Attached files
UNITED
STATES
SECURITIES AND
EXCHANGE COMMISSION
Washington, DC
20549
FORM
10-K
☑ ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE YEAR ENDED: DECEMBER 31,
2019
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number
000-53088
HIREQUEST,
INC.
(Exact name of registrant as
specified in its charter)
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Delaware
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91-2079472
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(State of
incorporation or organization)
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(I.R.S.
Employer Identification no.)
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111 Springhall Drive, Goose Creek, SC, 29445
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(Address of
principal executive offices) (Zip code)
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Registrant’s telephone number, including
area code: (843)
723-7400
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Securities
registered pursuant to Section 12(b) of the Act:
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Common Stock,
$0.001 par value
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HQI
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The Nasdaq Stock
Market LLC
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Title of each class
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Trading symbol(s)
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Name of each exchange on which
registered
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Securities registered pursuant to section 12(g) of
the Act: None
Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes ☐ No
☑
Indicate by check mark if the registrant is not
required to file reports pursuant to Section 13 or Section 15(d) of
the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1)
has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required
to file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T (§232.405 of
this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit such
files). Yes ☑ No ☐
Indicate by check mark whether the
Registrant is a large accelerated filer ☐ , an accelerated filer ☐ , a non-accelerated filer ☑ , a smaller
reporting company ☑ , or an emerging
growth company ☐ (as defined in Rule
12b-2 of the Exchange Act).
If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act. ☐
Indicate by check mark whether the Registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ☐ No ☑
The aggregate
market value of the voting and non-voting common equity held by
non-affiliates computed by reference to the price at which the
common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the
Registrant’s most recently completed second fiscal quarter
was $5,737,000.
Number
of shares of issuer's common stock outstanding at
March 27, 2020 was 13,536,472.
Portions of the
Registrant’s definitive proxy statement for the annual
meeting of stockholders to be filed pursuant to Regulation 14A or
an amendment to this Annual Report on Form 10-K are incorporated by
reference into Items 10, 11, 12, 13, and 14 of Part III of this
report. The Registrant will file its definitive proxy statement or
an amendment to this Annual Report on Form 10-K with the Securities
and Exchange Commission within 120 days of December 31,
2019.
HireQuest,
Inc.
2019 Annual
Report on Form 10-K
Table of
Contents
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Page
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PART
I
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PART
II
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PART
III
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PART
IV
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2
Special Note
Regarding Forward-Looking Statements
This Annual
Report on Form 10-K for the year ended December 31, 2019 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, system-wide sales, and the growth thereof; the impact of any global
pandemic including the novel coronavirus disease
("COVID-19"); operating results; anticipated benefits of the
merger with Command Center, Inc., or the conversion to the
franchise model; intended office openings; expectations of the
effect on our financial condition of claims and litigation;
strategies for customer retention and growth; strategies for risk
management; and all other statements that are not purely historical
and that may constitute statements of future expectations.
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
industry; the financial performance of our franchisees; changes in
customer demand; the extent to which we are successful in gaining
new long-term relationships with customers or retaining existing
ones, and the level of service failures that could lead customers
to use competitors’ services; 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; strategic actions, including acquisitions and
dispositions and our success in integrating acquired businesses
including, without limitation, successful integration following the
merger with Command Center, Inc.; disruptions to our technology
network including computer systems and software; natural events
such as severe weather, fires, floods, and earthquakes, or man-made
or other disruptions of our operating systems; and the factors
discussed in the “Risk Factors” section and elsewhere
in this Annual Report on Form 10-K.
Any
forward-looking statement made by us in this Annual Report on Form
10-K 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.
PART
I
Item 1. Business
Our
Company
HireQuest, Inc. (collectively with its subsidiaries, the
“Company,” “we,” “us,” or
“our”) is a Delaware corporation originally organized
in Washington as Command Staffing, LLC in 2002. In 2005, Temporary
Financial Services, Inc., a public company, acquired the assets of
Command Staffing, LLC, and the combined entity changed its name to
Command Center, Inc. On September 11, 2019, Command Center, Inc.
reincorporated in Delaware and changed its name to Hire Quest, Inc.
following its acquisition of Hire Quest Holdings, LLC (“Hire
Quest Holdings,” and together with its subsidiary, Hire
Quest, LLC, “Legacy HQ”). This acquisition is
sometimes referred to as the “Merger.” Hire Quest, LLC
was formed as a Florida limited liability company in 2002. Hire
Quest Holdings, LLC was formed as a Florida limited liability
company in 2017.
Our common stock trades on the
Nasdaq Market under the symbol “HQI.” Command Center
previously traded on the Nasdaq Market under the symbol
"CCNI."
3
More information about the Merger
and other recent developments can be found in Part II, Item 7. Management’s Discussion and
Analysis of Financial Conditions and Results of Operations of this
Annual Report on Form 10-K under the heading “Recent
Developments” which is incorporated herein by
reference.
More information about us may be
found at www.hirequest.com. The information on our website is not
incorporated by reference in this Annual Report on Form
10-K.
Our
Model
We are a
nationwide franchisor of temporary staffing offices providing
on-demand labor solutions primarily in the light industrial and
blue-collar segments of the staffing industry. We provide our
customers with seamless access to a contingent workforce whenever
they need it. Our daily dispatch model, in which we match temporary
employees with openings every day, allows us to be responsive to
our customers’ dynamic needs. Our flexible staffing solutions
permit our customers to focus on their underlying operations and to
expand or contract their workforce quickly to meet fluctuating
demands. We assist our employees in arranging transportation
amongst themselves to ensure timely arrival of the right number of
employees at the scheduled starting time. In addition, we pay our
employees daily which attracts workers who cannot wait up to three
weeks for their first paycheck under a traditional
model.
Our revenue,
which is largely comprised of royalty fees and interest on overdue
accounts that we charge our franchisees, was $16.2 million in 2019.
Our system-wide sales, which we define as sales at all office
locations, whether owned and operated by us or by our franchisees,
were $241.6 million. System-wide sales for 2019 include $227.7
million attributable to franchisee-owned offices and $13.9 million
attributable to offices we owned for a portion of the year before
selling them to franchisees. Currently all of our offices are
franchised. We employed 67,000 temporary employees in 2019. At
December 31, 2019, we had 147 franchisee-owned offices operating in
32 states and the District of Columbia.
Our franchisees
operate through one of our two owned brands: HireQuest Direct and
HireQuest. HireQuest Direct, which represents the great majority of
our franchises, focuses on daily-work-daily-pay jobs in the
construction and light industrial segments. HireQuest, focuses on
longer-term staffing positions in the light industrial and
administrative arenas.
On a
net basis, we added 50 offices in 2019 (opening 60 and closing 10),
most of them via the July 2019 Merger. We provide incentives to our
existing franchisees, including assistance with start-up funding
and acquisition costs, to encourage them to open in new markets.
While staffing industry growth has outpaced overall economic and
employment growth, the industry still employs only 2% of the United
States’ non-farm workforce.1 We believe
that the low percentage of the total workforce that is currently
contingent, when combined with potential shifts towards a more
contingent workforce in the overall economy, provides an
opportunity for future organic growth.
Our
differentiated services are driven by two key
elements:
●
Local
ownership and dedicated responsiveness. Our offices are franchisee-owned. We believe that
ownership at the local level – where the vast majority of
customer communication occurs – allows our organization to be
agile and responsive to customer needs. Since our franchisees have
personal financial stakes directly tied to the success of their
offices, our customers interface with owners who are incentivized
to deliver excellent customer service and resolve issues
efficiently. Responsiveness promotes customer retention. Each
franchisee is incentivized to acquire new business to help grow his
or her personal income.
●
Direct
dispatch from our offices. The majority of our employees are dispatched from
our offices every day. This allows our franchisees and their staff
to qualify the employees for work, provide them with any necessary
personal protective equipment, assist our employees in arranging
transportation amongst themselves, and ensure we deliver the right
number of qualified individuals at the right time. We believe that
employee dispatch from franchise offices increases consistency as
our employees are sent to a particular jobsite without having to
rely on potentially less reliable means of verification, such as
telephone calls. Once we and our customers have developed a rapport
with particular employees, we will sometimes dispatch these
employees directly to a customer location.
4
Our Industry
Temporary Staffing
According to the American Staffing Association,
the staffing and recruiting industry employed approximately 16
million people and accounted for $167 billion of sales in
2018.2 We focus
primarily on the largest segment, light industrial and blue collar
work, which accounts for roughly 37% of the temporary staffing
industry.3
The on-demand labor industry has
developed based on business needs for flexible staffing solutions.
The industry provides contingent workforce solutions as an
alternative to the costs and efforts that are required for
recruiting, hiring and managing permanent employees. Many of the
customers we target operate in a cyclical production environment
and find it difficult to staff according to their changing business
requirements. Companies also desire a way to maintain consistent
staffing levels when full-time employees are absent due to illness,
vacation, or unplanned terminations. On-demand labor offers
customers the opportunity to respond immediately to changes in
staffing needs, to reduce the costs associated with recruiting and
interviewing, to eliminate unemployment and workers’
compensation exposure, and to draw from a larger pool of potential
employees. We have found that staffing firms provide particular
value in assisting customers with filling mundane or repetitive
jobs, high turnover positions, staffing for project specific needs,
and filling other short duration positions such as special events,
disaster recovery, and seasonal jobs.
Historically,
our business has been bolstered by declining unemployment rates as
our customers find it more difficult and more expensive to recruit,
interview, hire, and train qualified staff. As employers look for
alternatives to combat these increasing costs and administrative
burdens, opportunities arise for the temporary staffing industry.
In addition, worker attitudes have changed from one which idealized
extended tenure with a single employer to one which is more open to
temporary or transient employment. This shift has increased the
availability of temporary workers in the economy as a
whole.
Government Regulation
As a large
employer, we are subject to a significant number of employment laws
at the state, federal, and local levels. We are required to comply
with all applicable federal and state laws and regulations relating
to employment, including verification of eligibility for
employment, occupational safety and health provisions, wage and
hour requirements, employment insurance, and laws relating to equal
opportunity employment. In addition to federal and state laws
and regulations, many counties and cities have become active in
regulating various aspects of employment, including minimum wages,
paid sick leave, retirement savings programs, transportation
benefits, application forms and background checks, and required
notices to employees, among others. Regulatory compliance creates a
barrier to entry to many would-be smaller competitors as they
cannot profitably comply with the administrative burden of new and
voluminous regulations.
In addition,
fourteen states and the Federal Trade Commission impose pre-sale
franchise registration or disclosure requirements on franchisors. A
number of states also regulate substantive aspects of our
relationship with our franchisees such as termination, nonrenewal,
transfer, no-poach and non-competition provisions, discrimination
among franchisees, and other aspects of the relationships between
and with franchisees. Additional legislation, which we cannot
predict, could expand these requirements imposed on
us.
Working Capital Practices
Our working capital requirements,
and the working capital requirements of our competition, are driven
largely by temporary employee payroll and accounts receivable from
customers. Since receipts lag behind employee pay – which is
typically daily or weekly – our working capital requirements
increase as system-wide sales increase.
We obtain our
working capital largely from cash produced by our daily operations.
In addition, we have obtained a line of credit from Branch Bank
& Trust Company, now called Truist Bank ("BB&T"), for $30
million with a $15 million sublimit for letters of credit. In our
experience, it is common for staffing firms to utilize cash
produced from operations along with credit facilities to finance
working capital requirements.
2 Id.
3 American Staffing Association,
Staffing Industry
Statistics (published May 2019). Available at: https://americanstaffing.net/staffing-research-data/fact-sheets-analysis-staffing-industry-trends/staffing-industry-statistics/#tab:tbs_nav_item_0
5
Our Competitive Strengths
We attribute
our success to the following strengths:
●
Nationwide
footprint with differentiated business model. We believe we are one of the largest providers
of on-demand temporary staffing solutions in the light industrial
and blue-collar segments of the staffing industry measured by
number of office locations. Our nationwide footprint allows us to
compete for national account relationships when our competitors
that are local or regional operators are simply too small. Our size
also allows us to obtain favorable terms on our workers’
compensation insurance program. Our franchise model has many
advantages as well. Most of our competitors utilize a company-owned
office model in which the management of day-to-day interactions
with customers is handled by individuals who do not have the
incentives to succeed that comes only from ownership. On the other
hand, our offices are owned and operated by franchisees whose
personal financial success is directly tied to the success or
failure of their local franchised office. The company-owned model
typically requires significant investment in middle management. We
largely avoid this expense because our franchisees are independent
business owners responsible for their own financial
well-being.
●
A franchise
system with expansion capabilities. We incentivize our franchisees to expand their own
businesses through our Franchise Expansion Incentive Program. Under
this program, we offer assistance overcoming the startup costs of
an office in a new metropolitan area by providing our existing
franchisees with credits on the royalty fees they pay in their
existing offices. Under certain circumstances, we will provide
assistance in acquisition funding or financing. In addition, our
Risk Management Incentive Program allows us to reward franchisees
who are successful in keeping their workers' compensation loss
ratios below certain thresholds by paying to franchisees an amount
equivalent to a portion of their premiums. We believe that this
incentivizes our franchisees to encourage workplace safety and
provides successful franchisees with capital to reinvest in or
expand their businesses.
●
Responsible
capital allocation with very little debt. As of December 31, 2019, we were debt free.
Financing our day-to-day needs with cash produced from operations
allows us to continue building cash reserves which we can use, in
addition to our line of credit with BB&T, to finance
significant transactions such as major reinvestments in our
business, strategic acquisitions, share buybacks, or stockholder
dividends, depending on the opportunities that present themselves.
Compared to company-owned offices, our franchise model allows us to
employ relatively fewer full-time staff at our corporate
headquarters decreasing the working capital needed for
operations.
Our Growth Strategy
We believe
there are opportunities to grow our business and brand. While the
onset of COVID-19 has made the economic future unpredictable, we
believe the following to be key components of our growth
strategy:
●
Continue to
grow the number of offices our franchisees
operate. We believe attractive
returns at the franchisee level should allow us to continue to
attract new franchisees and encourage our existing franchisees to
open new offices. In addition, we encourage our existing
franchisees to explore new potential markets through our Franchise
Expansion Incentive Program. When combined with the back-office
support that we provide franchisees, we believe we are poised to
expand into unserved or underserved markets like the Upper
Midwestern United States.
●
Capitalize
on our national footprint to grow same store and
system-wide sales. We
anticipate that our enhanced scale combined with our royalty
business model will contribute to growth in our access to and
profitability from national accounts. Traditionally, these larger
national accounts have the leverage to impose lower margins on
their temporary staffing providers. Our royalty-driven business
model, in which we earn a percentage of gross billings or payroll
funded regardless of margins, partially insulates stockholders from
margin volatility inherent in the ownership of the traditional
company-owned model for temporary staffing (although royalty
revenue from our HireQuest business line depends in part on the
gross margin of the franchisee). In addition, we have a strategic
relationship with Dock Square HQ, LLC, an entity with connections
at many of the largest users of temporary staffing in the country,
which increases the prospects of introduction to the decision
makers at these traditionally harder-to-reach potential
customers.
●
Increase
our brand awareness. As we
continue to develop new markets and to serve our existing markets,
we expect our brand to become more recognizable and a greater asset
to us in driving repeat customers, encouraging customers to expand
their use of our services across multiple markets, and increasing
new customer development.
6
Our
Offices
We had 147
offices located in 32 states and the District of Columbia as of
December 31, 2019. All were franchised. The map below provides the
number of offices we had in each state on December 31,
2019.
Number of Offices By State
December 31, 2019
We have a
strong concentration of offices in established and emerging regions
such as the Southeast, Texas, Colorado, and Washington. These
regional office concentrations allow for greater local brand
recognition and ease of oversight in those regions while we
continue to add offices in unserved and underserved communities.
These concentrations also allow us to better recognize local and
regional market trends and to centralize our administrative
functions. Since January 1, 2020, our franchisees have closed or
consolidated a small number of offices. These were largely
satellite offices or in markets already served by another office.
Accordingly, we do not expect these closures to materially impact
our revenue.
We encourage
our franchisees to locate in areas with access to public
transportation and major thoroughfares. Such locations facilitate
employee ease in reaching the office and increase their ability to
efficiently get to their work assignments. We also encourage our
franchisees to locate offices in areas between 1,000 and 1,500
square feet. Most of our offices are located near areas of
concentrated construction or major manufacturing and industrial
sites.
7
Our Franchise Program
Our
franchised offices are a key component of our success. We
urge our franchisees to customize their services according to the
unique opportunities and assets presented by each of their offices,
while also leveraging the overall size of the organization when
possible. This approach allows for each office to have a unique
blend of customers and emphases while also reducing overhead costs,
improving economies of scale, establishing procedural uniformity
and controls, and creating a predictable internal environment for
temporary employees.
A typical
franchised office location is managed by an owner with the
assistance of in-office personnel. Many offices hire business
development staff to help drive business to the offices. We provide
advice and guidance from our corporate headquarters.
Franchising Strategy
As of December
31, 2019, there were 147 franchised HireQuest and HireQuest Direct
offices operated by 57 franchisees. 29.3% of our franchisees owned
multiple offices. Our largest franchisee owned 13 offices, and
17.2% of our franchisees owned more than 5 offices. One individual
owned significant interests in 6 franchisees that operated 27
offices. 20 of our franchisees were Worlds Franchisees, those
franchisees that share common ownership with significant
stockholders, directors, and officers of the Company. The Worlds
Franchisees operated 57 offices as of December 31,
2019.
Our approach to
the franchise model creates what we believe to be superior
office-level economics. We finance many of the initial working
capital needs of our franchisees, including costs of new office
openings, through our ownership of franchisee accounts receivable
which we acquire through our franchise agreements. This is a
relatively inexpensive source of capital for our franchisees and
allows them to expand more freely. In addition, our Risk Management
Incentive Program lowers the effective cost of workers’
compensation insurance at the franchisee level – a
significant expense for many of our competitors. Through the Risk
Management Incentive Program, we pay franchisees who keep their
workers’ compensation loss ratios below a specific loss
threshold an amount equivalent to a portion of the premium they pay
for workers’ compensation coverage. We thereby eliminate for
our franchisees two of the strongest barriers to entry: financing
and workers’ compensation, and enable potentially higher
operating margins at the office level.
Franchise Agreements
For each
metropolitan area in which we have an office, we enter into a
franchise agreement with standard terms and conditions. Our
franchisees are granted the exclusive right to operate their chosen
brand, either HireQuest or HireQuest Direct, in their protected
territory. Typically, a protected territory corresponds with the
metropolitan statistical area where the office is located. We also
grant a franchisee a three-year right of first refusal on opening
an office using the other brand in that same protected
territory.
On December 31,
2019, our franchisees operated under 88 executed franchise
agreements. Our franchise agreements grant us the right to charge a
royalty fee of between 6% and 8%, depending on sales volume, on the
gross sales of our HireQuest Direct franchisees. For our HireQuest
business line, we charge a royalty fee of 4.5% of the payroll we
fund plus 18% of the gross margin for the territory.
Our typical
franchise agreement has a term of five years. We own the accounts
receivable of our franchisees pursuant to the franchise agreements.
We collect these and, after subtracting our royalty fees, payroll
and taxes funded for temporary employees, interest on overdue
accounts, and other fees and costs, we remit the remainder to our
franchisees. Our franchisees also gain access to our proprietary
software, HQ Webconnect, which we update regularly through a
dedicated staff of developers. Finally, in states that do not
require participation in a state-run policy, our franchisees gain
access to our workers’ compensation policy. By entering a
franchise agreement with us, our owner/operators remove some of the
most significant barriers to entry in our industry – payroll
funding and dedicated software, in addition to the workers’
compensation insurance premium benefits, and startup cost
assistance discussed above.
The table below
displays the number of franchise agreements scheduled to renew each
year:
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Year
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Renewals
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2020
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6
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2021
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9
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2022
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13
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2023
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12
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2024
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42
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2029
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6
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The large number of renewals in 2024
arose because of the significant number of new franchisees we added
in 2019 as a result of the Merger.
Franchisees
receive initial and ongoing training in our proven methods of
operation. We provide support personnel on an as-needed basis to
our franchisees. We have a comprehensive brand standards manual
which explains our policies on key operational, financial, and
regulatory compliance issues. Under the franchise agreement,
beneficial owners of our franchisees guaranty all debts and
obligations of the franchise to us. Still, we have less control
over a franchisee’s operations than we would if we owned and
operated an office ourselves.
8
Our Employees
Temporary Employees
Our
temporary employees are also a key component of our success. They
perform the services we provide. Hire Quest, LLC, our
wholly-owned subsidiary, is the employer of record of all of our
temporary employees. In 2019, we
employed approximately 67,000 temporary employees and issued
approximately 1.4 million paychecks. The vast majority of these
payments were made via electronic paycard. We anticipate these
numbers to be larger in 2020 as we will operate for a full year
with the legacy Command Center offices and their corresponding
employees under the HireQuest umbrella. Given the nature of
temporary employment, it is difficult for us to determine the exact
number of full time employees on a given day, however, 451
temporary employees worked at least 2,000 hours in
2019.
These temporary employees served
thousands of customers, primarily in the construction,
industrial/manufacturing, warehousing, disaster recovery,
hospitality, and recycling/waste management industries. Our
customers range in size from small businesses to large corporate
enterprises. Most of our work assignments are short-term, and many
are filled on little advance notice from customers.
We continuously recruit temporary
staff so we can respond to customer needs quickly. We attract our
employees through various means, including in-person recruitment,
online resources, cell phone texting services, our large and
ever-growing internal database, job fairs, word-of-mouth,
advertisements, and a number of other methods. Our success is
dependent, in part, on our ability to attract and retain temporary
employees. To that end, we have implemented a robust health
insurance program giving qualifying temporary employees a list of
plans to choose from.
We remain committed to worker
safety. We regularly provide safety and skills training. We also
aggressively manage our workers' compensation program to identify
trends in injuries and limit our losses and exposure. Through our
Risk Management Incentive Program, our franchisees are incentivized
to ensure safe working environments and to achieve quick
resolutions of workers' compensation claims when they do
arise.
Corporate Employees
In addition to
the temporary staff, we employ approximately fifty corporate
employees through HQ LTS Corporation, our wholly-owned subsidiary.
Most of these individuals were employed at our corporate
headquarters in Goose Creek, South Carolina. The vast majority of
these employees are full-time. These employees provide back office
support, including financing, insurance, accounting, operations,
national sales, information technology, legal, and human resources
services to our franchisees and temporary employees.
Executive Officers
Information
about our executive officers follows:
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Name
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Age
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Position
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Richard
Hermanns
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56
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President, Chief
Executive Officer, and Chairman of the Board
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John D.
