on Form 10-K; and the other factors discussed in this Quarterly Report and our Annual Report.

Previous 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.

Current wording

As of September 30, 2024 we had 416 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

On October 23, 2023 we entered into an agreement to acquire certain assets of TEC, The Employment Company ("TEC") for approximately $9.8 million. TEC has 10 locations across Arkansas that provide light industrial, clerical, technical, and professional staffing services. TEC generated over $34 million in total revenue for the trailing 12-month period ended September 30, 2023. The acquisition of TEC expanded our presence in Arkansas and grew our franchise base, as we immediately entered into new franchise agreements and sold the all of assets acquired. We funded this acquisition with our Senior Credit Facility and the proceeds related to the near simultaneous franchising of operations.

Current wording

On October 23, 2023 we entered into an agreement to acquire certain assets of TEC, The Employment Company ("TEC") for approximately $9.8 million. TEC has 10 locations across Arkansas that provide light industrial, clerical, technical, and professional staffing services. Prior to our acquisition, TEC generated over $34 million in system wide sales during the 12-month period ended September 30, 2023. The acquisition of TEC expanded our presence in Arkansas and grew our franchise base, as we immediately entered into new franchise agreements and sold the all of assets acquired. We funded this acquisition with our Senior Credit Facility and the proceeds related to the near simultaneous franchising of operations.

Previous 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).

Current wording

The following table displays our Consolidated Statements of Operations for the three-month and nine-month periods ended September 30, 2024 and September 30, 2023. Percentages reflect the line item as a percentage of total revenue (in thousands, except percentages).

Previous wording

Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations, when applicable. 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. Revenue does not include any owned locations for the three months ended June 30, 2024 or the three months ended June 30, 2023.

Current wording

Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations, when applicable. 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.” Revenue does not include any owned locations for the three months ended September 30, 2024 or the three months ended September 30, 2023.

Previous 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.

Current wording

Total revenue for the three months ended September 30, 2024 was approximately $9.4 million compared to $9.3 million for the three months ended September 30, 2023, an increase of approximately 1.6%. For the quarter ended September 30, 2024, there was a $2.6 million or 1.8% decrease in underlying system-wide sales from $151.0 million for the three months ended September 30, 2023 to $148.4 million for the three months ended September 30, 2024. The decrease in system-wide sales was primarily driven by a decline at MRI of $5.3 million partially offset by a $3.2 million increase for Snelling/HireQuest. Revenue as a percentage of system-wide sales was 6.3% for the three months ended September 30, 2024 compared to 6.1% for three months ended September 30, 2023.

Previous 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):

Current wording

Franchise royalties for the three months ended September 30, 2024 were approximately $9.0 million, an increase of approximately 0.9% from $8.9 million for the three months ended September 30, 2023. Our net effective royalty rate (as a percentage of external system-wide sales) was 6.1% for the three-month period ended September 30, 2024 and 5.9% for the three months ended September 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 September 30, 2024 and September 30, 2023 are as follows (in thousands):

Previous wording

Service revenue consists of interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. Direct costs to provide certain services are reflected as a reduction in service revenue. 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. All accounts that age beyond 84 days are charged back to the franchisee and no longer incur interest, although some of our franchisees elect to charge back accounts that age over 42 days in order to avoid the interest charge. In addition to royalty fees, we also charge a license fee to some locations that utilize our intellectual property that are not franchisees. License fees are 9% of the gross margin for the location. We have no employees and provide no services at the licensed locations. Service revenue also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vendor 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.

Current wording

Service revenue consists of interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. Direct costs to provide certain services are reflected as a reduction in service revenue. 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. All accounts that age beyond 84 days are charged back to the franchisee and no longer incur interest, although some of our franchisees elect to charge back accounts that age over 42 days in order to avoid the interest charge. In addition to royalty fees, we also charge a license fee to some locations that utilize our intellectual property that are not franchisees. License fees are 9% of the gross margin for those locations. We have no employees and provide no services at the licensed locations. Service revenue also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vendor 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.

