Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)

hqi20240930_10q.htm

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

HireQuest, Inc.

Consolidated Balance Sheets

See accompanying notes to consolidated financial statements.

HireQuest, Inc.

Consolidated Statements of Operations

(unaudited)

See accompanying notes to consolidated financial statements.

HireQuest, Inc.

Consolidated Statements of Changes in Stockholders' Equity

(unaudited)

See accompanying notes to consolidated financial statements.

HireQuest, Inc.

Consolidated Statements of Cash Flows

(unaudited)

See accompanying notes to consolidated financial statements.

HireQuest, Inc.

Notes to Consolidated Financial Statements

(unaudited)

Note 1 - Overview and Summary of Significant Accounting Policies

Nature of Business

HireQuest, Inc., together with its subsidiaries, ("HQI," the "Company," "we," us," or "our") is a nationwide franchisor of offices providing direct-dispatch, executive search, and commercial staffing solutions primarily in the light industrial and blue-collar segments of the staffing industry and traditional commercial staffing. Our franchisees provide various types of temporary personnel through two primary business models operating under the trade names "HireQuest Direct", "HireQuest", "Snelling", "DriverQuest", "HireQuest Health", "TradeCorp", "SearchPath", "Northbound Executive Search", "Management Recruiters International", "Sales Consultants" and "MRI". HireQuest Direct specializes primarily in unskilled and semi-skilled industrial and construction personnel. HireQuest, Snelling and TradeCorp specialize primarily in skilled and semi-skilled industrial personnel, clerical and administrative personnel, and permanent placement services. DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications. HireQuest Health specializes in skilled personnel in the medical and dental industries. Northbound Executive Search, MRI and SearchPath specialize in executive placement and consultant services.

On December 4, 2023 we completed our acquisition of customer relationships and certain other assets of TEC, The Employment Company ("TEC") for $9.8 million. TEC has been a premier provider of staffing services to the employers and workers in Northwest and Central Arkansas for over 40 years. For additional information related to these transactions, see Note 2 - Acquisitions.

As of September 30, 2024, we had 416 franchisee-owned offices and 1 company-owned office in 43 states, the District of Columbia, and 13 countries outside of the United States. We are the employer of record to approximately 80 thousand employees annually, who in turn provide services to thousands of clients in various industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, retail, and dental practices. We provide employment, marketing, working capital funding, software, and administrative services to our franchisees.

Basis of Presentation

We have prepared the accompanying consolidated financial statements in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"), and with the instructions to Article 8 of Regulation S-X. 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.

These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report filed on Form 10-K for the year ended December 31, 2023. Results for the interim periods presented are not necessarily indicative of the results expected for the full year or for any other period.

Consolidation

The consolidated financial statements include the accounts of HQI and all of its wholly-owned subsidiaries. Intercompany balances and transactions have been eliminated.

U.S. GAAP requires the primary beneficiary of a variable interest entity ("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 the beneficiary. We provide acquisition financing to some of our franchisees that could result in our having to absorb losses. This results in some franchisees being considered VIEs. We have reviewed our relationship with each of these franchisees and determined that we are not the primary beneficiary of any of these entities. Accordingly, we have not consolidated these entities.

Revision

Certain immaterial revisions have been made to the three months and nine months ended September 30, 2023 consolidated Statements of Operations for corrections to amounts included in the line item "Service revenue" to reclassify into the line items "Franchise royalties". These revisions did not have a significant impact on the financial statement line items impacted and had no effect on total revenue, net income, earnings per share, or stockholders' equity as previously reported.

Using the guidance in ASC Topic 250, Accounting Changes and Error Corrections, ASC Topic 250-S99-1, Assessing Materiality, and ASC Topic 250-S99-2, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, we evaluated whether our previously issued consolidated financial statements were materially misstated due to this classification error. Based upon our evaluation of both quantitative and qualitative factors, we believe that the effect of this classification error was not material to any previously reported quarterly period.

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, our allowance for credit losses, potential impairment of goodwill and other intangibles, stock-based compensation, and estimated fair value of assets and liabilities acquired.

Franchise Royalties

Below are summaries of our franchise royalties disaggregated by business model (in thousands):

		Three months ended			Nine months ended
		September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
HireQuest Direct		$	4,104			$	4,373			$	11,782			$	12,312
Snelling and HireQuest			2,372				2,414				6,772				7,234
DriverQuest and TradeCorp			260				82				626				308
HireQuest Health			104				133				310				398
Northbound, MRI, and SearchPath			2,148				1,903				5,539				6,765
Total		$	8,988			$	8,905			$	25,029			$	27,017

Service revenue, which forms the other component of our total revenue, consists of interest we charge our franchisees on overdue customer accounts receivable, trademark license fees, and other fees for optional services we provide. We recognize interest income based on the effective interest rate applied to the outstanding principal balance of overdue accounts. License fees are charged to some locations that utilize our intellectual property that are not franchisees. License fees are 9.0% of the gross margin for the location and are recognized when earned. We recognize revenue from optional services as we provide them.

Advertising fund revenue includes contributions to our National Advertising Fund by franchisees. Revenue related to these contributions is based on a percentage of sales of certain franchised locations and is recognized as earned.

Marketing and Advertising

We expense advertising and marketing costs as we incur them. These costs were approximately $318 thousand and $122 thousand during the three months ended September 30, 2024 and September 30, 2023, respectively, and approximately $924 thousand and $488 thousand during the nine months ended September 30, 2024 and September 30, 2023, respectively. These costs are included in general and administrative expenses.

Some of our MRI franchisees are required to pay an advertising fee equal to 0.5% - 1.0% of total net sales, which supports national advertising designed to build brand awareness and drive traffic for both potential customers and potential candidates. The national advertising effort is administered by us, with franchisees providing input. Some examples include subscriptions to various job boards, the creation of digital content for social media, supporting investments in marketing-related software, and purchasing video and print media.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2024, the Financial Accounting Standards Board ("FASB") issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40) which expands the required disclosures related to an entity's expenses and address requests from investors for more granular information about the make-up of expenses in commonly presented expense captions such as selling, general, and administrative. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027. We are currently evaluating the impact these changes may have on the Company's financial statements and related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740) - Improvements to Income Tax Disclosures, which requires enhancements and further transparency to certain income tax disclosures, primarily to the tax rate reconciliation and income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024, on a prospective basis with retrospective application permitted. The adoption of this new guidance is not expected to have a significant impact on the Company's financial statements and related disclosures.

In November 2023, FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an interim and annual basis, primarily regarding significant segment expenses and information used to assess segment performance. This ASU is effective for fiscal years beginning after December 15, 2023, and interim periods beginning after December 15, 2024. Retrospective application is required for all periods presented. The adoption of this new guidance is not expected to have a significant impact on the Company's financial statements and related disclosures.

There are no other new accounting pronouncements, issued or effective during the fiscal year, that are expected to have a significant impact on our financial statements and related disclosures.

Note 2 - Acquisitions

Asset Acquisitions

TEC, The Employment Company

On December 4, 2023 we completed our acquisition of the customer relationships and certain other assets of TEC in accordance with the terms of the Asset Purchase Agreement dated October 23, 2023 (the "TEC Agreement"). TEC was a premier provider of industrial staffing services to the employers in Northwest and Central Arkansas for over 40 years.

The following table summarizes the estimated fair values of the identifiable assets acquired as of the acquisition date:

Cash consideration		$	9,750
Total consideration		$	9,750
Customer relationships		$	9,750

We determined the TEC transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the customer relationships. Accordingly, no pro forma financial information is presented.

