# HireQuest, Inc. (HQI) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from HireQuest, Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1140102/000143774925009646/hqi20241231_10k.htm
Accession: 0001437749-25-009646
Filing date: 2025-03-27
Report date: 2024-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/HQI/
All MD&A years: /company/HQI/mda/
Previous year: /company/HQI/mda/fy2023/ (FY 2023)
Next year: /company/HQI/mda/fy2025/ (FY 2025)

Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

The following analysis is intended to help the reader understand our results of operations and financial condition, and should be read in conjunction with our consolidated financial statements and the accompanying notes located in Item 8 of this Form 10-K. This Annual Report on Form 10-K, including matters discussed in this Item 7. “Management's Discussion and Analysis of Financial Condition and Results of Operations” contains forward-looking statements relating to our plans, estimates and beliefs that involve important risks and uncertainties. See “Special Note Regarding Forward-Looking Statements” and Item 1A. “Risk Factors” 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.

This section of this Annual Report on Form 10-K generally discusses 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2023 items and year-to-year comparisons between 2023 and 2022 that are not included in this Annual Report on Form 10-K can be found in "Management’s Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 which we filed with the SEC on March 21, 2024.

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 the 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 the key performance indicator, see the section titled “Key Performance Indicator: System-Wide Sales” below.

Overview

We are 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,” "TradeCorp," “DriverQuest,” “HireQuest Health,” "Northbound Executive Search," "Management Recruiters International," "MRI," and "Sales Consultants." Some of the MRI franchises also operate under other brands specific to them. 

[[GREPCENT_TABLE]]
[["","\u25cf","HireQuest Direct focuses on daily-work/daily-pay jobs primarily for construction and light industrial customers."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Snelling and HireQuest focus on longer-term staffing positions in the light industrial and administrative arenas."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","DriverQuest specializes in both commercial and non-CDL drivers serving a variety of industries and applications."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","HireQuest Health specializes in skilled personnel in the healthcare and dental industries."],["","\u25cf","TradeCorp focuses on short-term skilled construction jobs."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","\u25cf","Northbound, MRI, SearchPath, and Sales Consultants focus on executive, managerial, and professional recruitment services, although they also offer short-term consultant services."]]
[[/GREPCENT_TABLE]]

As of December 31, 2024 we had approximately 425 franchisee-owned offices and 1 company-owned office in 44 states, the District of Columbia, and 13 countries outside of the United States. We licensed our tradenames to approximately 6 offices in California. In addition, there were 12 MRI locations that provided contract staffing services only. We provide employment for an estimated 65 thousand temporary employees annually working for thousands of clients in many industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, and retail.

We finished 2024 with a strong balance sheet. Our assets exceeded liabilities by over $64.8 million. Our liquidity position stayed strong in 2024 with Current Assets at December 31, 2024 of $49.2 million compared to $51.5 million at December 31, 2023.

On a year-over-year basis, we saw a 6.9% decrease in our system-wide sales from $605.1 million in 2023 to $563.6 million in 2024 as the overall staffing and recruiting industry softened during the year which particularly affected MRI where system-wide sales decreased 18.6% or $31 million in 2024 when compared to 2023.  

We recorded an 8.7% decrease in total revenue from $37.9 million in 2023 to $34.6 million in 2024. Income from operations declined from $10.6 million in 2023 to $4.4 million in 2024 due to the 6.9% decline in system-wide sales and a $6.0 million goodwill and intangible asset charge associated with the MRI acquisition.

24

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Results of Operations

The following table displays our consolidated statements of operations for the years ended December 31, 2024 and December 31, 2023 (in thousands, except percentages):

