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What changed in HireQuest, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of HireQuest, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+188 added−207 removedSource: 10-K (2024-03-21) vs 10-K (2023-03-21)

Top changes in HireQuest, Inc.'s 2023 10-K

188 paragraphs added · 207 removed · 153 edited across 6 sections

Item 1. Business

Business — how the company describes what it does

73 edited+9 added−11 removed71 unchanged
Biggest changeFor this work, Mr. McAnnar has received multiple awards, including the National Legal Aid & Defenders Association New Leaders in Advocacy Award and the Ina M. Boon Social Justice Award from the St. Louis City NAACP. Mr. McAnnar graduated cum laude with a Bachelor of Arts degree from the University of Pittsburgh.
Biggest changeHe is the co-founder of ArchCity Defenders, a non-profit organization in St. Louis, Mo., that led the push for change in Missouri’s municipal court system following the Ferguson unrest. For this work, Mr. McAnnar has received multiple awards, including the National Legal Aid & Defenders Association New Leaders in Advocacy Award and the Ina M.
In the meantime, we continue to operate Dental Power as company-owned. 2022 Acquisitions The Temporary Alternatives Acquisition On January 24, 2022 we completed our acquisition of certain assets of Temporary Alternatives in accordance with the terms of the Asset Purchase Agreement dated January 10, 2022 , including three locations in West Texas and New Mexico for approximately $7.0 million, inclusive of a prescribed amount of working capital.
In the meantime, we continue to operate Dental Power as company-owned. 2022 Acquisitions The Temporary Alternatives Acquisition On January 24, 2022 we completed our acquisition of certain assets of Temporary Alternatives in accordance with the terms of an Asset Purchase Agreement dated January 10, 2022, including three locations in West Texas and New Mexico for approximately $7.0 million, inclusive of a prescribed amount of working capital.
We funded this acquisition with existing cash on hand, and a draw on our existing line of credit with Truist. 4 Table of Contents Our Model We are a nationwide franchisor of temporary staffing offices providing direct-dispatch and commercial staffing solutions in the light industrial and blue-collar industries, and professional recruitment offices providing permanent placement services in the executive, managerial and administrative fields.
We funded this acquisition with existing cash on hand and a draw on our existing line of credit. 4 Table of Contents Our Model We are a nationwide franchisor of temporary staffing offices providing direct-dispatch and commercial staffing solutions in the light industrial and blue-collar industries, and professional recruitment offices providing permanent placement services in the executive, managerial and administrative fields.
Our strongest competition in any market comes from companies that have established long-lasting relationships with their clients. Competition in the industry tends to track the overall strength of the economy and trends in workforce flexibility. As the economy grows, the number of competitors generally increases. There are even fewer barriers to entry with recruiting and placement services.
Our strongest competition in any market comes from companies that have established long-lasting relationships with their clients. Competition in the industry tends to track the overall strength of the economy and trends in workforce flexibility. As the economy grows, the number of competitors generally increases. There are even fewer barriers to entry within recruiting and placement services.
Following the acquisitions completed in 2021 and 2022, we are expanding into or increasing our presence in several of the remaining segments of the staffing industry including permanent placement, health care, clerical and administrative, and professional. The direct-dispatch and commercial staffing industry has developed based on a business need for flexible staffing solutions.
Following the acquisitions completed in 2021, 2022 and 2023, we are expanding into or increasing our presence in several of the remaining segments of the staffing industry including permanent placement, health care, clerical and administrative, and professional. The direct-dispatch and commercial staffing industry has developed based on a business need for flexible staffing solutions.
For temporary labor through our Snelling and HireQuest brands, including HireQuest franchisees, Snelling franchisees, LINK Franchisees, DriverQuest franchisees, HireQuest Health franchisees, and Northbound franchises, we charge a royalty fee of 4.5% of the payroll we fund plus 18% of the gross margin for the territory. Most franchise agreements require a royalty of 5% - 7% of direct placement sales.
For temporary labor through our Snelling and HireQuest brands, including HireQuest franchisees, Snelling franchisees, DriverQuest franchisees, HireQuest Health franchisees, and Northbound franchises, we charge a royalty fee of 4.5% of the payroll we fund plus 18% of the gross margin for the territory. Most franchise agreements require a royalty of 5% - 7% of direct placement sales.
As of December 31, 2022, HireQuest, Inc. was the corporate parent of a series of wholly-owned subsidiaries, all of which are listed on Exhibit 21.1 filed herewith and incorporated herein by reference. Our Securities Exchange Act Reports We maintain a website at the following address: www.hirequest.com .
