# HireQuest, Inc.: Form 10-Q for the period ended Mar 31, 2024

- Company: [HireQuest, Inc.](/companies/hqi.md) (CIK 1140102)
- Form: 10-Q
- Filed: 2024-05-09
- Accepted by EDGAR: May 9, 2024, 17:16 ET
- Period: 2024-03-31
- Accession: 0001437749-24-015745
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1140102/000143774924015745/hqi20240331_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1140102/000143774924015745/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2024-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2024-01-01 to 2024-03-31 | $8.4m | us-gaap:Revenues |
| Selling, general and administrative | 3 months, 2024-01-01 to 2024-03-31 | $5.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2024-01-01 to 2024-03-31 | $2.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2024-01-01 to 2024-03-31 | $243.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2024-01-01 to 2024-03-31 | $340.0k | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2024-01-01 to 2024-03-31 | $1.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2024-01-01 to 2024-03-31 | $0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2024-01-01 to 2024-03-31 | 13,886,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2024-01-01 to 2024-03-31 | −$967.0k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2024-03-31 | $1.6m | us-gaap:Cash |
| Current assets | at 2024-03-31 | $55.1m | us-gaap:AssetsCurrent |
| Total assets | at 2024-03-31 | $105.9m | us-gaap:Assets |
| Current liabilities | at 2024-03-31 | $37.1m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2024-03-31 | $42.1m | us-gaap:Liabilities |
| Shareholders' equity | at 2024-03-31 | $63.9m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,945 characters.

*The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with our audited consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. The financial position, results of operations, cash flows and other information included herein are not necessarily indicative of the financial position, results of operations and cash flows that may be expected in future periods. See "Special Note Regarding Forward-Looking Statements" and "Part II - Item 1A. Risk Factors" below for a discussion of uncertainties and assumptions that may cause actual results to differ materially from those expressed or implied in the forward-looking statements. Additionally, we use a non-GAAP financial measure and a key performance indicator to evaluate our results of operations. For important information regarding the use of such non-GAAP measure, including a reconciliation to the most comparable GAAP measure, see the section titled "Use of Non-GAAP Financial Measure: Adjusted EBITDA" below. For important information regarding the use of such key performance indicator, see the section titled “Key Performance Indicator: System-Wide Sales” below.*

### Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q and other documents incorporated herein by reference include, and our officers and other representatives may sometimes make or provide, certain estimates and other forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act, including, among others, statements with respect to future revenue; franchise sales and system-wide sales; net income and Adjusted EBITDA (a Non-GAAP Financial Measure); operating results; dividends and shareholder returns; cost synergies of any mergers or acquisitions including those we have completed in 2022 and 2023; intended office openings or closings; expectations of the effect on our financial condition of claims and litigation; strategies for customer retention and growth; strategies for risk management; all other statements that are not purely historical and that may constitute statements of future expectations; and the impact of any global pandemic including COVID-19. Forward-looking statements can be identified by words such as: “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “project,” “estimate,” “expect,” “strategy,” “future,” “likely,” “may,” “should,” “will,” and similar references to future periods.

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.

Any forward-looking statement made by us in this Quarterly Report on Form 10-Q is based only on information currently available to us and speaks only as of the date on which it is made. The Company disclaims any obligation to update or revise any forward-looking statement, whether written or oral, that may be made from time to time, based on the occurrence of future events, the receipt of new information, or otherwise, except as required by law.

### Overview

HireQuest, Inc., together with its subsidiaries, (“HQI,” the “Company,” “we,” us,” or “our”) is a nationwide franchisor of offices providing direct-dispatch, executive search, commercial staffing, and permanent placement solutions primarily in the light industrial, blue-collar, executive, managerial, and administrative segments of the staffing industry. Our franchisees provide various types of temporary personnel, permanent placements, and recruitment services through multiple business models under the trade names “HireQuest Direct,” “Snelling,” “HireQuest,” “DriverQuest,” “HireQuest Health,” “TradeCorp," "Northbound Executive Search," "SearchPath," "Management Recruiters International," "MRI," and "Sales Consultants." Some of the MRI franchises also operate under other brands specific to a locality.