[[GREPCENT_TABLE]]
[["","","Year ended"],["","","December 31, 2024","","","December 31, 2023"],["Franchise royalties","","$","32,673","","","","94.4","%","","$","35,813","","","","94.5","%"],["Service revenue","","","1,925","","","","5.6","%","","","2,069","","","","5.5","%"],["Total revenue","","","34,598","","","","100.0","%","","","37,882","","","","100.0","%"],["Selling, general and administrative expenses","","","21,406","","","","61.9","%","","","24,448","","","","64.5","%"],["Goodwill and intangible asset impairment charge","","","6,035","","","","17.4","%","","","-","","","","\u2014","%"],["Depreciation and amortization","","","2,789","","","","8.1","%","","","2,793","","","","7.4","%"],["Income from operations","","","4,368","","","","12.6","%","","","10,641","","","","28.1","%"],["Other miscellaneous income (expense)","","","145","","","","0.4","%","","","(1,738",")","","","(4.6",")%"],["Interest income","","","556","","","","1.6","%","","","263","","","","0.7","%"],["Interest and other financing expense","","","(923",")","","","(2.7",")%","","","(1,386",")","","","(3.7",")%"],["Net income before income taxes","","","4,146","","","","12.0","%","","","7,780","","","","20.5","%"],["Provision for income taxes","","","221","","","","0.6","%","","","1,345","","","","3.6","%"],["Net income from continuing operations","","","3,925","","","","11.3","%","","","6,435","","","","17.0","%"],["Net loss from discontinued operations, net of tax","","","(253",")","","","(0.7",")%","","","(300",")","","","(0.8",")%"],["Net income","","$","3,672","","","","10.6","%","","$","6,135","","","","16.2","%"],["Non-GAAP data"],["Adjusted EBITDA","","$","16,129","","","","46.6","%","","$","16,487","","","","43.5","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","1.","See the definition and reconciliation of Adjusted EBITDA within the immediately following section titled \u201cUse of Non-GAAP Financial Measures: Adjusted EBITDA.\u201d"]]
[[/GREPCENT_TABLE]]

Use of Non-GAAP Financial Measures: Adjusted EBITDA

Earnings before interest, taxes, depreciation and amortization, and non-cash compensation, or adjusted EBITDA, is a non-GAAP measure that represents our net income before interest expense, income tax expense, depreciation and amortization, non-cash compensation, costs related to the work opportunity tax credit (“WOTC”) 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, non-cash compensation, WOTC-related costs and other non-recurring charges and gains bear minimal 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 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 WOTC related costs, adjusted EBITDA provides a basis for measuring the financial performance of our operations excluding the (non-operating) costs associated with qualifying for this tax credit. This tax credit is included on our income statement 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. In addition, by excluding certain non-recurring charges and gains, adjusted EBITDA provides a basis for measuring financial performance without non-recurring charges and gains. 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.

[[GREPCENT_TABLE]]
[["","","Year ended"],["","","December 31, 2024","","","December 31, 2023"],["Net income","","$","3,672","","","","10.6","%","","$","6,135","","","","16.2","%"],["Interest and other financing expense","","","923","","","","2.7","%","","","1,386","","","","3.7","%"],["Provision for income taxes","","","221","","","","0.6","%","","","1,345","","","","3.6","%"],["Depreciation and amortization","","","2,789","","","","8.1","%","","","2,793","","","","7.4","%"],["EBITDA","","","7,605","","","","22.0","%","","","11,659","","","","30.8","%"],["WOTC related costs","","","483","","","","1.4","%","","","461","","","","1.2","%"],["Non-cash compensation","","","1,759","","","","5.1","%","","","1,483","","","","3.9","%"],["Goodwill and intangible asset impairment","","","6,035","","","","17.4","%","","","-","","","","\u2014","%"],["Acquisition related charges","","","(28",")","","","(0.1",")%","","","2,344","","","","6.2","%"],["Impairment of notes receivable","","","275","","","","0.8","%","","","540","","","","1.4","%"],["Adjusted EBITDA","","$","16,129","","","","46.6","%","","$","16,487","","","","43.5","%"]]
[[/GREPCENT_TABLE]]

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. Once a company-owned office is sold, disposed of, or otherwise classified as held-for-sale, it would not be reflected in revenue and instead reported as “Income from discontinued operations, net of tax.” For a description of our revenue recognition practices, please refer to “Note 1 – Overview and Summary of Significant Accounting Policies – Revenue Recognition,” which disclosure is incorporated herein by reference.

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Total revenue for the year ended December 31, 2024 was approximately $34.6 million compared to $37.9 million for the year ended December 31, 2023, a decrease of 8.7%. This decrease is roughly consistent with the decrease in underlying system-wide sales which decreased 6.9% from $605.1 million in 2023 to $563.6 million in 2024. Revenue does not include any company-owned offices, as the office that we own is classified as held-for-sale.