Franchise royalties attributable to the acquiree of approximately $367 thousand are included in our Consolidated Statement of Operations for the three months ended September 30, 2024 and approximately $1.1 million are included in our Consolidated Statement of Operations for the nine months ended September 30, 2024.

Immediately after the acquisition, we sold all of the assets acquired. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the assets was approximately $7.6 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $2.1 million related to incentives given to the purchasers of the TEC assets by HQI which is reflected on the line item, "Other miscellaneous expense," in our Consolidated Statement of Operations for the year ended December 31, 2023.

Note 3 - Related Party Transactions

Prior to entering into a new related party transaction which is disclosable pursuant to Item 404 of Regulation S-K, the Audit Committee reviews and monitors all relevant information available. In addition, the Audit Committee reviews a summary of related parties and related party transactions on a quarterly basis. The Audit Committee, in its sole discretion, may approve the related party transaction only if it determines, in good faith and under all circumstances, that the transaction is in the best interests of the Company and its shareholders. The Audit Committee, in its sole discretion, may also impose conditions as it deems appropriate on the Company or the related party in connection with the approval of the related party transaction.

Several significant shareholders and directors of HQI own portions of Jackson Insurance Agency, Bass Underwriters, Inc., Insurance Technologies, Inc., and a number of our franchisees (in whole or in part).

Jackson Insurance Agency ("Jackson Insurance") and Bass Underwriters, Inc. ("Bass")

Edward Jackson, a member of our Board and significant stockholder, and a member of Mr. Jackson's immediate family own Jackson Insurance. Mr. Jackson, Richard Hermanns, our CEO, Chairman of our Board, and largest stockholder, and irrevocable trusts set up by each of them, collectively own a majority of Bass, a large managing general agent.

Jackson Insurance and Bass brokered property, casualty, general liability, and cybersecurity insurance for a series of predecessor entities prior to the 2019 merger with Command Center. Since July 15, 2019, they have continued to broker these same policies for HQI. Jackson Insurance also brokers certain insurance policies on behalf of some of our franchisees, including the Worlds Franchisees (defined below).

During the three months ended September 30, 2024 and September 30, 2023, Jackson Insurance and Bass invoiced HQI approximately $96 thousand and $329 thousand, respectively, for premiums, taxes, and fees related to these insurance policies. During the nine months ended September 30, 2024 and September 30, 2023, Jackson Insurance and Bass invoiced HQI approximately $1.7 million and $534 thousand, respectively, for premiums, taxes, and fees related to these insurance policies. Jackson Insurance and Bass retain a commission of approximately 9% - 15% of premiums.

Insurance Technologies, Inc. ("Insurance Technologies")

Mr. Jackson, Mr. Hermanns, and irrevocable trusts set up by each of them, collectively own a majority of Insurance Technologies, an IT development and security firm. On October 24, 2019, HQI entered into an agreement with Insurance Technologies 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. In addition, Insurance Technologies assisted with the IT diligence and integration process with respect to the Snelling and LINK acquisitions.

During the three months ended September 30, 2024 and September 30, 2023, Insurance Technologies invoiced HQI approximately $134 thousand and $208 thousand, respectively, for services provided pursuant to this agreement. During the nine months ended September 30, 2024 and September 30, 2023, Insurance Technologies invoiced HQI approximately $431 thousand and $318 thousand, respectively, for services provided pursuant to this agreement.

The Worlds Franchisees

Mr. Jackson and immediate family members of Mr. Hermanns have significant ownership interests in certain of our franchisees (the "Worlds Franchisees"). There were 35 Worlds Franchisees at September 30, 2024 that operated 71 of our 416 franchisee-owned offices.

Other transactions regarding the Worlds Franchisees are summarized below (in thousands):

		Three months ended			Nine months ended
		September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
Franchisee royalties		$	2,482			$	2,414			$	7,346			$	7,300

Balances regarding the Worlds Franchisees are summarized below (in thousands):

		September 30, 2024			December 31, 2023
Due to franchisees		$	2,481			$	2,677
Risk management incentive program liability			329				267

Note 4 - Line of Credit and Term Loans

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

On February 28, 2023 the Company and all of its subsidiaries as borrowers entered into a Revolving Credit Agreement (the "Credit Agreement") with Bank of America, N.A. for a $50,000,000 revolving facility (the "Senior Credit Facility"), which includes a $20,000,000 sublimit for the issuance of standby letters of credit. The Company also has a one-time right, upon at least ten Business Days' prior written notice to the bank to increase the maximum amount of the Senior Credit Facility to $60 million. As of September 30, 2024 this has not been exercised. The Senior Credit Facility provides for certain financial covenants including maintaining an Asset Coverage Ratio of at least 1.0:1.0 at all times; maintaining a Total Funded Debt to Adjusted EBITDA Ratio not exceeding 3.0:1.0; and maintaining, on a consolidated basis, a Fixed Charge Coverage Ratio of at least 1.25:1.0. As of September 30, 2024 we were in compliance with all financial covenants.

Interest will accrue on the outstanding balance of the line of credit at a variable rate equal to (a) the Term SOFR Daily Floating Rate (as defined in the Credit Agreement) plus a margin between 1.00% and 1.75% per annum. In each case, the applicable margin is determined by the Company's Total Funded Debt to Adjusted EBITDA, as defined in the Credit Agreement. At September 30, 2024 the effective interest rate was approximately 6.2%. The Senior Credit Facility will mature on February 28, 2028. As part of the refinancing transaction we recorded a loss on debt extinguishment of approximately $318 thousand during the nine months ended September 30, 2023, which is reflected on the line item, "Interest and other financing expense," in our Consolidated Statement of Operations.

The Credit Agreement and other loan documents contain customary representations and warranties, affirmative, and negative covenants, including without limitation, those covenants governing indebtedness, liens, fundamental changes, restricting certain payments including dividends unless certain conditions are met, transactions with affiliates, investments, engaging in business other than the current business of the Company and all of its subsidiaries and business reasonably related thereto, and sale/leaseback transactions. The Credit Agreement and other loan documents also contain customary events of default including, without limitation, payment default, material breaches of representations and warranties, breach of covenants, cross-default on material indebtedness, certain bankruptcies, certain ERISA violations, material judgments, change in control, termination or invalidity of any guaranty or security documents, and defaults under other loan documents. The obligations under the Credit Agreement and other loan documents are secured by substantially all of the assets of the Company and all of its subsidiaries as collateral including, without limitation, their accounts and notes receivable, intellectual property and the real estate owned by HQ Real Property Corporation.

At September 30, 2024, approximately $9.2 million of availability under the Senior Credit Facility was utilized by outstanding letters of credit that secure our obligations to our workers' compensation insurance carrier, and $500 thousand was utilized by a letter of credit that secures our pay-card funding account. For additional information related to the letter of credit securing our workers' compensation obligations see Note 5 - Workers' Compensation Insurance and Reserves.

Term Loan

In connection with the Northbound acquisition, we entered into an amortizing term loan from the seller for $1.5 million scheduled to mature on March 1, 2025 that bears interest at 4.0%. The Northbound term loan is unsecured and subordinated to the Senior Credit Facility. The Northbound term loan is payable in 36 monthly installments beginning on April 1, 2022 until March 1, 2025. We may prepay the Northbound term loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment.

