HireQuest(HQI) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements This section presents HireQuest, Inc.'s unaudited consolidated financial statements, including balance sheets, income, equity, and cash flows, for the period ended June 30, 2020 Consolidated Balance Sheets As of June 30, 2020, total assets increased to $48.2 million, cash significantly rose to $13.7 million, and stockholders' equity grew to $33.9 million Consolidated Balance Sheet Highlights (unaudited) | Balance Sheet Items | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash | $13,746,445 | $4,187,450 | | Accounts receivable, net | $19,646,917 | $28,201,279 | | Total current assets | $38,581,091 | $37,021,125 | | Total assets | $48,193,600 | $46,912,062 | | Liabilities & Equity | | | | Total current liabilities | $10,400,756 | $11,011,977 | | Total liabilities | $14,314,224 | $15,629,980 | | Total stockholders' equity | $33,879,376 | $31,282,082 | Consolidated Statements of Income Q2 2020 total revenue decreased to $2.9 million with net income of $1.16 million, while H1 2020 revenue increased to $7.0 million but net income declined to $2.03 million Financial Performance (unaudited) | Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $2,900,990 | $3,238,665 | $7,020,970 | $6,710,915 | | Income from Operations | $937,512 | $2,345,828 | $1,772,308 | $4,251,620 | | Net Income | $1,157,002 | $2,306,096 | $2,032,180 | $4,023,581 | | Diluted EPS | $0.09 | $0.23 | $0.15 | $0.40 | Consolidated Statements of Changes in Stockholders' Equity Stockholders' equity increased to $33.9 million by June 30, 2020, primarily driven by net income and stock-based compensation - For the six months ended June 30, 2020, total stockholders' equity increased by approximately $2.6 million, from $31,282,082 to $33,879,376[16] - This was primarily driven by net income of $2,032,180 and stock-based compensation of $565,057[16] Consolidated Statements of Cash Flows Net cash from operating activities significantly increased to $9.7 million for H1 2020, leading to a $9.6 million rise in the cash balance, ending at $13.7 million Cash Flow Summary - Six Months Ended June 30 (unaudited) | Cash Flow Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,665,926 | $1,547,849 | | Net cash (used in) provided by investing activities | ($144,722) | $983,026 | | Net cash provided by (used in) financing activities | $37,791 | ($3,810,895) | | Net increase (decrease) in cash | $9,558,995 | ($1,280,020) | | Cash, end of period | $13,746,445 | $11,297 | Notes to Consolidated Financial Statements These notes detail accounting policies, the impact of COVID-19, merger accounting, and key disclosures including a $1.6 million allowance for notes receivable - The company operates as a nationwide franchisor of on-demand labor solutions under the trade names "HireQuest Direct" and "HireQuest"[21] - The COVID-19 pandemic has had a material adverse effect on the company's business and results of operations[27] - Due to the potential impact of COVID-19 on borrowers' performance, the company established an allowance of approximately $1.6 million as of June 30, 2020, for potentially uncollectible notes receivable[98] - In July 2020, the Board of Directors authorized a one-year repurchase plan for up to 1 million shares of common stock[102] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of COVID-19 on operations, highlighting depressed sales, maintained profitability, improved liquidity, and the presentation of system-wide sales Overview & COVID-19 Impact The COVID-19 pandemic significantly impacted the company's franchisor operations, depressing sales and leading to a $1.6 million notes receivable reserve, yet liquidity improved with cash growing by $9.5 million - The COVID-19 pandemic depressed system-wide sales and resulting revenue, though sales consistently increased month-over-month since April 2020[110] - Franchisees closed or consolidated 13 offices, at least in part, due to the financial impacts of COVID-19[111] - A reserve of $1.6 million was placed on promissory notes held from franchisees and the purchaser of California offices in response to depressed economic conditions[112] - The company's cash balance increased by approximately $9.5 million in the first half of 2020, from $4.2 million at year-end to $13.7 million[113] Results of Operations Q2 2020 saw an 11.5% decrease in franchise royalties and a 121.6% increase in SG&A, while H1 2020 royalties rose 3.4% but SG&A increased 113.9% due to a $1.6 million reserve Financial Summary (in thousands) | | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 | | :--- | :--- | :--- | :--- | :--- | | Franchise royalties | $2,639 | $2,981 | $6,345 | $6,138 | | Total revenue | $2,901 | $3,239 | $7,021 | $6,711 | | SG&A expenses | $1,931 | $871 | $5,184 | $2,424 | | Net income | $1,157 | $2,306 | $2,032 | $4,024 | - Q2 2020 franchise royalties decreased 11.5% YoY to $2.6 million, negatively impacted by COVID-19[118] - H1 2020 SG&A expenses increased 113.9% YoY, primarily due to a $1.6 million reserve placed on notes receivable related to the negative economic impact of COVID-19[126] Liquidity and Capital Resources The company's liquidity is strong, with current assets exceeding liabilities by $28.2 million, cash increasing to $13.7 million, and $19.9 million available on its $30 million line of credit - As of June 30, 2020, current assets exceeded current liabilities by approximately $28.2 million[129] - Cash balance increased from $4.2 million at the end of 2019 to $13.7 million at the end of Q2 2020, as payroll funding needs decreased and accounts receivable were collected[130] - The company has a $30 million line of credit with Truist Bank, of which $19.9 million was available as of June 30, 2020[72] Non-GAAP Financial Measure: System-Wide Sales System-wide sales, a non-GAAP measure, decreased 15.2% to $44.1 million in Q2 2020 due to COVID-19, while H1 2020 sales slightly increased 1.0% to $100.1 million System-Wide Sales (Non-GAAP) | Period | 2020 | 2019 | Change | | :--- | :--- | :--- | :--- | | Three months ended June 30 | $44,073,695 | $51,960,747 | -15.2% | | Six Months ended June 30 | $100,536,300 | $99,524,968 | +1.0% | Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk - As a "smaller reporting company," HireQuest is not required to provide quantitative and qualitative disclosures about market risk[143] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - Management concluded that disclosure controls and procedures were effective as of the end of the reporting period[144] - No material changes in internal control over financial reporting were identified during the quarter ended June 30, 2020[144] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal proceedings but does not anticipate any material adverse effects on its business or financial condition - The company does not expect any material adverse effects on its business, financial condition, or results of operations from current legal proceedings[146] Risk Factors This section updates risk factors, primarily focusing on the COVID-19 pandemic's impact on the economy, franchisee health, and increased credit risk from loans to franchisees - The COVID-19 pandemic is identified as a serious threat, causing declines in system-wide sales and revenue, and leading to the closure or consolidation of 13 franchised offices[148][149] - The company's success is highly dependent on the financial health and cooperation of its franchisees, whose businesses have been negatively impacted by the pandemic[152] - The company faces significant credit risk from loans to franchisees and the purchaser of its California offices, leading to a $1.6 million reserve for potential non-payment due to COVID-19's economic impact[153] Unregistered Sales of Equity Securities and Use of Proceeds The company did not issue any unregistered securities or repurchase its own equity securities during the three months ended June 30, 2020 - No unregistered securities were issued during the three months ended June 30, 2020[154] - The company did not purchase any of its own securities during the three months ended June 30, 2020[155] Other Information No other information is reported for the period - None[156] Exhibits This section lists exhibits filed with the Form 10-Q, including the 2019 Equity Incentive Plan, certifications, and XBRL data files - A list of exhibits filed with the report is provided, including the 2019 Equity Incentive Plan, § 302 and § 906 certifications, and XBRL data files[157]