Previous 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.

Current wording

Service revenue for the three months ended September 30, 2024 was approximately $428 thousand, an increase of $62 thousand from the three months ended September 30, 2023, when service revenue was approximately $366 thousand. Interest income, which is included in service revenue was $197 thousand for the three months ended September 30, 2024 and $197 thousand for the three months ended September 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

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.

Current wording

Workers' compensationexpensewas approximately $499 thousand for the three months ended September 30, 2024, a decrease of $968 thousand when compared to a netexpense of approximately $1.5 million recorded in the three months ended September 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 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.

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 September 30, 2024 was approximately $2.8 million which is essentially flat compared to $2.9 million for the three months ended September 30, 2023.

Previous 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.

Current wording

Other SG&A was $2.1 million for the three months ended September 30, 2024, an increase of 1.4% from $2.0 million for the three months ended September 30, 2023.

Previous 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.

Current wording

Depreciation and amortization for the three months ended September 30, 2024 was approximately $697 thousand compared to $699 thousand for the three months ended September 30, 2023.

Previous wording

Interest income for the three months ended June 30, 2024 was approximately $151 thousand compared to $68 thousand for the three months ended June 30, 2023. Interest income represents interest related to the financing of franchised locations and the increase is due to the increase in Notes Receivables due to the TEC acquisition in December 2023 as noted in Note 2-Acquisitions.

Current wording

Interest income for the three months ended September 30, 2024 was approximately $138 thousand compared to $83 thousand for the three months ended September 30, 2023. Interest income represents interest related to the financing of franchised locations and the increase is due to the increase in Notes Receivables associated with the TEC acquisition in December 2023 as noted in Note 2-Acquisitions.

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 $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.

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 $302 thousand for the three months ended September 30, 2023 to $268 thousand for the three months ended September 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$897 thousand for the six 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 six months ended June 30, 2024 was 19.2%.

Current wording

Income taxbenefit was approximately $725 thousand for the three months ended September 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 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 September 30, 2024 was 25.1%.

Previous 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.

Current wording

Income tax expense for the three months ended September 30, 2023 was approximately $518 thousand. Our net ETR for the three months ended September 30, 2023 was 24.5%. The increase in the net ETR is driven by mix of our revenue, particularly the addition of MRI Network as the increase in executive, managerial and professional recruiting does not generate WOTC's at the same levels as staffing services.

Previous wording

Following the acquisition of Dental Power, we used the platform to build a customer base in the dental-oriented sector of the staffing industry, which benefits our entire system by increasing revenue opportunities for all franchises under the HireQuest Health brand. Dental Power has national customers, and we did not have any plans to sell the operations as a single franchise or bifurcate it off into several geographical franchisees. It was not being marketed or otherwise held-for-sale. We operated Dental Power as a company-owned location reflected in continuing operations. As part of the MRINetwork acquisition, their franchise base included a number of natural buyers who were already operating in the dental industry. We immediately began marketing Dental Power for sale to these and any other potential buyers. On March 27, 2023, we completed the sale of the assets we acquired in the Dental Power acquisition to an acquired MRI franchisee, who will continue to operate the business as part of their franchise. All operations of Dental Power while we operated the business have been classified as discontinued operations for all periods presented.

Current wording

Following the acquisition of Dental Power, we used the platform to build a customer base in the dental-oriented sector of the staffing industry, which benefits our entire system by increasing revenue opportunities for all franchises under the HireQuest Health brand. Dental Power has national customers, and we did not have any plans to sell the operations as a single franchise or bifurcate it off into several geographical franchisees. It was not being marketed or otherwise held-for-sale. We operated Dental Power as a company-owned location reflected in continuing operations. As part of the MRI Network acquisition, their franchise base included a number of natural buyers who were already operating in the dental industry. We immediately began marketing Dental Power for sale to these and any other potential buyers. On March 27, 2023, we completed the sale of the assets we acquired in the Dental Power acquisition to an acquired MRI franchisee, who will continue to operate the business as part of their franchise. All operations of Dental Power while we operated the business have been classified as discontinued operations for all periods presented.