The following table provides the estimated future maturities of term loans as of September 30, 2024 (in thousands):

2024			87
2025			132
Total future maturities			219

Note 5 - Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, accounts payable, the line of credit and all other current assets and liabilities approximate fair values due to their short-term nature. The fair value of notes receivable approximates the amortized cost basis as adjusted by an allowance for credit losses as we believe the stated interest rates reflects the prevailing market rates given our unique collateral position and the scarce capital resources willing to finance a franchise. The fair value of the term loan payable approximates its carrying value because current rates for similar borrowings do not have a material impact.

		September 30, 2024
(in thousands)			Total				Level 1				Level 2				Level 3
Cash		$	1,621			$	1,621			$	-			$	-
Notes receivable			8,438				-				8,438				-
Accounts receivable			50,492				-				50,492				-
Total assets at fair value		$	60,551			$	1,621			$	58,930			$	-
Term loan payable		$	219			$	-			$	219			$	-
Line of credit			13,403				-				13,403				-
Total liabilities at fair value		$	13,622			$	-			$	13,622			$	-

		December 31, 2023
(in thousands)			Total				Level 1				Level 2				Level 3
Cash		$	1,342			$	1,342			$	-			$	-
Notes receivable			9,622				-				9,622				-
Accounts receivable			44,394				-				44,394				-
Total assets at fair value		$	55,358			$	1,342			$	54,016			$	-
Term loan payable		$	646			$	-			$	646			$	-
Line of credit			14,119				-				14,119				-
Total liabilities at fair value		$	14,765			$	-			$	14,765			$	-

Note 6 - Workers'Compensation Insurance and Reserves

Note 7 - Stockholders' Equity

Dividend

Historically, we have paid a quarterly dividend. We intend to continue to pay a quarterly dividend based on our business results and financial position. The following common share dividends were paid during 2024 and 2023 (total paid in thousands):

Declaration date		Dividend			Total paid
March 1, 2023			0.06				833
June 1, 2023			0.06				835
September 1, 2023			0.06				837
December 1, 2023			0.06				836
March 1, 2024			0.06				838
June 1, 2024			0.06				838
September 1, 2024			0.06				841

Note 8 - Stock Based Compensation

Employee Stock Incentive Plan

In December 2019, our Board approved the 2019 HireQuest, Inc. Equity Incentive Plan (the "2019 Plan"). Subject to adjustment in accordance with the terms of the 2019 Plan, no more than 1.5 million shares of common stock are available in the aggregate for the grant of awards under the 2019 Plan. No more than 1 million shares may be issued in the aggregate pursuant to the exercise of incentive stock options. In addition, no more than 250 thousand shares may be issued in the aggregate to any employee or consultant, and no more than 50 thousand shares may be issued in the aggregate to any non-employee director, in any twelve-month period. Shares of common stock available for distribution under the Plan may consist, in whole or in part, of authorized and unissued shares, treasury shares or shares reacquired by the Company in any manner. The 2019 Plan was approved by our shareholders in June 2020 and became effective as of that date.

In September 2019, our Board approved a share purchase match program to encourage ownership and further align the interests of key employees and directors with those of our shareholders. Under this program, we will match 20% of any shares of our common stock purchased on the open market by or granted in lieu of cash compensation to key employees and directors up to $25 thousand in aggregate value per individual within any calendar year. These shares vest on the second anniversary of the date on which the matched shares were purchased if the individual is still employed by the Company or still serves as a director and certain other vesting criteria are met.During the first nine months of 2024, we issued 9,956 shares valued at approximately $144 thousand under this program. During the first nine months of 2023, we issued 3,702 thousand shares valued at approximately $72 thousand under this program.

In the first nine months of 2024, we issued 55,894 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $688 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these, 53,245 shares vested equally over the threemonths post grant. The remaining 2,649 shares were issued pursuant to our share purchase match program. Also, in the first nine months of 2024, we issued 5,270 shares pursuant to our share purchase match program to members of our Board of Directors valued at approximately $80 thousand. Also, in the first nine months of 2024, we issued 2,037 shares pursuant to our share purchase match program to key employees valued at approximately $29 thousand.

Also, in the first nine months of 2024, we issued 7,500 shares of restricted common stock pursuant to the 2019 Plan that vest over 4 years and were valued at approximately $101 thousand to a key employee for services in lieu of cash compensation.

In the first nine months of 2023, we issued 7,679 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $162 thousand to members of our Board of Directors for their services in lieu of cash compensation. Of these, 6,397 shares vested equally over the three months post grant. The remaining 1,282 shares were issued pursuant to our share purchase match program. Also, in the first nine months of 2023, we issued 1,261 shares pursuant to our share purchase match program to members of our Board of Directors valued at approximately $20 thousand.

Also, in the first nine months of 2023, we issued 55,431 shares of restricted common stock pursuant to the 2019 Plan valued at approximately $1.2 million to key employees for services in lieu of cash compensation. Of these, 9,272 shares were issued to our CEO and vest equally over the threemonths post grant. Of the remaining shares, 45,000 vest over 4 years and 1,159 shares were issued pursuant to our share purchase match program.

The following table summarizes our restricted stock outstanding at December 31, 2023, and changes during the nine months ended September 30, 2024 (number of shares in thousands).

		Shares			Weighted average grant date price
Non-vested, December 31, 2023			155			$	17.52
Granted			70				12.71
Vested			(73	)			15.01
Non-vested, September 30, 2024			152				16.50

Stock options that were outstanding at Command Center were deemed to be issued on the date of the merger with Legacy HQ. Outstanding awards continue to remain in effect according to the terms of the Command Center 2008 Plan, the Command Center 2016 Plan, and the corresponding award documents. There were approximately 13 thousand stock options vested at September 30, 2024 and December 31, 2023.

The following table summarizes our stock options outstanding at December 31, 2023, and changes during the nine months ended September 30, 2024 (number of shares in thousands).

		Number of shares underlying options			Weighted average exercise price per share			Weighted average grant date fair value
Outstanding, December 31, 2023			13			$	5.47			$	2.98
Granted			-				-				-
Outstanding, September 30, 2024			13				5.47				2.98

There were nonon-vested stock options outstanding at September 30, 2024 or at December 31, 2023.

The following table summarizes information about our outstanding stock options, and reflects the intrinsic value recalculated based on the closing price of our common stock of $14.16 at September 30, 2024 (number of shares and intrinsic value in thousands).

		Number of shares underlying options			Weighted average exercise price per share			Weighted average remaining contractual life (years)			Aggregate intrinsic value
Outstanding and exercisable			13			$	5.47				3.5			$	112

At September 30, 2024, there was unrecognized stock-based compensation expense totaling approximately $1.2 million relating to non-vested restricted stock grants that will be recognized over the next 3.9 years.

Note 9 - Earnings per Share

We calculate basic earnings 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 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 and unvested restricted shares, except where their inclusion would be anti-dilutive. Outstanding common stock equivalents at September 30, 2024 and September 30, 2023 totaled approximately 152 thousand and 173 thousand, respectively.