McAnnar
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37
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Vice President,
Secretary, and General Counsel
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Cory
Smith
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43
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Treasurer and Chief
Financial Officer
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Richard Hermanns has
served as President and Chief Executive Officer, as well as
Chairman of the Board of Directors, of HireQuest, Inc. since the
Merger. Mr. Hermanns has nearly thirty years of experience in the
temporary staffing industry. He has served as Chief Executive
Officer and Secretary of Hire Quest, LLC, now a wholly-owned
subsidiary of HireQuest, Inc., since the company’s founding
in 2002. He served in the same capacities for predecessor entities
since July 1991. He is also Chairman of the Board of Directors and
President of Hirequest Insurance Company and has been since its
founding in 2010. He has been Chief Executive Officer of Hire Quest
Financial, LLC since its founding in 2006. Together with Edward
Jackson, Mr. Hermanns owns a majority stake in Bass Underwriters,
Inc., a large managing general insurance agent. Prior to founding
Hire Quest and its related entities, Mr. Hermanns served as Chief
Financial Officer of Outsource International, and as an Assistant
Vice President for NCNB National Bank (now Bank of America). Mr.
Hermanns obtained his Bachelor of Science degree in Economics and
Finance from Barry University, and his Masters of Business
Administration in Finance from the University of Southern
California. Mr. Hermanns is also active in the charitable realm.
Among his charitable pursuits, he founded the Higher Quest
Foundation, a non-profit organization dedicated to fighting global
hunger in a more sustainable way.
9
John D. McAnnar is
the General Counsel, Vice President, and Secretary of HireQuest,
Inc. He has served as General Counsel and Vice President for
HireQuest, LLC, now a wholly-owned subsidiary of HireQuest, Inc.,
since 2014. He manages a broad range of legal affairs in the
securities, employment, construction, insurance, finance, workers'
compensation, intellectual property, and other realms. He
previously served in the litigation departments of Carmody
MacDonald, P.C. and Armstrong Teasdale, LLP, where he focused on
complex commercial litigation, corporate, and employment law. Mr.
McAnnar is an adjunct professor at the Charleston School of Law. He
co-founded ArchCity Defenders, Inc., a non-profit organization in
St. Louis, Missouri, that led the push for change in
Missouri’s municipal court system following the Ferguson
unrest. For this work, Mr. McAnnar has received awards including
the National Legal Aid & Defenders Association New Leaders
in Advocacy Award, the Ina M. Boon Social Justice Award, and many
others. He served on St. Louis Mayor Francis Slay’s Vanguard
Cabinet and was a Commissioner on the St. Louis Developmental
Disability Resources Commission, a body that oversaw millions of
dollars of taxpayer funds. John graduated magna cum laude from the St. Louis
University School of Law, where he was inducted into the Alpha
Sigma Nu Jesuit Honor Society and the Order of the Woolsack. He
graduated cum
laude from the University of Pittsburgh with a Bachelor
of Arts degree.
Cory
Smith is the Treasurer and
Chief Financial Officer of HireQuest, Inc. He was appointed as
Command Center’s Chief Financial Officer on July 22, 2017.
Mr. Smith was previously employed by Command Center from 2010
through 2015, serving as Controller during the final two years of
his tenure. Before rejoining Command Center, he was employed
by Southeast Staffing beginning in 2015, where he served as the
Vice President of Finance. From 2005 to 2010, Mr. Smith worked as a
Certified Public Accountant, primarily performing attestation work.
Mr. Smith graduated cum laude from Lewis-Clark College with a Bachelor of
Science in Business Administration.
Our Competition
The manual labor sector of the
on-demand labor industry is largely fragmented and highly
competitive, with relatively low barriers to entry aside from
payroll funding, workers’ compensation premiums, and startup
costs. No single staffing company dominates the industry. Our
competitors range in size from small, local or regional operators
with five or fewer locations to large, multi-national companies
with hundreds of locations. Our strongest competition in any market
comes from companies that have established long-lasting
relationships with their clients. Competition in the industry tends
to track the overall strength of the economy and trends in
workforce flexibility. As the economy grows, the number of
competitors generally increases.
The primary competitive factors in
our market segments include price, the ability to timely provide
the requested workers, and success in meeting customer
expectations. Secondary factors include name recognition,
established reputation, and customer relationships. Businesses
operating in these segments of the on-demand labor industry require
access to significant working capital to pay temporary employees,
particularly in the spring and summer when seasonal staffing
requirements are highest, and to fund workers' compensation
premiums or claims. Lack of working capital can be a significant
impediment to growth for small, local, and regional on-demand labor
providers. A second barrier to entry is an affordable
workers’ compensation policy. Small entrants usually do not
have the scale necessary to secure a policy on terms similar to
ours. Regulatory compliance is becoming more burdensome,
particularly for smaller firms that cannot profitably comply with
the increasing number of federal, state, and local employment laws
and regulations.
We also face
increasing competition from “gig-economy” companies who
are attempting to monetize the temporary staffing industry through
smartphone applications. We believe these apps, however, will not
be a major source of successful competition in the commoditized
section of the labor spectrum where we specialize. The apps, which
operate on a broad-blast, first-come-first-served basis, often
result in too many or too few workers arriving at a jobsite as well
as other problems such as improper personal protective equipment or
employees arriving at a jobsite unwilling or unable to perform the
assigned tasks. In contrast, our direct dispatch model allows us to
screen employees’ readiness for work every day, assist with
arranging transportation to and from jobsites, and match employees
with company-provided personal protective equipment before they
leave the office.
10
Our Cyclicality and Seasonality
The temporary staffing industry has
historically been cyclical. Success tends to track the economy.
When our franchisees’ customers expect to have long-term
permanent needs, they tend to increase their use of temporary
employees. Our revenue tends to increase as the economy expands.
During economic downturns, our revenue tends to
diminish.
Some of the industries in which we
operate are subject to seasonal fluctuation. Many of the jobs
filled by temporary employees are outdoors and generally performed
during the warmer months of the year. As a result, activity
increases in the spring and continues at higher levels through the
summer, then begins to taper off during fall and through winter. In
addition, demand by industrial customers tends to slow after the
holiday season and pick up again in the third and fourth quarters
– peaking in the third quarter. Our exposure to seasonality
is tempered, in part, by our strong presence in the Southern United
States. Seasonal fluctuations are typically less pronounced in the
more temperate parts of the United States, where many of our
franchised offices are located. Fluctuations in seasonal business
affect financial performance from period to period. Severe weather
in a location for prolonged periods has the potential to impair
business within those geographies, given the outdoor nature of many
of its assignments. However, natural disasters also sometimes lead
to additional assignments in the disaster recovery
industry.
Our Intellectual Property
We own the
rights to all of our key trademarks including
“HireQuest,” “HireQuest Direct,” “The
Right People at the Right Time,” and all of our stylized
logos. We also own the rights to trademarks we have utilized in the
past. We license the use of our marks to our franchisees via the
franchise agreements.
We have developed and own our
proprietary software, HQ Webconnect, to handle most aspects of
operations, including temporary employee dispatch and payroll,
invoicing, and accounts receivable. Our software system also allows
us to produce internal reports necessary to track and manage
financial performance of franchisees, trends in customers, to root
out potential fraud, and to examine other vital metrics
efficiently. We believe that our software facilitates customer
interaction, allowing for online bill payment, invoice review, and
other important functions. Because we developed a proprietary
system and have a dedicated IT development staff, we constantly
refine our software based on feedback from franchisees, customers,
and employees. We license the use of our software to franchisees
via our franchise agreements. The system is not patented. We have
invested in off-site back-up and storage systems that we believe
provide reasonable protections for our electronic information
systems against breakdowns as well as other disruptions and
unauthorized intrusions.
We rely on
common law protection of our copyrighted works. These works include
advertising and marketing materials and other items that are not
material to our business. We license some intellectual property
from third parties for use in our corporate headquarters, but such
licenses are not material to our business.
Our Organizational Structure
HireQuest, Inc.
is a holding company. It is the corporate parent of a series of
wholly-owned subsidiaries including: (1) HQ LTS Corporation, which
employs the staff of our corporate headquarters; (2) HQ Financial
Corporation, which provides financing and related services to our
franchisees; (3) Hire Quest, LLC, which is the employer of record
of our temporary employees; (4) HQ Franchising Corporation, which
assuming all proper regulatory approval, is expected to become the
franchisor of HireQuest and HireQuest Direct franchises in 2020;
(5) HQ Real Property Corporation, which, as of December 31, 2019,
owns our corporate headquarters and two adjacent parcels of real
property; and (6) HQ Insurance Corporation, which currently has no
operations but may serve a role related to our workers'
compensation program in the future.
11
Organization as of December 31, 2019
In addition,
Command Center had two wholly-owned subsidiaries which we dissolved
in December 2019: (1) Command Florida, LLC, and (2) ComStaff
Transport, Inc. Command Florida facilitated the Merger and served
no ongoing purpose. ComStaff had no operations in 2019 or
2018.
We
underwent the following significant changes in 2019: (1) we
completed the Merger between Legacy HQ and Command Center and
subsequently reincorporated in Delaware, (2) in connection with the
Merger, we entered into a new credit facility; (3) we entered into
a consulting agreement with Dock Square HQ, LLC, (4) we converted
all of the Command Center company-owned offices, acquired during
the Merger, to our franchise model, and (5) we exited the
California market for strategic reasons. For more information on
these transactions, please see Part II, Item 7. Management’s Discussion and
Analysis of Financial Conditions and Results of Operations under
the heading “Recent Developments” which is incorporated
herein by reference.
Our Securities Exchange Act Reports
We maintain a
website at the following address: www.hirequest.com. The
information on our website is not incorporated by reference in this
Annual Report on Form 10-K.
We make
available on our website certain reports and amendments to those
reports that we file with or furnish to the Securities and Exchange
Commission (the “SEC”) in accordance with the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). These include our annual reports on Form 10-K, our
quarterly reports on Form 10-Q, our current reports on Form 8-K,
and Section 16 filings by our officers, directors and 10%
stockholders. We make this information available on our website
free of charge as soon as reasonably practicable after we or they
electronically file the information with, or furnish it to, the
SEC.
Item 1A. Risk Factors
Our common stock value and our business, results of operations,
cash flows, and financial condition are subject to various risks,
including, but not limited to, those set forth below. If any of
these risks actually occur, our common stock, business, results of
operations, cash flows, and financial condition could be materially
adversely affected. In such case, the value of your investment
could decline and you may lose all or part of the money you paid to
buy our common stock. These risk factors should be carefully
considered together with the other information in this Form 10-K,
including the risks and uncertainties described under the heading
“Special Note Regarding Forward-Looking
Statements.”
Risks Related to Our Business and Industry
Fluctuations in general economic conditions, including those caused
by the novel coronavirus disease ("COVID-19"), may significantly
impact demand for our services, system-wide sales, and
profitability.
The demand for
temporary staffing is highly dependent upon the state of the
economy and upon the workforce needs of our clients, which creates
uncertainty and volatility. National and global economic activity
can be slowed by many factors, including the economic impact of
COVID-19, fluctuating markets and interest rates and global trade
uncertainties. As economic activity slows, companies tend to reduce
their use of temporary workers and reduce their recruitment of new
employees, and permanent full-time and part-time workers are
generally inclined to work more hours and overtime, resulting in
fewer available vacancies and less demand for our services.
Significant declines in demand of any region or industry in which
we have a major presence may severely reduce the demand for our
services and thereby significantly decrease our revenue and
profits. Deterioration in economic conditions or the financial or
credit markets could also have an adverse impact on our
clients’ ability to pay for services we have already
provided.
12
The
coronavirus pandemic is an emerging serious threat to health and
economic wellbeing affecting our franchisees, employees, customers
and the overall economy.
On March 11, 2020, the World Health
Organization announced that infections of COVID-19 had become
pandemic, and on March 13, 2020, the President of the United States
announced a National Emergency relating to the disease. Since March
13, several state and local authorities have taken dramatic action
including, without limitation, ordering the workforce to stay home,
banning all non-essential businesses from operating, refusing to
issue new building permits, and invalidating current building
permits causing work to stop. There has been widespread infection
in the United States and abroad, with the potential for
catastrophic impact on human lives, including those of our
franchisees and employees, and the economy as a whole, including
our customers. In addition to the actions described above,
national, state, and local authorities have recommended social
distancing and imposed or are considering quarantine and isolation
measures on large portions of the population and additional
mandatory business closures. These measures, while intended to
protect human life, are expected to have serious adverse impacts on
domestic and foreign economies of uncertain severity and duration.
The effectiveness of economic stabilization efforts, including
proposed government payments to affected citizens and industries,
is uncertain. Some economists are predicting the United States will
soon enter a recession.
The sweeping nature of the COVID-19
pandemic makes it extremely difficult to predict how our business
operations will be affected long term. But the likely overall
economic impact of the pandemic is viewed as highly negative to the
general economy. Already, the COVID-19 outbreak has begun to
negatively impact our operations and revenue as well as those of
our franchisees. We expect the effects to become more acute in the
next few months. It is possible that a number of our offices may be
forced to close. To date, our franchisees have closed or
consolidated a small number of offices at least, in part, due to
the potential financial impacts of COVID-19. Some of our
franchisees may experience economic hardship or even failure. We
may be classified as a non-essential business in some or all of the
jurisdictions that impose a ban on non-essential businesses. If
that were to occur, we may be forced to temporarily or permanently
close offices in those jurisdictions. Our customers may choose to
voluntarily close their worksites. Already, we have witnessed a
significant drop in the amount of hospitality, event service, and
catering business that we do. We may experience a shortage of
temporary employees as a result of the spread of the
disease.
Any of the above factors, or other
cascading effects of the coronavirus pandemic that are not
currently foreseeable, could materially increase our costs,
severely negatively impact our revenue, net income, and other
results of operations, reduce system-wide sales, cause office
closings or cause us to lose franchisees, and impact our liquidity
position, possibly significantly. The duration of any such impacts
cannot be predicted.
We may be unable to attract sufficient qualified candidates to meet
the needs of our clients.
We compete to
meet our clients’ needs for workforce solutions and,
therefore, we must continually attract qualified candidates to fill
positions. Attracting qualified candidates depends on factors such
as desirability of the assignment, location, the health of our
workforce, and the associated wages and other benefits. We have
experienced shortages of qualified candidates and we may experience
such shortages in the future due to a number of factors including,
without limitation, as a result of the COVID-19 pandemic. Further,
if there is a shortage, the cost to employ or recruit these
individuals could increase. If we are unable to pass those costs
through to our clients, it could materially and adversely affect
our business.
We are
vulnerable to seasonal fluctuations with lower demand in the fall
and winter months.
Royalty fees
generated from office sales in markets subject to seasonal
fluctuations will be less stable and may be lower than in other
markets. Locating offices in highly seasonal markets involves
higher risks. Individual franchisee revenue can fluctuate
significantly on both a quarter over quarter and year over year
basis thereby impacting our royalty and service revenue, depending
on the local economic conditions and need for temporary labor
services in the local economy. Weather can also have a significant
impact on our operations as there is typically lower demand for
staffing services during adverse weather conditions in the winter
months. To the extent that seasonal fluctuations become more
pronounced, our royalty fees could fluctuate materially from period
to period.
We are critically dependent on workers’ compensation
insurance coverage at commercially reasonable terms, and unexpected
changes in claim trends on our workers’ compensation may
negatively impact our financial condition.
We employ
workers for whom we provide workers’ compensation insurance.
Our workers’ compensation insurance policies are renewed
annually. The majority of our insurance policies are with Chubb/Ace
American. Our insurance carriers require us to collateralize a
significant portion of our workers’ compensation obligation.
We currently collateralize our policies largely with a letter of
credit from Branch Banking and Trust Company, now Truist Bank
(“BB&T”). If we no longer had access to that
collateral, we could not be certain we would be able to obtain
appropriate types or levels of insurance in the future or that
adequate replacement policies would be available on acceptable
terms. As our business grows or if our financial results
deteriorate, the amount of collateral required will likely increase
and the timing of providing collateral could be accelerated.
Resources to meet these requirements may not be available to us in
a timely manner or at all. The loss of our workers’
compensation insurance coverage would prevent us from operating as
a staffing services business in the majority of our markets.
Further, we cannot be certain that our current and former insurance
carriers will be able to pay claims we make under such
policies.
We are
responsible for a significant portion of expected losses under our
workers’ compensation program. Unexpected changes in claim
trends, including the severity and frequency of claims, changes in
state laws regarding benefit levels and allowable claims, actuarial
estimates, or medical cost inflation, could result in costs that
are significantly higher. There can be no assurance that we will be
able to increase the fees charged to our clients in a timely manner
and in a sufficient amount to cover increased costs as a result of
any changes in claims-related liabilities.
Our efforts to
actively manage the safety of our temporary workers and actively
control costs with internal staff and our network of workers’
compensation related service providers may not be sufficient to
prevent material increases to our workers’ compensation
costs.
13
We are dependent on a small number of individuals who constitute
our current management.
We are highly
dependent on the services of our senior management team and other
key employees at our corporate headquarters and on our
franchisees’ ability to recruit, retain, and motivate key
employees. Competition for such employees can be intense, and the
inability to attract and retain the additional qualified employees
required to expand our activities, or the loss of current key
employees including, without limitation, as a result of the
COVID-19 pandemic, could adversely affect our and our
franchisees’ operating efficiency and financial condition. In
addition, our growth strategy may place strains on our management
who may become distracted from day-to-day duties.
Our industry is subject to extensive government regulation and the
imposition of additional regulations, which could materially harm
our future earnings.
Our workforce
solutions are subject to extensive government regulation. In
particular, we are subject to a significant number of employment
laws due to our being a large employer. Additionally, there are
state and federal rules regarding disclosure requirements to
potential franchisees and regulations regarding our relationship
with existing franchisees. The cost to comply, and any inability to
comply with government regulation, could have a material adverse
effect on our business and financial results. Increases or changes
in government regulation of the workplace or of the
employer-employee relationship, or judicial or administrative
proceedings related to such regulation, could materially harm our
business.
We offer our
qualifying temporary workers government-mandated health insurance
in compliance with the Patient Protection and Affordable Care Act
and the Health Care and Education Reconciliation Act of 2010
(collectively, the “ACA”). We cannot be certain that
compliant insurance coverage will remain available to us on
reasonable terms, and we could face additional risks arising from
future changes to or repeal of the ACA or changed interpretations
of our obligations under the ACA.
Recently, Congress enacted the
Families First Coronavirus Response Act which, among other things,
requires certain employers under certain circumstances to pay their
employees emergency paid sick leave and pay further leave under an
extension of the Family Medical Leave Act. It is possible that the
payments required by this law will have a significant negative
impact on many of our franchisees. We cannot predict whether
Congress will enact additional legislation in response to COVID-19
or whether additional legislation will impact us and our
franchisees positively or negatively.
We may incur employment related claims or other types of claims and
costs that could materially harm our business.
We are in the
business of employing people in the workplaces of our clients. We
incur a risk of liability for claims for personal injury, wage and
hour violations, immigration, discrimination, harassment, and other
liabilities arising from the actions of our clients and/or
temporary workers. Some or all of these claims may give rise to
negative publicity, litigation, settlements, or investigations. As
a result, we may incur costs, charges or other material adverse
impacts on our financial statements.
We maintain
insurance with respect to some potential claims and costs with
deductibles. We cannot be certain that our insurance will be
available, or if available, will be of a sufficient amount or scope
to cover claims that may be asserted against us. Should the
ultimate judgments or settlements exceed our insurance coverage,
they could have a material effect on our business. We cannot be
certain we will be able to obtain appropriate types or levels of
insurance in the future, that adequate replacement policies will be
available on acceptable terms, or at all, or that our insurance
providers will be able to pay claims we make under such
policies.
We operate in a highly competitive industry and may be unable to
retain clients or market share.
Our industry is
highly competitive and rapidly innovating. We compete in national,
regional and local markets with full-service and specialized
temporary staffing companies. Our competitors offer a variety of
flexible workforce solutions. Therefore, there is no assurance
that we will be able to retain clients or market share in the
future, nor can there be any assurance that we will, in light of
competitive pressures, be able to remain profitable or maintain our
current profit margins.
If we fail successfully to implement our growth strategy, which
includes new office development by existing and new franchisees,
our ability to increase our revenue and operating profits could be
adversely affected.
Portions of our growth strategy rely
on new office development by existing and new franchisees. Our
franchisees may face many challenges in opening new offices
including:
14
●
Availability and cost of financing;
●
Negotiation of acceptable lease and financing
terms;
●
Trends in the overall and local economy of the
target market;
●
Recruitment, training, and retention of
qualified core staff and temporary personnel; and
●
General economic and business conditions
(including those resulting from the effects of the coronavirus
global pandemic (COVID-19)).
These factors are outside of our
control and could hinder our franchisees from opening new offices
or expanding existing ones. This could prevent us from successfully
implementing our growth strategy.
Changes in our industry could place strains on our management,
employees, information systems, and internal controls, which may
adversely impact our business.
Changes in the temporary staffing
industry and how our customers utilize, order, and pay for
temporary staffing services, particularly through new and
innovative uses of technology, may place significant demands on our
administrative, operational, financial, and other resources or
require us to obtain different or additional resources. Any failure
to respond to or manage such changes effectively could adversely
affect our business. To be successful, we will need to continue to
implement management information systems and improve our operating,
administrative, financial, and accounting systems and controls in
order to adapt quickly to such changes. These changes may be
time-consuming and expensive, increase management responsibilities,
and divert management attention, and we may not realize a return on
our investment in these changes.
The loss of or damage to key relationships, including with Dock
Square, may adversely affect the Company’s
business.
The Company’s business is
dependent on its relationships with clients and collaboration
partners. On July 15, 2019, the Company entered into a consulting
arrangement with Dock Square HQ, LLC (“Dock Square”),
an organization with connections at
many of the largest users of temporary staffing in the country.
Pursuant to this consulting arrangement, Dock Square introduces
prospective customers and expands relationships with existing
customers of the Company in return for which it is
eligible to receive unregistered shares of the Company’s
common stock, subject to certain performance metrics and vesting
terms. The loss of or damage to the Company’s
consulting arrangement with Dock Square may adversely affect the Company’s business
and revenue.
Shifts in attitudes towards contingent workforces could negatively
impact our results of operations and financial
condition.
Attitudes and beliefs about
contingent workforces could change such that our customers no
longer desire to utilize our services. If this occurs, it could
negatively impact our financial condition and results of
operations. Such a shift could also make it challenging or
impossible for us to successfully implement our growth
strategies.
Difficult political or market conditions, natural disasters, global
pandemics, or other unpredictable matters could affect our business
in many ways including by reducing the amount of available
temporary employees, reducing the amount of customer projects, or
harming the overall economy which could materially reduce our
revenue, earnings and cash flow and adversely affect our financial
condition.
Our business is linked to conditions
in the overall economy, such as those impacting the ability of our
customers to obtain financing, the availability of temporary
employees, changes in laws, and catastrophic events such as fires,
floods, earthquakes, tornadoes, hurricanes, and pandemics. In
particular, the recent outbreak of COVID-19 could materially affect
our business to the extent it affects the economy overall,
negatively impacts the industries our customers are in, or infects
a large number of temporary employees removing them from the
available worker pool. These factors are unpredictable and outside
of our control. They may affect the level and volatility of
securities prices and the liquidity and value of investments,
including investments in our common stock.