As of December 31, 2023, HireQuest, Inc. was the corporate parent of a series of wholly-owned subsidiaries, all of which are listed on Exhibit 21.1 filed herewith and incorporated herein by reference. Our Securities Exchange Act Reports We maintain a website at the following address: www.hirequest.com .
Our Intellectual Property We own the rights to all of our key trademarks including “HireQuest,” “HireQuest Direct,” “Snelling,” “DriverQuest,” “HireQuest Health,” “Recruit,” "Northbound Executive Search," "MRI," “VETSQuest,” “The Right People at the Right Time,” "Management Recruiters," "Sales Consultants," and all of our stylized logos. We also own the rights to trademarks we have utilized in the past.
Our Intellectual Property We own the rights to all of our key trademarks including “HireQuest,” “HireQuest Direct,” “Snelling,” “DriverQuest,” “HireQuest Health,” "Northbound Executive Search," "MRI," “VETSQuest,” “The Right People at the Right Time,” "Management Recruiters," "Sales Consultants," "TradeCorp," and all of our stylized logos. We also own the rights to trademarks we have utilized in the past.
This shift has increased the availability of temporary workers in the economy as a whole. Conversely, periods of declining unemployment are a challenge for our industry. Government Regulation While the offices under our brands are operated by franchisees, three of our wholly-owned subsidiaries serve as the employer of record of the temporary employees.
This shift has increased the availability of temporary workers in the economy as a whole. Conversely, periods of increasing unemployment are a challenge for our industry. Government Regulation While the offices under our brands are operated by franchisees, three of our wholly-owned subsidiaries serve as the employer of record of the temporary employees.
Still, we have substantially less control over a franchisee’s operations than we would if we owned and operated an office ourselves. Franchisees are not required to provide full financial statements oHr other information that is outside of the royalty base.
Still, we have substantially less control over a franchisee’s operations than we would if we owned and operated an office ourselves. Franchisees are not required to provide full financial statements or other information that is outside of the royalty base.
MRI has been a leader in the recruitment industry since 1965 and has grown into one of the largest franchised executive search and recruitment organizations in the world. As of December 31, 2022 there were approximately 210 active MRI franchises across the globe performing executive, managerial, and professional recruitment services.
MRI has been a leader in the recruitment industry since 1965 and has grown into one of the largest franchised executive search and recruitment organizations in the world. As of December 31, 2022 there were approximately 210 active MRI franchises performing executive, managerial, and professional recruitment services.
In 2022, our franchisees operated under the trade names “HireQuest Direct,” “Snelling,” “HireQuest,” “DriverQuest,” “HireQuest Health,” "Northbound Executive Search," "Management Recruiters International," and "Sales Consultants." Many 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.
In 2023, our franchisees operated under the trade names “HireQuest Direct,” “Snelling,” “HireQuest,” “DriverQuest,” “HireQuest Health,” "Northbound Executive Search," "Management Recruiters International," "TradeCorp" and "Sales Consultants." Many 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.
Pursuant to the LINK Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired approximately 35 franchised offices, customer lists and contracts, and other assets of LINK for a purchase price of approximately $11.1 million (the "LINK Acquisition"). We funded this acquisition with existing cash on hand.
Pursuant to the LINK Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired approximately 35 franchised offices, customer lists and contracts, and other assets of LINK for a purchase price of approximately $11.1 million (the "LINK Acquisition"). We funded this acquisition with existing cash on hand and a draw on our line of credit.
Following the Merger, we began with a strong direct-dispatch program. With the Snelling Acquisition and the LINK Acquisition, we significantly expanded our traditional commercial staffing solutions. With the MRI Acquisition, we have added a third leg and firmly established ourselves as one of the top permanent placement firms in the United States.
Following the Merger, we began with a strong direct-dispatch program. With the Snelling Acquisition and the LINK Acquisition, we significantly expanded our traditional commercial staffing solutions. With the MRI Acquisition, we have added a third service offering and have firmly established ourselves as one of the top permanent placement firms in the United States.
Additionally, in states that do not require participation in a state-run program, our franchisees gain access to our "A++" rated workers’ compensation insurance coverage. Franchise Agreements - Permanent Placement We assumed the vast majority of our permanent placement franchise agreements from Management Recruiters International, Inc. in December 2022. There are a significant number of variations among the agreements.
Additionally, in states that do not require participation in a state-run program, our franchisees gain access to our "A++" rated workers’ compensation insurance coverage. Franchise Agreements - Permanent Placement We assumed most of our permanent placement franchise agreements from Management Recruiters International, Inc. ("MRI") in December 2022. There are a significant number of variations among the agreements.