Previous wording

Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations, when applicable. 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. Revenue does not include any owned locations for the six months ended June 30, 2024 or the six months ended June 30, 2023.

Current wording

Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations, when applicable. 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.” Revenue does not include any owned locations for the nine months ended September 30, 2024 or the nine months ended September 30, 2023.

Previous wording

Total revenue for the six months ended June 30, 2024 was approximately $17.1 million compared to $18.8 million for the six months ended June 30, 2023, a decrease of 9.3%. For the six months ended June 30, 2024, there was a $29.2 million or 9.4% decrease in underlying system-wide sales when compared to the prior year quarter. Revenue as a percentage of system-wide sales was 6.1% for the six months ended June 30, 2024 versus 6.1% for the six months ended June 30, 2023. The decrease in Total Revenue was primarily driven bya weakening across the board in system-wide sales including a decrease in system-wide sales of $18.2 million in MRI.

Current wording

Total revenue for the nine months ended September 30, 2024 was approximately $26.5 million compared to $28.1 million for the nine months ended September 30, 2023, a decrease of 5.7%. For the nine months ended September 30, 2024, there was a $31.9 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 6.2% for the nine months ended September 30, 2024 versus 6.1% for the nine months ended September 30, 2023. The decrease in Total Revenue was primarily driven bya $23.6 million decrease in system-wide sales at MRI due to continued weakness in the staffing and recruiting sectors that MRI serves.

Previous wording

Franchise royalties for the six months ended June 30, 2024 were approximately $16.0 million, a decrease of 11.4% from $18.1 million for the six months ended June 30, 2023. Of the $2.1 million net decrease, approximately $1.4 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 5.7% for the six-month period ended June 30, 2024 compared to 5.9% for the six 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 six months ended June 30, 2024 and June 30, 2023 are as follows (in thousands):

Current wording

Franchise royalties for the nine months ended September 30, 2024 were approximately $25.0 million, a decrease of 7.4% from $27.0 million for the nine months ended September 30, 2023. Of the $2.0 million net decrease, approximately $1.1 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 nine-month period ended September 30, 2024 compared to 5.9% for the nine months ended September 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 nine months ended September 30, 2024 and September 30, 2023 are as follows (in thousands):

Previous wording

Service revenue for the six months ended June 30, 2024 was approximately $1.1 million, an increase of 322 thousand from the six months ended June 30, 2023, when service revenue was approximately $736 thousand. Interest income, which is included in service revenue was $373 thousand for the six months ended June 30, 2024 and $462 thousand for the six 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.

Current wording

Service revenue for the nine months ended September 30, 2024 was approximately $1.5 million, an increase of $385 thousand from the nine months ended September 30, 2023, when service revenue was approximately $1.1 million. Interest income, which is included in service revenue was $570 thousand for the nine months ended September 30, 2024 and $659 thousand for the nine months ended September 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

Workers' compensationexpensewas approximately $1.1 million for the six months ended June 30, 2024, an increase of $244 thousand when compared to a netexpenseof approximately $875 thousand recorded in the six 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.

Current wording

Workers' compensationexpensewas approximately $1.6 million for the nine months ended September 30, 2024, a decrease of $724 thousand when compared to a netexpenseof approximately $2.3 million recorded in the nine months ended September 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 six months ended June 30, 2024 was approximately $5.7 million compared to $6.7 million for the six months ended June 30, 2023, a decrease of 15.4% primarily due to a 10.7% 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 nine months ended September 30, 2024 was approximately $8.5 million compared to $9.6 million for the nine months ended September 30, 2023, a decrease of 11.1% due to a reduction in headcount and the associated salary, benefits, bonus and insurance costs.

Previous wording

Depreciation and amortization for the six months ended June 30, 2024 and June 30, 2023 was approximately $1.4 million compared to $1.4 million.

Current wording

Depreciation and amortization for the nine months ended September 30, 2024 and September 30, 2023 was unchanged at approximately $2.1 million.