We use the treasury stock method to calculate the diluted common shares outstanding which were as follows (in thousands):

		Three months ended			Nine months ended
		September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
Weighted average number of common shares used in basic net income per common share			13,834				13,751				13,817				13,709
Dilutive effects of unvested restricted stock and stock options			-				69				90				68
Weighted average number of common shares used in diluted net income per common share			13,834				13,820				13,907				13,777

Note 10 - Goodwill and Intangible Assets

Annual impairment test

During the third quarter of 2024, we completed our annual review of goodwill for potential impairment using a quantitative assessment for all of our reporting units. The fair value of each reporting unit was estimated using a weighting of a discounted cash flow model and prices of comparable businesses. As a result of this review, we concluded that the carrying value of our MRI reporting unit exceeded its estimated fair value resulting in an impairment charge of approximately $4.8 million. The goodwill impairment was primarily attributable to industry and market conditions effecting the overall financial performance of the reporting unit. These industry and market conditions were deemed a triggering event that led us to also review the fair value of certain indefinite-lived intangible assets related to the MRI reporting unit. As a result of this review we concluded the carrying value of the trade name related to MRI exceeded its estimated fair value resulting in an impairment charge of approximately $1.2 million. The related impairment was primarily attributable to industry and market conditions effecting the overall financial performance of the reporting unit. The balance for the trade name related to MRI was approximately $2.2 million and $940 thousand at December 31, 2023 and September 30, 2024, respectively.

The combined impairment charge of approximately $6.0 million is reflected in the line item, "Goodwill and intangible asset impairment charge," in our Consolidated Statements of Operations for the three and nine months ended September 30, 2024.

The table below reflects our goodwill and changes in the carrying value:

(in thousands)
Goodwill balance at December 31, 2023		$	5,870
Impairment charge during 2024			(4,795	)
Goodwill balance at September 30, 2024		$	1,075
Goodwill before impairment		$	5,870
Accumulated impairment charge			(4,795	)
Goodwill balance at September 30, 2024		$	1,075

Intangible Assets

The following table reflects our finite-lived and indefinite-lived intangible assets:

			September 30, 2024			December 31, 2023
(in thousands except useful life)	Estimated useful life			Gross				Accumulated amortization and impairment				Net				Gross				Accumulated amortization				Net
Finite-lived intangible assets:
Franchise agreements	15 years		$	25,556			$	(5,393	)		$	20,163			$	25,556			$	(4,116	)		$	21,440
Purchased software	7 years			3,200				(1,371	)			1,829				3,200				(1,029	)			2,171
Internally developed software	5 years			3,021				(847	)			2,174				2,683				(498	)			2,185
Total finite-lived intangible assets			31,777				(7,611	)			24,166				31,439				(5,643	)			25,796
Indefinite-lived intangible assets:
Domain name	Indefinite			2,226				-				2,226				2,226				-				2,226
Trade name	Indefinite			3,580				(1,240	)			2,340				3,580				-				3,580
Total intangible assets		$	37,583			$	(8,851	)		$	28,732			$	37,245			$	(5,643	)		$	31,602

Amortization expense related to intangible assets totaled approximately $656 thousand and $655 thousand for the three months ended September 30, 2024 and September 30, 2023, respectively, and $2.0 million for the nine months ended September 30, 2024 and September 30, 2023.

Note 11 - Commitments and Contingencies

Franchise Acquisition Indebtedness

New franchisees financed the purchase of several offices with promissory notes. In some instances, this financing resulted in certain franchises being considered VIEs. 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(s). The balance due from the franchises determined to be VIEs was approximately $7.4 million and $8.2 million on September 30, 2024 and December 31, 2023, respectively.

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 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 September 30, 2024.

Note 12 - Income Tax

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year and changes in tax law and tax rates. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known, or the tax environment changes.

Note 13 - Discontinued Operations

In connection with the Dubin acquisition, certain assets acquired are still owned by us and classified as held-for-sale. When we acquired Dubin, there were two business lines. Dubin Workforce Solutions specialized in temporary labor assignments. The Dubin Group focused on permanent recruiting. We immediately sold the assets of Dubin Workforce Solutions to a new franchisee. There was not a franchisee identified for the Dubin Group portion of the business, however, we began marketing the franchise and classified it as held-for-sale immediately upon acquisition. We entered into an employment agreement with the seller to continue managing the business as a Company-owned location while it was held-for-sale. During 2023, we actively solicited but did not receive any reasonable offers to purchase the assets and, in response, have adjusted the price and increased efforts to grow the customer base. The franchise continues to be actively marketed at a price that is reasonable given its results of operation. We expect to complete a sale of these assets within the next 12 months.

When we acquired Dental Power in 2021, we used the platform to build a customer base in the dental-oriented sector of the staffing industry to increase revenue opportunities under the HireQuest Health brand. Once we acquired MRI in December 2022, there were a number of natural buyers within the MRI Network. At that time we reclassified Dental Power to held-for-sale. On March 1, 2023, we agreed to sell the Dental Power assets to an MRI franchisee, who will continue to operate the business as part of their franchise. The sale agreement calls for proceeds of $2 million payable over 5 years with a market rate of interest. We recognized a gain of approximately $340 thousand in the first quarter of 2023 upon completion of the transaction.

Intangible assets associated with discontinued operations consist of a customer list with a net carrying value of approximately $891 thousand on September 30, 2024 and December 31, 2023.

The net (loss) income from discontinued operations as reported in our Consolidated Statements of Operations was comprised of the following amounts (in thousands):

		Three months ended			Nine months ended
		September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
Revenue		$	258			$	209			$	593			$	1,688
Cost of staffing services			82				102				203				1,106
Gross profit			176				107				390				582
Selling, general and administrative expenses			(232	)			(116	)			(580	)			(579	)
(Loss) gain on sale of intangible assets			-				(143	)			(11	)			196
Net (loss) income before tax			(56	)			(152	)			(201	)			199
(Benefit) provision for income taxes			(14	)			(37	)			(49	)			48
Net (loss) income		$	(42	)		$	(115	)		$	(152	)		$	151

Note 14 - Notes Receivable

Notes from Franchisees

Several franchisees borrowed funds from us primarily to finance the initial purchase price of office assets, including intangible assets.

Notes outstanding, net of allowance for losses, were approximately $8.4 million and $9.6 million as of September 30, 2024 and December 31, 2023, respectively. Notes receivable generally bear interest at a fixed rate between 6.0% and10.0%.Notes receivable are generally secured by the assets of each office and the ownership interests in the franchise. We report interest income on notes receivable as interest income in our Consolidated Statements of Operations. Interest income was approximately $138 thousand and $83 thousand during the three months ended September 30, 2024 and September 30, 2023, respectively, and was approximately $424 thousand and $197 thousand during the nine months ended September 30, 2024 and September 30, 2023, respectively.

We estimate the allowance for credit losses for franchisees separately from the allowance for credit losses from non-franchisees because of the level of detailed sales information available to us with respect to our franchisees. Based on our review of available collateral historical information, current conditions, and reasonable and supportable forecasts, we have established an allowance of approximately $623 thousand as of September 30, 2024 and December 31, 2023, for credit losses from franchisees.

The following table summarizes our notes receivable balance to franchisees (in thousands):

		September 30, 2024			December 31, 2023
Note receivable		$	9,061			$	10,245
Allowance for losses			(623	)			(623	)
Notes receivable, net		$	8,438			$	9,622

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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

Special Note Regarding Forward-Looking Statements

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

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

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

Overview

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

●

HireQuest Direct focuses on daily-work/daily-pay jobs primarily for construction and light industrial customers.

	●	TradeCorp focuses on skilled laborers and tradespeople, including apprentice, journeyman, and master-level professionals.
	●	Snelling, HireQuest, and TradeCorp focus on longer-term staffing positions in the light industrial and administrative arenas.

●

DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications.

●

HireQuest Health specializes in skilled personnel in the healthcare and dental industries.

●

Northbound Executive Search, MRI and SearchPath focus on executive, managerial, and professional recruitment services, although they also offer short-term consultant services.