Given the nature of temporary employment, it is difficult for us to determine the exact number of full-time employees on a given day, however, approximately 670 temporary employees worked at least 1,800 hours in 2021. 9 Table of Contents These temporary employees served thousands of customers, primarily in the construction, industrial/manufacturing, warehousing, hospitality, recycling/waste management, and disaster recovery industries.
Given the nature of temporary employment, it is difficult for us to determine the exact number of full-time employees on a given day, however, approximately 15 thousand temporary employees worked at least 1,800 hours in 2023. 9 Table of Contents These temporary employees served thousands of customers, primarily in the construction, industrial/manufacturing, warehousing, hospitality, recycling/waste management, and disaster recovery industries.
With our collaborative inter-office and inter-brand culture, franchisees have vast resources to draw up on to grow and scale their businesses. 5 Table of Contents Our Industry Temporary Staffing and Permanent Recruiting According to the American Staffing Association (ASA), the staffing and recruiting industry in the United States generated record annual revenue of $168 billion in 2021 (even after a revenue dip in 2020).
With our collaborative inter-office and inter-brand culture, franchisees have vast resources to draw up on to grow and scale their businesses. 5 Table of Contents Our Industry Temporary Staffing and Permanent Recruiting According to the American Staffing Association (ASA), the staffing and recruiting industry in the United States generated record annual revenue of approximately $220 billion in 2023 (even after a revenue dip in 2020).
Northbound, MRI, and Sales Consultants focus on executive, managerial, and professional recruitment services, although many franchisees also offer short-term consultant and contract staffing services. Our revenue, which is primarily comprised of ro yalty fees generated by the operations of our franchised offices, license fees, and interest charged to our franchisees on overdue accounts receivable, was $31.0 million in 2022.
Northbound, MRI, and Sales Consultants focus on executive, managerial, and professional recruitment services, although many franchisees also offer short-term consultant and contract staffing services. Our revenue, which is primarily comprised of ro yalty fees generated by the operations of our franchised offices, license fees, and interest charged to our franchisees on overdue accounts receivable, was $35.8 million in 2023.
We believe that this incentivizes our franchisees to encourage workplace safety, while also providing franchisees with capital to reinvest in, or expand, their businesses. ● Responsible capital allocation with very little debt .
We believe that this incentivizes our franchisees to encourage workplace safety, while also providing franchisees with capital to reinvest in, or expand, their businesses. ● Responsible capital allocation .
As of December 31, 2022, our temporary staffing franchisees operated under 158 executed franchise agreements. For our HireQuest Direct brand we charge a royalty fee of between 6% and 8% of gross temporary labor sales, depending on sales volume.
As of December 31, 2023, our temporary staffing franchisees operated under 157 executed franchise agreements. For our HireQuest Direct brand we charge a royalty fee of between 6% and 8% of gross temporary labor sales, depending on sales volume.
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.
For contract staffing, 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.
This does not include revenue from locations currently owned by us as those are classified as held-for-sale and reported as discontinued operations. Our system-wide sales, which we define as sales at all offices, whether owned and operated by us or by our franchisees, were $472.2 million in 2022. Nearly all system-wide-sales originated from franchisee-owned offices.
This does not include revenue from locations currently owned by us as those are classified as held-for-sale and reported as discontinued operations. Our system-wide sales, which we define as sales at all offices, whether owned and operated by us or by our franchisees, were $605.1 million in 2023. Nearly all system-wide-sales originated from franchisee-owned offices.
We also had 27 franchisees that share common ownership with significant stockholders, directors, and officers of the Company. We refer to these as the "Worlds Franchisees." These 27 Worlds Franchisees operated 67 offices as of December 31, 2022. Our approach to the franchise model creates what we believe to be superior office-level economics.
We also had 34 franchisees that share common ownership with significant stockholders, directors, and officers of the Company. We refer to these as the "Worlds Franchisees." These 34 Worlds Franchisees operated 70 offices as of December 31, 2023. Our approach to the franchise model creates what we believe to be superior office-level economics.
Executives of the company set this tone at the top, and we routinely have Company functions designed to engage and integrate our employees into our culture. Through our wholly-owned subsidiary HQ LTS Corporation, we employed 124 distinct corporate employees during 2022, with 103 active at December 31, 2022.
Executives of the company set this tone at the top, and we routinely have Company functions designed to engage and integrate our employees into our culture. Through our wholly-owned subsidiary HQ LTS Corporation, we employed 139 distinct corporate employees during 2023, with 96 active at December 31, 2023.