Our credit facility contains operating and financial covenants that
may restrict our business and financing activities.
On July 11,
2019, in connection with the Merger, we, along with our
subsidiaries, entered into a loan agreement with BB&T for a $30
million line of credit with a $15 million sublimit for letters of
credit. The loan agreement and other loan documents contain
customary events of default and negative covenants, including but
not limited to those governing indebtedness, liens, fundamental
changes, transactions with affiliates, and sales of assets. The
loan agreement also requires us to comply with a fixed charge
coverage ratio of at least 1.10:1.00.
15
The agreements limit, among
other things, our ability to:
●
Sell, lease, license, or
otherwise dispose of assets;
●
Undergo a change in
control;
●
Consolidate and merge with
other entities; or
●
Create, incur, or assume
liens, debt, and other encumbrances.
The operating
and other restrictions and covenants in the agreements and in any
future financing arrangement that we may enter into, may restrict
our ability to finance our operations, engage in certain business
activities, or expand or fully pursue our business strategies, or
otherwise limit our discretion to manage our business. Our ability
to comply with these restrictions and covenants may be affected by
events beyond our control, and we may not be able to meet those
restrictions and covenants. A breach of any of the restrictions and
covenants could result in a default under our agreements which
could cause any outstanding indebtedness under the agreements or
under any future financing arrangements to become immediately due
and payable, and result in the termination of commitments to extend
further credit.
The phase-out of the London Interbank Offered Rate
(“LIBOR”), or the replacement of LIBOR with a different
reference rate, may adversely affect interest rates.
Borrowings
under our credit facility bear interest at rates determined using
LIBOR as the reference rate. On July 27, 2017, the Financial
Conduct Authority (the authority that regulates LIBOR) announced
that it would phase-out LIBOR by the end of 2021. It is unclear
whether new methods of calculating LIBOR will be established such
that it continues to exist after 2021, or if alternative rates or
benchmarks will be adopted, and currently it appears highly likely
that LIBOR will be discontinued or substantially modified by 2021.
Changes in the method of calculating LIBOR, or the replacement of
LIBOR with an alternative rate or benchmark, may adversely affect
interest rates and result in higher borrowing costs. This could
materially and adversely affect our results of operations, cash
flows, and liquidity. We cannot predict the effect of the potential
changes to LIBOR or the establishment and use of alternative rates
or benchmarks. Furthermore, we may need to renegotiate our
revolving credit facility or incur other indebtedness, and changes
in the method of calculating LIBOR, or the use of an alternative
rate or benchmark, may negatively impact the terms of such
indebtedness.
Risks Related to
Our Franchisees and Business Model
Converting our company-owned offices to franchises has multiple
risks.
We believe that
the franchise model is superior to the company-owned store model.
To that end, we converted the remaining company-owned offices to
franchises in the third quarter of 2019. However, we will have less
control over the day-to-day operations of the offices and the
franchisees may operate in a manner that is counter to our
interests or introduce risks to our business by departing from our
operating norms. Further, franchises are generally regulated at
both the federal and the state level, so operating as franchises
will introduce additional regulatory risk. In addition, the new
franchisees will need to adapt to a new operating model, a new IT
system, and new business processes.
Our operating and financial results and growth strategies are
closely tied to the success of our franchisees.
With all of our
offices being operated by franchisees, we are dependent on the
financial success and cooperation of our franchisees. We have
limited control over how our franchisees’ businesses are run,
and the inability of franchisees to operate successfully could
adversely affect our operating and financial results through
decreased royalty payments or otherwise. If our franchisees incur
too much debt, if their operating expenses increase, or if economic
or sales trends deteriorate (including as a result of the global
pandemic caused by COVID-19) such that they are unable to operate
profitably or repay existing debt, it could result in their
financial distress, including insolvency or bankruptcy. If a
significant franchisee or a significant number of franchisees
become financially distressed, our operating and financial results
could be impacted through reduced or delayed royalty payments. A
franchisee bankruptcy could have a substantial negative impact on
our ability to collect payments due under such franchisee’s
franchise agreement. Our success also depends on the willingness
and ability of our franchisees to be incentivized to deliver
excellent customer service, resolve any issues efficiently, and
ensure customer retention. In addition, our success depends on the
willingness and ability of our franchisees to implement major
initiatives, which may include financial investment. Our
franchisees may be unable to successfully implement strategies that
we believe are necessary for their further growth, which in turn
may harm our growth prospects and financial condition.
16
Our franchisees could take action that could harm our
business.
Our franchisees
are contractually obligated to operate their offices in accordance
with the operations standards set forth in our agreements with them
and applicable laws. However, although we attempt to properly train
and support all our franchisees, they are independent third parties
whom we do not control. The franchisees own, operate, and oversee
the daily operations of their offices, and their core office
employees are not our employees. While we have the ability to
enforce our franchise agreements, many of our franchisees’
actions are outside of our control. Although we have developed
criteria to evaluate and screen prospective franchisees, we cannot
be certain that our franchisees will have the business acumen or
financial resources necessary to operate successful franchises at
their approved locations, and state franchise laws may limit our
ability to terminate or not renew these franchise agreements.
Moreover, despite our training, support, and monitoring,
franchisees may not successfully operate offices in a manner
consistent with our standards and requirements or may not hire and
adequately train qualified office personnel. The failure of our
franchisees to operate their franchises in accordance with our
standards or applicable law, actions taken by their employees or a
negative publicity event at one of our franchisees’ offices
or involving one of our franchisees could have a material adverse
effect on our reputation, our brands, our ability to attract
prospective franchisees, and our business, financial condition, or
results of operations.
If we fail to identify, recruit, and contract with a sufficient
number of qualified franchisees, our ability to open new offices
and increase our revenue could be materially adversely
affected.
The opening of
additional offices and expansion into new markets depends, in part,
upon the availability of prospective franchisees who meet our
selection criteria. Many of our franchisees open and operate
multiple offices, and part of our growth strategy requires us to
identify, recruit and contract with new franchisees or rely on our
existing franchisees to expand. We may not be able to identify,
recruit or contract with suitable franchisees in our target markets
on a timely basis or at all. If we are unable to recruit suitable
franchisees or if franchisees are unable or unwilling to open new
offices, our growth may be slower than anticipated, which could
materially adversely affect our ability to increase our revenue and
materially adversely affect our business, financial condition and
results of operations.
Opening new offices in existing markets and aggressive development
could cannibalize existing sales and may negatively affect sales at
existing offices.
We intend to
continue opening new franchised offices in our existing markets as
a part of our growth strategy. Expansion in existing markets may be
affected by local economic and market conditions. Further, the
customer target area of our offices varies by location, depending
on a number of factors, including population density, area
demographics and geography. As a result, the opening of a new
office in or near markets in which our franchisees’ offices
already exist could adversely affect the sales of these existing
franchised offices. Sales cannibalization between offices may
become significant in the future as we continue to expand our
operations and could affect sales growth, which could, in turn,
materially adversely affect our business, financial condition or
results of operations. There can be no assurance that sales
cannibalization will not occur or become more significant in the
future as we increase our presence in existing
markets.
A large number of our franchises are controlled by a small number
of individuals.
A significant
number of our franchises are controlled or beneficially owned by a
small number of individuals. Specifically, the offices we sold and
converted to franchises on September 27, 2019 are controlled by a
single individual via several affiliated entities. In addition, the
franchisees we refer to as the "Worlds Franchisees" share
significant common ownership with one another and with us. If
either of these ownership groups, or any of our other relatively
large ownership groups, were to experience financial difficulty,
reduced sales volume, or close, we may experience a negative impact
on our results of operations, liquidity, or financial
condition.
Our results of operations may be significantly affected by the
ability of certain franchisees to repay their loans to
us.
Lending money
to our franchisees for startup costs and short-term funding is an
essential part of our business. While most of our franchisees have
historically repaid their loans to us, for various reasons, a small
number have not, and there is no guarantee that our franchisees
will continue to repay their loans in the future. The risk of
non-payment is affected, among other things, by:
●
The overall condition and
results of operations of the particular franchise;
●
Changes in economic
conditions that impact specific franchisees, our industry, or the
overall economy;
●
The amount and duration of
the loan;
●
Credit risks of a
particular borrower; and
●
In terms of collateral, the
value of the franchised business and any individual guarantee we
have or have not obtained.
17
Our
franchisees’ ability to repay their loans usually depends
upon their successful operation of their business and income
stream. Loans we extend to franchisees to finance their purchase of
a new branch typically are our largest and riskiest loans; however,
given their historical role in driving growth in our overall size
and revenue streams, we intend to continue those lending efforts.
At December 31, 2019, our loans receivable from franchisees and
from the party to whom we sold the California offices constituted
24.2% of our assets. We extended for us unprecedented levels of
purchase financing loans in 2019 in connection with the Merger and
subsequent sales and conversions of company-owned offices to
franchises. If our franchisees do not repay these loans, it may
negatively impact our overall financial condition and results of
operations.
We may have improperly balanced the costs and benefits related to
our Franchise Expansion Incentive Program.
Through our
Franchise Expansion Incentive Program, we have agreed, under
certain circumstances, to provide certain franchisees with credits
to their royalty fees, financing assistance, or acquisition
funding. If the new offices which are funded in whole or in part by
this program fail or underperform, we may suffer financially, and
it may have an adverse impact on our results of operations,
liquidity, or financial condition.
We may have improperly balanced the costs and benefits related to
our Risk Management Incentive Program.
Through our
Risk Management Incentive Program, we have agreed, under certain
circumstances, to provide certain payments to our franchisees. The
program is designed to incentivize our franchisees to achieve
certain loss ratio thresholds for workers’ compensation
insurance. If more franchisees than anticipated achieved these
thresholds, or franchisees significantly exceeded our expectations
with respect the workers’ compensation claims history, we may
be required to pay more than we have anticipated pursuant to our
Risk Management Incentive Program which may negatively impact our
results of operations, liquidity, or financial
condition.
We may engage in litigation with our franchisees.
Although we
believe we generally enjoy a positive working relationship with our
franchisees, the nature of the franchisor-franchisee relationship
may give rise to litigation with our franchisees. While we do not
engage in litigation with our franchisees in the ordinary course of
business, it is possible that we may experience litigation with
some of our franchisees in the future. We may engage in future
litigation with franchisees to enforce our contractual
indemnification rights if we are brought into a matter involving a
third party due to the franchisee’s alleged acts or
omissions. In addition, we may be subject to claims by our
franchisees relating to our franchise disclosure document,
including claims based on financial information contained in our
franchise disclosure document. Engaging in such litigation may be
costly and time-consuming and may distract management and
materially adversely affect our relationships with franchisees and
our ability to attract new franchisees. Any negative outcome of
these or any other claims could materially adversely affect our
results of operations as well as our ability to expand our
franchise system and may damage our reputation and brands.
Furthermore, existing and future franchise-related legislation
could subject us to additional litigation risk in the event we
terminate or fail to renew a franchise relationship.
Risks Related to
the Merger and Our Organizational Structure
We may not realize all of the anticipated benefits of the
Merger
The success of
the Merger will depend, in large part, on the ability of the
combined company to realize the anticipated benefits from combining
the businesses of Legacy HQ with Command Center. To realize the
anticipated benefits, the combined company must successfully
integrate the businesses. This integration has been, and will
continue to be, complex and time-consuming.
Potential
difficulties we may encounter include, among others:
●
Unanticipated issues in
integrating logistics, information, communications, and other
systems;
●
Integrating personnel from
the two companies while maintaining focus on providing a
consistent, high quality level of service;
●
Unanticipated issues
resulting from the completion of the transition of our owned-office
network to franchised operations owned by multiple franchisees,
including first-time business owners;
●
Integrating complex
systems, technology, networks, and other assets of the two
companies in a seamless manner to minimize disruption to customers,
employees, service providers, and other
constituencies;
18
●
Performance shortfalls as a
result of diversion of management’s attention from day-to-day
operations matters to integration matters;
●
Potential unknown
liabilities, liabilities that are significantly larger than
anticipated, unforeseen expenses or delays associated with the
Merger and the integration process;
●
Unanticipated changes in
applicable laws and regulations;
●
The impact on our internal
controls and compliance with the regulatory requirements under the
Sarbanes-Oxley Act of 2002, including, without limitation, any
problems that arise as a result of integrating the accounting
systems of a public and a private company; and
●
Unanticipated complexities
associated with managing the larger, combined
business.
These factors
could contribute to us not fully achieving the anticipated benefits
of the Merger, which could adversely affect our results of
operations.
If we are a “personal holding company,” we may be
required to pay personal holding company taxes, which would have an
adverse effect on our cash flows, results of operations, and
financial condition.
Under the Code,
a corporation that is a “personal holding company” may
be required to pay a personal holding company tax in addition to
regular income taxes. A corporation generally is considered a
personal holding company if (1) at any time during the last half of
the taxable year more than 50% of the value of the
corporation’s outstanding stock is owned, directly,
indirectly, or constructively, by or for five or fewer individuals,
the Ownership Test, and (2) at least 60% of the corporation’s
“adjusted ordinary gross income” constitutes
“personal holding company income", the Income Test. A
corporation that is considered a personal holding company is
required to pay a personal holding company tax at a rate equal to
20% of such corporation’s undistributed personal holding
company income, which is generally taxable income with certain
adjustments, including a deduction for U.S. federal income taxes
and dividends paid.
We will likely
satisfy the Ownership Test for the 2019 tax year. However, we do
not expect to satisfy the Income Test in 2019. Accordingly, we do
not believe that we will be considered a personal holding company
for the 2019 tax year. However, because personal holding company
status is determined annually and is based on the nature of the
corporation’s income and percentage of the
corporation’s outstanding stock that is owned, directly,
indirectly, or constructively, by major stockholders, there can be
no assurance that we will not be a personal holding company for the
2019 tax year or become a personal holding company in any future
taxable year. If we were considered a personal holding company with
undistributed personal holding company income in a taxable year,
the payment of personal holding company taxes would have an adverse
effect on our cash flows, results of operations, and financial
condition.
We have identified a material weakness
in our internal control over financial reporting which
may adversely affect the accuracy and reliability
of our financial statements, and our reputation, business and the
price of our common stock, as well as lead to a loss of investor
confidence in us.
As described under Item 9A. "Controls and Procedures" below,
management has concluded that a material weakness in our internal
control over financial reporting existed as
of December 31, 2019 and, accordingly, internal
control over financial reporting and our disclosure controls and
procedures were not effective as of such date. A material weakness
is a deficiency, or a 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
consolidated financial statements will not be prevented or detected
on a timely basis.
We are taking steps to
remediate this material weakness. While we believe these steps will
improve the effectiveness of our internal control over financial
reporting and remediate the identified deficiency, if our
remediation efforts are insufficient to address the material
weakness or we identify additional material weaknesses in our
internal control over financial reporting in the future, our
ability to record, process, summarize and report information
required to be disclosed within the time periods specified by the
rules and forms of the SEC and to otherwise comply with our
reporting obligations under the federal securities laws and our
credit agreement will likely be adversely affected. The occurrence
of, or failure to remediate, the material weakness and any future
material weaknesses in our internal control over financial
reporting may adversely affect the accuracy and reliability of our
financial statements and have other consequences that could
materially and adversely affect our business, including an adverse
impact on the market price of our common stock, potential actions
or investigations by the SEC or other regulatory authorities,
possible defaults under our credit agreement, shareholder lawsuits,
a loss of investor confidence and damage to our
reputation.
19
We will incur increased costs and demands upon management as a
result of complying with the laws and regulations affecting public
companies, which could harm our operating results.
As a public
company, we will incur significant legal, accounting, investor
relations and other expenses, including costs associated with
public company reporting requirements. We also have incurred and
will incur costs associated with current corporate governance
requirements, including requirements under Section 404 and
other provisions of the Sarbanes-Oxley Act, as well as rules
implemented by the SEC and the Nasdaq market. We expect these rules
and regulations to substantially increase our legal and financial
compliance costs over prior years and to make some activities more
time-consuming and costly. We are unable to currently estimate
these costs with any degree of certainty. We also expect that, as a
public company, it will be more difficult and more expensive for us
to obtain director and officer liability insurance, and we may be
required to incur substantially higher costs to obtain coverage or
to accept reduced policy limits and coverage. As a result, it may
be more difficult for us to attract and retain qualified
individuals to serve on our board of directors or as our executive
officers.
Risks Related to
Technology and Cybersecurity
Advances in technology may disrupt the labor and recruiting
markets.
We expect the
increased use of internet-based and mobile technology will attract
additional technology-oriented companies and resources to the
staffing industry. We face increasing competition from
“gig-economy” companies entering the temporary staffing
industry by providing apps to connect workers with employers. Such
competition could adversely affect our business and results of
operations. Our candidates and clients increasingly demand
technological innovation to improve the access to and delivery of
our services.
Our
clients increasingly rely on automation, artificial intelligence
and other new technologies to reduce their dependence on labor
needs, which may reduce demand for our services and impact our
operations. Our franchisees face extensive pressure for lower
prices and new service offerings and we must continue to invest in
and implement new technology and industry developments to remain
relevant to our ultimate clients and candidates. If we are unable
to do so, our business and results of operations may decline
materially. Furthermore, if our clients are able to increase
the effectiveness of their internal staffing and recruitment
functions through analytics, automation or otherwise, their need
for the services our franchisees offer may decline. New technology
and more sophisticated staffing management and recruitment
processes may cause clients to outsource less of their staffing
management, reducing the demand for our franchisees
services.
Our information technology systems may need to be updated or
replaced.
We occasionally
implement, modify, retire and change our systems. These changes to
our information technology systems may be disruptive, take longer
than desired, be more expensive than anticipated, be distracting to
management, or fail, causing our business and results of operations
to suffer materially.
The improper disclosure of, or access to, our confidential and/or
proprietary information, or a failure to adequately protect this
information, could materially harm our business.
Our business
requires the use, processing, and storage of confidential
information about applicants, candidates, temporary workers, other
employees and clients. We occasionally experience cyberattacks,
computer viruses, social engineering schemes and other means of
unauthorized access to our systems. The security controls over
sensitive or confidential information and other practices we and
our third-party vendors follow may not prevent the improper access
to, disclosure of, or loss of such information. We may fail to
implement practices and procedures that comply with increasing
privacy regulations. Failure to protect the integrity and security
of such confidential and/or proprietary information could expose us
to regulatory fines, litigation, contractual liability, damage to
our reputation and increased compliance costs.
Our facilities, operations, and information technology systems are
vulnerable to damage and interruption.
Our primary
computer systems, headquarters, support facilities and operations
are vulnerable to damage or interruption from power outages,
computer and telecommunications failures, computer viruses,
employee errors, security breaches, natural disasters and
catastrophic events. Failure of our systems or damage to our
facilities may cause significant interruption to our business, and
require significant additional capital and management resources to
resolve, causing material harm to our business.
20
Risks Related to Ownership of Our Stock
Our directors, officers, and current principal stockholders own a
large percentage of our common stock and could limit other
stockholders’ influence over corporate
decisions.
As of March 27,
2020, our directors, officers, and current stockholders holding
more than 5% of our common stock collectively beneficially own,
directly or indirectly, in the aggregate, approximately 65% of our
outstanding common stock. Mr. Hermanns beneficially owns
approximately 43% of our outstanding common stock, and Mr. Jackson
beneficially owns approximately 19% of our outstanding common
stock. As a result, these stockholders acting alone or together may
be capable of controlling most matters requiring stockholder
approval, including the election of directors, approval of
acquisitions, approval of equity incentive plans, and other
significant corporate transactions. This concentration of ownership
may have the effect of delaying or preventing a change in control.
The interests of these stockholders may not always coincide with
our corporate interests or the interests of our other stockholders,
and they may act in a manner with which some stockholders may not
agree or that may not be in the best interests of all
stockholders.
Our stock typically trades in low volumes daily which could lead to
illiquidity, volatility, or depressed stock price.
Because of a
history of low trading volume, our stock may be relatively illiquid
and its price may be volatile. Our stock trades on the Nasdaq stock
exchange, but typically trades in low daily volumes. For example,
the average daily trading volume in our common stock on Nasdaq
during the fourth quarter of 2019 was approximately 7,500 shares
per day. This may make it more difficult for our stockholders to
resell shares when desired or at attractive prices. Some investors
view low-volume stocks as unduly speculative and therefore not
appropriate candidates for investment. Also, due to the low volume
of shares traded on any trading day, persons buying or selling in
relatively small quantities may easily influence prices of our
stock.
We currently do not have any analysts covering our stock which
could negatively impact both the stock price and trading volume of
our stock.
The trading market for our common stock will likely be influenced
by the research and reports that industry or securities analysts
may publish about us, our business, our market or our competitors.
We do not currently have, and may never obtain, research coverage
by financial analysts. If no or few analysts commence coverage of
us, the trading price of our stock may not increase. Even if we do
obtain analyst coverage, if one or more of the analysts covering
our business downgrade their evaluation of our stock, the price of
our stock could decline. If one or more of these analysts cease to
cover our stock, we could lose visibility in the market for our
stock, which in turn could cause our stock price to decline.
Furthermore, if our operating results fail to meet analysts’
expectations our stock price would likely decline.
Our stock price could be extremely volatile, and, as a result,
stockholders may not be able to resell shares at or above their
purchase price.
In the last 52
weeks, our stock price, as reported by Nasdaq, has ranged from a
low of $3.85 to a high of $8.55. In addition, in recent years, the
stock market in general has been highly volatile. The effects
of the recent global coronavirus (COVID-19) outbreak could
exacerbate this volatility. As a result, the market price and
trading volume of our common stock is likely to be similarly
volatile, and investors in our common stock may experience a
decrease, which could be substantial, in the value of their stock,
including decreases unrelated to our results of operations or
prospects, and could lose part or all of their investment. The
price of our common stock could be subject to wide fluctuations in
response to a number of factors, including those described
elsewhere in this report and others such as:
●
Variations in our operating
performance and the performance of our competitors;
●
Actual or anticipated
fluctuations in our quarterly or annual operating
results;
●
Publication of research
reports by securities analysts about us, our competitors, or our
industry;
●
The public’s reaction
to our press releases, our other public announcements and our
filings with the SEC;
●
Our failure, or the failure
of our competitors, to meet analysts’ projections or guidance
that we or our competitors may give to the market;
●
Additions or departures of
key personnel;
●
Strategic decisions by us
or our competitors, such as acquisitions, divestitures, spin-offs,
joint ventures, strategic investments, or changes in business
strategy;
●
The passage of legislation
or other regulatory developments affecting us or our
industry;
●
Speculation in the press or
investment community;
●
Changes in accounting
principles;
●
Terrorist acts, acts of
war, or periods of widespread civil unrest;
●
Natural disasters or
calamities (including, without limitation, pandemics or other
widespread events);
●
Breach or improper handling
of data or cybersecurity events; and
●
Other factors (including
currently unknown factors) which could result in changes in general
market and economic conditions.