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

As of September 30, 2024 we had 416 franchisee-owned offices and 1 company-owned office in 43 states, the District of Columbia, and 13 countries outside of the United States, and we licensed our trade names to 6 offices in California. In addition, on such date, there were5 MRI locations that provided contract staffing services only. We provide employment for an estimated 80 thousand temporary employees annually working for thousands of clients in many industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, retail, and dental.

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

Recent Developments

TEC, The Employment Company

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

Results of Operations

Financial Summary

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

		Three months ended			Nine months ended
		September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
Franchise royalties		$	8,988				95.5	%		$	8,905				96.1	%		$	25,029				94.4	%		$	27,017				96.1	%
Service revenue			428				4.5	%			366				3.9	%			1,486				5.6	%			1,101				3.9	%
Total revenue			9,416				100.0	%			9,271				100.0	%			26,515				100.0	%			28,118				100.0	%
Selling, general and administrative expenses			5,379				57.1	%			6,354				68.5	%			16,286				61.4	%			17,824				63.4	%
Goodwill and intangible asset impairment charge			6,035				64.1	%			-				0.0	%			6,035				22.8	%			-				0.0	%
Depreciation and amortization			697				7.4	%			699				7.5	%			2,092				7.9	%			2,096				7.5	%
(Loss) income from operations			(2,695	)			(28.6	)%			2,218				23.9	%			2,102				7.9	%			8,198				29.2	%
Other miscellaneous (expense) income			(65	)			(0.7	)%			117				1.3	%			12				0.0	%			259				0.9	%
Interest income			138				1.5	%			83				0.9	%			424				1.6	%			197				0.7	%
Interest and other financing expense			(268	)			(2.8	)%			(302	)			(3.3	)%			(763	)			(2.9	)%			(1,155	)			(4.1	)%
Net (loss) income before income taxes			(2,890	)			(30.7	)%			2,116				22.8	%			1,775				6.7	%			7,499				26.7	%
(Benefit) provision for income taxes			(725	)			(7.7	)%			518				5.6	%			172				0.6	%			1,530				5.4	%
Net (loss) income from continuing operations			(2,165	)			(23.0	)%			1,598				17.2	%			1,603				6.0	%			5,969				21.2	%
Net (loss) income from discontinued operations, net of tax			(42	)			(0.4	)%			(115	)			(1.2	)%			(152	)			(0.6	)%			151				0.5	%
Net (loss) income		$	(2,207	)			(23.4	)%		$	1,483				16.0	%		$	1,451				5.5	%		$	6,120				21.8	%
Non-GAAP data
Adjusted EBITDA		$	4,926				52.3	%		$	3,742				40.4	%		$	12,324				46.5	%		$	12,194				43.4	%

Use of Non-GAAP Financial Measure: Adjusted EBITDA

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

●

By excluding interest expense, Adjusted EBITDA measures our financial performance irrespective of our capital structure or how we finance our operations.

●

By excluding taxes on income, we believe Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding factors that are beyond our control.

●

By excluding depreciation and amortization expense, Adjusted EBITDA measures the financial performance of our operations without regard to their historical cost.

●

By excluding WOTC related costs, Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the costs associated with qualifying for this tax credit.

●

By excluding non-cash compensation, Adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the value of our restricted stock and stock option awards.

●

By excluding acquisition-related charges, net, Adjusted EBITDA provides a basis for measuring the financial performance of our operations without regard to gains or losses that arise from acquisitions.

●

By excluding other non-recurring charges and gains such as goodwill and intangible asset impairment, Adjusted EBITDA provides a basis for measuring financial performance without such items.

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

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

		Three months ended			Nine months ended
		September 30, 2024			September 30, 2023			September 30, 2024			September 30, 2023
Net (loss) income		$	(2,207	)		$	1,483			$	1,451			$	6,120
Interest expense			268				302				763				1,155
(Benefit) provision for income taxes			(725	)			518				172				1,530
Depreciation and amortization			697				699				2,092				2,096
EBITDA			(1,967	)			3,002				4,478				10,901
WOTC related costs			134				68				326				339
Non-cash compensation			549				306				1,249				928
Goodwill and intangible asset impairment			6,035				-				6,035				-
Acquisition related charges, net			100				66				111				(274	)
Write down of note receivable			75				300				125				300
Adjusted EBITDA		$	4,926			$	3,742			$	12,324			$	12,194

Three Months Ended September 30, 2024 Compared to the Three Months Ended September 30, 2023

Revenue

Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations, when applicable. Once a company-owned office is sold, disposed of, or otherwise classified as held-for-sale, it would not be reflected in revenue and instead reported as "Income from discontinued operations, net of tax." Revenue does not include any owned locations for the three months ended September 30, 2024 or the three months ended September 30, 2023.

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

Franchise Royalties

Franchise royalties for the three months ended September 30, 2024 were approximately $9.0 million, an increase of approximately 0.9% from $8.9 million for the three months ended September 30, 2023. Our net effective royalty rate (as a percentage of external system-wide sales) was 6.1% for the three-month period ended September 30, 2024 and 5.9% for the three months ended September 30, 2023. Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models under which we operate, as well as incentives we offer during the year. A summary of franchise royalties by brand for the three months ended September 30, 2024 and September 30, 2023 are as follows (in thousands):

		Three months ended
		September 30, 2024			September 30, 2023
Franchise royalties from HireQuest Direct		$	4,104			$	4,373
Franchise royalties from Snelling and HireQuest			2,372				2,414
Franchise royalties from DriverQuest and TradeCorp			260				82
Franchise royalties from HireQuest Health			104				133
Franchise royalties from Northbound, MRI, and SearchPath			2,148				1,903
Franchise royalties		$	8,988			$	8,905

Service Revenue

Service revenue consists of interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. Direct costs to provide certain services are reflected as a reduction in service revenue. As accounts receivable age over 42 days, our franchisees pay us interest on these accounts equal to 0.5% of the amount of the uncollected receivable each 14-day period. All accounts that age beyond 84 days are charged back to the franchisee and no longer incur interest, although some of our franchisees elect to charge back accounts that age over 42 days in order to avoid the interest charge. In addition to royalty fees, we also charge a license fee to some locations that utilize our intellectual property that are not franchisees. License fees are 9% of the gross margin for those locations. We have no employees and provide no services at the licensed locations. Service revenue also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vendor programs or IT license blocks. Generally, we do not profit from these arrangements as they represent pass-through items, although there may be timing differences. In addition, there are occasionally classification differences where the cost is embedded in selling, general and administrative expenses.

Service revenue for the three months ended September 30, 2024 was approximately $428 thousand, an increase of $62 thousand from the three months ended September 30, 2023, when service revenue was approximately $366 thousand. Interest income, which is included in service revenue was $197 thousand for the three months ended September 30, 2024 and $197 thousand for the three months ended September 30, 2023. Fluctuations in interestgenerally follow the mix of aged accounts in our accounts receivable, although relatively few age over 42 days and result in service revenue for us. Many of our franchisees have elected to charge back accounts early in order to avoid or reduce the interest charge. Therefore, there will not be a proportionally large increase in service revenue even when there is a large increase in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely. We view the imposition of higher interest rates on aged accounts receivable to serve as an incentive for our franchisees to select credit-worthy customers. Service revenue is expected to fluctuate from quarter-to-quarter.