Financing our day-to-day needs largely with cash produced from operations allows us to continue building cash reserves which we can use, in addition to our bank line of credit, to finance significant transactions such as major reinvestments in our business, strategic acquisitions, share buybacks, or stockholder dividends, depending on the opportunities that present themselves.
Financing our day-to-day needs largely with cash produced from operations allows us to rebuild cash reserves which we can use, in addition to our bank line of credit, to finance significant transactions such as major reinvestments in our business, strategic acquisitions, and stockholder dividends, depending on the opportunities that present themselves.
We finance many of the initial working capital needs of our franchisees, including costs of new office openings, through our ownership of franchisee accounts receivable which we acquire through our franchise agreements. This is a relatively inexpensive source of capital for our franchisees and allows them to expand more freely.
We finance the initial working capital needs of our franchisees through our ownership of franchisee accounts receivable which we acquire through our franchise agreements. This is a relatively inexpensive source of capital for our franchisees and allows them to expand more freely.
The MRINetwork Acquisition On December 12, 2022 we completed our acquisition of the certain assets of MRINetwork (“MRI”) in accordance with the terms of an Asset Purchase Agreement dated November 16, 2022, for approximately $13.3 million, inclusive of a limited amount of working capital.
The MRINetwork Acquisition On December 12, 2022 we completed our acquisition of certain assets of MRINetwork (“MRI”) in accordance with the terms of an Asset Purchase Agreement dated November 16, 2022, for approximately $13.3 million.
McAnnar 40 Chief Legal Officer, Vice President, and Secretary Richard Hermanns is the President and Chief Executive Officer, as well as Chairman of the Board of Directors, of HireQuest, Inc. Mr. Hermanns has thirty-two years of experience in the temporary staffing industry.
McAnnar 41 Chief Legal Officer, Vice President of Professional Services, and Secretary Richard Hermanns is the President and Chief Executive Officer, as well as Chairman of the Board of Directors, of HireQuest, Inc. Mr. Hermanns has thirty-four years of experience in the temporary staffing industry.
We are now able to offer total talent access to our clients and partners. Smaller acquisitions have helped us fill our map and provide our franchisees and customers more targeted offerings.
We are now able to offer total talent access to our clients and partners. Smaller acquisitions have helped us fill our footprint and provide our franchisees and customers with ore targeted offerings.
He has fulfilled the former two roles for both HQI, and its predecessor, HireQuest, LLC, since 2014. His work with HireQuest involves a range of legal, operational, and risk management affairs in different realms, including mergers and acquisitions, securities, employment, insurance and finance, workers’ compensation, and intellectual property. Previously, Mr.
He has fulfilled the General Counsel or Chief Legal Officer role for both HQI, and its predecessor, HireQuest, LLC, since 2014. His work with HireQuest involves a range of legal, operational, and risk management affairs in different realms, including mergers and acquisitions, securities, employment, insurance and finance, workers’ compensation, and intellectual property. Previously, Mr.
As we continue to develop new markets and to serve our existing markets, we expect our brands to become more recognizable and a greater asset to us in driving repeat customers, encouraging customers to expand their use of our services across multiple markets, and increasing new customer development. 7 Table of Contents Our Offices Domestic: We had 435 offices located in 45 states, the District of Columbia, and 13 countries other than the United States as of December 31, 2022.
As we continue to develop new markets and to serve our existing markets, we expect our brands to become more recognizable and a greater asset to us in driving repeat customers, encouraging customers to expand their use of our services across multiple markets, and increasing new customer development. 7 Table of Contents Our Offices Domestic: We had 427 franchisee owned offices and one company owned office located in 45 states, the District of Columbia, and 13 countries outside the United States as of December 31, 2023.
Snelling and HireQuest 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.
Snelling and HireQuest focus on longer-term staffing positions in the light industrial and administrative arenas. TradeCorp focuses on jobs primarily for construction site skilled trades. 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.
The table below displays the number of HireQuest Direct, HireQuest, Snelling, and Northbound franchise agreements scheduled to renew at the end of each year: Year Renewals 2023 11 2024 36 2025 12 2026 47 2027 32 After 2027 (1) 20 1. Excludes franchise agreements that renew between 2023 and 2027 which will be up for renewal again after 2027.
The table below displays the number of HireQuest Direct, HireQuest, Snelling, and Northbound franchise agreements scheduled to renew at the end of each year: Year Renewals 2024 25 2025 12 2026 43 2027 32 2028 27 After 2028 (1) 18 1. Excludes franchise agreements that renew between 2024 and 2028 which will be up for renewal again after 2028.