Previous 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.

Current wording

Interest income for the nine months ended September 30, 2024 was approximately $424 thousand compared to $197 thousand for the nine months ended September 30, 2023. Interest income represents interest related to the financing of franchised locations and the increase is due to the increase in Notes Receivables associated with the TEC acquisition in December 2023 as noted in Note 2-Acquisitions.

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 $854 thousand for the six months ended June 30, 2023 to $495 thousand for the six 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 and also due to a loss on debt extinguishment of $0.3 million that occurred in the three months ended March 31, 2023 associated with a refinancing.

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 $1.2 million for the nine months ended September 30, 2023 to $763 thousand for the nine months ended September 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 and also due to a loss on debt extinguishment of $300 thousand that occurred in the three months ended March 31, 2023 associated with a refinancing.

Previous 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%.

Current wording

Income tax expense was approximately $172 thousand for the nine months ended September 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 nine months ended September 30, 2024 was 9.7%.

Previous wording

Income tax expense for the six months ended June 30, 2023 was approximately $1.0 million. Our net ETR for the six months ended June 30, 2023 was 18.8%. 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 nine months ended September 30, 2023 was approximately $1.5 million. Our net ETR for the nine months ended September 30, 2023 was 20.4%. The decrease in the net ETR is driven by mix of our revenue, particularly the addition of MRI Network 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

Following the acquisition of Dental Power, we used the platform to build a customer base in the dental-oriented sector of the staffing industry, which benefits our entire system by increasing revenue opportunities for all franchises under the HireQuest Health brand. Dental Power has national customers, and we did not have any plans to sell the operations as a single franchise or bifurcate it off into several geographical franchisees. It was not being marketed or otherwise held-for-sale. We operated Dental Power as a company-owned location reflected in continuing operations. As part of the MRINetwork acquisition, their franchise base included a number of natural buyers who were already operating in the dental industry. We immediately began marketing Dental Power for sale to these and any other potential buyers. On March 27, 2023, we completed the sale of the assets we acquired in the Dental Power acquisition to an acquired MRI franchisee, who will continue to operate the business as part of their franchise. All operations of Dental Power while we operated the business have been classified as discontinued operations for all periods presented.

Current wording

Following the acquisition of Dental Power, we used the platform to build a customer base in the dental-oriented sector of the staffing industry, which benefits our entire system by increasing revenue opportunities for all franchises under the HireQuest Health brand. Dental Power has national customers, and we did not have any plans to sell the operations as a single franchise or bifurcate it off into several geographical franchisees. It was not being marketed or otherwise held-for-sale. We operated Dental Power as a company-owned location reflected in continuing operations. As part of the MRI Network acquisition, their franchise base included a number of natural buyers who were already operating in the dental industry. We immediately began marketing Dental Power for sale to these and any other potential buyers. On March 27, 2023, we completed the sale of the assets we acquired in the Dental Power acquisition to an acquired MRI franchisee, who will continue to operate the business as part of their franchise. All operations of Dental Power while we operated the business have been classified as discontinued operations for all periods presented.

Previous 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.

Current wording

At , our current assets exceeded our current liabilities by approximately $23.3 million. Our current assets included approximately $1.6 million of cash and $50.5 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 September 30, 2024 included approximately $11.0 million due to our franchisees on pending settlement statements, $3.7 million related to our workers’ compensation claims liability, and $13.4 million of borrowings under our line of credit.

Previous 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.

Current wording

During the nine months ended September 30, 2024, cash provided by continuing operating activities was approximately $3.5 million and included net income from continuing operations of approximately $1.6 million, adjusted by non-cash items (primarily the goodwill and intangible asset impairment charge, depreciation, stock-based compensation, amortization ) of approximately $8.4 million. These provisions were offset by changes in operating assets and liabilities requiring cash of approximately $6.5 million, including an increase in accounts receivable of $6.3 million. During the nine months ended September 30, 2023, cash provided by continuing operating activities was approximately $1.8 million and included net income from continuing operations of approximately $6.0 million, adjusted by non-cash items of approximately $3.8 million. These provisions were partially offset by changes in operating assets and liabilities requiring cash of approximately $7.9 million.