Operating Expenses

Operating expenses for the three months ended September 30, 2024 were approximately $12.1 million compared to $7.1 million for the three months ended September 30, 2023. The increase of $5.0 million was primarily driven by a goodwill and intangible asset non-cash charge of $6.0 million related to the MRI acquisition- See Note 10 Goodwill and Intangible Assets partially offset by a $1.0 million decrease in Workers compensation expense. Overall, operating expenses represented 8.2% of system-wide-sales in the three months ended September 30, 2024 versus 4.7% of system-wide sales in the three months ended September 30, 2023.

Workers' Compensation

Workers' compensation expense was approximately $499 thousand for the three months ended September 30, 2024, a decrease of $968 thousand when compared to a net expense of approximately $1.5 million recorded in the three months ended September 30, 2023. Our workers' compensation reserves provide benefits following a workplace injury. Benefits are usually statutory in nature and are generally provided in partial or complete replacement of the injured worker's recourse to the liability system. Payments may include medical treatment, rehabilitation, lost wages, and survivor benefits. Workers compensation rating is typically based on job classification, and our workers fall in hundreds of classifications. Annually, we use third-party actuaries to ensure that the overall ratings are sound, that individual insurer rates are adequate, and that individual risks receive a fair rate that reflects both the characteristics of the job classification and the Company's risk experience. The company pays premiums, actual claims, and establishes reserves for future claims. In turn we charge our franchises a percentage of payroll as determined by our workers' compensation carrier, plus or minus certain incentives and charges we provide for good or bad workers' compensation claims history. The overall charge is an estimate of the fully developed future costs and may not always coincide with the actual costs we incur resulting in expense or benefit in a given period. Over the long-term, our workers' compensation expense should equal the amounts we collect from franchisees and essentially be a pass-through cost. In the short-term, we cannot accurately predict the effects of workers' compensation in specific future periods, and historical trends are not indicative of future results.

Compensation and Benefits

Compensation-related expenses include wages, payroll taxes, benefits, and stock-based compensation, and continue to be the largest component of operating expenses. Compensation and benefits for the three months ended September 30, 2024 was approximately $2.8 million which is essentially flat compared to $2.9 million for the three months ended September 30, 2023.

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

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

Depreciation and amortization

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

Other Income and Expense

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

Other miscellaneous income (expense)

For the three months ended September 30, 2024, other miscellaneous expense was approximately $65 thousand, compared to other miscellaneous income of $117 thousand for the three months ended September 30, 2023. This change was primarily driven by a gain on the disposal of a discontinued asset in the period ending September 30, 2023 and a loss of $100 thousand on the disposal of an intangible asset during the three months ended September 30, 2024.

Interest income and expense

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

Interest and other financing expense relates primarily to the Credit Agreement with Bank of America, N.A. Interest and other financing expense decreased from $302 thousand for the three months ended September 30, 2023 to $268 thousand for the three months ended September 30, 2024. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. The decrease in interest expense is consistent with the decrease in the outstanding line of credit balance.

Provision for income tax

Income tax benefit was approximately $725 thousand for the three months ended September 30, 2024. We estimate an annual projected effective tax rate ("ETR") for the year to determine income tax expense or benefit in the interim periods. The estimated annual ETR does not include tax effects from significant unusual or infrequently occurring items. Such items are accounted for discretely during the period in which they occur. The ETR is primarily driven by the federal WOTC, which is included as part of income tax expense because it can be claimed only on the income tax return and can be realized only through the existence of taxable income. Other significant items affecting our tax rate are windfall tax deductions related to stock-based compensation, and overall limits on executive compensation. Our net ETR for the three months ended September 30, 2024 was 25.1%.

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

Discontinued Operations

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

Following our acquisition of Dubin, we divided their operations into separate businesses and sold certain customer related assets of one of the acquired locations to a new franchisee. The remaining assets related to the operations of the other acquired location (in Philadelphia) have not been sold and as of September 30, 2024 remain classified as held-for-sale. In the meantime, we operate this Philadelphia location as company-owned, although all operations are presented as part of discontinued operations.

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

Nine Months Ended September 30, 2024 Compared to the Nine Months Ended September 30, 2023

Revenue

Our total revenue consists of franchise royalties and service revenue we receive from our franchises. Revenue would also include staffing revenue with respect to owned locations, when applicable. Once a company-owned office is sold, disposed of, or otherwise classified as held-for-sale, it would not be reflected in revenue and instead reported as "Income from discontinued operations, net of tax." Revenue does not include any owned locations for the nine months ended September 30, 2024 or the nine months ended September 30, 2023.

Total revenue for the nine months ended September 30, 2024 was approximately $26.5 million compared to $28.1 million for the nine months ended September 30, 2023, a decrease of 5.7%. For the nine months ended September 30, 2024, there was a $31.9 million or 6.9% decrease in underlying system-wide sales when compared to the prior year quarter. Revenue as a percentage of system-wide sales was 6.2% for the nine months ended September 30, 2024 versus 6.1% for the nine months ended September 30, 2023.The decrease in Total Revenue was primarily driven by a $23.6 million decrease in system-wide sales at MRI due to continued weakness in the staffing and recruiting sectors that MRI serves.

Franchise Royalties

Franchise royalties for the nine months ended September 30, 2024 were approximately $25.0 million, a decrease of 7.4% from $27.0 million for the nine months ended September 30, 2023. Of the $2.0 million net decrease,approximately $1.1 million was related to the decrease in system-wide sales in MRI.Our net effective royalty rate (as a percentage of external system-wide sales) was 5.8% for the nine-month period ended September 30, 2024 compared to 5.9% for the nine months ended September 30, 2023. Our net effective royalty rate will generally fluctuate due to mix of business among the various royalty models under which we operate, as well as incentives we offer during the year. A summary of franchise royalties by brand for the nine months ended September 30, 2024 and September 30, 2023 are as follows (in thousands):

		Nine months ended
		September 30, 2024			September 30, 2023
Franchise royalties from HireQuest Direct		$	11,782			$	12,312
Franchise royalties from Snelling and HireQuest			6,772				7,234
Franchise royalties from DriverQuest and TradeCorp			626				308
Franchise royalties from HireQuest Health			310				398
Franchise royalties from Northbound, MRI, and SearchPath			5,539				6,765
Franchise royalties		$	25,029			$	27,017

Service Revenue

Service revenue consists of interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. Direct costs to provide certain services are reflected as a reduction in service revenue. As accounts receivable age over 42 days, our franchisees pay us interest on these accounts equal to 0.5% of the amount of the uncollected receivable each 14-day period. All accounts that age beyond 84 days are charged back to the franchisee and no longer incur interest, although some of our franchisees elect to charge back accounts that age over 42 days in order to avoid the interest charge. In addition to royalty fees, we also charge a license fee to some locations that utilize our intellectual property that are not franchisees. License fees are 9% of the gross margin for the location. We have no employees and provide no services at the licensed locations. Service revenue also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vendor programs or IT license blocks. Generally, we do not profit from these arrangements as they represent pass-through items, although there may be timing differences. In addition, there are occasionally classification differences where the cost is embedded in selling, general and administrative expenses.

Service revenue for the nine months ended September 30, 2024 was approximately $1.5 million, an increase of $385 thousand from the nine months ended September 30, 2023, when service revenue was approximately $1.1 million. Interest income, which is included in service revenue was $570 thousand for the nine months ended September 30, 2024 and $659 thousand for the nine months ended September 30, 2023. Fluctuations in interestgenerally follow the mix of aged accounts in our accounts receivable, although relatively few age over 42 days and result in service revenue for us. Many of our franchisees have elected to charge back accounts early in order to avoid or reduce the interest charge. Therefore, there will not be a proportionally large increase in service revenue even when there is a large increase in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely. We view the imposition of higher interest rates on aged accounts receivable to serve as an incentive for our franchisees to select credit-worthy customers. Service revenue is expected to fluctuate from quarter-to-quarter.

