HireQuest(HQI) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements HireQuest's total revenues increased to $18.8 million due to acquisitions, but net income declined to $4.4 million from $5.3 million due to higher expenses Consolidated Balance Sheets Total assets increased to $107.8 million, driven by accounts receivable, while liabilities rose to $45.8 million due to increased line of credit borrowings Consolidated Balance Sheet Highlights (unaudited) | (in thousands) | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $57,869 | $51,930 | | Total assets | $107,808 | $103,283 | | Total current liabilities | $40,598 | $36,780 | | Line of credit | $16,504 | $12,543 | | Total liabilities | $45,762 | $45,029 | | Total stockholders' equity | $62,046 | $58,254 | Consolidated Statements of Income Q2 2023 revenue grew to $9.0 million, but a surge in expenses led to net income from continuing operations dropping to $2.1 million Consolidated Income Statement Summary (unaudited) | (in thousands, except per share data) | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $8,990 | $8,000 | $18,848 | $15,045 | | Income from operations | $2,665 | $4,256 | $5,981 | $8,147 | | Net income from continuing operations | $2,053 | $4,798 | $4,371 | $5,290 | | Net income | $2,008 | $4,891 | $4,638 | $5,494 | | Diluted EPS (Total) | $0.15 | $0.36 | $0.34 | $0.40 | Consolidated Statements of Cash Flows Net cash from operating activities reversed to an outflow of $228,000, primarily due to increased accounts receivable, while financing activities used $979,000 Cash Flow Summary (unaudited) | (in thousands) | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(228) | $9,083 | | Net cash provided by (used in) investing activities | $229 | $(9,962) | | Net cash (used in) provided by financing activities | $(979) | $751 | | Net decrease in cash | $(978) | $(128) | | Cash, end of period | $2,071 | $1,128 | Notes to Consolidated Financial Statements Notes detail the company's staffing franchisor business, significant 2022 acquisitions, debt refinancing, and discontinued operations - The company operates as a nationwide franchisor of offices providing direct-dispatch, executive search, and commercial staffing solutions under various trade names including 'HireQuest Direct', 'Snelling', and 'MRI'[18] - In 2022, the company completed four major acquisitions: Temporary Alternatives, The Dubin Group, Northbound Executive Search, and MRINetwork, significantly expanding its operations and franchise base[19] Franchise Royalties by Business Model (in thousands) | | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | HireQuest Direct | $3,810 | $4,417 | $7,888 | $7,949 | | Other Brands (HireQuest, Snelling, MRI, etc.) | $4,894 | $2,804 | $10,139 | $5,848 | | Total | $8,704 | $7,221 | $18,027 | $13,797 | - On February 28, 2023, the company entered into a new $50 million revolving credit facility with Bank of America, replacing its prior agreement with Truist Bank[107] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue growth in Q2 2023 was driven by acquisitions, though offset by pre-existing location declines and increased operating expenses Results of Operations Q2 2023 revenue grew to $9.0 million due to acquisitions, but operating expenses surged to $6.3 million, causing net income to fall to $2.1 million - Total revenue for Q2 2023 increased 12.4% to $9.0 million, driven by the MRINetwork acquisition, which offset a decrease from pre-existing locations[168][169] - Operating expenses for Q2 2023 increased 68.9% to $6.3 million, primarily due to higher compensation and administrative costs inherited from the MRINetwork acquisition[174] Reconciliation of Net Income to Adjusted EBITDA (in thousands) | | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Six months ended June 30, 2023 | Six months ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income | $2,008 | $4,891 | $4,638 | $5,494 | | Adjusted EBITDA | $3,871 | $5,848 | $8,452 | $10,800 | Liquidity and Capital Resources Primary liquidity sources are cash from operations and a $50 million credit facility, with $17.3 million in working capital and $23.2 million available - At June 30, 2023, the company had current assets exceeding current liabilities by $17.3 million[215] - The company entered a new $50 million revolving credit facility with Bank of America on February 28, 2023, which matures in 2028. As of June 30, 2023, availability under the facility was approximately $23.2 million[223][226] Key Performance Indicator: System-Wide Sales System-wide sales increased 30.8% to $157.0 million in Q2 2023, primarily due to the MRINetwork acquisition, despite a decline in pre-existing location sales System-Wide Sales by Brand (in thousands) | | Three months ended June 30, 2023 | Three months ended June 30, 2022 | Change | | :--- | :--- | :--- | :--- | | HireQuest Direct | $62,166 | $64,997 | (4.4)% | | Snelling and HireQuest | $41,909 | $46,162 | (9.2)% | | Northbound, MRI, and SearchPath | $49,236 | $4,910 | 902.8% | | Total System-wide sales | $156,966 | $120,032 | 30.8% | - The addition of MRINetwork accounted for $43.5 million of the increase in system-wide sales during Q2 2023, while sales from pre-existing locations decreased by approximately $6.6 million[233] Quantitative and Qualitative Disclosures about Market Risk As a "smaller reporting company," HireQuest, Inc. is not required to provide the information for this item - The company is a "smaller reporting company" as defined by Rule 12b-2 of the Exchange Act and is not required to provide quantitative and qualitative disclosures about market risk[239] Controls and Procedures Disclosure controls and procedures were ineffective due to a material weakness in accounting resources, with remediation efforts underway - A material weakness in internal control over financial reporting was identified, as the company did not have sufficient accounting resources to handle the volume of technical accounting issues and provide adequate review[241] - Despite the material weakness, management concluded that the financial statements in this report are fairly presented in all material respects[242] - Management's remediation plan includes hiring additional accounting staff and engaging third-party professionals to strengthen internal controls[243] PART II. OTHER INFORMATION Legal Proceedings The company is involved in various legal and administrative proceedings in the normal course of business but does not anticipate any of these to result in material uninsured losses or have a material adverse effect on its financial condition - The company does not expect material uninsured losses to arise from any of its current legal matters[247] Risk Factors No material changes to risk factors except for a new risk concerning adverse developments in the financial services industry impacting liquidity - A new risk factor has been added regarding adverse developments affecting the financial services industry, citing the recent failures of Silicon Valley Bank (SVB) and Signature Bank[249] - This new risk highlights that instability in the banking sector could impact the company's access to funding, credit, and liquidity, potentially affecting its ability to meet financial obligations[249][250] Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities during the period - None Other Information There is no other information to report for this item - None Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications (Exhibits 31.1, 31.2, 32.1) and Inline XBRL documents