Franchise Royalties

We charge our franchisees a royalty fee on the basis of one of several models. Under the HireQuest Direct model, the royalty fee charged ranges from 6% to 8% of gross billings, depending on volume. Royalty fees are charged at 8% for the first $1 million of billing with the royalty fee dropping 0.5% for every $1 million of billing thereafter until the royalty fee is 6% (once gross billings reach $4 million annually). The smaller royalty fee is charged only on the incremental dollars resulting in an effective royalty fee at a blended rate of between 6% and 8%. We will grant our franchisees credits for low margin business. For the HireQuest, Snelling, DriverQuest, HQ Medical, and TradeCorp model, our royalty fee is 4.5% of the temporary payroll we fund plus 18% of the gross margin for the territory. Most franchise agreements provide for a royalty of 5% to 7% of direct placement sales. For the Snelling and SearchPath franchise agreements assumed where the franchise owner did not execute new HireQuest or HireQuest Direct business line franchise agreements, the royalty fee ranges from 5% to 8% of all sales. MRI franchise agreements assumed have royalty rates varying from 1% to 9% of placement sales, depending on sales volume and other factors. The MRI franchises with a lower royalty scale generally pay a flat annual fee plus a percentage-based royalty. For temporary labor, MRI franchises pay a royalty that ranges from 20% to 25% of payroll, depending on sales volume. Some customers that utilize qualified independent contractors cause the franchise to pay a royalty that ranges from 4% to 10% of contractor payments, depending on sales volume.

Franchise royalties for the year ended December 31, 2024 were approximately $32.7 million compared to $35.8 million for the year ended December 31, 2023, a decrease of 8.8%, driven predominantly by a decline in total system-wide sales of $41.5 million from $605.1 million in 2023 to $563.6 million in 2024 . The blended effective royalty rate for 2024 and 2023 was 5.8% and 5.9%, respectively.

Service Revenue

Service revenue consists of revenue generated from franchisees that are outside of our core services such as license fees, franchise fees related to our advertising fund, and miscellaneous income. This includes interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide. As accounts receivable age over 42 days, our franchisees pay us interest on these accounts equal to 0.5% of the amount of the uncollected receivable each 14-day period. Accounts that age over between 42 and 84 days are charged back to the franchisee and no longer incur interest. Some of our franchisees elect to charge back accounts before they age 84 days in order to reduce or avoid the interest charge. Service revenue also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vender programs or IT licenses. Generally, we do not profit from these arrangements as they represent pass-through items, although there may be timing differences.

Service revenue for the year ended December 31, 2024 was approximately $1.9 million which decreased when compared to $2.1 million for the year ended December 31, 2023. Interest on overdue accounts decreased approximately $62 thousand from $850 thousand for the year ended December 31, 2023 to $788 thousand for the year ended at December 31, 2024. This decrease follows the overall decrease in accounts receivable. We pride ourselves on maintaining quality, creditworthy customers who pay timely, and the Company does not strive to increase interest on aged accounts receivable. Fees collected related to our advertising fund decreased by approximately $126 thousand from $515 thousand in 2023 to $389 thousand in 2023 and is related to the decline in MRI system-wide sales. 

Operating Expenses

Operating expenses for the year ended December 31, 2024 were approximately $30.2 million compared to $27.2 million for the year ended December 31, 2023, an increase of $3.0 million. This increase was primarily driven by a $6.0 million goodwill and intangible asset charge in 2024 associated with MRI partially offset by a $1.2 million decrease in salaries, bonuses and stock based compensation and a $1.7 million reduction in net workers' compensation expense.  

Workers' Compensation

Workers' compensation expense was approximately $2.0 million for the year ended December 31, 2024, versus an expense of approximately $3.7 million for the year ended December 31, 2023 a decrease of $1.7 million. This decrease is primarily due to a decreased number of medical claims relative to comparison periods. 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 typically fall into hundreds of different 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. Generally workers' compensation expense or benefit will fluctuate based on the mix of classifications, the level of payroll, recent claims resolution and cumulative experience. We cannot accurately predict the effects of workers' compensation in future periods, and historical trends may not be indicative of future results.

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Other Operating Expenses

Other Operating Expenses for the year ended December 31, 2024 was approximately $25.4 million compared to $20.7 million for the year ended December 31, 2023, an increase of $4.7 million. The increase in Other Operating expense primarily relates to a $6.0 million intangible asset and goodwill impairment charge related to MRI partially offset by a $1.2 million decrease in salaries, bonuses and stock based compensation.