21
In the past,
following periods of volatility in the market price of a
company’s securities, securities class action litigation has
often been brought against that company. Because of the potential
volatility of our stock price, we may become the target of
securities litigation in the future. If we were to become involved
in securities litigation, it could result in substantial costs,
divert management’s attention and resources from our business
and adversely affect our business.
Because we do not currently pay any cash dividends on our common
stock, you may not receive any return on investment unless you sell
your common stock for a price greater than that which you paid for
it.
We may retain
future earnings, if any, for future operations, expansion and debt
repayment and do not currently pay any cash dividends on our common
stock. Any decision to declare and pay dividends in the future will
be made at the discretion of our Board of Directors and will depend
on, among other things, our results of operations, financial
condition, cash requirements, contractual restrictions, and other
factors that our board of directors may deem relevant. In addition,
our ability to pay dividends may be limited by covenants of any
existing and future outstanding indebtedness we or our subsidiaries
incur. As a result, you may not receive any return on an investment
in our common stock unless you sell our common stock for a price
greater than that which you paid for it.
We are a “smaller reporting company” as defined in the
Securities Act, and the reduced disclosure requirements applicable
to smaller reporting companies may make our common stock less
attractive to investors.
We are
a “smaller reporting company” as defined in
Section 229.10(f)(1) of the
Securities Act, as amended, and we may take advantage of certain
exemptions from various reporting requirements that are applicable
to other public companies that are not smaller reporting companies
including, among other things, reduced financial disclosure
requirements including being permitted to provide only two years of
audited financial statements and reduced disclosure obligations
regarding executive compensation. As a result, our stockholders may
not have access to certain information that they may deem
important. We could remain a smaller reporting company
indefinitely. As a smaller reporting company, investors may deem
our stock less attractive and, as a result, there may be less
active trading of our common stock, and our stock price may be more
volatile.
Item 1B. Unresolved Staff
Comments
None.
Item 2. Description of
Properties
We own our
corporate headquarters, a building of approximately 15,000 square
feet, in Goose Creek, South Carolina. This building serves as our
base of operations for nearly all of the employees who provide
franchisee support functions. We lease approximately 3,220 square
feet of office space in our headquarters to an unaffiliated company
and 1,640 square feet of office space to another unaffiliated
company. Both leases are at market rates.
We also own two
parcels of land immediately adjacent to our headquarters. We are
developing these into an additional headquarters building of
approximately 10,000 square feet and a supporting parking lot. We
expect this expansion project to be completed in 2020.
We are unaware
of any material liens or other encumbrances on our real
property.
Item 3. Legal Proceedings
From time to
time we are involved in various legal and administrative
proceedings. Based on information currently available to us, we do
not expect material uninsured losses to arise from any of these
matters. We believe the outcomes of these proceedings, even if
determined adversely, will not have a material adverse effect on
our business, financial condition, results of operations, or
liquidity and capital resources.
22
Item 4. Mine Safety
Disclosure
Not
applicable.
PART II
Item 5. Market for Registrant’s
Common Equity, Related Stockholder Matters, and Issuer Purchases of
Equity Securities
Market Information for our Common Stock
Our common
stock is listed on the Nasdaq Capital Market under the symbol
“HQI.” Prior to September 11, 2019, our common stock
traded under the symbol “CCNI.”
Holders of Our Common Stock
As of March 16,
2020, we had approximately 48 holders of record of our common
stock.
Dividends
We do not
currently pay a dividend on our common stock. The declaration,
amount, and payment of any future dividends on shares of our common
stock will be at the sole discretion of our board of directors,
which may take into account general economic conditions, our
financial condition and results of operations, our available cash
and current and anticipated cash needs, capital requirements,
contractual, legal, tax, and regulatory restrictions (including
restrictions imposed by our credit facility), the implications of
the payment of dividends by us on our stockholders, and any other
factors that our board of directors may deem relevant.
Transfer Agent
and Registrar
Our transfer agent is Continental
Stock Transfer & Trust Company located at 17 Battery Street,
8th Floor,
New York, New York, 10004.
Item 6. Selected Financial Data
As a smaller reporting company we
are not required to supply the information requested in this
section.
Item 7. Management’s Discussion and Analysis of
Financial Conditions and Results of Operations
The following
analysis is intended to help the reader understand our results of
operations and financial condition, and should be read in
conjunction with our consolidated financial statements and the
accompanying notes located in Item 8 of this Form
10-K.
23
Overview
We are a
nationwide franchisor of offices providing on-demand labor
solutions in the light industrial and blue-collar segments of the
staffing industry. We were formed through the merger between Hire
Quest Holdings, LLC (“Hire Quest Holdings”) and Command
Center, Inc. We refer to Hire Quest Holdings and its wholly-owned
subsidiary, Hire Quest, LLC, collectively as Legacy HQ. We refer to
this merger, which closed on July 15, 2019 as the Merger. As of
December 31, 2019 we had 147 franchisee-owned offices in 32 states
and the District of Columbia. We provide employment for an
estimated 67,000 individuals annually working for thousands of
clients in many industries including construction, recycling,
warehousing, logistics, auctioneering, manufacturing, hospitality,
landscaping, and retail.
Recent Developments
We expect the
recent coronavirus pandemic to have a significant impact on our
operations. In March, 2020, infections of the coronavirus
("COVID-19") had become pandemic with persons testing positive in
all fifty states and the District of Columbia. With widespread
infection in the United States and abroad, national, state, and
local authorities have recommended social distancing and
have taken dramatic action including, without
limitation, ordering the workforce to stay home, banning all
non-essential businesses from operating, refusing to issue new
building permits, and invalidating current building permits causing
work to stop. These measures, while intended to protect human life,
are expected to have serious adverse impacts on domestic and
foreign economies of uncertain severity and duration. The
effectiveness of economic stabilization efforts, including proposed
government payments to affected citizens and industries, is
uncertain. Some economists are predicting the United States will
soon enter a recession.
The sweeping nature of the COVID-19
pandemic makes it extremely difficult to predict how our business
operations will be affected in the long term. But the likely
overall impact of the pandemic is viewed as highly negative to the
general economy. Already, the
COVID-19 outbreak has begun to neagitvely impact our operations and
revenue as well as those of our franchisees. We expect the effects
to become more acute in the next few months. It is possible
that a number of our offices may be forced to close. To date, our franchisees have closed or
consolidated a small number of offices at least, in part, due to
the potential financial impacts of COVID-19. Some of our
franchisees may experience economic hardship or even failure. In
general, those franchisees whose businesses are oriented towards
construction, manufacturing, logistics, or waste services have been
less impacted to date than those whose businesses are more focused
on hospitality services. We have
already witnessed a significant drop in the amount of hospitality,
event service, and catering business that our franchisees
do. Our other lines of business may suffer in the future as
well. For example, we may be classified as a non-essential business
in some or all of the jurisdictions that impose a ban on
non-essential businesses. If that were to occur, we may be forced
to temporarily or permanently close offices in those jurisdictions.
Our customers may choose to voluntarily close their
worksites. We may also experience a shortage of temporary
employees as a result of the spread of the
disease.
Any of the above factors, or other
cascading effects of the coronavirus pandemic that are not
currently foreseeable, could materially negatively impact our
revenue, net income, and other results of operations, reduce
system-wide sales, cause office closings or cause us to lose
franchisees, and impact our liquidity position, possibly
significantly. The duration of any such impacts cannot be
predicted.
We underwent
the following significant changes in 2019 which we expect to have a
material impact on our operations: (1) we completed the Merger
between Legacy HQ and Command Center and subsequently
reincorporated in Delaware, (2) in connection with the Merger, we
entered into a new credit facility with Branch Banking & Trust,
(3) we entered into a consulting agreement with Dock Square HQ,
LLC, (4) we converted all of the company-owned offices, acquired
during the Merger, to our franchise model, and (5) we exited the
California market for strategic reasons.
The Merger, the Name Change, and the Reincorporation in
Delaware
On July 15,
2019, Legacy HQ and Command Center completed the
Merger.
Upon closing,
the ownership interests of Hire Quest Holdings were converted into
the right to receive a number of shares amounting to 68% of the
total shares of the Company’s common stock outstanding
immediately after the closing. Legacy HQ members also appointed
four new directors to the Board effective July 15, 2019 to fill the
board seats vacated by four legacy Command Center
directors.
On September
11, 2019, Command Center changed its name to HireQuest, Inc. We
reincorporated in Delaware, consolidated our corporate headquarters
in Goose Creek, South Carolina, and adopted new bylaws. In
connection with the name change, we started trading as
“HQI” on the Nasdaq Capital Market.
The New Credit Facility
On July 11,
2019, in connection with the Merger, we, along with our
subsidiaries, entered into a loan agreement with Branch Banking and
Trust Company, now Truist Bank (”BB&T”), for a $30
million line of credit with a $15 million sublimit for letters of
credit. Interest will accrue on the outstanding balance of the line
of credit at a variable rate equal to One Month LIBOR plus a margin
between 1.25% and 1.75% that is determined based on the
Company’s collateral value plus unrestricted cash reduced by
the outstanding balance of the line of credit. This amount is
referred to as the Net Lendable Collateral. A non-use fee of
between 0.125% and 0.250%, also determined by the Net Lendable
Collateral, will accrue on the unused portion of the line of
credit. The available balance under the line of credit is reduced
by outstanding letters of credit. The line of credit is scheduled
to mature on May 31, 2024.
The loan
agreement and other loan documents contain customary events of
default and negative covenants, including but not limited to, terms
governing indebtedness, liens, fundamental changes, transactions
with affiliates, and sales of assets. The loan agreement also
requires us to comply with a fixed charge coverage ratio of at
least 1.10:1.00. This covenant will be tested quarterly on a
rolling four quarter basis commencing with the four quarter period
ending September 30, 2020. The obligations under the loan agreement
and other loan documents are secured by substantially all of the
operating assets of the Company and our subsidiaries as collateral.
The Company’s obligations under the line of credit are
subject to acceleration upon the occurrence of an event of default
as defined in the loan agreement.
Command
Center’s prior credit facility with Wells Fargo was paid off
and terminated in connection with the transaction described
above.
The Dock
Square Consulting Agreement
Dock Square HQ,
LLC (“Dock Square”), an affiliate of Dock Square
Capital, LLC, was a strategic partner of, and 6.5% investor in,
Hire Quest, LLC, then a 93.5% subsidiary of Hire Quest Holdings.
Prior to the effective time of the Merger, (a) Dock Square
distributed to its direct or indirect members all of its rights,
title and interest in and to its membership interest in Hire Quest,
LLC, and (b) each such member contributed to Hire Quest Holdings
all of its respective rights, title and interest in and to its
membership interest in Hire Quest, LLC as a capital contribution in
exchange for, in the aggregate, a 6.5% membership interest in Hire
Quest Holdings. Immediately after such reorganization and
prior to the closing of the Merger, Hire Quest Holdings owned 100%
of the membership interests in Hire Quest, LLC.
24
As contemplated
by the Merger Agreement, on July 15, 2019, the Company entered into
a consulting arrangement with Dock Square. Pursuant to this
consulting arrangement, Dock Square introduces prospective
customers and expands relationships with existing customers of
the Company in return for which it is eligible to receive
unregistered shares of the Company’s common stock, subject to
certain performance metrics and vesting terms. The grant of any
such shares by the Company would be based on the Company’s
gross revenue generated from the services of Dock Square as
measured over a 12 month period. Upon the grant of any such shares,
50% of such granted shares would vest immediately, and the
remaining 50% of such granted shares would be subject to a vesting
requirement linked to the Company’s gross revenue generated
from the services of Dock Square measured over a 3 year period. We
refer to any such shares as the “Performance Shares.”
We anticipate the maximum aggregate number of Performance Shares
issuable under the consulting arrangement would not exceed
approximately 1.6 million shares. Any Performance Shares would be
in addition to the pro rata portion of the shares of Company common
stock that Dock Square’s members received as merger
consideration at the closing of the Merger along with the other
investors in Hire Quest Holdings. Dock Square would receive
any declared and paid dividends on issued Performance Shares,
including the unvested portion of such shares during the 3-year
vesting measurement period, and the issued but unvested Performance
Shares would vest on a change of control of the Company. In
addition, Dock Square received piggy-back registration rights with
respect to its Performance Shares issued and vested at the time of
such registration. As of December 31, 2019, no Performance Shares
have been granted under this agreement as the required metrics have
not been met.
Franchise Model Conversion
On July 15,
2019, we sold the operating assets of the offices in Conway and
North Little Rock, AR; Flagstaff, Mesa, North Phoenix, Phoenix,
Tempe, Tucson, and Yuma, AZ; Aurora and Thornton, CO; Atlanta, GA;
College Park and Speedway, IN; Shreveport, LA; Baltimore and
Landover, MD; Oklahoma City and Tulsa, OK; Chattanooga, Madison,
Memphis, and Nashville, TN; Amarillo, Austin, Houston, Irving,
Lubbock, Odessa, and San Antonio, TX; and Roanoke, VA to existing
franchisees of Legacy HQ (including the Worlds Franchisees
described below) and new franchisees. On September 29, 2019, we
sold the operating assets of the offices in Coeur D’Alene,
ID; Griffith, IN; Bloomington, Brooklyn Park, Cambridge, Hopkins,
St. Paul, and Wilmar, MN; Bismarck, Dickinson, Fargo, Grand Forks,
Minot, Watford City, and Williston, ND; Bellevue and Omaha, NE;
Hillsboro, OR; Sioux Falls, SD; and Bellingham, Everett, Kent, Mt.
Vernon, Seattle, Spokane, Tacoma, and Vancouver, WA to a new
franchisee. The purchasers of these assets, or their related
entities, executed franchise agreements with us and became
franchisees.
The aggregate
sale price for the operating assets of the offices sold on July 15
and September 29, 2019 consisted of approximately (i) $12.1 million
paid in the form of promissory notes accruing interest at an annual
rate of 6% plus (ii) the right to receive 2% of annual sales in
excess of $3.2 million in the aggregate for the franchise territory
containing Phoenix, AZ for 10 years, up to a total aggregate amount
of $2.0 million. Approximately $2.2 million of the notes receivable
were sold to Hire Quest Financial, LLC, a related party, in
exchange for accounts receivable of an equal value. In addition, we
received $3.0 million in cash as prepayment on the notes issued on
September 29, 2019. In accordance with an agreement with the buyer,
an unrelated franchisee, this cash payment also triggered a
discount in the purchase price equal to 10% of the cash payment, or
$300,000.
We have
recognized the operations of company-owned offices within
discontinued operations. Any additional expenses incurred related
to previously company-owned offices will continue to be recognized
as part of discontinued operations in future periods. This
conversion of company-owned offices to franchises will likely have
a material impact on the presentation of our results of operations
in the future with revenue from franchise royalty fees and service
revenue increasing and income from discontinued operations, net of
tax decreasing to zero by the end of the first quarter of
2020.
Exiting the California Market
On September
27, 2019, we closed on the sale of substantially all of the
operating and intangible assets of our four offices in Corona,
Hayward, Sacramento, and Fresno, California (collectively, the
“California Assets”). We retained the net working
capital of these offices. We sold these operating and intangible
assets outside of the franchise system and do not intend to sell
franchises in California in the near future.
The aggregate sale price
for the California Assets consisted of $1.8 million paid in the
form of a four-year promissory note accruing interest at an annual
rate of 10% issued by the buyer to the Company.
25
In accordance
with ASC 805, Business Combinations, we accounted for the Merger as
a reverse acquisition. As such, Legacy HQ is considered the
accounting acquirer. Accordingly, Legacy HQ's historical financial
statements replace Command Center’s historical financial
statements following the completion of the Merger, and the results
of operations of both companies are included in our financial
statements for all periods beginning July 15, 2019.
Results of Operations
The following
table displays our consolidated statements of operations for the
years ended December 31, 2019 and December 31, 2018 (in thousands,
except percentages):
|
|
Year
ended
|
|||
|
|
December 31,
2019
|
December 31,
2018
|
||
|
Franchise
royalties
|
$14,674
|
92.4%
|
$11,287
|
91.5%
|
|
Service
revenue
|
1,202
|
7.6%
|
1,043
|
8.5%
|
|
Total
revenue
|
15,876
|
100.0%
|
12,330
|
100.0%
|
|
Selling,
general and administrative expenses
|
12,692
|
80.0%
|
5,325
|
43.1%
|
|
Depreciation and
amortization
|
400
|
2.5%
|
93
|
0.8%
|
|
Income from
operations
|
2,784
|
17.5%
|
6,912
|
56.1%
|
|
Other
miscellaneous income
|
751
|
4.7%
|
190
|
1.4%
|
|
Interest
and other financing expense
|
(560)
|
(3.5%)
|
(20)
|
(0.1%)
|
|
Net income before income
taxes
|
2,976
|
18.7%
|
7,082
|
57.4%
|
|
Provision for income
taxes
|
3,481
|
21.9%
|
21
|
0.2%
|
|
Income
(loss) from continuing operations
|
(505)
|
(3.2%)
|
7,061
|
57.2%
|
|
Income from discontinued
operations, net of tax
|
215
|
1.4%
|
56
|
0.4%
|
|
Net income
(loss)
|
$(290)
|
(1.8%)
|
$7,117
|
57.6%
|
Total Revenue
Our total
revenue consists of franchise royalties and service
revenue.
Total revenue
for the year ended December 31, 2019 was approximately $15.9
million compared to $12.3 million for 2018, an increase
of 28.8%. This increase was largely driven by organic growth among
offices not acquired through the Merger which amounted to 58% of
the total increase. Total revenue growth directly attributable to
the offices acquired during the Merger, which closed in July, and
their subsequent conversion to franchises, amounted to 42% of the
increase.
Because we significantly increased the
number of franchised offices, we increased both our royalty revenue
and our service revenue.
Sales at
company-owned offices are not reflected in revenue, but are
reflected net of costs, expenses, and taxes associated with those
sales as “Income from discontinued operations, net of
tax.”
Franchise Royalties
We charge our franchisees a royalty
fee on gross billings to customers on the basis of one of two
models: the HireQuest Direct model, and the HireQuest model. Under
the HireQuest Direct model, the royalty fee charged ranges from 6%
of gross billings to 8% of gross billings. Royalty fees are charged
at 8% for the first $1,000,000 of billing with the royalty fee
dropping ½ of 1% for every $1,000,000 of billing thereafter
until the royalty fee is 6% once gross billings reach $4,000,000
annually. The smaller royalty fee is charged only on the
incremental dollars resulting in an actual royalty fee at a blended
rate of between 6% and 8%. We grant our franchisees credits for low
margin business. For the HireQuest business line, our royalty fee
is 4.5% of the temporary payroll we fund plus 18% of the gross
margin for the territory.
26
Our
franchise royalties increased approximately $3.4 million, or 30.0%,
from $11.3 million in 2018 to $14.7 million in 2019. Of this
increase, 57% was due to growth unrelated to the Merger and 43%
arose from the offices we acquired through the Merger.
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. As accounts receivable age over 42 days, our
franchisees pay us interest on these accounts equal to 0.5% of the
amount of the uncollected receivable each 14 day period. Accounts
that age over 84 days are charged back to the franchisee and are
not charged interest.
Service
revenue for the year ended December 31, 2019 increased
approximately $160,000, or 15.4%, from approximately $1 million in
2018 to approximately $1.2 million in 2019. 72% of this additional
revenue arose from organic growth. The offices we added through the
Merger accounted for 28% of the increase.
Selling, General, and Administrative Expenses
(“SG&A”)
SG&A increased by approximately $7.4 million,
or 138.4%, in 2019 to $12.7 million from $5.3 million in 2018.
Nearly 70% of this increase was due to Merger-related
expenses. The significant Merger-related expenses include
professional fees of approximately $1.8 million for investment
bankers, attorneys, and other professionals, $1.9 million of
non-recurring compensation including severance payments and
accelerated vesting of stock, $835,000 for reorganizational and
rebranding expenses, and $566,000 in other non-recurring expenses
mostly related to Command Center’s headquarters lease, which
we terminated in December 2019 and associated costs. SG&A
expenses unrelated to the Merger include a $758,000 increase in
stock based compensation and $370,000 in increased legal and
professional fees related to the operation of a public
company.
Provision for income tax
Provision for
income taxes for the year ended December 31, 2019 was approximately
$3.5 million. The difference was primarily due to a one-time,
Merger related charge of approximately $4.0 million. Prior to the
Merger, Legacy HQ had a significant amount of uncollected accounts
receivable. As a cash-basis taxpayer, Legacy HQ did not owe taxes
on those uncollected accounts. When Legacy HQ merged into and
became a part of a public company, it was required to switch to the
accrual basis of accounting and changed its tax status from a
partnership to a corporation. Accordingly, we recognized a
provision for the taxes which would become due related to these
changes.
Income from discontinued operations, net of tax
Income from
discontinued operations, net of tax, was $215,000 for the year
ended December 31, 2019 compared with $56,000 for the year ended
December 31, 2018. The increase was due to our owning certain
offices from the date of the Merger through the date they were sold
to franchisees or, in the case of California offices, to an
independent third party.
Liquidity and Capital Resources
Our major
source of liquidity and capital is cash generated from our ongoing
operations consisting of (a) royalty revenue and (b) service
revenue, including interest charged on overdue accounts receivable
and other fees for optional services. We also receive interest on
notes receivable that we issued in connection with the conversion
of company-owned offices to franchised offices. In addition, we
have the capacity to borrow under our line of credit with
BB&T.
At December 31,
2019, our current assets exceeded our current liabilities by
approximately $26.0 million. Our current assets included
approximately $4.2 million of cash and $28.2 million of accounts
receivable, which our franchisees have billed to customers and
which we own in accordance with our franchise agreements. Our
largest current liabilities include approximately $3.6 million due
to our franchisees, $2.3 million related to our workers’
compensation claims liability, and $1.8 million due in relation to
our risk management incentive program.
27
Our working capital requirements are
driven largely by temporary employee payroll and accounts
receivable from customers. Since receipts lag behind employee pay
– which is typically daily or weekly – our working
capital requirements increase as system-wide sales
increase.
We
believe that our future cash generated from operations, together
with interest income from outstanding notes receivable and our
capacity under our existing line of credit with BB&T, will
provide adequate resources to meet our working capital needs and
cash requirements for at least the next 12 months. For a discussion
of our credit facility with BB&T, and the related loan
agreements, please refer to “Recent Developments –
The New Credit Facility”
in this Item 7, which disclosure is incorporated herein by
reference. 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. The
impact of the COVID-19 crisis on availability of capital or credit
is difficult to predict and may be
significant.
Operating Activities
Net cash used
in operating activities from continuing operations was
approximately $5.0 million for the year ended December 31, 2019.