In 2022, we employed approximately 82 thousand temporary employees and contracted with 120 independent contractors. Our systems generated approximately 1.5 m illion paychecks. The vast majority of these payments were made via electronic transfer or paycard.
In 2023, we employed approximately 73 thousand temporary employees and contracted with 120 independent contractors. Our systems generated approximately 1.5 m illion paychecks. Most of these payments were made via electronic transfer or paycard.
We are continuously evaluating acquisition opportunities that will allow us to expand our franchisee base, expand the number of industries our franchisees service, and diversify our national footprint. ● Continue to grow the number of offices our franchisees operate .
The following are key components of our growth strategy: ● Make strategic acquisitions . We are continuously evaluating acquisition opportunities that will allow us to expand our franchisee base, expand the number of industries our franchisees service, and diversify our national footprint. ● Continue to grow the number of offices our franchisees operate .
The vast majority of franchisees are not granted any exclusive territory. Historically, the franchisees have been encouraged to focus on a particular demographic, industry, or geography. As of December 21, 2022, our MRI franchisees operated under 207 executed franchise agreements.
Most franchisees are not granted any exclusive territory. Historically, the franchisees have been encouraged to focus on a particular demographic, industry, or geography. As of December 31, 2023 our MRI franchisees operated under 192 executed franchise agreements.
We urge our franchisees to customize their services according to the unique opportunities and assets available at each of their offices, while also leveraging the overall size of the organization whenever possible.
Our Franchise Program Our franchised offices are a key component of our success. We urge our franchisees to customize their services according to the unique opportunities and assets available at each of their offices, while also leveraging the overall size of the organization whenever possible.
These works include advertising and marketing materials and other items that are not material to our business. We license some intellectual property from third parties for use in our corporate headquarters, but such licenses are not material to our business. Our Organizational Structure HireQuest, Inc. is a holding company.
We license some intellectual property from third parties for use in our corporate headquarters, but such licenses are not material to our business. Our Organizational Structure HireQuest, Inc. is a holding company.
The system is not patented. We have invested in off-site back-up and storage systems that we believe provide reasonable protection for our electronic information systems against breakdowns as well as other disruptions and unauthorized intrusions. We rely on common law protection of our copyrighted works.
We have invested in off-site back-up and storage systems that we believe provide reasonable protection for our electronic information systems against breakdowns as well as other disruptions and unauthorized intrusions. We rely on common law protection of our copyrighted works. These works include advertising and marketing materials and other items that are not material to our business.
Franchising Strategy As of December 31, 2022, there were approximately 435 franchised Snelling, HireQuest, HireQuest Direct, and MRI offices operated by 363 franchisees. Approximately 15% of our franchisees owned multiple offices. Our largest franchisee owned 12 offices, and about 5% of our franchisees owned 4 or more offices. One individual owned significant interest in 7 franchisees that operated 25 offices.
Franchising Strategy As of December 31, 2023, there were approximately 427 franchised Snelling, HireQuest, HireQuest Direct, and MRI offices operated by 325 franchisees. Approximately 15% of our franchisees owned multiple offices. Our largest franchisee owned 11 offices, and about 3% of our franchisees owned 4 or more offices. One individual owned significant interest in 8 franchisees that operated 28 offices.
Our Competition The staffing industry is highly fragmented and highly competitive, with relatively low barriers to entry aside from payroll funding, workers’ compensation premiums, and startup costs. No single staffing company dominates the industry.
He has also been an adjunct professor at the Charleston School of Law. Our Competition The staffing industry is highly fragmented and highly competitive, with relatively low barriers to entry aside from payroll funding, workers’ compensation premiums, and startup costs. No single staffing company dominates the industry.
We divided Dubin 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 locations have not been sold and as of December 31, 2022 and are classified as held-for-sale. In the meantime, we operate the Philadelphia franchise as company-owned.
The remaining assets related to the operations of the other acquired locations have not been sold as of December 31, 2023 and are classified as held-for-sale. In the meantime, we operate the Philadelphia franchise as company-owned.
Executive Officers Information about our executive officers follows: Name Age Position Richard Hermanns 59 President, Chief Executive Officer, and Chairman of the Board David S. Burnett 56 Chief Financial Officer John D.
Executive Officers Information about our executive officers follows: Name Age Position Richard Hermanns 60 President, Chief Executive Officer, and Chairman of the Board Steven G. Crane 67 Chief Financial Officer John D.