Depreciation and Amortization

Depreciation and amortization for the year ended December 31, 2024 was approximately $2.8 million compared to $2.8 million for the year ended December 31, 2023. 

Other Miscellaneous Income and Expense

Other miscellaneous income and expense includes all non-operating income and expense other than interest and taxes. For the year ended December 31, 2024, other miscellaneous income was approximately $144 thousand, compared to $1.7 million of other miscellaneous expense for the year ended December 31, 2023. In 2023 the largest component of this loss is related to the loss of $2.1 million on disposition of the TEC assets. This was partially offset by $187 thousand in rental income from leasing of excess space at market rates at our Corporate Headquarters and $102 thousand of miscellaneous other income.  

Interest income and expense

Interest income for the year ended December 31, 2024 was approximately $556 thousand compared to $263 thousand for the year ended December 31, 2023. Interest income represents interest related to the financing of franchised locations. The increase is primarily driven by the disposition of the TEC assets.

Interest and other financing expense relates primarily to our revolving credit facility. Interest and other financing expense decreased approximately $0.4 million to $1.0 million in the year ended December 31, 2024 when compared to the $1.4 million for the year ended December 31, 2023. This decrease was due primarily to lower average borrowings during the year. In 2024 our average borrowings were $13.3 million versus $16.5 million in 2023. Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. 

Provision for income tax

Income tax expense was approximately $0.2 million in 2024 and $1.3 million in 2023. The effective tax rates for 2024 and 2023 were 5.3% and 17.3%, respectively. The effective tax rate is primarily driven by the federal Work Opportunity Tax Credit, which reduced our effective tax rate by 21% and 12% for the years ended December 31, 2024 and December 31, 2023, respectively, and 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 factors impacting our effective rate include windfall tax deductions related to stock-based compensation, and deduction limits on overall compensation.

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Loss from discontinued operations, net of tax

Company-owned offices that have been disposed of by sale, disposed of other than by sale, or are classified as held-for-sale are reported separately as discontinued operations. In addition, a newly acquired business that on acquisition meets the held-for-sale criteria will be reported as discontinued operations. Accordingly, the assets and liabilities, operating results, and cash flows for these businesses are presented separate from our continuing operations, for all periods presented in our consolidated financial statements and footnotes, unless indicated otherwise. The assets and liabilities of a discontinued operation held-for-sale are measured at the lower of the carrying value or fair value less cost to sell.

As of December 31, 2024 and 2023 there was 1 company-owned location reported as discontinued operations:

[[GREPCENT_TABLE]]
[["","\u25cf","Certain assets acquired in the Dubin Agreement related to the operations of the Philadelphia franchise."]]
[[/GREPCENT_TABLE]]

The loss from discontinued operations amounts as reported on our consolidated statements of income was comprised of the following amounts:

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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 offices to franchised offices.

At December 31, 2024 our current assets exceeded our current liabilities by approximately $25.1 million. Our current assets included approximately $2.2 million of cash and $42.3 million of accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements. As of December 31, 2024, the outstanding balance under our line of credit with Bank of America was $6.8 million, with approximately another $9.7 million utilized for the issuance of Letters of Credit, leaving approximately $33.4 million available for additional borrowing under the line as of such date, assuming compliance with necessary conditions. Other current liabilities include approximately $7.6 million due to our franchisees, $2.6 million of accrued wages, benefits and payroll taxes, and $3.6 million related to our workers’ compensation claims liability.

Our working capital requirements are driven largely by temporary employee payroll, which is typically paid 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 accounts receivable are converted to cash upon collection and not replaced with additional billings. As the economy recovers, this dynamic generally reverses. 

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, and other liquidity requirements associated with our continuing operations for the next 12 months. We also believe that 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, and other 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.

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Cash Flows

Operating Activities

During 2024 net cash generated  by operating activities was approximately $12.3 million. Net cash generated by operating activities for the year included net income of approximately $3.9 million and a change of working capital of $0.9 million as a use of cash which was partially offset by significant non-cash expenses in 2024, including approximately $6.0 million in an intangible asset and goodwill impairment charge, $1.8 million in stock-based compensation, and $2.8 million in depreciation and amortization.