- HireQuest Direct focuses on daily-work/daily-pay jobs primarily for construction and light industrial customers.
- TradeCorp focuses on skilled laborers and tradespeople, including apprentice, journeyman, and master-level professionals.
- Snelling, HireQuest, and TradeCorp focus on longer-term staffing positions in the light industrial and administrative arenas.
- DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications.
- HireQuest Health specializes in skilled personnel in the healthcare and dental industries.
- Northbound Executive Search, MRI and SearchPath focus on executive, managerial, and professional recruitment services, although they also offer short-term consultant services.

Our brands exhibit similar long-term financial performance and have similar economic characteristics. Therefore, we provide our services under a single operating division or segment. However, we strive to provide additional information and disclosures related to business models where appropriate.

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.

Management is pursuing a strategy that includes organic and acquisition growth components. Our organic growth strategy includes expanding existing client business, seeking out national and global account opportunities for our franchisees, access to capital for our franchisees to expand into new markets, and offering new franchises to qualified applicants. Part of this growth strategy includes an expansive training program for our franchisees to start, operate and grow their business. Our acquisition growth strategy includes identifying strategic, accretive, "tuck-in" acquisitions financed primarily through a combination of cash and debt (including seller financing), the issuance of equity in appropriate circumstances, and the use of earn-outs where efficient to protect the negotiated value and future cash flows.

### Recent Developments

### TEC, The Employment Company

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.

### Results of Operations

### Financial Summary

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).

|  | Three months ended March 31, 2024 |  | March 31, 2023 |  |
| --- | ---: | ---: | ---: | ---: |
| Franchise royalties | $7,831 | 93.0% | $9,323 | 94.6% |
| Service revenue | 588 | 7.0% | 534 | 5.4% |
| Total revenue | 8,419 | 100.0% | 9,857 | 100.0% |
| Selling, general and administrative expenses | 5,619 | 66.7% | 5,844 | 59.3% |
| Depreciation and amortization | 698 | 8.3% | 697 | 7.1% |
| Income from operations | 2,102 | 25.0% | 3,316 | 33.6% |
| Other miscellaneous income | 37 | 0.4% | 43 | 0.4% |
| Interest income | 136 | 1.6% | 46 | 0.5% |
| Interest and other financing expense | (243) | (2.9)% | (540) | (5.5)% |
| Net income before income taxes | 2,032 | 24.1% | 2,865 | 29.1% |
| Provision for income taxes | 340 | 4.0% | 547 | 5.5% |
| Net income from continuing operations | 1,692 | 20.1% | 2,318 | 23.5% |
| Net (loss) income from discontinued operations, net of tax | (73) | (0.9)% | 312 | 3.2% |
| Net income | $1,619 | 19.2% | $2,630 | 26.7% |
| Non-GAAP data |  |  |  |  |
| Adjusted EBITDA | $3,357 | 39.9% | $4,581 | 46.5% |

### Use of Non-GAAP Financial Measure: Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure that represents our net income before interest expense, provision for income taxes, depreciation and amortization, costs related to the work opportunity tax credit (“WOTC”), non-cash compensation and acquisition-related charges, net, and other charges and gains we consider non-recurring. We utilize Adjusted EBITDA as a financial measure as management believes investors find it a useful tool to perform meaningful comparisons and evaluations of past, present, and future operating results. We believe it is a complement to net income and other financial performance measures. Adjusted EBITDA is not intended to represent or replace net income as defined by U.S. GAAP and should not be considered as an alternative to net income or any other measure of performance prescribed by U.S. GAAP. We use Adjusted EBITDA to measure our financial performance because we believe interest, taxes, depreciation and amortization, WOTC-related costs, non-cash compensation, acquisition-related charges, net and other non-recurring charges and gains bear little or no relationship to our operating performance.

- By excluding interest expense, Adjusted EBITDA measures our financial performance irrespective of our capital structure or how we finance our operations.
- By excluding taxes on income, we believe Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding factors that are beyond our control.
- By excluding depreciation and amortization expense, Adjusted EBITDA measures the financial performance of our operations without regard to their historical cost.
- By excluding WOTC related costs, Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the costs associated with qualifying for this tax credit.
- By excluding non-cash compensation, Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the value of our restricted stock and stock option awards.
- By excluding acquisition-related charges, net, Adjusted EBITDA provides a basis for measuring the financial performance of our operations without regard to gains or losses that arise from acquisitions.
- By excluding other non-recurring charges and gains, Adjusted EBITDA provides a basis for measuring financial performance without such items.