Operating Expenses

Operating expenses for the nine months ended September 30, 2024 were approximately $24.4 million compared to $19.9 million for the nine months ended September 30, 2023, an increase of 22.6% or $4.5 million. The increase primarily relates to a non-cash goodwill and intangible asset impairment charge of $6.0 million partially offset by a $724 thousand reduction in Workers Compensation and a $1.1 million reduction in Compensation and Benefits. Overall, operating expenses including the goodwill and intangible impairment charge represented 5.7% of system-wide-sales in the nine months ended September 30, 2024.

Workers' Compensation

Workers' compensation expense was approximately $1.6 million for the nine months ended September 30, 2024, a decrease of $724 thousand when compared to a net expense of approximately $2.3 million recorded in the nine months ended September 30, 2023. Our workers' compensation reserves provide benefits following a workplace injury. Benefits are usually statutory in nature and are generally provided in partial or complete replacement of the injured worker's recourse to the liability system. Payments may include medical treatment, rehabilitation, lost wages, and survivor benefits. Workers compensation rating is typically based on job classification, and our workers fall in hundreds of classifications. Annually, we use third-party actuaries to ensure that the overall ratings are sound, that individual insurer rates are adequate, and that individual risks receive a fair rate that reflects both the characteristics of the job classification and the Company's risk experience. The company pays premiums, actual claims, and establishes reserves for future claims. In turn we charge our franchises a percentage of payroll as determined by our workers' compensation carrier, plus or minus certain incentives and charges we provide for good or bad workers' compensation claims history. The overall charge is an estimate of the fully developed future costs and may not always coincide with the actual costs we incur resulting in expense or benefit in a given period. Over the long-term, our workers' compensation expense should equal the amounts we collect from franchisees and essentially be a pass-through cost. In the short-term, we cannot accurately predict the effects of workers' compensation in specific future periods, and historical trends are not indicative of future results.

Compensation and Benefits

Compensation-related expenses include wages, payroll taxes, benefits, and stock-based compensation, and continue to be the largest component of operating expenses. Compensation and benefits for the nine months ended September 30, 2024 was approximately $8.5 million compared to $9.6 million for the nine months ended September 30, 2023, a decrease of 11.1% due to a reduction in headcount and the associated salary, benefits, bonus and insurance costs.

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

Other SG&A was $6.1 million for the ninemonths ended September 30, 2024 , an increase of $256 thousand or 4.3% from $5.9 million for the ninemonths ended September 30, 2023. This increase was driven primarily by a $436 thousand increase in Advertising & Marketing expense partially off-set by a $172 thousand reduction in computer expenses and professional fees.

Depreciation and amortization

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

Other Income and Expense

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

Other miscellaneous income

For the nine months ended September 30, 2024, other miscellaneous income was approximately $12 thousand, compared to other miscellaneous income of $259 thousand for the nine months ended September 30, 2023. The company received $158 thousand in rental income and $77 thousand from a gain on disposal of an intangible asset during the nine month period ending in September 30, 2023 compared to rental income of $76 thousand and a loss of $100 thousand on disposal of an intangible asset in the nine month period ending September 30, 2024.

Interest income and expense

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

Interest and other financing expenserelates primarily to the Credit Agreement with Bank of America, N.A. Interest and other financing expense decreased from $1.2 million for the nine months ended September 30, 2023 to $763 thousand for the nine months ended September 30, 2024. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. The decrease in interest expense is consistent with the decrease in the outstanding line of credit balance and also due to a loss on debt extinguishment of $300 thousand that occurred in the three months ended March 31, 2023 associated with a refinancing.

Provision for income tax

Income tax expense was approximately $172 thousand for the nine months ended September 30, 2024. We estimate an annual projected effective tax rate ("ETR") for the year to determine income tax expense or benefit in the interim periods. The estimated annual ETR does not include tax effects from significant unusual or infrequently occurring items. Such items are accounted for discretely during the period in which they occur. The ETR is primarily driven by the federal Work Opportunity Tax Credit ("WOTC"), which is included as part of income tax expense because it can be claimed only on the income tax return and can be realized only through the existence of taxable income. Other significant items affecting our tax rate are windfall tax deductions related to stock-based compensation, and overall limits on executive compensation. Our net ETR for the nine months ended September 30, 2024 was 9.7%.

Income tax expense for the nine months ended September 30, 2023 was approximately $1.5 million. Our net ETR for the nine months ended September 30, 2023 was 20.4%. The decrease in the net ETR is driven by mix of our revenue, particularly the addition of MRI Network as the increase in executive, managerial and professional recruiting does not generate Work Opportunity Tax Credits at the same levels as staffing services.

Discontinued Operations

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

Following our acquisition of Dubin, we divided their operations into separate businesses and sold certain customer related assets of one of the acquired locations to a new franchisee. The remaining assets related to the operations of the other acquired location (in Philadelphia) have not been sold and as of September 30, 2024 remain classified as held-for-sale. In the meantime, we operate this Philadelphia location as company-owned, although all operations are presented as part of discontinued operations.

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

Liquidity and Capital Resources

Overview

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

At , our current assets exceeded our current liabilities by approximately $23.3 million. Our current assets included approximately $1.6 million of cash and $50.5 million of net accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements. Our largest current liabilities as of September 30, 2024 included approximately $11.0 million due to our franchisees on pending settlement statements, $3.7 million related to our workers' compensation claims liability, and $13.4 million of borrowings under our line of credit.

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

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

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

Operating Activities

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

Investing Activities

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

Financing Activities

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

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

On February 28, 2023 the Company and all of its subsidiaries as borrowers (collectively, the "Borrowers") entered into a Revolving Credit Agreement with Bank of America, N.A. (the "Bank") for a $50,000,000 revolving facility (the "Senior Credit Facility"), which includes a $20,000,000 sublimit for the issuance of standby letters of credit. The Company also has a one-time right, upon at least ten business days' prior written notice to the Bank to increase the maximum amount of the Senior Credit Facility to $60 million. The Senior Credit Facility provides for certain financial covenants including an Asset Coverage Ratio of at least 1.0:1.0 at all times; maintaining a Total Funded Debt to Adjusted EBITDA Ratio not exceeding 3.0:1.0; and maintaining, on a consolidated basis, a Fixed Charge Coverage Ratio of at least 1.25:1.0. Interest will accrue on the outstanding balance of the line of credit at a variable rate equal to (a) the Term SOFR Daily Floating Rate plus a margin between 1.00% and 1.75% per annum. In each case, the applicable margin is determined by the Company's Total Funded Debt to Adjusted EBITDA, as defined in the related credit agreement (the "Credit Agreement"). The Senior Credit Facility will mature on February 28, 2028.

The Credit Agreement and other loan documents contain customary representations and warranties, affirmative, and negative covenants, including without limitation, those covenants governing indebtedness, liens, fundamental changes, restricting certain payments including dividends unless certain conditions are met, transactions with affiliates, investments, engaging in business other than the current business of the Borrowers and business reasonably related thereto, and sale/leaseback transactions. The Credit Agreement and other loan documents also contain customary events of default including, without limitation, payment default, material breaches of representations and warranties, breach of covenants, cross-default on material indebtedness, certain bankruptcies, certain ERISA violations, material judgments, change in control, termination or invalidity of any guaranty or security documents, and defaults under other loan documents. The obligations under the Credit Agreement and other loan documents are secured by substantially all of the assets of the Borrowers as collateral including, without limitation, their accounts and notes receivable, intellectual property and the real estate owned by HQ Real Property Corporation.