Operating activity for the year included significant Merger-related
SG&A expenses which contributed to a net loss from continuing
operations of approximately $505,000. Other uses of cash included
an increase in accounts receivable of approximately $7.5 million
and a decrease in accrued benefits and payroll taxes of
approximately $1.4 million. These uses were offset by an increase
in our workers’ compensation claims liability of
approximately $2.0 million, a decrease in prepaid expense and other
current assets of approximately $1.6 million, and an increase in
the amount due to our franchisees of approximately $1.2 million.
Net cash provided by operating activities was approximately $5.1
for the year ended December 31, 2018 and included net income of
approximately $7.1 million. This was offset by a decrease in the
amount due to our franchisees of approximately $1.5
million.
Investing Activities
Net cash
provided by investing activities was approximately $9.8 million for
the year ended December 31, 2019. This was largely due to the cash
acquired in the Merger of approximately $5.4 million and payments
on notes receivable of approximately $3.6 million. These provisions
were offset by the purchase of property and equipment of
approximately $507,000. Net cash provided by investing activities
was approximately $154,000 for the year ended December 31, 2018.
This was largely related to the sale of property and
equipment.
Financing Activities
Net cash used
by financing activities was approximately $11.9 million for the
year ended December 31, 2019. This use was largely due to the
purchase of stock of approximately $8.4 million pursuant to the
tender offer made by the Company in conjunction with the Merger and
payments to affiliates of approximately $5.5 million. This use
was offset by net contribution of Legacy HQ members of
approximately $1.2 million. Net cash used by financing activities
was approximately $4.2 million for the year ended December 31,
2018. This was largely related to distributions to Legacy HQ
members of approximately $7.0 million. This use was offset by an
increase in the amount due to affiliates of approximately $2.8
million.
System-Wide Sales
We sometimes
refer to total sales generated by our franchisees as
“franchise sales.” We also sometimes refer to offices
that we owned and operated for a period prior to their sale to
franchisees, the last of which closed on September 29, 2019 as
“company-owned offices.” Sales at company-owned offices
are reflected net of costs, expenses, and taxes associated with
those sales on our financial statements as “income from
discontinued operations, net of tax.” We refer to the sum of
franchise sales and sales at company-owned offices as
“system-wide sales.” System-wide sales include sales at
all offices, whether owned and operated by us or by our
franchisees. System-wide sales is a non-GAAP measure. While we do
not record franchise sales as revenue, management believes that
information on system-wide sales is important to understanding the
Company’s financial performance because those sales are the
basis on which we calculate and record franchise royalty revenue,
are directly related to interest charged on overdue accounts, which
we record under service revenue, and are indicative of the
financial health of the franchisee base. System-wide sales are not
intended to represent revenue as defined by generally accepted
accounting principles in the United States ("U.S. GAAP"), and such
information should not be considered as an aternative to revenue or
any other measure of performance prescribed by U.S.
GAAP.
The following
table reflects our system-wide sales broken into its components for
the years ended December 31, 2019 and 2018:
|
|
December
31, 2019
|
December
31, 2018
|
|
Franchise
sales
|
$227,691,668
|
$189,293,776
|
|
Company-owned
sales
|
13,932,769
|
722,849
|
|
System-wide
sales
|
$241,624,437
|
$190,016,625
|
System-wide sales were
$241.6 million in 2019, up $51.6 million or 27.2%. The increase in
system-wide sales arose largely from organic growth and from the
offices added in July 2019 via the Merger, which were subsequently
sold as franchisees.
28
Number of Offices
We examine the
number of offices we open and close every year. The number of
offices is directly tied to the amount of royalty and service
revenue we earn. On a net basis, we added 50 offices in 2019 by
opening or acquiring 60 and closing 10 offices. Acquired offices
are presented below after subtracting acquired offices which were
consolidated into existing offices. The vast majority of the
additions arose from the Merger. In 2018, we added 18 offices on a
net basis by opening 21 and closing 3.
The following
table accounts for the number of offices opened and closed in 2018
and 2019.
|
Franchised offices,
December 31, 2017
|
79
|
|
Closed in 2018
|
(3)
|
|
Opened in 2018
|
21
|
|
Franchised offices,
December 31, 2018
|
97
|
|
Closed in 2019
|
(10)
|
|
Acquired in
2019
|
52
|
|
Opened in 2019
|
8
|
|
Franchised offices,
December 31, 2019
|
147
|
Seasonality
Our
revenue fluctuates quarterly and is generally higher in the second
and third quarters of our year. Some of the industries
in which we operate are subject to seasonal fluctuation. Many of
the jobs filled by employees are outdoor jobs that are generally
performed during the warmer months of the year. As a result, in an
average year, activity increases in the spring and continues at
higher levels through summer, then begins to taper off during fall
and through winter.
Off-Balance Sheet Arrangements
The Company does not engage in any off-balance sheet financing
arrangements.
Critical Accounting Policies
Management’s
discussion and analysis of financial condition and results of
operations are based upon our financial statements, which have been
prepared in accordance with GAAP. The preparation of these
financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenue and expenses and the related disclosure of contingent
assets and liabilities. Management bases its estimates and
judgments on historical experience and on various other factors
that it believes to be reasonable under the circumstances, the
results of which form the basis for making judgments about the
carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Management
believes that the following accounting policies are the most
critical to aid in fully understanding and evaluating our reported
financial results, and they require management’s most
difficult, subjective, or complex judgments, resulting from the
need to make estimates about the effect of matters that are
inherently uncertain.
Consolidation
The
consolidated financial statements include the accounts of HQI
and all of its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated.
GAAP requires
the primary beneficiary of a variable interest entity (a
“VIE”), to consolidate that entity. To be the primary
beneficiary of a VIE, an entity must have both the power to direct
the activities that most significantly impact the VIE’s
economic performance, and the obligation to absorb losses or the
right to receive benefits from the VIE that are significant to it.
We provide acquisition financing to some of our franchises that
results in some of them being considered a VIE. We have reviewed
these franchises and determined that we are not the primary
beneficiary of any of these entities, and accordingly, these
entities have not been consolidated.
29
We account for
business acquisitions under the acquisition method of accounting by
recognizing identifiable tangible and intangible assets acquired,
liabilities assumed, and non-controlling interests in the acquired
business at their fair values. The purchase price exceeding the
fair value of the identifiable tangible and intangible assets
acquired and liabilities assumed is recorded as goodwill. We
expense acquisition related costs as we incur them.
Revision
During the
fourth quarter of 2019, we identified a misstatement in the amount
presented in our due to franchisee liability reported in prior
years. The misstatement resulted from an accumulation of errors
related to transferring items from the franchisee settlement
statements to the Company’s general ledger. We determined
these errors accumulated prior to 2018. The accumulated error would
have been material to the financial statements as of December 31,
2019 if we applied it in its entirety to them.
Pursuant to the
guidance of Staff Accounting Bulletin No. 99, Materiality, we
concluded that the errors were not material to any of our prior
year consolidated financial statements. The accompanying
consolidated balance sheet as of December 31, 2018 includes a
cumulative revision relating to this misstatement.
This revision
did not have any material effect on income from operations, net
income, or cash flows, nor did it affect our past compliance with
debt covenants. This misstatement had no effect on our cash
balances.
The following
table compares previously reported balances, adjustments, and
revised balances as of December 31, 2018.
|
Balance sheet changes
|
Previously
reported
2018
|
Adjustment
|
Revised 2018
|
|
Due to
franchisee
|
$620,385
|
$1,810,063
|
$2,430,448
|
|
Retained
earnings
|
5,783,996
|
(1,810,063)
|
3,973,933
|
Accounts receivable and allowance for doubtful
accounts
Accounts
receivable consist of amounts due for labor services from customers
of franchises and of previously company-owned offices. At December
31, 2019, substantially all of our accounts receivable were due
from franchises. At December 31, 2018, approximately 99% and 1% of
our accounts receivable were due from franchises and previously
company-owned offices, respectively.
Through our
franchise agreements, we own the accounts receivable from labor
services provided by our franchises. Accounts receivable that age
beyond 84 days are charged back to our franchises. Accordingly, we
do not record an allowance for doubtful accounts on these accounts
receivable.
For labor
services provided by previously company-owned offices, we record
accounts receivable at face value less an allowance for doubtful
accounts. We determine the allowance for doubtful accounts
based on historical write-off experience, the age of the
receivable, other qualitative factors and extenuating
circumstances, and current economic data which represents our best
estimate of the amount of probable losses on these accounts
receivable, if any. We review the allowance for doubtful accounts
periodically and write off past due balances when it is probable
that the receivable will not be collected. Our allowance for
doubtful accounts on accounts receivable generated by company-owned
offices was approximately $168,000 and $-0- at December 31, 2019
and December 31, 2018, respectively.
Revenue Recognition
Our
primary source of revenue comes from royalty fees based on the
operation of our franchised offices. Royalty fees from our
HireQuest Direct business line are based on a percentage of sales
for services our franchisees provide to customers and usually range
from 5% to 8%. Royalty fees from our HireQuest business line are
4.5% of the payroll we fund plus 18% of the gross margin for the
territory. Revenue is presented on a net basis as agent as opposed
to a gross basis as principal, and recognized when we satisfy our
performance obligations. Our performance obligations take the form
of a franchise license and promised services. Promised services
consist primarily of paying temporary employees, completing all
payroll related statutory obligations, and providing workers'
compensation insurance. Because these
performance obligations are interrelated, we do not consider them
to be individually distinct and account for them as a single
performance obligation. Because
our franchisees receive and consume the benefits of our services
simultaneously, our performance obligations are satisfied when our
services are provided. Franchise royalties are billed on a weekly
basis. We also offer various incentive programs for franchisees
including royalty incentives and other support initiatives. Royalty
fees are reduced to reflect any royalty incentives earned or
granted under these programs. Additionally, we provide
franchise royalty credits and incentives. These credits and
incentives are provided to drive new location development, organic
growth, and to limit workers' compensation exposure. Franchise
royalty fees are presented net of these credits and incentives.
Service revenue
consists of interest we charge our franchisees on overdue customer
accounts receivable and other miscellaneous fees for optional
services we provide. Interest income is recognized based on the
effective interest rate applied to the outstanding principal
balance. Revenue for optional
services is recognized as services are provided.
30
Workers’ compensation claims liability
We maintain
reserves for workers’ compensation claims based on their
estimated future cost. These reserves include claims that have been
reported but not settled, as well as claims that have been incurred
but not reported. Annually, we use third party actuarial estimates
of the future costs of these claims discounted by a 3% present
value interest rate to estimate the amount of our reserves.
Quarterly, we use development factors provided by a third-party
actuary to estimate the amount of our reserves. We make adjustments
as necessary. If the actual cost of the claims exceeds the amount
estimated, additional reserves may be required.
Workers’ compensation Risk Management Incentive
Program
We pay our
qualifying franchisees an amount equal to a percentage of the
premium they pay for workers’ compensation insurance if they
keep their workers' compensation loss ratios below specific
thresholds. This program, which we refer to as the Risk Management
Incentive Program, incentivizes our franchisees to keep our
temporary employees safe and to control their exposure to large
workers' compensation claims.
Notes Receivable
Notes
receivable
consist primarily of amounts due to us related to the financing of
franchised locations. We report notes receivable
at the principal balance outstanding less an allowance for
losses.
We charge interest at a fixed rate and interest income is
calculated by applying the effective rate to the outstanding
principal balance. Notes receivable are generally secured by the
assets of each location and the ownership interests in the
franchise. We monitor the financial condition of our franchisees
and record provisions for estimated losses when we believe it is
probable that our franchisees will be unable to make their required
payments. Our
allowance for losses on notes receivable was $-0- at December 31,
2019 and December 31, 2018.
Fair Value Measures
Fair value is
the price that would be received to sell an asset, or paid to
transfer a liability, in the principal or most advantageous market
for the asset or liability in an ordinary transaction between
market participants on the measurement date. Our policy on fair
value measures requires us to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value. The policy establishes a fair value hierarchy based on the
level of independent, objective evidence surrounding the inputs
used to measure fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement. The policy prioritizes the inputs into three levels
that may be used to measure fair value:
Level 1:
Applies to assets or liabilities for which there are quoted prices
in active markets for identical assets or liabilities.
Level 2:
Applies to assets or liabilities for which there are inputs other
than quoted prices that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active
markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less
active markets); or model-derived valuations in which significant
inputs are observable or can be derived principally from, or
corroborated by, observable market data.
Level 3:
Applies to assets or liabilities for which there are unobservable
inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or
liabilities.
Discontinued Operations
During the
quarter ended September 29, 2019, we sold substantially all of the
offices acquired in the Merger. Accordingly, the assets and
liabilities, operating results, and cash flows for these businesses
are presented as discontinued operations, separate from our
continuing operations, for all periods presented in our
consolidated financial statements and footnotes, unless
indicated otherwise.
Item 7A. Quantitative and Qualitative
Disclosures about Market Risk
As a smaller reporting company we
are not required to supply the information requested in this
section.
31
Item 8. Financial Statements and
Supplementary Data
Report of Independent Registered Public Accounting
Firm
To the
Stockholders and Board of Directors of HireQuest, Inc.
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of HireQuest,
Inc. (the “Company”) as of December 31, 2019 and 2018,
the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years ended December 31,
2019 and 2018, and the related notes collectively referred to as
the “financial statements”. In our opinion, the
financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of
December 31, 2019 and 2018, and the results of its operations and
its cash flows for each of the years ended December 31, 2019 and
2018, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
The
Company's management is responsible for these financial statements.
Our responsibility is to express an opinion on the Company’s
financial statements based on our audits. We are a public
accounting firm registered with the Public Company Accounting
Oversight Board (United States) (“PCAOB”) and are
required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits we are required to obtain an understanding of
internal control over financial reporting but not for the purpose
of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly, we express
no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
Revision of 2018 Financial
Statements
We have served as
the Company’s auditor since 2017.
/s/ Plante
Moran
Denver,
Colorado
March
30, 2020
32
HireQuest,
Inc.
Consolidated
Balance Sheets
|
|
December 31,
2019
|
December 31,
2018
|
|
ASSETS
|
|
(revised)
|
|
Current assets
|
|
|
|
Cash
|
$4,187,450
|
$1,291,317
|
|
Accounts
receivable
|
28,201,279
|
20,725,170
|
|
Notes
receivable
|
3,419,458
|
-
|
|
Prepaid expenses,
deposits, and other assets
|
188,560
|
-
|
|
Prepaid workers'
compensation
|
822,938
|
-
|
|
Due from
affiliates
|
-
|
209,685
|
|
Other
assets
|
201,440
|
-
|
|
Total current
assets
|
37,021,125
|
22,226,172
|
|
Property and equipment,
net
|
1,900,686
|
2,045,881
|
|
Notes receivable, net
of current portion
|
7,990,251
|
85,500
|
|
Deposits and other
assets
|
-
|
8,334
|
|
Total
assets
|
$46,912,062
|
$24,365,887
|
|
LIABILITIES AND STOCKHOLDERS'
EQUITY
|
|
|
|
Current
liabilities
|
|
|
|
Accounts
payable
|
$253,845
|
$53,435
|
|
Other current
liabilities
|
1,893,846
|
95,223
|
|
Accrued benefits and
payroll taxes
|
1,113,904
|
504,035
|
|
Due to
affiliates
|
-
|
7,740,083
|
|
Due to
franchisees
|
3,610,596
|
2,430,448
|
|
Risk management
incentive program liability
|
1,811,917
|
1,852,328
|
|
Workers' compensation
claims liability
|
2,327,869
|
-
|
|
Total current
liabilities
|
11,011,977
|
12,675,552
|
|
Workers' compensation
claims liability, net of current portion
|
1,516,633
|
-
|
|
Franchisee
deposits
|
1,412,924
|
767,509
|
|
Deferred tax
liability
|
1,688,446
|
-
|
|
Total
liabilities
|
15,629,980
|
13,443,061
|
|
Commitments and
contingencies (Note 11)
|
|
|
|
Stockholders'
equity
|
|
|
|
Preferred stock -
$0.001 par value, 416,666 shares authorized; none
issued
|
-
|
-
|
|
Common stock - $0.001
par value, 30,000,000 shares authorized; 13,518,036 and 9,939,668
shares issued and outstanding, respectively
|
13,518
|
9,940
|
|
Additional paid-in
capital
|
27,584,610
|
6,938,953
|
|
Retained
earnings
|
3,683,954
|
3,973,933
|
|
Total stockholders'
equity
|
31,282,082
|
10,922,826
|
|
Total liabilities and
stockholders' equity
|
$46,912,062
|
$24,365,887
|
See accompanying notes to
consolidated financial statements.
33
HireQuest,
Inc.
Consolidated
Statements of Operations
|
|
Year
ended
|
|
|
|
December
31, 2019
|
December
31, 2018
|
|
Franchise
royalties
|
$14,673,636
|
$11,287,149
|
|
Service
revenue
|
1,202,824
|
1,042,479
|
|
Total revenue
|
15,876,460
|
12,329,628
|
|
Selling, general and
administrative expenses
|
12,692,297
|
5,325,000
|
|
Depreciation and
amortization
|
400,132
|
92,608
|
|
Income from operations
|
2,784,031
|
6,912,020
|
|
Other miscellaneous
income
|
751,077
|
189,796
|
|
Interest and other
financing expense
|
(559,585)
|
(19,697)
|
|
Net income before
income taxes
|
2,975,523
|
7,082,119
|
|
Provision for income taxes
|
3,480,996
|
21,029
|
|
Income (loss) from continuing operations
|
(505,473)
|
7,061,090
|
|
Income from
discontinued operations, net of tax
|
215,494
|
56,097
|
|
Net income
(loss)
|
$(289,979)
|
$7,117,187
|
|
|
|
|
|
Basic
and diluted earnings (loss) per share
|
|
|
|
Continuing
operations
|
$(0.05)
|
$0.71
|
|
Discontinued
operations
|
0.02
|
0.01
|
|
Basic earnings (loss) per
share
|
$(0.03)
|
$0.72
|
|
|
|
|
|
Basic
and diluted weighted average shares outstanding
|
11,588,776
|
9,939,668
|
See accompanying notes to
consolidated financial statements.
34
HireQuest,
Inc.
Consolidated
Statement of Changes in Stockholders’ Equity
|
|
Common stock
|
|
|
|
|
|
|
Shares
|
Par value
|
Additional paid-in
capital
|
Retained
earnings
|
Total stockholders'
equity
|
|
Balance at December 31,
2017 (revised)
|
9,939,668
|
$9,940
|
$6,938,953
|
$3,873,160
|
$10,822,053
|
|
Net
distributions
|
-
|
-
|
-
|
(7,016,414)
|
(7,016,414)
|
|
Net income for the
year
|
-
|
-
|
-
|
7,117,187
|
7,117,187
|
|
Balance at December 31,
2018
|
9,939,668
|
9,940
|
6,938,953
|
3,973,933
|
10,922,826
|
|
Net
contributions
|
-
|
-
|
1,155,907
|
-
|
1,155,907
|
|
Merger with Command Center,
Inc.
|
4,677,487
|
4,677
|
26,937,648
|
-
|
26,942,325
|
|
Stock-based
compensation
|
-
|
-
|
255,162
|
-
|
255,162
|
|
Restricted common stock
granted for services
|
250,000
|
250
|
428,227
|
-
|
428,477
|
|
Common stock issued for
services
|
14,035
|
14
|
74,399
|
-
|
74,413
|
|
Common stock issued for the
exercise of options
|
31,667
|
32
|
161,845
|
-
|
161,877
|
|
Common stock purchased and
retired
|
(1,394,821)
|
(1,395)
|
(8,367,531)
|
-
|
(8,368,926)
|
|
Net loss for the
year
|
-
|
-
|
-
|
(289,979)
|
(289,979)
|
|
Balance at December 31,
2019
|
13,518,036
|
$13,518
|
$27,584,610
|
$3,683,954
|
$31,282,082
|
See accompanying notes to
consolidated financial statements.
35
HireQuest,
Inc.
Consolidated
Statement of Cash Flow
|
|
Year
ended
|
|
|
|
December 31,
2019
|
December 31,
2018
|
|
Cash flows from
operating activities
|
|
|
|
Net income
(loss)
|
$(289,979)
|
$7,117,187
|
|
Income from
discontinued operations
|
(215,494)
|
-
|
|
Net income
(loss) from continuing operations
|
(505,473)
|
7,117,187
|
|
Adjustments
to reconcile net income to net cash used in
operations:
|
|
|
|
Depreciation and
amortization
|
400,132
|
92,608
|
|
Stock based
compensation
|
758,053
|
-
|
|
Deferred
taxes
|
(1,242,501)
|
-
|
|
Gain on
disposition of property and equipment
|
(174,626)
|
(34,912)
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(7,476,109)
|
(730,879)
|
|
Prepaid
expenses, deposits, and other assets
|
1,588,118
|
1,385
|
|
Prepaid
workers' compensation
|
(334,177)
|
-
|
|
Due from
affiliates
|
218,018
|
540,117
|
|
Accounts
payable
|
200,411
|
9,031
|
|
Risk
management incentive program liability
|
(40,411)
|
-
|
|
Other
current liabilities
|
(203,153)
|
-
|
|
Accrued
benefits and payroll taxes
|
(1,402,184)
|
(453,510)
|
|
Due to
franchisees
|
1,180,148
|
(1,466,868)
|
|
Workers'
compensation claims liability
|
2,004,591
|
-
|
|
Net cash
(used in) provided by operating activities - continuing
operations
|
(5,029,163)
|
5,074,159
|
|
Net cash
provided by operating activities - discontinued
operations
|
9,986,976
|
-
|
|
Net cash
provided by operating activities
|
4,957,813
|
5,074,159
|
|
Cash flows from
investing activities
|
|
|
|
Purchase of
property and equipment
|
(507,602)
|
(411,309)
|
|
Proceeds
from the sale of property and equipment
|
735,537
|
560,277
|
|
Proceeds
from payments on notes receivable
|
3,563,011
|
-
|
|
Cash
acquired in acquisition
|
5,376,543
|
|
|
Cash issued
for notes receivable
|
-
|
(85,500)
|
|
Net change
in in franchisee deposits
|
645,416
|
90,356
|
|
Net cash
provided by investing activities
|
9,812,905
|
153,824
|
|
Cash flows from
financing activities
|
|
|
|
Payments on
line of credit
|
712,354
|
-
|
|
Payments to
affiliates
|
(5,535,797)
|
-
|
|
Proceeds from affiliates
|
-
|
2,803,828
|
|
Purchase of
treasury stock
|
(8,368,926)
|
-
|
|
Net
contributions (distributions) by HQ, LLC members
|
1,155,907
|
(7,016,414)
|
|
Proceeds
from the conversion of stock options
|
161,877
|
-
|
|
Net cash
used in financing activities
|
(11,874,585)
|
(4,212,586)
|
|
Net increase in
cash
|
2,896,133
|
1,015,397
|
|
Cash, beginning
of period
|
1,291,317
|
275,920
|
|
Cash, end of
period
|
$4,187,450
|
$1,291,317
|
|
Supplemental
disclosure of non-cash investing and financing
activities
|
|
|
|
Stock
issued for acquisition
|
26,942,325
|
|
|
Notes
received for the sale of branches
|
14,887,220
|
-
|
|
Accounts receivable received for the sale of
branches
|
2,204,286
|
|
|
Supplemental
disclosure of cash flow information
|
|
|
|
Interest
paid
|
559,585
|
-
|
|
Income
taxes paid
|
1,819,344
|
-
|
See accompanying notes to
consolidated financial statements.