The table below displays the number of MRI franchise agreements scheduled to renew each year: Year Renewals 2023 54 2024 42 2025 23 2026 22 2027 15 After 2027 (1) 51 1. Excludes franchise agreements that renew between 2023 and 2027 which will be up for renewal again after 2027.
The table below displays the number of MRI and SearchPath franchise agreements scheduled to renew each year: Year Renewals 2024 58 2025 32 2026 31 2027 20 2028 14 After 2028 (1) 37 1. Excludes franchise agreements that renew between 2024 and 2028 which will be up for renewal again after 2028.
Temporary Alternatives is a staffing division of dmDickason Personnel Services, a family-owned company based in El Paso, TX. The acquisition of Temporary Alternatives will expand our national footprint into West Texas and grow our franchise base, and we immediately entered into a franchise agreement and sold the non-working capital assets acquired.
Temporary Alternatives is a staffing division of dmDickason Personnel Services, a family-owned company based in El Paso, TX. We immediately entered into a franchise agreement and sold the non-working capital assets acquired. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.
We believe that our software facilitates efficient customer interaction, allowing for online bill payment, invoice review, and other important functions. Because WebConnect© is a proprietary system, we maintain a dedicated IT development staff, who continually refine our software in response to feedback from franchisees, customers, and employees. We license the use of our software to franchisees via our franchise agreements.
Because HQ WebConnect© is a proprietary system, we maintain a dedicated IT development staff, who continually refine our software in response to feedback from franchisees, customers, and employees. We license the use of our software to franchisees via our franchise agreements. The system is not patented.
Compared to company-owned offices, our franchise model allows us to employ relatively fewer full-time staff at our corporate headquarters decreasing the working capital needed for operations. Our Growth Strategy We believe there are considerable opportunities to grow our business and brands. The following are key components of our growth strategy: ● Make strategic acquisitions .
Compared to company-owned offices, our franchise model allows us to employ relatively fewer full-time staff at our corporate headquarters decreasing the working capital needed for operations. We have found historically that franchisees are also better incentivized to collect outstanding accounts thus reducing accounts receivable overall. Our Growth Strategy We believe there are considerable opportunities to grow our business and brands.
With little to no overhead required, no payroll funding, and no workers' compensation, the executive recruitment industry is extremely spread out and extremely competitive. In most areas, no single company has a dominant share of the market.
With little to no overhead required, no payroll funding, and no workers' compensation, the executive recruitment industry is extremely competitive. In most areas, no single company has a dominant share of the market. In addition to us, several large publicly owned companies specialize in recruitment services, and we also compete against a variety of regional or specialized companies.
We employed approximately 82 thousand temporary employees and contracted with 120 independent contractors during 2022. At December 31, 2022, we had approximately 435 franchisee-owned offices operating in 45 states, the District of Columbia, and 13 countries outside the United States. On a net basis, we opened 218 offices in 2022 (acquiring 207, opening 16, and closing 5).
We employed approximately 73 thousand temporary employees and contracted with 120 independent contractors during 2023. At December 31, 2023, we had approximately 427 franchisee-owned offices and one company owned office operating in 45 states, the District of Columbia, and 13 countries outside the United States.
Secondary factors include customer relationships, name recognition, and established reputation. Businesses operating in these areas of the staffing industry require access to significant working capital to pay temporary employees, particularly in the spring and summer when seasonal staffing requirements are highest, and to fund workers' compensation premiums and claims.
Businesses operating in these areas of the staffing industry require access to significant working capital to pay temporary employees, particularly in the spring and summer when seasonal staffing requirements are highest, and to fund workers' compensation premiums and claims. Lack of working capital can be a significant impediment to growth for small, local, and regional staffing service providers.
We operated Dental Power as a company-owned location until the fourth quarter of 2022, when we classified it as held-for-sale.
We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist. We operated Dental Power as a company-owned location until the fourth quarter of 2022, when we classified it as held-for-sale.
(collectively “Dubin”) in accordance with the terms of an Asset Purchase Agreement dated January 19, 2022 for approximately $2.5 million, inclusive of a prescribed amount of working capital. Dubin provides executive placement services and commercial staffing in the Philadelphia metropolitan area.
The Dubin Acquisition On February 21, 2022 we completed our acquisition of the staffing operations of The Dubin Group, Inc., and Dubin Workforce Solutions, Inc. (collectively “Dubin”) in accordance with the terms of an Asset Purchase Agreement dated January 19, 2022 for approximately $2.5 million, inclusive of a prescribed amount of working capital.