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

At September 30, 2024, availability under the Senior Credit Facility was approximately $26.9 millionbased on eligible collateral, less letter of credit reserves, bank product reserves, and current advances, assuming continued covenant compliance. Our all-in-rate of borrowing was6.2% and is repriced daily. On October 23, 2023, we entered into an agreement to acquire certain assets of TEC Staffing Services, Inc. ("TEC") for approximately $9.8 million.

Economy and Inflation

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

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

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

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

Key Performance Indicator: System-Wide Sales

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

For the nine months ended September 30, 2024, nearly all of our offices were franchised with the only exceptions being a portion of the Dubin operations acquired in the first quarter of 2022. The following table reflects our system-wide sales broken into its components for each period indicated. The Dubin operations are presented in the consolidated financial statements as discontinued operations because they are considered held-for-sale, but their system-wide sales are reflected along with all other offices in the table below. Percentages indicate the change in system-wide sales relative to the comparable prior period (in thousands, except percentages):

		Three months ended			Nine months ended
		September 30, 2024			September 30, 2023			Change			September 30, 2024			September 30, 2023			Change
System-wide sales from HireQuest Direct		$	64,030			$	65,572				(2.4	)%		$	178,489			$	186,515				(4.3	)%
System-wide sales from Snelling and HireQuest			40,984				37,801				8.4	%			116,635				121,555				(4.0	)%
System-wide sales from DriverQuest and TradeCorp			3,925				1,237				217.3	%			10,332				3,248				218.1	%
System-wide sales from HireQuest Health			1,419				1,922				(26.2	)%			4,845				4,921				(1.5	)%
System-wide sales from Northbound, MRI, and SearchPath			38,000				44,466				(14.5	)%			117,900				143,764				(18.0	)%
System-wide sales from Discontinued Operations			258				209				23.4	%			593				1,688				(64.9	)%
System-wide sales		$	148,616			$	151,207				(1.7	)%		$	428,794			$	461,691				(7.1	)%

Number of Offices

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

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

Offices, December 31, 2022			435
Opened in 2023			14
Purchased in 2023			7
Closed in 2023			(29	)
Offices, December 31, 2023			427
Opened in 2024			19
Purchased in 2024			1
Closed in 2024			(30	)
Offices, September 30, 2024			417

Critical Accounting Estimates

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the estimated fair value of the net assets of acquired businesses. Goodwill is not amortized, but instead is subject to annual impairment testing that is conducted each calendar year in the third quarter. The goodwill asset impairment test involves comparing the fair value of a reporting unit to its carrying amount. An impairment charge is recognized when the carrying amount exceeds the reporting unit's fair value. Interim tests during the year may be required if an event occurs or circumstances change (a "triggering event") that in management's judgement would more likely than not reduce the fair value of a reporting unit below its' carrying amount.

To estimate fair value, we may use both a discounted cash flow and a market valuation approach. The discounted cash flow approach uses cash flow projections and a discount rate to calculate the fair value of each reporting unit while the market approach relies on market multiples of similar companies. The key assumptions used for the discounted cash flow approach include projected revenues and profit margins, changes in working capital, and the current discount and tax rates. For the market approach, we select a group of peer companies that we believe are best representative of each reporting unit.

Annual assessments are conducted in the context of information that is reasonably available to us as of the date of the assessment including our best estimates of future sales volumes and prices; labor cost and availability; operational efficiency, and the then current discount rates and tax rates. We performed our annual goodwill impairment tests as of August 31, 2024.

Other intangible assets are recorded at cost or, when acquired as a part of a business combination, at estimated fair value. These assets include customer relationships, technology-related assets, trademarks, and other intellectual property. Intangible assets that have definite lives are amortized using a method that reflects the pattern in which the economic benefits of the assets are consumed or the straight-line method over estimated useful lives of 5 to 15 years. Intangible assets with indefinite lives are subject to at least annual impairment testing, which are conducted each calendar year in the fourth quarter. The impairment testing compares the fair value of the intangible asset with its' carrying amount using the relief from royalty method or the comparable sales method, depending on the asset. The relief from royalty method uses cash flow projections and a discount rate to calculate the fair value of intellectual property while the comparable sales approach relies on recent sales of similar assets by unrelated companies. The key assumptions used for the relief from royalty method include projected revenues and profit margins, an assumed royalty rate, and the current discount and tax rates. For the comparable sales approach, we rely on public reports of recent sales that we believe are best representative of each asset being evaluated.

Interim tests may be required if an event occurs or circumstances change that would more likely than not reduce the fair value below the carrying value or change the useful life of the asset. Many of the factors used in assessing fair value are outside the control of management, and it is reasonably likely that assumptions and estimates will change in future periods. These changes could result in future impairments.

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

Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Notwithstanding the material weakness, which still existed as of September 30, 2024 , the Company's management, including its Chief Executive Officer and Chief Financial Officer, have concluded that the consolidated financial statements included in this Quarterly Report present fairly, in all material respects, our financial position, results of operations and cash flows as of the dates, and for the periods presented, in conformity with accounting principles generally accepted in the United States.

Management Plans to Remediate Material Weakness

Beginning with our quarterly report on Form 10-Q for the quarter ended March 31, 2021 the Company reported a material weakness in our internal control over financial reporting as we did not have sufficient accounting resources available to handle the volume of technical accounting issues and provide adequate review functions in connection with the integration of acquisitions. As part of the remediation, the Company has engaged third party professionals with appropriate technical expertise for subsequent acquisitions. Also, in order to give the Chief Accounting Officer ("CAO") more time to do an appropriate review as and when required, the Company has transitioned the CAO's responsibility over the Finance Operations Group which processes and reconciles daily transactions to another leader in the organization. In addition, the Company is actively recruiting for additional staff in the accounting department with appropriate professional experience and in November 2023, hired a Chief Financial Officer ("CFO") who has 17 years of experience as a public company CFO and 5 years of experience as a public company director including as Audit Committee Chair. Based on our recruiting efforts in October the Company hired a Senior Accountant with 9 years of accounting experience. Lastly, the Company is working through the accounting processes currently the responsibility of the CAO with the goal of (1) making the processes more efficient and (2) transitioning work from the CAO to other appropriately experienced accounting staff.

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

PART II. OTHER INFORMATION

Item 1. 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.

Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibit No.		Description
31.1		Certification of Richard Hermanns, Chief Executive Officer of HireQuest, Inc. pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
31.2		Certification of Steve Crane, Chief Financial Officer of HireQuest, Inc. pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith)
32.1		Certification of Richard Hermanns, Chief Executive Officer of HireQuest, Inc., and Steve Crane, Chief Financial Officer of HireQuest, Inc., pursuant to 18 U.S.C. Section 1350, as adopted in Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith)
101.INS		Inline XBRL Instance Document (filed herewith)
101.SCH		Inline XBRL Taxonomy Extension Schema Document (filed herewith)
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase Document (filed herewith)
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase Document (filed herewith)
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase Document (filed herewith)
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase Document (filed herewith)
104		Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101)

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, hereunto duly authorized.

/s/ Richard Hermanns		November 7, 2024
Richard Hermanns		Date
President and Chief Executive Officer
/s/ Steve Crane		November 7, 2024
Steve Crane		Date
Chief Financial Officer

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