36
HireQuest,
Inc.
Notes to
Consolidated Financial Statements
Note 1 – Overview and Summary of Significant Accounting
Policies
Nature of Business
HireQuest, Inc.
(“HQI,” the “Company,” “we,”
us,” or “our”) is a nationwide franchisor of
offices providing on-demand labor solutions in the light industrial
and blue-collar segments of the staffing industry. We provide
various types of temporary personnel through two business models
operating under the trade names “HireQuest Direct,”
previously known as “Trojan Labor,” and
“HireQuest,” previously known as “Acrux
Staffing.” HireQuest Direct specializes primarily in
unskilled and semi-skilled industrial and construction personnel.
HireQuest specializes primarily in skilled and semi-skilled
industrial personnel as well as clerical and administrative
personnel.
As of December
31, 2019 we had 147 franchisee-owned offices in 32 states and the
District of Columbia. We are the employer of record to
approximately 67,000 employees annually, who in turn provide
services for thousands of clients in various industries including
construction, recycling, warehousing, logistics, auctioneering,
manufacturing, hospitality, landscaping, and retail. We provide
staffing, marketing, funding, software, and administrative services
to our franchisees. On September 29, 2019, we finalized the
conversion of the last of our company-owned offices to
franchise-owned offices. Between July 15, 2019 and that date, we
also owned and operated offices.
HQI is
the product of a merger between Command Center, Inc.
(“Command Center”), and Hire Quest Holdings, LLC,
(“Hire Quest Holdings”). We refer to Hire Quest
Holdings collectively with its wholly-owned subsidiary, Hire Quest,
LLC, as “Legacy HQ.” We refer to this merger, which
closed on July 15, 2019, as the “Merger.” Upon the
closing of the Merger, all of the ownership interests in Legacy HQ
were converted into the right to receive an aggregate number of
shares representing 68% of the total shares of the Company’s
common stock outstanding immediately after the Merger. Because
the Legacy HQ security holders received a majority of the equity
securities and voting rights of the combined company upon the
closing of the Merger, Legacy HQ is considered to be the accounting
acquirer. This means that Legacy HQ will allocate the purchase
price to the fair value of Command Center’s assets acquired
and liabilities assumed on the acquisition date. This also means
that Legacy HQ’s historical financial statements replace
Command Center’s historical financial statements following
the completion of the Merger, and the results of operations of both
companies will be included in our financial statements for all
periods subsequent to the Merger. For additional information
related to the Merger, see Note 2 –
Acquisitions.
Basis of Presentation
We have
prepared the accompanying consolidated financial statements in
accordance with accounting principles generally accepted in the
United States of America (“GAAP”). In the opinion of
management, the accompanying consolidated financial statements
reflect all adjustments of a normal recurring nature that are
necessary for a fair presentation of the results for the periods
presented.
Reporting Period End Date
As of January
1, 2019, we changed our financial reporting period from a calendar
year to a fiscal year. Then, in November of 2019, we changed our
financial reporting period back to a calendar year. Because the
fiscal quarter end dates coincided with the calendar quarter end
dates in the first and second quarter, this change had no effect on
the comparability of these financial statements. In the third
quarter, there was a one-day difference between the fiscal quarter
end date and the calendar quarter end date, which did not have a
material effect on the comparability of that quarter.
Consolidation
The
consolidated financial statements include the accounts of HQI
and all of its wholly-owned subsidiaries. Intercompany balances and
transactions have been eliminated.
GAAP requires
the primary beneficiary of a variable interest entity (a
“VIE”), to consolidate that entity. To be the primary
beneficiary of a VIE, an entity must have both the power to direct
the activities that most significantly impact the VIE’s
economic performance, and the obligation to absorb losses or the
right to receive benefits from the VIE that are significant to it.
We provide acquisition financing to some of our franchisees that
results in some of them being considered a VIE. We have reviewed
these franchisees and determined that we are not the primary
beneficiary of any of these entities, and accordingly, these
entities have not been consolidated.
37
Use of Estimates
The preparation
of financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets,
liabilities, revenue and expenses. Actual results could differ from
those estimates.
Significant
estimates and assumptions underlie our workers’ compensation
claim liabilities, our workers’ compensation Risk Management
Incentive Program, our deferred taxes, and estimated fair value of
assets and liabilities acquired.
Revision
During the
fourth quarter of 2019, we identified a misstatement in the amount
presented in our due to franchisee liability reported in prior
years. The misstatement resulted from an accumulation of errors
related to transferring items from the franchisee settlement
statements to the Company’s general ledger. We determined
these errors accumulated prior to 2018. The accumulated error would
have been material to the financial statements as of December 31,
2019 if we applied it in its entirety to them.
Pursuant to the
guidance of Staff Accounting Bulletin No. 99, Materiality, we
concluded that the errors were not material to any of our prior
year consolidated financial statements. The accompanying
consolidated balance sheet as of December 31, 2018 includes a
cumulative revision relating to this misstatement.
This revision
did not have any material effect on income from operations, net
income, or cash flows, nor did it affect our past compliance with
debt covenants. This misstatement had no effect on our cash
balances.
The following
table compares previously reported balances, adjustments, and
revised balances as of December 31, 2018.
|
Balance sheet
changes
|
Previously
reported
2018
|
Adjustment
|
Revised 2018
|
|
Due to
franchisee
|
$620,385
|
$1,810,063
|
$2,430,448
|
|
Retained
earnings
|
5,783,996
|
(1,810,063)
|
3,973,933
|
Accounts Receivable and Allowance for Doubtful
Accounts
Accounts
receivable consist of amounts due for labor services from customers
of franchises and of previously company-owned offices. At December
31, 2019, substantially all of our accounts receivable were due
from franchises. At December 31, 2018, approximately 99% and 1% of
our accounts receivable were due from franchises and previously
company-owned offices, respectively.
We own the
accounts receivable from labor services provided by our franchises.
Accounts receivable that age beyond 84 days are charged back to our
franchises. Accordingly, we do not record an allowance for doubtful
accounts on these accounts receivable.
For labor
services provided by previously company-owned offices, we record
accounts receivable at face value less an allowance for doubtful
accounts. We determine the allowance for doubtful accounts
based on historical write-off experience, the age of the
receivable, other qualitative factors and extenuating
circumstances, and current economic data which represents our best
estimate of the amount of probable losses on these accounts
receivable, if any. We review the allowance for doubtful accounts
periodically and write off past due balances when it is probable
that the receivable will not be collected. Our allowance for
doubtful accounts on accounts receivable generated by company-owned
offices was approximately $168,000 and $-0- at December 31, 2019
and December 31, 2018, respectively.
Revenue Recognition
Our primary source of revenue comes from royalty
fees based on the operation of our franchised offices. Royalty fees
from our HireQuest Direct business line are based on a percentage
of sales for services our franchisees provide to customers and
usually range from 5% to 8%. Royalty fees from our HireQuest
business line are 4.5% of the payroll we fund plus 18% of the gross
margin for the territory. Revenue is presented on a net basis as
agent as opposed to a gross basis as principal, and recognized when
we satisfy our performance obligations. Our performance obligations
take the form of a franchise license and promised services.
Promised services consist primarily of paying temporary employees,
completing all payroll related statutory obligations, and providing
workers' compensation insurance. Because these
performance obligations are interrelated, we do not consider them
to be individually distinct and therefore account for them as a
single performance obligation. Because our franchisees receive and consume the
benefits of our services simultaneously, our performance
obligations are satisfied when our services are provided. Franchise
royalties are billed on a weekly basis. We also offer various
incentive programs for franchisees including royalty incentives and
other support initiatives. Royalty fees are reduced to reflect any
royalty incentives earned or granted under these programs.
Additionally, we provide franchise royalty credits and incentives.
These credits and incentives are provided to drive new location
development, organic growth, and to limit workers' compensation
exposure. Franchise royalty fees are presented net of these credits
and incentives.
Service revenue
consists of interest we charge our franchisees on overdue customer
accounts receivable and other miscellaneous fees for optional
services we provide. Interest income is recognized based on the
effective interest rate applied to the outstanding principal
balance. Revenue for optional
services is recognized as services are provided.
Below are summaries of our revenue
disaggregated by brand:
|
|
December 31,
2019
|
December 31,
2018
|
|
HireQuest
Direct
|
$13,621,998
|
$10,185,172
|
|
HireQuest
|
1,051,637
|
1,101,977
|
|
Total
|
$14,673,636
|
$11,287,149
|
38
Workers’ Compensation Claims Liability
We maintain
reserves for workers’ compensation claims based on estimated
future cost. These reserves include claims that have been reported
but not settled, as well as claims that been incurred but not
reported. Annually, we use third party actuarial estimates of the
future costs of these claims discounted by a 3% present value
interest rate to estimate the amount of our reserves. Quarterly, we
use development factors provided by a third-party actuary to
estimate the amount of our reserves. Adjustments are made as
necessary. If the actual cost of the claims exceeds the amount
estimated, additional reserves may be required.
Workers’ Compensation Risk Management Incentive
Program
We pay to our
qualifying franchisees an amount equal to a percentage of the
premium they pay for workers’ compensation insurance if they
keep their workers' compensation loss ratios below specific
thresholds. This program, which we refer to as the Risk Management
Incentive Program, incentivizes our franchisees to keep our
temporary employees safe and to control their exposure to large
workers' compensation claims.
Stock-Based Compensation
Periodically, we issue
restricted common shares or options to purchase our common shares
to our officers, directors, or employees. We measure compensation
costs for equity awards at their fair value on their grant date and
expense these costs over the service period on a straight line
basis. The fair value of stock
awards is based on the quoted price of our common stock on the
grant date. The fair value of option
awards is determined using the Black-Scholes valuation
model.
Provision for Income Taxes
We account for provision (benefit) for income taxes under the asset
and liability method. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. We measure deferred
tax assets and liabilities using enacted tax rates expected to
apply to taxable income in the years in which we expect to recover
or settle those deferred amounts. We record valuation allowances
for deferred tax assets that more likely than not will not be
realized. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. Our policy is to recognize interest to
be paid on an underpayment of income taxes in interest expense and
any related statutory penalties in selling, general, and
administrative expenses in our consolidated statements of
operations.
We
have analyzed our filing positions in all jurisdictions where we
are required to file returns, and found no positions
that would require a liability
for unrecognized income tax positions to be recognized. In the
event that we are assessed penalties and/or interest, penalties
will be charged to selling, general, and administrative expense and
interest will be charged to interest expense.
The Work
Opportunity Tax Credit (“WOTC”) is a source of
fluctuation in our effective income tax rate. The WOTC is designed
to encourage the hiring of workers from certain disadvantaged
targeted categories, and is generally calculated as a percentage of
wages over a twelve month period up to worker maximum by targeted
category. We estimate the amount of WOTC we expect to receive based
on wages certified in the current period.
Business Combinations
We account for
business acquisitions under the acquisition method of accounting by
recognizing identifiable tangible and intangible assets acquired,
liabilities assumed, and non-controlling interests in the acquired
business at their fair values. We record the portion of the
purchase price that exceeds the fair value of the identifiable
tangible and intangible assets acquired and liabilities assumed as
goodwill. We expense acquisition related costs as we incur
them.
39
Earnings per Share
We calculate
basic earnings (loss) per share by dividing net income or loss
available to common stockholders by the weighted average number of
common shares outstanding. We do not include the impact of any
potentially dilutive common stock equivalents in our basic earnings
(loss) per share calculations. Diluted earnings per share reflect
the potential dilution of securities that could share in our
earnings through the conversion of common shares issuable via
outstanding stock options, except where their inclusion would be
anti-dilutive. Outstanding common stock equivalents at December 31,
2019 totaled approximately 29,000.
Diluted common
shares outstanding were calculated using the treasury stock method
and are as follows:
|
|
Year
ended
|
|
|
|
December
31, 2019
|
December
31, 2018
|
|
Weighted average number of
common shares used in basic net income per common
share
|
11,588,776
|
9,939,668
|
|
Dilutive effects of stock
options
|
-
|
-
|
|
Weighted average number of
common shares used in diluted net income per common
share
|
11,588,776
|
9,939,668
|
Property and Equipment
We record
property and equipment at cost. We compute depreciation using the
straight-line method over the estimated useful lives, typically
three to five years. Repairs and maintenance are expensed as
incurred. When assets are sold or retired, we eliminate cost and
accumulated depreciation from the consolidated balance sheet and
reflect a gain or loss in the consolidated statement of
income.
We expense
advertising and marketing costs as we incur them. These were
$449,000 and $7,000 in 2019, and 2018, respectively. The expense in
2019 included rebranding expenses incurred in relation to the
Merger. These costs are included in general and administrative
expenses.
Fair Value Measures
Fair value is
the price that would be received to sell an asset, or paid to
transfer a liability, in the principal or most advantageous market
for the asset or liability in an ordinary transaction between
market participants on the measurement date. Our policy on fair
value measures requires us to maximize the use of observable inputs
and minimize the use of unobservable inputs when measuring fair
value. The policy establishes a fair value hierarchy based on the
level of independent, objective evidence surrounding the inputs
used to measure fair value. A financial instrument’s
categorization within the fair value hierarchy is based upon the
lowest level of input that is significant to the fair value
measurement. The policy prioritizes the inputs into three levels
that may be used to measure fair value:
Level 1:
Applies to assets or liabilities for which there are quoted prices
in active markets for identical assets or liabilities.
Level 2:
Applies to assets or liabilities for which there are inputs other
than quoted prices that are observable for the asset or liability
such as quoted prices for similar assets or liabilities in active
markets; quoted prices for identical assets or liabilities in
markets with insufficient volume or infrequent transactions (less
active markets); or model-derived valuations in which significant
inputs are observable or can be derived principally from, or
corroborated by, observable market data.
Level 3:
Applies to assets or liabilities for which there are unobservable
inputs to the valuation methodology that are significant to the
measurement of the fair value of the assets or
liabilities.
|
|
|
Fair
value
|
|
|
|
Level
|
December 31, 2019
|
December 31,
2018
|
|
Cash
|
1
|
$4,187,450
|
$1,291,317
|
|
Notes
receivable
|
2
|
11,409,709
|
85,500
|
|
Accounts
receivable
|
2
|
28,201,279
|
20,725,170
|
40
Discontinued Operations
During the
quarter ended September 29, 2019, we sold substantially all of the
offices acquired in the Merger. Accordingly, the assets and
liabilities, operating results, and cash flows for these businesses
are presented as discontinued operations, separate from our
continuing operations, for all periods presented in our
consolidated financial statements and footnotes, unless
indicated otherwise.
Notes
Receivable
Notes
receivable
consist primarily of amounts due to us related to the financing of
franchised locations. We report notes receivable
at the principal balance outstanding less an allowance for
losses.
We charge interest at a fixed rate and interest income is
calculated by applying the effective rate to the outstanding
principal balance. Notes receivable are generally secured by the
assets of each location and the ownership interests in the
franchise. We monitor the financial condition of our franchisees
and record provisions for estimated losses when we believe it is
probable that our franchisees will be unable to make their required
payments. Our
allowance for losses on notes receivable was $-0- at December 31,
2019 and December 31, 2018.
Recently Adopted Accounting Pronouncements
In May 2014,
the Financial Accounting Standards Board (“FASB”),
issued new revenue recognition guidance under Accounting Standards
Update (“ASU”) 2014-09, Revenue from Contracts with
Customers, that supersedes the existing revenue recognition
guidance under GAAP. The new standard focuses on creating a single
source of revenue guidance for revenue arising from contracts with
customers for all industries. The objective of the new standard is
for companies to recognize revenue when it transfers the promised
goods or services to its customers at an amount that represents
what the company expects to be entitled to in exchange for those
goods or services.
On January 1,
2018, we adopted the new revenue recognition guidance using the
modified retrospective method for all open contracts and related
amendments. The adoption of this new guidance did not have a
material impact on our consolidated financial
statements.
In February
2016, the FASB issued guidance on lease accounting. The new
guidance continues to classify leases as either finance or
operating, but results in the lessee recognizing most operating
leases on the balance sheet as right-of-use assets and lease
liabilities. This guidance was effective for annual and interim
periods beginning after December 15, 2018, with early adoption
permitted. In July 2018, the FASB amended the standard to provide
transition relief for comparative reporting, allowing companies to
adopt the provisions of the new standard using a modified
retrospective transition method on the adoption date, with a
cumulative-effect adjustment to retained earnings recorded on the
date of adoption. We have elected to adopt the standard using the
transition relief provided in the July amendment.
We have elected
the three practical expedients allowed for implementation of the
new standard, but have not utilized the hindsight practical
expedient. Accordingly, we did not reassess: 1) whether any expired
or existing contracts are or contain leases; 2) the lease
classification for any expired or existing leases; or 3) initial
direct costs for any existing leases.
As a result of
adopting this guidance, we recognized a right-of-use asset, and
corresponding lease liability, of approximately $200,000 adopted as
of January 1, 2019. The adoption of this guidance did not have a
material impact on expense recognition. The deferred rent
liability, which was the difference between the straight-line lease
expense and cash paid, reduced the right-of-use asset upon
adoption.
41
Recently
Issued Accounting Pronouncements
In June 2016,
the FASB issued ASU 2016-13, Financial Instruments – Credit
Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments. The standard significantly changes how entities will
measure credit losses for most financial assets and certain other
instruments that are not measured at fair value through net income.
The standard will replace today's “incurred loss”
approach with an “expected loss” model for instruments
measured at amortized cost. For available-for-sale securities,
entities will be required to record allowances rather than reduce
the carrying amount, as they do today under the
other-than-temporary impairment model. It also simplifies the
accounting model for purchased credit-impaired debt securities and
loans. This guidance is effective for annual periods beginning
after December 15, 2019, and interim periods therein. Early
adoption is permitted for annual periods beginning after December
15, 2018, and interim periods therein. We are currently evaluating
the impact of the new guidance on our consolidated financial
statements and related disclosures.
In December
2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740):
Simplifying the Accounting for Income Taxes (“ASU
2019-12”). ASU 2019-12 was issued as a means to reduce
the complexity of accounting for income taxes for those entities
that fall within the scope of the accounting standard. The
guidance is to be applied using a prospective method, excluding
amendments related to franchise taxes, which should be applied on
either a retrospective basis for all periods presented or a
modified retrospective basis through a cumulative-effect adjustment
to retained earnings as of the beginning of the fiscal year of
adoption. We are currently evaluating the impacts of adoption
of the new guidance to our consolidated financial
statements.
We do not
expect other accounting standards that the FASB or other
standards-setting bodies have issued to have a material impact on
our financial position, results of operations, and cash
flows.
Note 2 – Acquisitions
On July 15,
2019, the Company completed its acquisition of Legacy HQ in
accordance with the terms of the Agreement and Plan of Merger dated
April 8, 2019 (the “Merger Agreement”). Upon the
closing of the Merger, all of the membership interests in Legacy HQ
were converted into the right to receive 68% of the Company’s
common stock outstanding immediately after the closing, or
9,939,668 shares.
We accounted
for the Merger as a reverse acquisition. As such, Legacy HQ is
considered the accounting acquirer and Legacy HQ's historical
financial statements replace Command Center’s historical
financial statements following the completion of the Merger. The
results of operations of both companies are included in our
financial statements for all periods beginning July 15,
2019.
The fair value
of the purchase consideration is calculated based on the Company's
stock price as it is considered to be more reliable than the fair
value of the membership interests of Legacy HQ, a private company.
Consideration is calculated based on the Company's closing share
price of $5.76 on Nasdaq on July 15, 2019.
The following
table summarizes the estimated fair values of the identifiable
assets acquired and liabilities assumed as of the acquisition date.
These estimates are preliminary, pending final evaluation of
certain assets and liabilities, and therefore are subject to
revisions that may result in adjustment to the values presented
below:
|
Common
stock
|
4,677,487
|
|
Closing
share price on July 15, 2019
|
$5.76
|
|
Stock
consideration
|
$26,942,325
|
|
|
|
|
Accounts
receivable
|
$10,480,907
|
|
Cash and
cash equivalents
|
5,376,543
|
|
Identifiable intangible
assets
|
17,015,857
|
|
Other
current assets
|
725,453
|
|
Property,
plant and equipment, net
|
281,186
|
|
Right-of-use asset
|
1,642,695
|
|
Current
liabilities
|
(3,124,081)
|
|
Lease
liabilities
|
(1,624,461)
|
|
Deferred
tax liability
|
(2,930,947)
|
|
Other
liabilities
|
(900,827)
|
|
Preliminary
purchase price allocation
|
$26,942,325
|
42
The purchase consideration above
differs from what was previously disclosed due to an immaterial
adjustment to the identifiable intangible assets and the deferred
tax liability. The identifiable intangible assets, portions of
which consisted of customer lists, were allocated to the offices
purchased.
The following table presents the
amount of Command Center’s revenue and net income since the
July 15, 2019 acquisition date included in our consolidated
statement of operations for the year ended December 31,
2019:
|
|
From July 15, 2019 through December 31, 2019
|
|
Total revenue
|
1,768,550
|
|
Net income
|
1,171,677
|
The following
table presents the unaudited pro forma information assuming the
Merger occurred on January 1, 2018. The unaudited pro forma
information is not necessarily indicative of the results of
operations that would have been achieved if the acquisition had
taken place on that date.
|
|
Year
ended
|
|
|
|
December
31, 2019
|
December
31, 2018
|
|
Franchise
royalties
|
$16,176,219
|
$12,402,072
|
|
Net Income
|
5,090,045
|
6,381,936
|
|
Basic earnings per
share
|
$0.38
|
$0.48
|
|
Basic weighted average
shares outstanding
|
13,294,201
|
13,266,840
|
|
Diluted earnings per
share
|
$0.38
|
$0.48
|
|
Diluted weighted average
shares outstanding
|
13,294,736
|
13,266,840
|
These
calculations reflect the decreased amortization expense, the
decreased merger related expenses, and the consequential tax
effects that would have resulted had the Merger closed on January
1, 2018.
Effective
September 11, 2019, as contemplated by the Merger Agreement and as
approved by our stockholders, Command Center changed its name to
HireQuest, Inc., changed its state of incorporation from
Washington to Delaware, adopted new bylaws, and moved its principal
executive offices to Goose Creek, South Carolina. In connection
with our name change to HireQuest, Inc., we also changed the
trading symbol of our common stock from “CCNI” to
“HQI.”