One of them is the Higher Quest Foundation, a non-profit organization dedicated to fighting global hunger in a sustainable way. David S. Burnett is the Chief Financial Officer of HireQuest, Inc. He has served as the Chief Financial Officer since December 2021. Prior to joining HQI, Mr.
One of them is the Higher Quest Foundation, a non-profit organization dedicated to fighting global hunger in a sustainable way. Steven G. Crane is the Chief Financial Officer of HireQuest, Inc. and has served as the Chief Financial Officer since November 2023. Mr. Crane has more than 20 years of financial management and leadership experience.
He achieved his juris doctorate, magna cum laude, from St. Louis University School of Law, where he was inducted into the Alpha Sigma Nu Jesuit Honor Society and the Order of the Woolsack. He is also an adjunct professor at the Charleston School of Law.
Boon Social Justice Award from the St. Louis City NAACP. Mr. McAnnar graduated cum laude with a Bachelor of Arts degree from the University of Pittsburgh. He achieved his juris doctorate, magna cum laude , from St. Louis University School of Law, where he was inducted into the Alpha Sigma Nu Jesuit Honor Society and the Order of the Woolsack.
We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist. The Dubin Acquisition On February 21, 2022 we completed our acquisition of the staffing operations of The Dubin Group, Inc., and Dubin Workforce Solutions, Inc.
We funded this acquisition with existing cash on hand and a draw on our then-existing line of credit with Truist. The Dental Power Acquisition On December 6, 2021 we completed our acquisition of the Dental Power Staffing division ("Dental Power") of Dental Power International, Inc.
When our franchisees’ customers expect to have long-term permanent needs, they tend to increase their use of temporary employees. Our revenue tends to increase as the economy expands, and conversely, our revenue tends to decrease when the economy contracts. 11 Table of Contents Some of the industries in which we operate are subject to seasonal fluctuation.
Our revenue tends to increase as the economy expands, and conversely, our revenue tends to decrease when the economy contracts. 11 Table of Contents Some of the industries in which we operate are subject to seasonal fluctuation. Many of the jobs filled by temporary employees are outdoors and generally performed during the warmer months of the year.
Our common stock trades on the Nasdaq Market under the symbol “HQI.” All references to “common stock” means the common stock of HireQuest, Inc., par value $0.001 per share. Our principal executive office is located at 111 Springhall Drive, Goose Creek, SC, 29445 and the telephone number is (843) 723-7400. More information about us may be found at www.hirequest.com.
Our principal executive office is located at 111 Springhall Drive, Goose Creek, SC, 29445 and the telephone number is (843) 723-7400. More information about us may be found at www.hirequest.com.
Northbound provides executive placement and short-term consultant services primarily to blue chip clients in the financial services industry. The acquisition of Northbound will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base. We immediately entered into a franchise agreement and sold the customer-related assets acquired.
Northbound provides executive placement and short-term consultant services primarily to blue chip clients in the financial services industry. We immediately entered into a franchise agreement and sold the customer-related assets acquired. We funded this acquisition with existing cash on hand, seller financing of $1.5 million, and a draw on our existing line of credit with Truist.
DPI is a 46-year-old dental staffing company headquartered in Carrboro, NC with long-standing client relationships in the dental industry providing temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S. We funded this acquisition with existing cash on hand and a draw on our existing line of credit with Truist.
(“DPI”) in accordance with the terms of the Asset Purchase Agreement dated November 2, 2021, for approximately $1.9 million. DPI was a 46-year-old dental staffing company headquartered in Carrboro, NC with long-standing client relationships in the dental industry providing temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S.
While staffing industry growth has outpaced overall economic and employment growth, the industry still employs only a small percentage of the United States’ non-farm work force.
We provide incentives to our existing franchisees, including assistance with start-up funding and acquisition costs, to encourage them to expand into new markets and industries. While staffing industry growth has outpaced overall economic and employment growth, the industry still employs only a small percentage of the United States’ non-farm work force.
The map below provides the number of offices we had in each state. Number of Offices By State December 31, 2022 We have a strong concentration of offices in established and emerging regions such as the Southeast, Florida, Texas, the Rust Belt, Colorado, and Washington.
Number of Offices By State December 31, 2023 We have a strong concentration of offices in established and emerging regions such as the Southeast, Florida, Texas, the upper Midwest, Colorado, and Washington. These regional office concentrations contribute to greater brand recognition while we continue to add offices in unserved and underserved regions.
We have developed and own our proprietary software to handle most aspects of operations, including temporary employee dispatch and payroll, invoicing, and accounts receivable. Our software system also allows us to produce internal reports necessary to track and manage financial performance of franchisees, customer trends, detect potential fraud, and to examine other key performance indicators.