In addition, our Credit Agreement requires us to comply with a fixed charge coverage ratio and a leverage ratio, both of which include Adjusted EBITDA substantially as defined above. For all of these reasons, we believe that Adjusted EBITDA provides us, and investors, with information that is relevant and useful in evaluating our business.

However, because Adjusted EBITDA excludes depreciation and amortization, it does not measure the capital we require to maintain or preserve our fixed and intangible assets. In addition, because Adjusted EBITDA does not reflect interest expense, it does not take into account the total amount of interest we pay on outstanding debt, nor does it show trends in interest costs due to changes in our financing or changes in interest rates. Adjusted EBITDA, as defined by us, may not be comparable to Adjusted EBITDA as reported by other companies that do not define Adjusted EBITDA exactly as we define the term. Because we use Adjusted EBITDA to evaluate our financial performance, we reconcile it to net income, which is the most comparable financial measure calculated and presented in accordance with U.S. GAAP below (in thousands).

|  | Three months ended March 31, 2024 | March 31, 2023 |
| --- | ---: | ---: |
| Net income | $1,619 | $2,630 |
| Interest expense | 243 | 540 |
| Provision for income taxes | 340 | 547 |
| Depreciation and amortization | 697 | 697 |
| EBITDA | 2,899 | 4,414 |
| WOTC related costs | 85 | 145 |
| Non-cash compensation | 362 | 362 |
| Acquisition related charges, net | 11 | (340) |
| Adjusted EBITDA | $3,357 | $4,581 |

### Three Months Ended March 31, 2024 Compared to the Three Months Ended March 31, 2023

### Revenue

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 March 31, 2024 or the three months ended March 31, 2023.

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.

#### Franchise Royalties

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):

|  | Three months ended March 31, 2024 | March 31, 2023 |
| --- | ---: | ---: |
| Franchise royalties from HireQuest Direct | $3,823 | $4,012 |
| Franchise royalties from Snelling and HireQuest | 2,110 | 2,399 |
| Franchise royalties from DriverQuest and TradeCorp | 155 | 135 |
| Franchise royalties from HireQuest Health | 94 | 90 |
| Franchise royalties from Northbound, MRI, and SearchPath | 1,649 | 2,687 |
| Franchise royalties | $7,831 | $9,323 |

#### Service Revenue

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.

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 to charge 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.

### Operating Expenses

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.

#### Workers' Compensation

Workers' compensation *expense* was approximately $572 thousand for the three months ended March 31, 2024, an increase of $387 thousand when compared to a net *expense* of 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.

In recent periods (including the three months ended March 31, 2023), we have benefited from a workers compensation reserve assumed in a 2021 acquisition that was reduced as claims were resolved. The remainder of the associated liability now appears relatively stable and we do not expect benefits in future periods. Generally workers' compensation expense (benefit) will fluctuate based on the mix of classifications, the level of payroll, recent claims resolution and cumulative experience. We cannot accurately predict the effects of workers' compensation, and historical trends are not indicative of future results.

#### Compensation and Benefits

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.

#### Other Selling, General, and Administrative Expenses ("SG&A")

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.

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

#### Depreciation and amortization

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.

### Other Income and Expense

Other income and expense consists of interest income on notes receivable, rent received from sub-tenants, and other non-operating income and expense.

#### Other miscellaneous income

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.

#### Interest income and expense

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.

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.

### Provision for income tax

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%.

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.

### Discontinued Operations

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.

Following our acquisition of Dubin, we divided their operations into separate businesses and sold certain customer related assets of one of the acquired locations to a new franchisee. The remaining assets related to the operations of the other acquired location (in Philadelphia) have not been sold and as of March 31, 2024 remain classified as held-for-sale. In the meantime, we operate this Philadelphia location as company-owned, although all operations are presented as part of discontinued operations.

The assets and liabilities of our discontinued operations are presented separately in the asset and liability sections, respectively, of the balance sheet for all periods presented. Similarly, cash flows and the results of operations are also removed from continuing operations in the respective financial statements. In general, assets held-for-sale are not amortized or depreciated, and are measured at the lower of carrying amount or fair value less costs to sell.