Note 3 – Discontinued Operations
We sold the
offices we acquired from Command Center to franchisees in the third
quarter of 2019 through sales of operating office assets to
existing and new franchisees in two tranches. We also made the
strategic decision to sell the assets of Command Center’s
four California offices outside of our franchise system to an
unaffiliated third party, and we no longer conduct business in the
state of California. A summary of total consideration received and
assets sold is as follows:
|
Notes
receivable
|
$14,884,620
|
|
Accounts
receivable
|
2,204,286
|
|
Cash
|
221,845
|
|
Consideration
received
|
17,310,751
|
|
|
|
|
Customer
lists
|
$17,015,857
|
|
Lease and utility
deposits
|
100,009
|
|
Fixed
assets
|
57,448
|
|
Gain
|
137,437
|
|
Sale price
allocation
|
$17,310,751
|
43
July
Sale
On July
15, 2019, we closed on the sale of certain assets related to the
operations of company-owned offices in Conway and North Little
Rock, AR; Flagstaff, Mesa, North Phoenix, Phoenix, Tempe, Tucson,
and Yuma, AZ; Aurora and Thornton, CO; Atlanta, GA; College Park
and Speedway, IN; Shreveport, LA; Baltimore and Landover, MD;
Oklahoma City and Tulsa, OK; Chattanooga, Madison, Memphis, and
Nashville, TN; Amarillo, Austin, Houston, Irving, Lubbock, Odessa,
and San Antonio, TX; and Roanoke, VA (collectively, the "July
Franchise Assets"). In connection with their purchases, the buyers
executed franchise agreements with us and became
franchisees.
The aggregate
sale price for the July Franchise Assets consisted of approximately
(i) $4.7 million paid in the form of promissory notes accruing
interest at an annual rate of 6% issued by the buyers to the
Company plus (ii) the right to receive 2% of annual sales in excess
of $3.2 million in the aggregate for the franchise territory
containing Phoenix, AZ for 10 years, up to a total aggregate amount
of $2.0 million.
Regarding the
note related to the territory containing Phoenix, we estimated the
future revenue streams of these locations to determine the fair
value of this note, which was estimated to be $1.2
million.
We sold
a subset of these July Franchise Assets to buyers in which some of
our directors, officers, and significant stockholders have direct
or indirect interests (the “Worlds Buyers”). For more
information related to the Worlds Buyers and other Worlds
Franchisees, see Note 4 – Related Party
Transactions.
Contemporaneously
with the sale of these assets, we entered into an agreement with
Hire Quest Financial, LLC ("HQF), an affiliate of a director,
Edward Jackson, and our President and CEO, Richard Hermanns, who
are also our two largest stockholders, whereby the promissory notes
issued by the Worlds Buyers to the Company in the aggregate
principal amount of approximately $2.2 million were transferred to
HQF in exchange for accounts receivable of an equal
value.
September
Sale
On
September 29, 2019, we closed on the sale of certain assets related
to company-owned offices in Coeur D’Alene, ID; Griffith, IN;
Bloomington, Brooklyn Park, Cambridge, Hopkins, St. Paul, and
Wilmar, MN; Bismarck, Dickinson, Fargo, Grand Forks, Minot, Watford
City, and Williston, ND; Omaha and Bellevue, NE; Hillsboro, OR;
Sioux Falls, SD; and Bellingham, Everett, Kent, Mt. Vernon,
Seattle, Spokane, Tacoma, and Vancouver, WA (collectively, the
"September Franchise Assets"). We simultaneously entered into
franchise agreements with affiliates of the buyer, pursuant to
which the affiliates will operate these
offices.
The aggregate
purchase price for the September Franchise Assets consisted of
approximately $9.7 million paid in the form of five-year promissory
notes accruing interest at an annual rate of 6% issued by the buyer
to the Company. In early October, we received a $3.0 million cash
payment on these notes. In accordance with an agreement with the
buyer, this cash payment triggered a discount in the purchase price
equal to 10% of the cash payment, or $300,000.
Both the July
15, 2019 and September 29, 2019 purchase agreements contain
negotiated representations, warranties, covenants, and
indemnification provisions by the parties which are believed to be
customary for transactions of this type. The related-party
transactions contain covenants and warranties similar to those
contained in all other transactions.
The
California Sale
On
September 27, 2019, we closed on the sale of substantially all of
the operating and intangible assets of our four California offices
in Corona, Hayward, Sacramento, and Fresno (collectively the
"California Assets"), to Resolute Enterprises, LLC ("Resolute"), a
Florida limited liability company and unaffiliated third party. We
retained the net working capital of these offices. The aggregate
purchase price for the California Assets consisted of $1.8 million
paid in the form of a four-year promissory note accruing interest
at an annual rate of 10% issued by Resolute to the Company. The
promissory note is secured by the California Assets. The California
Purchase Agreement contained negotiated representations,
warranties, covenants, and indemnification provisions by the
parties, which are believed to be customary for transactions of
this type.
44
The income from
discontinued operations amounts as reported on our consolidated
statements of operations was comprised of the following
amounts:
|
|
Year
ended
|
|
|
|
December
31, 2019
|
December
31, 2018
|
|
Revenue
|
$13,932,769
|
$722,849
|
|
Cost of staffing
services
|
9,946,836
|
629,448
|
|
Gross
profit
|
3,985,933
|
93,401
|
|
Gain on sale
|
137,437
|
-
|
|
SG&A
|
3,836,045
|
18,603
|
|
Net income before income
taxes
|
287,325
|
74,798
|
|
Provision for income
taxes
|
71,831
|
18,699
|
|
Net
income
|
$215,494
|
$56,097
|
We continue to be involved with all
of the offices we sold through franchise agreements, with the
exception of the offices sold in California. For the year ended
December 31, 2019, approximately
$1.4 million is included in royalty revenue in our consolidated
statement of operations that originated from sold locations that
subsequently became franchisees.
The term of the franchise agreements
is five years, however we expect the franchise agreements to be
renewed at the end of the current term.
Note 4 – Related Party Transactions
HQI shares some
common ownership with Hire Quest Financial, LLC; Hirequest
Insurance Company; Brave New World Services, LLC, formerly known as
Hire Quest LTS, LLC; Bass Underwriters, Inc. and its related
entities; Insurance Technologies, Inc., a number of our
franchisees; and the not-for-profit Higher Quest Foundation,
Inc.
Hire Quest Financial LLC (“HQF”)
Richard
Hermanns, our President, CEO, Chairman of the Board, and most
significant stockholder, and Edward Jackson, a member of our Board
and a significant stockholder, collectively own a majority of
HQF.
Prior to March
20, 2018, Legacy HQ had an agreement with HQF to provide finance
and insurance related services and a line of credit. The management
fee charged by HQF, which included the interest charge on the line
of credit, amounted to 2% of the sales of our franchisee-owned and
company-owned offices, also known as system-wide sales. Legacy HQ
terminated this arrangement in March, 2018. Amounts included in our
statements of operations for the year ended December 31, 2018 are
approximately $249,000.
During the year
ended December 31, 2018, Legacy HQ transferred approximately $1.8
million of accounts and notes receivable due from franchisees to
HQF, as well as approximately $600,000 of investments and property
and equipment. On July 15, 2019, Legacy HQ conveyed approximately
$2.2 million of accounts receivable to HQF. These transfers were
used to pay down intercompany debt obligations.
The
intercompany debt was entirely extinguished prior to the Merger
between Legacy HQ and Command Center. At December 31, 2019 and
December 31, 2018, HQI owed HQF approximately $-0- and $6.7
million, respectively.
Hirequest Insurance Company (“HQ Ins.”)
Mr. Hermanns,
certain of his immediate family members, a dynasty trust under his
control, Mr. Jackson, and certain of his immediate family members
collectively own a majority of HQ Ins.
HQ Ins.
is a North Carolina protected cell captive insurance company.
Effective March 1, 2010, Legacy HQ purchased a deductible
reimbursement insurance policy from HQ Ins. to cover losses up to
the $500,000 per claim deductible on the Legacy HQ high-deductible
workers’ compensation policy originally obtained through AIG
and, later through ACE American Insurance Company
(see Note 6 – Workers’
Compensation Insurance and Reserves). Legacy HQ terminated its policy with HQ Ins. on
July 15, 2019 upon the closing of the Merger.
Premiums paid
by Legacy HQ to HQ Ins. for workers compensation insurance during
the years ended December 31, 2019 and December 31, 2018 are
approximately $3.6 million and $5.5 million,
respectively.
Brave New World Services, LLC, formerly known as Hire Quest LTS
(“HQ LTS”)
Mr. Jackson and
a relative of Mr. Hermanns collectively own a majority of HQ
LTS.
45
Historically,
HQ LTS employed the personnel at Legacy HQ headquarters. HQI
terminated this relationship on July 15, 2019 upon the closing of
the Merger. Payroll service fees paid to HQ LTS during the year
ended December 31, 2019 and December 31, 2018 are approximately
$19,000 and $38,000, respectively.
Jackson Insurance Agency, Bass Underwriters, Inc., and Insurance
Technologies, Inc. (collectively, “Bass”)
Mr. Hermanns
and Mr. Jackson collectively are the majority owners of Bass
Underwriters. Mr. Jackson and Mr. Hermanns are also significant or
majority stockholders of the following entities related to Bass:
Bulldog Premium Finance LLC, Gridiron Insurance Underwriters, Inc.,
Insurance Technologies, Inc., and Genesis Educational Services of
Florida, Inc. Mr. Jackson owns a majority stake in Jackson
Insurance Agency.
Jackson
Insurance Agency has historically brokered Legacy HQ’s
property, casualty, general liability, and cybersecurity insurance.
Since July 15, 2019, it has brokered these same policies for HQI.
It also brokers certain insurance policies on behalf of some of our
franchisees, including the Worlds Franchisees. Premiums paid to
Bass during the year ended December 31, 2019 and December 31, 2018
are approximately $613,000 and $212,000, respectively. Bass does
not retain the majority of the premiums but does profit by making a
commission.
On
October 24, 2019, we entered into an agreement with Insurance
Technologies, an IT development and security firm, to add certain
cybersecurity protections to our existing information technology
systems and to assist in developing future information technology
systems within our HQ Webconnect software. Insurance Technologies
invoiced us $60,000 in 2019 pursuant to this
agreement.
The Worlds Franchisees
Mr.
Hermanns and Mr. Jackson have direct or indirect ownership
interests in certain of our franchisees (the “Worlds
Franchisees”). There were 20 Worlds Franchisees at December 31, 2019 that
operated 57 of our 147 offices.
There were 23 Worlds Franchisees that operated 50 of Legacy
HQ’s 97 offices at December 31, 2018.
Balances
regarding the Worlds Franchisees are summarized below:
|
|
December 31,
2019
|
December 31,
2018
|
|
Due from
franchisee
|
$993,495
|
$254,943
|
|
Risk management incentive
program liability (asset)
|
1,027,960
|
( 988,562)
|
Transactions
regarding the Worlds Franchisees are summarized below:
|
|
Year ended
|
|
|
|
December 31,
2019
|
December 31,
2018
|
|
Franchisee
royalties
|
$6,964,690
|
$5,900,637
|
Note 5 – Line of Credit
In July
2019, we entered into an agreement with Branch Banking and Trust
Company, now Truist Bank (“BB&T”), for a $30
million line of credit with a $15 million sublimit for letters of
credit. At December 31, 2019, $9.8 million was utilized by
outstanding letters of credit that secure our obligations to our
workers’ compensation insurance carrier, $1 million was
utilized by a letter of credit that secures our paycard funding
account, leaving $19.2 million available under the agreement for
additional borrowings. For additional information related to the
letter of credit securing our workers’ compensation
obligations see Note 6 – Workers’
Compensation Insurance and Reserves.
This line of
credit is scheduled to mature on May 31, 2024. The current
agreement bears interest at a variable rate equal to the Daily One
Month London Interbank Offering Rate, or LIBOR, plus a margin
between 1.25% and 1.75%. The margin is determined based on the
value of our net collateral, which is equal to our total collateral
plus unrestricted cash less the outstanding balance, if any, under
the loan agreement. At December 31, 2019 the effective interest
rate was 3.0%. A non-use fee of between 0.125% and 0.250% will
accrue on the unused portion of the line of credit. As collateral
for repayment of any and all obligations under this agreement, we
granted BB&T a security interest in substantially all of our
operating assets and the operating assets of our subsidiaries. This
agreement, and other loan documents, contain customary events of
default and negative covenants, including but not limited to those
governing indebtedness, liens, fundamental changes, transactions
with affiliates, and sales of assets. This agreement requires us to
comply with a fixed charge coverage ratio of at least 1.10:1.00,
which will be tested quarterly, on a rolling four quarter basis,
commencing with the four quarters ending September 30, 2020. Our
obligations under this agreement are subject to acceleration upon
the occurrence of an event of default as defined in the loan
agreement.
46
In March 2018,
Legacy HQ entered into a $5 million line of credit agreement
with BB&T with an interest rate of LIBOR plus 1.75%. The
line was collateralized by substantially all Legacy HQ assets and
contained certain restrictive covenants. There were no borrowings
on the line of credit at December 31, 2018. It was terminated in
July 2019 upon the execution of the current agreement.
Prior
to March 20, 2018, Legacy HQ had a $16 million line of credit with
HQF. The line was collateralized by substantially all Legacy HQ
assets and a personal guarantee of the CEO of Legacy HQ. In lieu of
interest, use of the line of credit was included in the management
fee of 2% of system-wide sales as described above
in Note 4 – Related Party
Transactions.
Note 6 – Workers’ Compensation Insurance and
Reserves
Beginning in
March 2014, Legacy HQ obtained its workers’ compensation
insurance through Chubb Limited and ACE American Insurance Company
(collectively, “ACE”), in all states in which it
operated, other than monopolistic jurisdictions. The ACE policy was
a high deductible policy pursuant to which Legacy HQ had primary
responsibility for all claims with ACE providing insurance for
covered losses and expenses in excess of $500,000 per incident. In
addition to the ACE policy, Legacy HQ purchased a deductible
reimbursement insurance policy from HQ Ins. to cover losses up to
the $500,000 deductible with ACE. This resulted in Legacy HQ
effectively being fully insured during this time period. Effective
July 15, 2019, we terminated our deductible reimbursement policy
with HQ Ins. and have assumed the primary responsibility for all
claims up to the deductible occurring on or after July 15, 2019.
The primary responsibility of all claims occurring before July 15,
2019 remains with HQ Ins. We assumed the Legacy HQ policy with
ACE.
Command Center
also obtained its workers’ compensation insurance through
ACE. Pursuant to Command Center’s policy, ACE provides
insurance for covered losses and expenses in excess of $500,000 per
incident. Command Center’s current ACE policy includes a
one-time obligation for the Company to pay any single claim filed
under the Command Center policy within a policy year that exceeds
$500,000 (if any), but only up to $750,000 for that claim. All
other claims within the policy year are subject to the $500,000
deductible. Effective July 15, 2019, in connection with the
Merger, we assumed all of the workers’ compensation claims of
Command Center. We also assumed Command Center’s
workers’ compensation policy with ACE.
Under these
high deductible programs, HQI is effectively self-insured. Per our
contractual agreements with ACE, we must provide collateral
deposits of approximately $9.8 million, which we accomplished by
providing letters of credit under our agreement with
BB&T.
For
workers’ compensation claims originating in the monopolistic
jurisdictions of Washington, North Dakota, Ohio, and Wyoming, we
pay workers’ compensation insurance premiums and obtain full
coverage under mandatory state administered programs. Our liability
associated with claims in these jurisdictions is limited to premium
payments based upon the amount of payroll paid within each
jurisdiction. Accordingly, our consolidated financial
statements reflect only the mandated workers’ compensation
insurance premium liability for workers’ compensation claims
in these jurisdictions.
The following
table reflects the changes in our workers' compensation claims
liability:
|
|
December
31, 2019
|
December
31, 2018
|
|
Estimated future claims
liabilities at the beginning of the period
|
$-
|
$-
|
|
Claims paid during the
period
|
(1,237,977)
|
-
|
|
Additional future claims
liabilities recorded during the period
|
5,082,478
|
-
|
|
Estimated future claims
liabilities at the end of the period
|
$3,844,501
|
$-
|
47
Note 7 – Analysis of Franchised and Company-Owned
Offices
Below is a
summary of changes in the number of offices:
|
Franchised offices,
December 31, 2017
|
79
|
|
Closed in 2018
|
(3)
|
|
Opened in 2018
|
21
|
|
Franchised offices,
December 31, 2018
|
97
|
|
Closed in 2019
|
(10)
|
|
Opened in 2019
|
60
|
|
Franchised offices,
December 31, 2019
|
147
|
Note 8 – Stockholders’ Equity
Tender Offer
In June 2019,
we commenced an issuer tender offer to purchase up to 1,500,000
shares of our common stock at a fixed price of $6.00 per share.
This tender offer expired on July 25, 2019, and we accepted for
purchase approximately 1.4 million shares for an aggregate cost of
approximately $8.4 million, excluding fees and
expenses.
Issuance of Common Stock
In October
2019, we issued 8,750 shares of stock pursuant to the exercise of
8,750 common stock options with a strike price of $5.50 for a total
purchase price of $48,125. In December 2019, we issued 22,917
shares of stock pursuant to the exercise of 22,917 common stock
options with weighted average strike price of $4.96 for a total
purchase price of $113,752.
Note 9 – Stock Based Compensation
Employee Stock Incentive Plan
Our 2008 Stock
Incentive Plan (the “2008 Plan”), which permitted the
grant of up to 533,333 equity awards, expired in January 2016. In
November 2016, our stockholders approved a new stock incentive
plan, the 2016 Plan, under which we are authorized to grant
awards for up to 500,000 shares of our common stock over the 10
year life of the plan.
In September
2019, our Board approved a share purchase match program to
encourage ownership and align the interests of key employees and
directors. Under this program, we will match 20% of any shares of
our commons stock purchased on the open market by key employees and
directors up to $25,000 in aggregate value within any one-year
period. These shares vest on the second anniversary of the date on
which the matched shares were purchased. We issued approximately
2,000 shares under this program in 2019.
In September
2019, we issued 160,000 shares of restricted common stock pursuant
to the 2016 Plan valued at approximately $1.1 million for services,
and to encourage retention, to certain employees. These shares vest
over four years, with 50% vesting on September 1, 2021, and 6.25%
vesting each quarter thereafter for the next eight quarters. Also
in September 2019, we issued 90,000 shares of restricted common
stock pursuant to the 2016 Plan valued at $648,000 for services to
non-employee members of our board of directors. These shares vest
equally over approximately three years with the first vesting
occurring the day before our annual stockholder meeting to be held
in 2020, and the remainder vesting in equal portions on each of the
first two anniversaries of that date.
In November
2019, we issued 9,833 shares of restricted common stock pursuant to
the 2016 Plan valued at $58,506 to certain members of our Board of
Directors for their services. Of these 9,833 shares, 8,194 shares
vest equally over the following three months, and the remaining
1,639 shares vest equally over the following twenty-four
months.
Also in
November of 2019, we issued 4,202 shares of restricted common stock
pursuant to the 2016 Plan valued at $25,002 to an employee in lieu
of cash for a bonus, which vest equally over the following three
months.
48
The following
table summarizes our restricted stock outstanding at December 31,
2018, and changes during the period ended December 31,
2019.
|
|
Shares
|
Weighted
average grant date price
|
|
Non-vested, December 31,
2018
|
-
|
$-
|
|
Granted
|
264,035
|
7.15
|
|
Vested
|
(8,401)
|
6.19
|
|
Non-vested, December 31,
2019
|
255,634
|
7.18
|
Stock options
that were outstanding at Command Center were deemed to be issued on
the date of the Merger. Outstanding awards continue to remain in
effect according to the terms of the 2008 Plan, the 2016 Plan, and
the corresponding award documents. There were approximately 24,000
and -0- stock options vested at December 31, 2019 and December 31,
2018, respectively.
The estimated
fair value of each option granted is calculated using the
Black-Scholes option-pricing model. Expected volatilities are based
on the Company’s historical data and implied volatility. The
Company uses historical data to estimate expected employee
forfeitures of stock options. The expected life of options granted
is management’s best estimate using recent and expected
transactions. The risk-free rate for periods within the expected
life of the option is based on the U.S. Treasury yield curve in
effect at the time of grant. The weighted-average assumptions used
in the model were as follows:
|
|
2019
|
2018
|
|
Expected term
(years)
|
2.3 - 8.9
|
-
|
|
Expected
volatility
|
46.8 - 63.1%
|
0.0%
|
|
Dividend
yield
|
0.0%
|
0.0%
|
|
Risk-free
rate
|
1.7 - 2.4%
|
0.0%
|
|
Weighted average grant
date fair value
|
$3.18
|
$-
|
The following
table summarizes our stock options outstanding at December 31,
2018, and changes during the period ended December 31,
2019.
|
|
Number
of shares underlying options
|
Weighted
average exercise price per share
|
Weighted
average grant date fair value
|
|
Outstanding, December 31,
2018
|
-
|
$-
|
$-
|
|
Granted
|
160,832
|
5.86
|
3.18
|
|
Forfeited
|
(100,000)
|
5.70
|
3.16
|
|
Exercised
|
(31,667)
|
5.11
|
2.71
|
|
Outstanding, December 31,
2019
|
29,165
|
7.20
|
3.76
|
The following
table summarizes our non-vested stock options outstanding at
December 31, 2018, and changes during the period ended December 31,
2019:
|
|
Number
of shares underlying options
|
Weighted
average exercise price per share
|
Weighted
average grant date fair value
|
|
Non-vested, December 31,
2018
|
-
|
$-
|
$-
|
|
Granted
|
84,523
|
5.56
|
3.05
|
|
Forfeited
|
(57,857)
|
5.70
|
3.16
|
|
Vested
|
(21,250)
|
5.21
|
2.76
|
|
Non-vested, December 31,
2019
|
5,417
|
5.48
|
3.01
|
49
|
|
Number
of shares underlying options
|
Weighted average
exercise price per share
|
Weighted average
remaining contractual life (years)
|
Aggregate intrinsic
value
|
|
Outstanding
|
29,166
|
$7.20
|
4.72
|
$50,637
|
|
Exercisable
|
23,749
|
7.59
|
3.89
|
12,237
|
At December 31,
2019, there was unrecognized stock-based compensation expense
totaling approximately $1.4 million relating to non-vested options
and restricted stock grants that will be recognized over the next
3.7 years.