Previous 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.

Current wording

During the nine months ended September 30, 2024, cash generated by investing activities was approximately $557 thousand, primarily from payments on notes receivable. During the nine months ended September 30, 2023, cash generated by investing activities was approximately $310 thousand.

Previous 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.

Current wording

During the nine months ended September 30, 2024, cash used by financing activities was approximately $3.7 million and included net payments on our revolving line of credit of approximately $717 thousand and the payment of approximately $2.5 million in dividends. During the period ended September 30, 2023, cash used by financing activities was approximately $4.0 million and included the payment of dividends totaling approximately $2.5 million and payments on our term loan of approximately $3.3 million partially offset by net proceeds from our revolving line of credit of $1.9 million.

Previous wording

On February 28, 2023 the Company and all of its subsidiaries as borrowers (collectively, the "Borrowers") entered into a Revolving Credit Agreement with Bank of America, N.A. (the "Bank") 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 a one-time right, upon at least ten business days’ prior written notice to the Bank to increase the maximum amount of the Senior Credit Facility to $60 million. The Senior Credit Facility provides for certain financial covenants including an Asset Coverage Ratio of at least 1.0:1.0 at all times; maintaining a Total Funded Debt to Adjusted EBITDA Ratio not exceeding 3.0:1.0; and maintaining, on a consolidated basis, a Fixed Charge Coverage Ratio of at least 1.25:1.0. Interest will accrue on the outstanding balance of the line of credit at a variable rate equal to (a) the BSBY Daily Floating Rate 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 related credit agreement (the "Credit Agreement"). The Senior Credit Facility will mature on February 28, 2028.

Current wording

On February 28, 2023 the Company and all of its subsidiaries as borrowers (collectively, the "Borrowers") entered into a Revolving Credit Agreement with Bank of America, N.A. (the "Bank") 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 a one-time right, upon at least ten business days’ prior written notice to the Bank to increase the maximum amount of the Senior Credit Facility to $60 million. The Senior Credit Facility provides for certain financial covenants including an Asset Coverage Ratio of at least 1.0:1.0 at all times; maintaining a Total Funded Debt to Adjusted EBITDA Ratio not exceeding 3.0:1.0; and maintaining, on a consolidated basis, a Fixed Charge Coverage Ratio of at least 1.25:1.0. Interest will accrue on the outstanding balance of the line of credit at a variable rate equal to (a) the Term SOFR Daily Floating Rate 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 related credit agreement (the "Credit Agreement"). The Senior Credit Facility will mature on February 28, 2028.

Previous 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.

Current wording

At September 30, 2024, availability under the Senior Credit Facility was approximately $26.9 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 6.2% 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.

Previous wording

Many leading economists predict high rates of inflation will continue through 2024. We do not believe inflation has had a material effect on our Company’s results of operations as inflation generally results in higher rates per hour that can offset any slowdown in organic growth opportunities. This might not be the case if inflation continues to grow. A prolonged period of high inflation may also impact our ability to carry out our acquisition strategy. On the other hand, if business conditions deteriorate, it may be easier for us to identify an acquisition candidate.

Current wording

The U.S. economy has suffered from high rates of inflation in recent years. We do not believe inflation has had a material effect on our Company’s results of operations as inflation generally results in higher rates per hour that can offset any slowdown in organic growth opportunities. This might not be the case if inflation continues to grow. A prolonged period of high inflation may also impact our ability to carry out our acquisition strategy. On the other hand, if business conditions deteriorate, it may be easier for us to identify an acquisition candidate.

Previous 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):

Current wording

For the nine months ended September 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 six month ended June 30, 2024:

Current wording

The following table accounts for the number of offices opened and closed or consolidated during the nine months ended September 30, 2024:

Previous wording

See Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2023.

Current wording

In addition, see Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Estimates" in our Annual Report on Form 10-K for the year ended December 31, 2023.