### Liquidity and Capital Resources

### Overview

Our major source of liquidity and capital is cash generated from our ongoing operations consisting of royalty revenue, service revenue and staffing revenue from franchisee-owned locations. We also receive principal and interest payments on notes receivable that we issued in connection with the conversion of company-owned or acquired offices to franchised offices.

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.

Our working capital requirements are driven largely by temporary employee payroll, which is typically daily or weekly, and weekly cash settlements with our franchises. Since collections from accounts receivable lag employee pay our working capital requirements increase as system-wide sales increase, and vice-versa. When the economy contracts, our cash balance tends to increase in the short-term as payroll funding requirements decrease and aged accounts receivable are converted to cash upon collection. As the economy recovers, our cash balance generally decreases and accounts receivable increase.

We believe that our current cash balance, together with the future cash generated from operations, principal and interest payments on notes receivable, and our borrowing capacity under our line of credit, will be sufficient to satisfy our working capital needs, capital asset purchases, future dividends (if any), and other liquidity requirements associated with our continuing operations for the next 12 months. We also believe that these sources of liquidity and capital will be sufficient to satisfy our liquidity requirements associated with our continuing operations beyond the next 12 months.

Our access to, and the availability of, financing on acceptable terms in the future will be affected by many factors including overall liquidity in the capital or credit markets, the state of the economy and our credit strength as viewed by potential lenders. We cannot provide assurances that we will have future access to the capital or credit markets on acceptable terms. We expect our borrowing costs to continue to increase as the Federal Reserve raises its benchmark interest rates in an effort to control inflation.

### Operating Activities

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.

### Investing Activities

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.

### Financing Activities

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.

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

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.

The Credit Agreement and other loan documents contain customary representations and warranties, affirmative, and negative covenants, including without limitation, those covenants governing indebtedness, liens, fundamental changes, restricting certain payments including dividends unless certain conditions are met, transactions with affiliates, investments, engaging in business other than the current business of the Borrowers and business reasonably related thereto, 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 Borrowers as collateral including, without limitation, their accounts and notes receivable, intellectual property and the real estate owned by HQ Real Property Corporation.

The Company utilized the proceeds of the Senior Credit Facility (i) first to pay off its existing credit agreement with Truist (described below), (ii) second, to pay off its existing term loan with Truist (described below), and (iii) third, to pay transaction fees and expenses incurred in connection with closing the transactions described above. The Company intends to utilize the proceeds of any loans made under the Senior Credit Facility for working capital, required letters of credit, and general corporate purposes in accordance with the terms of the Senior Credit Facility.

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.

### Economy and Inflation

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.

The February 2022 Russian invasion of Ukraine and the resulting economic sanctions imposed by the United States and other countries, along with certain international organizations, have significantly impacted the global economy, including exacerbating inflationary pressures created by COVID-related supply chain disruptions, and given rise to potential global security issues that have adversely affected and may continue to adversely affect international business and economic conditions. The ongoing effects of the hostilities and sanctions are no longer limited to Russia and Russian companies and have spilled over to and negatively impacted other regional and global economic markets.

In October 2023, the Palestinian militant group Hamas launched an unprecedented assault on Israel, who in turn formally declared war as its soldiers battled Hamas fighters and launched airstrikes on Gaza. This war between Israel and Hamas could spur inflation and hamper global growth if it turns into a wider conflict that causes a significant increase in oil prices.

Global conflicts such as these have resulted in rising energy prices and an even more constrained supply chain, and thus aggravated the inflationary global environment with cost increases affecting labor, fuel, materials food and services. At this time, the ultimate extent of the duration of the military actions, resulting sanctions and future economic and market disruptions, and resulting effects on the Company, and on our acquisition strategy, are impossible to predict.

### Key Performance Indicator: System-Wide Sales

We refer to total sales generated by our franchisees as “franchise sales.” For any period prior to their conversion to franchises, we refer to sales at company-owned and operated offices as “company-owned sales.” In turn, we refer to the sum of franchise sales and company-owned sales as “system-wide sales.” In other words, system-wide sales include sales at all offices, whether owned and operated by us or by our franchisees. In addition, system-wide sales includes sales at company-owned offices that are classified as discontinued operations. System-wide sales is a key performance indicator, although we do not record system-wide sales as revenue. Management believes that information on system-wide sales is important to understanding our financial performance because those sales are the basis on which we calculate and record much of our franchise royalty revenue, are directly related to all other royalty revenue and service revenue and are indicative of the financial health of our franchisee base. Management uses system-wide sales to benchmark current operating levels to historic operating levels. System-wide sales should not be considered as an alternative to revenue.