Note 10 – Property and Equipment
The following
table summarizes the book value of our assets and accumulated
depreciation.
|
|
December
31, 2019
|
December
31, 2018
|
|
Land
|
$472,492
|
$487,492
|
|
Buildings and
improvements
|
1,231,308
|
1,305,280
|
|
Furniture and
fixtures
|
762,314
|
377,110
|
|
Construction in
progress
|
62,751
|
157,350
|
|
Accumulated
depreciation
|
(628,179)
|
(281,351)
|
|
Total property and
equipment, net
|
$1,900,686
|
$2,045,881
|
Construction in
progress consists primarily of capitalized costs related to an
addition to our corporate headquarters and internally-developed
software.
Depreciation
expense related to property and equipment totaled approximately
$400,000 and $93,000 during the years ended December 31, 2019
and December 31, 2018, respectively.
Note 11 – Commitments and Contingencies
Consulting Agreement
As contemplated
by the Merger Agreement, on July 15, 2019, we entered into a
consulting arrangement with Dock Square. Pursuant to this
consulting arrangement, Dock Square introduces prospective
customers and expands relationships with our existing customers for
which in return it is eligible to receive unregistered shares of
our common stock, subject to certain performance metrics and
vesting terms. The grant of any such shares by us would be based on
our gross revenue generated from the services of Dock Square as
measured over a 12 month period. Upon the grant of any such shares,
50% of such granted shares would vest immediately, and the
remaining 50% of such granted shares would be subject to a vesting
requirement linked to the gross revenue generated from the services
of Dock Square measured over a 3 year period. We refer to any such
shares as the “Performance Shares.” We anticipate the
maximum aggregate number of Performance Shares issuable under the
consulting arrangement would not exceed 1.6 million shares. Any
Performance Shares would be in addition to the pro rata portion of
the shares of our common stock that Dock Square’s members
received as merger consideration at the closing of the Merger,
along with the other investors in Legacy HQ. Dock Square would
receive any declared and paid dividends on issued Performance
Shares, including the unvested portion of such shares during the
3-year vesting measurement period, and the issued but unvested
Performance Shares would vest upon a change of control. In
addition, Dock Square received piggy-back registration rights with
respect to its Performance Shares issued and vested at the time of
such registration. To date, no shares have been issued to Doc
Square as performance targets have not been met.
Franchise Acquisition Indebtedness
We financed the
purchase of several offices by new franchises with notes
receivable. In some instances, this financing resulted in certain
franchises being considered VIE’s. We have determined that we
are not required to consolidate these entities because we do not
have the power to direct these entities’ daily operations. If
these franchises default on these notes, we bear the risk of loss
of the outstanding balance on these notes, less what we could
recoup from the potential resale of the repossessed office. The
balance due from the franchises determined to be VIE’s on
December 31, 2019 was approximately $2.5 million.
50
From time to
time, we are involved in various legal and administrative
proceedings. Based on information currently available to us,
we do not expect material uninsured losses to arise from any of
these matters. We believe the outcome of these matters, even
if determined adversely, will not have a material adverse effect on
our business, financial condition or results of operations. There
have been no material changes in our legal proceedings as of
December 31, 2019.
In conjunction
with the Merger, Legacy HQ changed its status as an S-corporation
to a C-corporation, and changed the method of accounting for income
taxes from the cash basis of accounting to the accrual basis of
accounting. This change in accounting basis resulted in the
recognition an additional income tax of approximately $4.3 million
that will paid over the next four years. In relation to this change
in accounting method, we have a deferred tax liability of
approximately $3.4 million. The Merger also resulted in the
recognition of intangible assets that had no basis for income tax
purposes, with the subsequent sale of these intangible assets
resulting in a taxable gain.
The provision
for income taxes is comprised of the following:
|
|
December 31,
2019
|
December 31,
2018
|
|
Current:
|
|
|
|
Federal
|
$3,551,418
|
$-
|
|
State
|
996,510
|
39,728
|
|
Deferred:
|
|
|
|
Federal
|
(1,113,042)
|
-
|
|
State
|
46,110
|
-
|
|
Provision for income
taxes
|
$3,480,996
|
$39,728
|
Deferred income
taxes reflect the net tax effects of temporary differences between
the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of our deferred taxes are as
follows:
|
|
December 31,
2019
|
December 31,
2018
|
|
Deferred tax assets and
liabilities
|
|
|
|
Workers' compensation
claims liability
|
$947,023
|
$-
|
|
Depreciation and
amortization
|
279,990
|
-
|
|
Bad debt
reserve
|
41,436
|
-
|
|
Accrued
vacation
|
37,771
|
-
|
|
Cash to accrual Section
481 adjustment
|
(3,000,216)
|
-
|
|
Stock based
compensation
|
5,550
|
-
|
|
Total deferred tax
liability
|
$(1,688,446)
|
$-
|
Management
estimates that our effective tax rates was approximately 123% for
2019. The items accounting for the difference between income taxes
computed at the statutory federal income tax rate and the income
taxes reported on the statements of income are as
follows:
|
|
December 31,
2019
|
December 31,
2018
|
||
|
Income tax expense
based on statutory rate
|
$624,860
|
21.0%
|
$-
|
0.0%
|
|
Permanent
differences
|
(789,810)
|
(26.5%)
|
-
|
0.0%
|
|
State income taxes
expense net of federal taxes
|
820,698
|
27.6%
|
-
|
0.0%
|
|
WOTC
|
(498,000)
|
(16.7%)
|
-
|
0.0%
|
|
HQ Conversion to C
Corp
|
3,320,594
|
111.6%
|
-
|
0.0%
|
|
Other
|
2,654
|
0.1%
|
39,728
|
0.6%
|
|
Total taxes (benefits)
on income
|
$3,480,996
|
117.1%
|
$39,728
|
0.6%
|
Some franchisees have borrowed funds
from us, primarily to finance the initial purchase price of
franchised locations. Notes outstanding were approximately $11.4
million and $86,000 as of December 31, 2019 and December 31, 2018,
respectively, net of allowance for losses.
Notes receivable bear interest at a
fixed rate between 6.0% and 10.0%. Notes are generally secured by
the assets of each location and the ownership interests in the
franchisee. Interest income on franchisee notes is reported in other miscellaneous income in our
consolidated statements of operations and was approximately
$280,000 and $16,000 in 2019 and 2018,
respectively.
51
Based on our review of the financial condition
of our franchisees that have borrowed funds, we have not
established any allowance for losses as of December 31, 2019 and
December 31, 2018. The following table summarizes changes in our
notes receivable balance:
|
Balance as of
December 31, 2017
|
$-
|
|
Notes
issued
|
85,500
|
|
Payments
received
|
-
|
|
Balance as of
December 31, 2018
|
85,500
|
|
Notes
issued
|
14,887,620
|
|
Payments
received
|
(3,563,411)
|
|
Balance as of
December 29, 2019
|
$11,409,709
|
Note 14
– Unaudited Quarterly Results of Operations
The following
table displays our unaudited consolidated statement of operations
for the fourth quarter ended December 31, 2019 and December 31,
2018:
|
|
Quarter
ended
|
|
|
|
December
31, 2019
|
December
31, 2018
|
|
Franchise
royalties
|
$5,396,922
|
$3,255,016
|
|
Service
revenue
|
475,748
|
280,150
|
|
Total revenue
|
5,872,670
|
3,535,166
|
|
Selling, general and
administrative expenses
|
3,131,312
|
1,339,504
|
|
Depreciation and
amortization
|
324,502
|
66,252
|
|
Income from
operations
|
2,416,856
|
2,129,410
|
|
Other miscellaneous income
(expense)
|
(616)
|
41,112
|
|
Interest and other
financing expense
|
(37,748)
|
(5,000)
|
|
Net income before
income taxes
|
2,378,492
|
2,165,522
|
|
Benefit for income
taxes
|
(1,399,406)
|
(13,277)
|
|
Income from continuing
operations
|
3,777,898
|
2,178,799
|
|
Income (loss) from
discontinued operations, net of tax
|
(315,067)
|
11,421
|
|
Net
income
|
$3,462,831
|
$2,190,220
|
|
|
|
|
|
Basic
earnings per share
|
|
|
|
Continuing
operations
|
$0.28
|
$0.22
|
|
Discontinued
operations
|
(0.02)
|
0.00
|
|
Total
|
$0.26
|
$0.22
|
|
|
|
|
|
Diluted
earnings per share
|
|
|
|
Continuing
operations
|
$0.28
|
$0.22
|
|
Discontinued
operations
|
(0.02)
|
0.00
|
|
Total
|
$0.26
|
$0.22
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
Basic
|
13,488,436
|
9,939,668
|
|
Diluted
|
13,490,636
|
9,939,668
|
52
Note
15 - Subsequent Events
COVID-19
Pandemic
In December 2019, a novel strain of
coronavirus disease ("COVID-19") was first reported in Wuhan,
China. Less than four months later, on March 11, 2020, the World
Health Organization declared COVID-19 a pandemic. The extent of
COVID-19's effect on our operational and financial performance will
depend on future developments, including the duration, spread, and
intensity of the pandemic, all of which are uncertain and difficult
to predict considering the rapidly evolving landscape. As a result,
it is not currently possible to ascertain the overall impact of
COVID-19 on our business. However, if the pandemic continues to
evolve into a severe worldwide health crisis, the disease could
have a material adverse effect on the Company's business, results
of operations, financial condition, and cash
flows.
53
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of December 31, 2019, we carried out an evaluation, under the
supervision and with the participation of our management, including
our principal executive officer and our principal financial
officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities and Exchange Act of 1934, as
amended (the “Exchange Act”)). Based on this
evaluation, our principal executive officer and principal financial
officer concluded that, as of December 31, 2019, due to the
material weakness in our internal control over financial reporting
described below, our disclosure controls and procedures were not
effective.
Management's Annual Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Under the
supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework set forth
by the Committee of Sponsoring Organizations of the Treadway
Commission in Internal
Control—Integrated Framework (2013). Internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles and
includes those policies and procedures that:
a)
pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
Company;
b)
provide reasonable
assurance that transactions are recorded as necessary to permit the
preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures
of the Company are being made only in accordance with
authorizations of our management and directors; and
c)
provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the Company’s assets that
could have a material effect on the financial
statements.
A system of controls, no matter how well designed and operated,
cannot provide absolute assurance that the objectives of the system
of controls are met, and no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud,
if any, within a company have been detected.
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.
We identified a material weakness in our internal controls as we
did not design procedures to detect errors in the material account
"Due
to franchisees," account balance such that we could provide
reasonable assurance that transactions were recorded properly in
the general ledger as necessary to permit the preparation of
financial statements in accordance with generally accepted
accounting principles.
Based on our evaluation under the framework described above, our
management concluded that, due to the material weakness, our
internal control over financial reporting was not effective as of
December 31, 2019 in accordance with Item 308(a)(3) of Regulation
S-K.
54
Remediation Efforts to Address Material Weakness
Management is committed to maintaining a strong internal control
environment. In response to the identified material weakness,
management has taken, and will continue to take, action toward the
remediation of the material weaknesses in internal control over
financial reporting, including hiring additional staff in the
accounting department and implementing detection controls,
including additional reconciliation, oversight, and review
procedures.
Management believes the steps outlined above, when fully
implemented, will remediate the material weakness described above.
The Audit Committee of the Board of Directors and management will
continue to monitor the implementation of these remediation
measures and the effectiveness of our internal control over
financial reporting on an ongoing basis.
Changes in Internal Control Over Financial Reporting
On July 15, 2019, we completed the Merger with Command Center. In
connection with this Merger, the internal controls and internal
control over financial reporting framework of Legacy HQ and Command
Center are being integrated. Such integration has resulted in
changes in our internal control over financial reporting (as
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
that have materially affected our internal control over financial
reporting. For example, the Company hired staff in the accounting
department in preparation for public company financial statements
and retained Command Center’s CFO with public company
accounting experience. Other than such changes that have resulted
and are expected to continue to result from such integration,
including the remediation efforts described above, there have not
been any material changes in our internal control over financial
reporting that occurred during the quarter ended December 31, 2019
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
The certifications required by Rule 13a-14 of the Exchange Act are
filed as exhibits 31.1 and 31.2, respectively, to this Annual
Report on Form 10-K.
Internal Control over Financial Reporting of Legacy HQ
During the audit of Legacy HQ, a privately-held company, for the
year ended December 31, 2018, Legacy HQ’s auditor identified
deficiencies in Legacy HQ’s internal control over financial
reporting that it considered material weaknesses with respect to
staffing levels for the preparation of public company financial
statements, audit adjustments required for multiple journal
entries, insufficient footnote disclosure in certain instances,
and, although expected for a company of Legacy
HQ’s size, inadequate segregation of duties, provider
oversight, and review control.
Item 9B. Other Information
None.
PART
III
Item 10. Directors, Executive Officers, and Corporate
Governance
On December 3, 2019, as part of our
post-merger review of our corporate governance policies, we adopted
and approved the HireQuest, Inc. Code of Ethics and Business
Conduct (the “Code”). We adopted the Code to, among
other things, address the changes to the Company resulting from the
Merger. The Code applies to all directors, officers and employees
of the Company and all of our subsidiaries. The Code replaces the
Command Center, Inc. Standards of Ethics and Business Conduct in
its entirety (the “Command Center Code”).
The adoption of the Code did not
relate to or result in any waiver, whether explicit or implicit, of
any provision of the Command Center Code. A copy of the Code is
available on our website at www.hirequest.com by entering the
“Invest in HireQuest” tab, then clicking the
“Investor Relations” button, and finally selecting
“Corporate Governance.” We will satisfy the disclosure
requirement of Item 5.05 of Form 8-K (which requires disclosure on
Form 8-K or the company website of certain waivers or amendments of
the Code) by posting relevant information on our website at
www.hirequest.com. The contents of our website are not incorporated
by reference in this report.
The remaining information required
by this Item 10 will be included in the Proxy Statement for the
2020 Annual Meeting of Stockholders (the “Proxy
Statement”) or in an amendment ti this Annual Report on Form
10-K and is incorporated herein by reference.
Item 11. Executive
Compensation
The information
required by this Item 11 will be included in the Proxy Statement or
in an amendment to this Annual Report on Form 10-K and is
incorporated herein by reference.
Item 12. Security Ownership of
Certain Beneficial Owners and Management and Related Stockholder
Matters
The information
required by this Item 12 will be included in the Proxy Statement or
in an amendment to this Annual Report on Form 10-K and is
incorporated herein by reference.
Item 13.
Certain Relationships and Related
Transactions, and Director Independence
The information
required by this Item 13 will be included in the Proxy Statement or
in an amendment to this Annual Report on Form 10-K and is
incorporated herein by reference.
Item 14. Principal Accountant Fees
and Services
The information
required by this Item 14 will be included in the Proxy
Statement or in an amendment to this Annual Report on Form
10-K and is incorporated herein by reference.
55
PART IV
Item 15. Exhibits and Financial
Statement Schedules
(b) (1) All financial
statements:
Consolidated
Financial Statements can be found under Part II, Item 8 of this
Form 10-K.
(c)
Exhibits:
The following
exhibits are filed or furnished with this Form 10-K or incorporated
herein by reference.
|
Exhibit No.
|
Description
|
|
Plan of
Conversion, dated September 9, 2019 (incorporated by reference to
Exhibit 2.1 to the Company’s Current Report on Form 8-K,
filed with the SEC September 9, 2019).
|
|
|
Agreement and
Plan of Merger dated April 8, 2019, by and among Command Center,
Inc., CCNI One, Inc., Command Florida, LLC, Hire Quest Holdings,
LLC, and Richard Hermanns as Member Representative (incorporated by
reference to Exhibit 2.1 to the Company’s Current Report on
Form 8-K, filed with the SEC on April 9, 2019)
|
|
|
Certificate of
Conversion, as filed with the Secretary of State of the State of
Delaware on September 9, 2019 (incorporated by reference to Exhibit
3.1 to the Company’s Current Report on Form 8-K, filed with
the SEC September 9, 2019).
|
|
|
Certificate of
Incorporation, as filed with the Secretary of State of the State of
Delaware on September 9, 2019 (incorporated by reference to Exhibit
3.2 to the Company’s Current Report on Form 8-K, filed with
the SEC September 9, 2019).
|
|
|
Cover Sheet for
Conversion of Business Entity and Articles of Conversion, as filed
with the Secretary of State of Washington on September 11, 2019
(incorporated by reference to Exhibit 3.3 to the Company’s
Current Report on Form 8-K, filed with the SEC September 9,
2019).
|
|
|
Bylaws,
effective September 11, 2019 (incorporated by reference to Exhibit
3.4 to the Company’s Current Report on Form 8-K, filed with
the SEC September 9, 2019).
|
|
|
Form of Common
Stock Share Certificate (filed
herewith).
|
|
|
Description
of Securities (filed herewith).
|
|
|
Employment
Agreement among HQ LTS Corporation, the Company, and Richard
Hermanns (incorporated by reference to Exhibit 10.2 to the
Company’s Current Report on Form 8-K, filed with the SEC of
September 26, 2019).
|
|
|
Employment
Agreement among HQ LTS Corporation, the Company, and John D.
McAnnar (incorporated by reference to Exhibit 10.3 to the
Company’s Current Report on Form 8-K, filed with the SEC of
September 26, 2019).
|
|
|
Loan Agreement,
dated as of July 11, 2019, by and among Branch Banking and Trust
Company, Command Center, Inc., Command Florida, LLC, Hire Quest,
L.L.C., HQ LTS Corporation, HQ Real Property Corporation, HQ
Insurance Corporation, HQ Financial Corporation, and HQ Franchising
Corporation (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed with the SEC on
July 17, 2019).
|
|
|
Separation and
Release of Claims Agreement by and between the Company and Richard
K. Coleman executed August 29, 2019 (incorporated by reference to
Exhibit 10.1 to the Company’s Current Report on Form 8-K
filed with the SEC on September 4, 2019).
|
|
|
Form of
Indemnification Agreement (Directors and Officers) (incorporated by
reference to Exhibit 10.1 to the Company’s Current Report on
Form 8-K, filed with the SEC on September 9, 2019).
|
|
2019 HireQuest, Inc.
Non-Employee Director Compensation Plan (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
filed with the SEC on September 26, 2019).
|
|
|
Addendum to Employment
Agreement between the Company and Cory Smith (incorporated by
reference to Exhibit 10.4 to the Company’s Current Report on
Form 8-K, filed with the SEC on September 26, 2019).
|
|
|
Consulting Agreement by and
between Command Center, Inc. and Dock Square HQ, LLC, dated July
15, 2019 (incorporated by reference to Exhibit 10.8 to the
Company’s Quarterly Report on Form 10-Q, filed with the SEC
on November 13, 2019).
|
|
|
Form of Restricted Stock
Award Agreement pursuant to the Company’s 2016 Stock
Incentive Plan (incorporated by reference to Exhibit 10.9 to the
Company’s Quarterly Report on Form 10-Q, filed with the SEC
on November 13, 2019).
|
|
|
Executive Employment
Agreement by and between the Company and Brendan Simaytis, dated
June 30, 2019 (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed with the SEC on
July 1, 2019).
|
|
|
Consulting and
Nondisclosure Agreement, dated as of June 30, 2019, by and between
Command Center, Inc. and Brendan Simaytis (incorporated by
reference to Exhibit 10.2 to the Company’s Current Report on
Form 8-K, filed with the SEC on July 1, 2019).
|
|
|
Form of Asset Purchase
Agreement (incorporated by reference to Exhibit 10.12 to the
Company’s Quarterly Report on Form 10-Q, filed with the SEC
on November 13, 2019).
|
|
|
Amended and Restated
Employment Agreement, by and between the Company and Richard K.
Coleman, Jr., effective March 31, 2019 (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K,
filed with the SEC on April 4, 2019).
|
|
|
Executive Employment
Agreement, dated as of June 5, 2019, between Command Center, Inc.
and Cory Smith (incorporated by reference to Exhibit 10.1 to the
Company’s Current Report on Form 8-K, filed with the SEC on
June 10, 2019).
|
|
|
List of subsidiaries of the
Company (filed herewith).
|
|
|
Consent of Plante &
Moran, PLLC (filed herewith).
|
|
|
Certification of Chief
Executive Officer - § 302 Certification (filed
herewith).
|
|
|
Certification of Chief
Financial Officer - § 302 Certification (filed
herewith).
|
|
|
Certification of Chief
Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
§ 1350, as adopted in § 906 of the Sarbanes-Oxley Act of
2002 (filed herewith).
|
|
|
101.INS
|
XBRL Instance Document
(filed herewith).
|
|
101.SCH
|
XBRL Taxonomy Extension
Schema Document (filed herewith).
|
|
101.CAL
|
XBRL Taxonomy Extension
Calculation Linkbase Document (filed herewith).
|
|
101.DEF
|
XBRL Taxonomy Extension
Definition Linkbase Document (filed herewith).
|
|
101.LAB
|
XBRL Taxonomy Extension
Label Linkbase Document (filed herewith).
|
|
101.PRE
|
XBRL Taxonomy Extension
Presentation Linkbase Document (filed herewith).
|
56
SIGNATURES
In accordance
with Section 13 and 15(d) of the Exchange Act, the registrant
caused this Form 10-K to be signed on its behalf by the
undersigned, thereunto duly authorized.
HIREQUEST,
INC.
|
/s/ Richard F.
Hermanns
|
|
Richard F.
Hermanns
|
|
March 30, 2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
President, Chief Executive
Officer, Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Cory Smith
|
|
Cory Smith
|
|
March 30, 2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
Treasurer, Chief Financial
Officer
|
|
|
|
|
POWER OF
ATTORNEY
Each person
whose individual signature appears below hereby authorizes and
appoints Richard Hermanns, Cory Smith, and John McAnnar, and each
of them, with full power of substitution and resubstitution and
full power to act without the other, as his true and lawful
attorney-in-fact and agent to act in his name, place and stead and
to execute in the name and on behalf of each person, individually
and in each capacity stated below, and to file any and all
amendments to this annual report on Form 10-K and to file the same,
with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting
unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing,
ratifying and confirming all that said attorneys-in-fact and agents
or any of them or their or his substitute or substitutes may
lawfully do or cause to be done by virtue
thereof.
In accordance
with the Exchange Act, this Form 10-K has been signed below by the
following persons on behalf of the registrant and in the capacities
and on the dates indicated.
|
/s/ JD Smith
|
|
JD
Smith
|
|
March 30, 2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ R. Rimmy
Malhotra
|
|
R.
Rimmy Malhotra
|
|
March 30, 2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Kathleen
Shanahan
|
|
Kathleen
Shanahan
|
|
March 30, 2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Payne
Brown
|
|
Payne Brown
|
|
March 30, 2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Lawrence F.
Hagenbuch
|
|
Lawrence F.
Hagenbuch
|
|
March 30, 2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Edward
Jackson
|
|
Edward Jackson
|
|
March 30,
2020
|
|
Signature
|
|
Printed Name
|
|
Date
|
|
Director
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Richard F.
Hermanns
|
|
Richard F.
Hermanns
|
|
March 30,
2020
|
|
Signature
|
|
Printed
Name
|
|
Date
|
|
Chairman of the Board of
Directors
|
|
|
|
|
57