Investing Activities

During 2024, net cash generated from investing activities was approximately $44 thousand and included cash proceeds from the conversion of acquired offices into franchisees of approximately $717 thousand and proceeds from payments on notes receivable of approximately $1.6 million. These proceeds were offset by cash paid paid for acquisitions of $1.7 million.

Financing Activities

During 2024, net cash used in financing activities was approximately $11.2 million which was primarily due to a net payback on our revolving credit of $7.3 million, and by the payment of dividends of approximately $3.4 million.

Capital Resources

Revolving Credit Agreement with Bank of America

On February 28, 2023 the Company and all of its subsidiaries as borrowers entered into a Revolving Credit Agreement ("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. 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. Interest will accrue on the outstanding balance of the Senior Credit Facility at a variable rate equal to (a) the BSBY Daily Floating Rate plus a margin between 1.00% and 1.75% per annum. In each case, the applicable margin is determined by the Company's Total Funded Debt to Adjusted EBITDA, as defined in the Credit Agreement. The Senior Credit Facility will mature on February 28, 2028. As part of this refinancing we recorded a loss on debt extinguishment of approximately $310 thousand, which is reflected on the line item, "Interest and other financing expense," in our consolidated statement of income for 2023. 

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.

At December 31, 2024, availability under the Senior Credit Facility was approximately $33.6 million based on eligible collateral, less letter of credit reserves, bank product reserves and current advances assuming continued covenant compliance. 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. Our average borrowing rate for the year ended December 31, 2024 was 6.5% and is repriced daily. For additional information related to the letter of credit securing our workers’ compensation obligations see Note 5 - Workers’ Compensation Insurance and Reserves.

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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. 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.

During 2024, all of our offices were franchised with the only exception being the Philadelphia office acquired in February 2022. The following table reflects our system-wide sales broken into its components for the periods indicated (in thousands):

[[GREPCENT_TABLE]]
[["","","Year ended"],["","","December 31,","","","December 31,"],["","","2024","","","2023"],["System-wide sales from HireQuest Direct","","$","235,278","","","$","246,193"],["System-wide sales from Snelling and HireQuest","","","155,443","","","","157,404"],["System-wide sales from DriverQuest and TradeCorp","","","13,687","","","","5,824"],["System-wide sales from HireQuest Health","","","6,033","","","","6,700"],["System-wide sales from Northbound, MRI, and SearchPath","","","152,423","","","","187,244"],["System-wide sales from discontinued operations","","","759","","","","1,777"],["System-wide sales","","$","563,623","","","$","605,142"]]
[[/GREPCENT_TABLE]]

System-wide sales were $563.6 million in 2024, a decrease of 6.9%, from $605.1 million in 2023. The decrease in system-wide sales is primarily related to a decrease in demand in the staffing and recruiting industry during the year which particularly affected MRI where system-wide sales decreased 18.6% or $31 million in 2024 when compared to 2023.

Number of Offices

We track the number of offices we open and close every year as the number of offices is usually directly tied to the amount of royalty and service revenue we earn. In 2024, we decreased our office count by 2 offices on a net basis by opening or acquiring 30 and closing 32.

The following table accounts for the number of offices opened and closed in 2024 and 2023.

[[GREPCENT_TABLE]]
[["Franchised offices, December 31, 2022","","","435"],["Purchased in 2023","","","7"],["Opened in 2023","","","14"],["Closed in 2023","","","(29",")"],["Franchised offices, December 31, 2023","","","427"],["Purchased in 2024","","","-"],["Opened in 2024","","","30"],["Closed in 2024","","","(32",")"],["Franchised offices, December 31, 2024","","","425"]]
[[/GREPCENT_TABLE]]

30

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Seasonality

Our revenue fluctuates quarterly and is generally higher in the second and third quarters of our year. Some of the industries in which we operate are subject to seasonal fluctuation. Many of the jobs filled by employees are outdoor jobs that are generally performed during the warmer months of the year. As a result, in an average year, activity increases in the spring and continues at higher levels through summer, then begins to taper off during fall and through winter.

Critical Accounting Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are based upon our financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses and the related disclosure of contingent assets and liabilities. Note 1, “Overview and Summary of Significant Accounting Policies”, to the Consolidated Financial Statements describes the significant accounting policies used to prepare the Consolidated Financial Statements and recently issued accounting guidance.