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):

|  | Three months ended March 31, 2024 | March 31, 2023 | Change |
| --- | ---: | ---: | ---: |
| System-wide sales from HireQuest Direct | $54,333 | $58,777 | (7.6)% |
| System-wide sales from Snelling and HireQuest | 36,559 | 41,844 | (12.6)% |
| System-wide sales from DriverQuest and TradeCorp | 2,969 | 682 | 335.3% |
| System-wide sales from HireQuest Health | 1,728 | 898 | 92.4% |
| System-wide sales from Northbound, MRI, and SearchPath | 38,350 | 50,062 | (23.4)% |
| System-wide sales from Discontinued Operations | 96 | 1,255 | (92.4)% |
| System-wide sales | $134,035 | $153,518 | (12.7)% |

27

### Number of Offices

We examine the number of offices we open and close every period. The number of offices is directly tied to the amount of royalty and service revenue we earn. We count a location as an office if it has a physical location and is generating revenue.

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

|  |  |
| --- | ---: |
| Offices, December 31, 2022 | 435 |
| Opened in 2023 | 14 |
| Purchased in 2023 | 7 |
| Closed in 2023 | (29) |
| Offices, December 31, 2023 | 427 |
| Opened in 2024 | 6 |
| Closed in 2024 | (5) |
| Offices, March 31, 2024 | 428 |

### Critical Accounting Estimates

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, 2022.

## Market risk

As filed, 163 characters.

We are a “smaller reporting company” as defined by Rule 12b-2 of the Exchange Act, and, as such, are not required to provide the information required by this Item.

## Controls and procedures

As filed, 4,024 characters.

### Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, management concluded that these disclosure controls and procedures were not effective as of the end of such period as a result of the material weakness disclosed below.

As previously reported, we identified a material weakness in our internal control over financial reporting as we did not have sufficient accounting resources available to handle the volume of technical accounting issues and provide adequate review functions. A material weakness is a deficiency or combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Notwithstanding the material weakness, which still existed as of March 31, 2024 , the Company’s management, including its Chief Executive Officer and Chief Financial Officer, have concluded that the consolidated financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.

### Management Plans to Remediate Material Weakness

Beginning with our quarterly report on Form 10-Q for the quarter ended March 31, 2021 the Company reported a material weakness in our internal control over financial reporting as we did not have sufficient accounting resources available to handle the volume of technical accounting issues and provide adequate review functions in connection with the integration of acquisitions. As part of the remediation, the Company has engaged third party professionals with appropriate technical expertise for subsequent acquisitions. Also, in order to give the Chief Accounting Officer (“CAO”) more time to do an appropriate review as and when required, the Company has transitioned the CAO’s responsibility over the Finance Operations Group which processes and reconciles daily transactions to another leader in the organization. In addition, the Company is actively recruiting for additional staff in the accounting department with appropriate professional experience and in November 2024, hired a Chief Financial Officer (“CFO”) who has 17 years of experience as a public company CFO and 5 years of experience as a public company director including as Audit Committee Chair. Lastly, the Company is working through the accounting processes currently the responsibility of the CAO with the goal of (1) making the processes more efficient and (2) transitioning work from the CAO to other appropriately experienced accounting staff.

We are committed to maintaining a strong internal control environment and implementing measures designed to help ensure that control deficiencies contributing to the material weakness are remediated as soon as possible. We have made significant progress towards remediation and continue to implement our remediation plan for the material weakness in internal control over financial reporting described above. We will consider the material weakness remediated after the applicable controls operate for a sufficient period of time, and management has concluded, through testing, that the controls are operating effectively.

### Changes in internal control over financial reporting

During the quarter ended March 31, 2024, there were no significant changes in our internal control over financial reporting, other than those referred to above, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 221 characters.

There have been no material changes from the risk factors we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the Securities and Exchange Commission on March 21, 2024.

Filed May 9, 2024.
Source: SEC EDGAR, the filing index for accession 0001437749-24-015745. Last ingested by Listed: Oct 24, 2026, 15:05 ET. No prices; not investment advice.