A critical accounting estimate is an estimate that: (i) is made in accordance with generally accepted accounting principles, (ii) involves a significant level of estimation uncertainty and (iii) has had or is reasonably likely to have a material impact on the Company’s financial condition or results of operations.

On an ongoing basis we evaluate our estimates, including, but not limited to, those related to our workers’ compensation claim liabilities, our Risk Management Incentive Program, our deferred taxes, our notes receivable allowance for losses, and estimated fair value of assets and liabilities acquired. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective, or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. 

Workers’ Compensation Claims Liability 

We maintain reserves for workers’ compensation claims based on their estimated future cost. These reserves include claims that have been reported but not settled, as well as claims that have been incurred but not reported. Our estimated workers’ compensation claims liability was $6.3 million at December 31, 2024, versus $6.6 million at December 31, 2023. The decrease is due to our having now fully reserved claims from prior years which developed at a higher rate than historical norms. Annually, we engage an independent actuary to estimate the future costs of these claims. Quarterly, we use development factors provided by an independent actuary to estimate the future costs of these claims. We make adjustments as necessary. If the actual costs of the claims exceed the amount estimated, we may incur additional charges.

Workers’
compensation Risk Management Incentive Program (“
RMIP”
)

Our RMIP is designed to incentivize our franchises to keep our temporary employees safe and control exposure to large workers’ compensation claims. We accomplish this by paying our franchisees an amount equivalent to a percentage of the amount they pay for workers’ compensation insurance if they keep their workers’ compensation loss ratios below specified thresholds.

Notes Receivable 
and Allowance for Credit Losses

Notes receivable from franchisees consist primarily of amounts due to us related to the financing of franchised locations. We report notes receivable from franchisees at the principal balance outstanding less an allowance for losses. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. Notes receivable are generally secured by the assets of each location and the ownership interests in the franchise. We monitor the financial condition of our debtors and record provisions for estimated losses when we believe it is probable that our debtors will be unable to make their required payments. We evaluate the potential impairment of notes receivable based on various analyses, including estimated discounted future cash flows, at least annually and whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When a note receivable is deemed impaired, we discontinue accruing interest and only recognize interest income when payment is received. Our allowance for credit losses on notes receivable was approximately
$773 thousand and $623 thousand at December 31, 2024 and December 31, 2023, respectively.

Some of our notes receivable have contingent consideration based on a percentage of specified system-wide sales that exceed certain thresholds. Notes with contingent consideration are recorded at fair value when originated. Probability of payment is reflected in the fair value, as is the time value of money. Subsequent changes in the recorded amount of contingent consideration are recognized during period in which the change was recognized.

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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 will perform our next annual goodwill impairment tests as of August 31, 2025; or earlier, if adverse changes in circumstances result in our assessment that a triggering event has occurred at any of our reporting units and an interim test is required.

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. 

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 values 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 affecting 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 $940 thousand and $2.2 million at December 31, 2024 and December 31, 2023, 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 Income for the twelve months ended December 31, 2024.

Business Combinations

We account for business acquisitions under the acquisition method of accounting by recognizing identifiable tangible and intangible assets acquired, liabilities assumed, and non-controlling interests in the acquired business at their fair values. We record the portion of the purchase price that exceeds the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed, if any, as goodwill. Any gain on a bargain purchase is recognized immediately. We recognize identifiable assets acquired and liabilities assumed in a business combination regardless of whether they have been previously recognized by the acquiree prior to the acquisition. We expense acquisition related costs as we incur them. Our acquisitions may include contingent consideration. Any contingent consideration is measured at fair value at the date of acquisition. Contingent consideration is remeasured at fair value each reporting period with subsequent changes in the fair value of the contingent consideration recognized during the period.

Asset Acquisitions

When we purchase a group of assets in a transaction that is not accounted for as a business combination, usually because the group of assets does not meet the definition of a business, we account for the transaction using a cost accumulation model, with the cost of the acquisition allocated to the acquired assets based on their relative fair values. Goodwill is not recognized. In an asset acquisition, direct transaction costs are treated as consideration transferred to acquire the group of assets and are capitalized as a component of the cost of the assets acquired. Our acquisitions may include contingent consideration. Any contingent consideration is measured at fair value at the date of acquisition. Contingent consideration is remeasured at fair value each reporting period with subsequent changes in the fair value of the contingent consideration recognized during the period.