Our software system also allows us to produce internal reports necessary to track and manage financial performance of franchisees, customer trends, detect potential fraud, and to examine other key performance indicators. We believe that our software facilitates efficient customer interaction, allowing for online bill payment, invoice review, and other important functions.
Hire Quest Holdings, LLC was formed as a Florida limited liability company in 2017. Since the Merger, we have made a number of acquisitions which are discussed in more detail below. The COVID-19 pandemic impacted our business and operations in 2021 and to a lesser extent in 2022.
Hire Quest Holdings, LLC was formed as a Florida limited liability company in 2017. Since the Merger, we have made a number of acquisitions which are discussed in more detail below. Our common stock trades on the Nasdaq Market under the symbol “HQI.” All references to “common stock” means the common stock of HireQuest, Inc., par value $0.001 per share.
Lack of working capital can be a significant impediment to growth for small, local, and regional staffing service providers. A second barrier to entry is an affordable workers’ compensation policy. Small entrants usually do not have the scale necessary to secure a policy on terms similar to ours.
A second barrier to entry is an affordable workers’ compensation policy. Small entrants usually do not have the scale necessary to secure a policy on terms similar to ours. Regulatory compliance is becoming more burdensome, particularly for smaller firms that cannot profitably comply with the increasing number of federal, state, and local employment laws and regulations.
These regional office concentrations contribute to greater brand recognition while we continue to add offices in unserved and underserved regions. These concentrations also allow us to better recognize local and regional market trends. International: In the MRI transaction we acquired 19 non-US offices located in 13 countries.
These concentrations also allow us to better recognize local and regional market trends. International: In the MRI transaction, we acquired 19 non-US offices located in 13 countries in North and South America, Europe, Asia, and Africa. International operations transact with us using US dollars, and currently only placement services are provided outside of the United States.
Many of the jobs filled by temporary employees are outdoors and generally performed during the warmer months of the year. As a result, activity increases in the spring and continues at higher levels through the summer, then begins to taper off during fall and through winter.
As a result, activity increases in the spring and continues at higher levels through the summer, then begins to taper off during fall and through winter. In addition, demand by industrial customers tends to slow after the holiday season and pick up again in the third and fourth quarters – peaking in the third quarter.
In addition, we have noticed that our seasonality has been mitigated by the addition of Snelling, which focuses on weekly-paid employees. We expect seasonality to decrease even further as a result of the MRI Acquisition as the MRI franchisees are involved in permanent placement which may be subject to less seasonality than on-demand employment.
Our exposure to seasonality is mitigated, in part, by our strong presence in the Southern United States where seasonal fluctuations are typically less pronounced. In addition, we have noticed that our seasonality has been mitigated by the addition of Snelling, which focuses on weekly-paid employees.
All of these offices were franchised, except the Dental Power office (acquired in the DPI transaction) and the Philadelphia office (acquired as part of the Dubin transaction). There were also 12 MRI locations that provided contract staffing services only which we did not include in the office count. Finally, we licensed our trademarks for use in 10 locations in California.
Finally, we licensed our trademarks for use in 10 locations in California. In addition, there were 7 MRI locations that provided contract staffing services only. The map below provides the number of offices we had in each state.
The acquisition of Dubin will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base. We funded this acquisition with existing cash on hand, deferred purchase payments, and a draw on our existing line of credit with Truist.
Dubin provides executive placement services and commercial staffing in the Philadelphia, PA metropolitan area. We funded this acquisition with existing cash on hand, deferred purchase payments, and a draw on our existing line of credit with Truist. We divided Dubin into separate businesses and sold certain customer related assets of one of the acquired locations to a new franchisee.
Burnett received his Bachelor of Science degree in Business Administration (Accounting) from Old Dominion University, and a Master of Science degree in Taxation from Golden Gate University. He is both a Certified Public Accountant and a Certified Treasury Professional. 10 Table of Contents John D. McAnnar is the Chief Legal Officer, Vice President, and Secretary of HireQuest, Inc.
He holds his B.S. in Mechanical Engineering from Tulane University and has a Masters in International Management from Thunderbird School of International Management at Arizona State University. 10 Table of Contents John D. McAnnar is the Chief Legal Officer, Vice President of Professional Services, and Secretary of HireQuest, Inc.
In addition to us, several large publicly owned companies specialize in recruitment services, and we also compete against a variety of regional or specialized companies. The primary competitive factors in our market includes price, the ability to provide the requested workers on a timely basis, and success in meeting customer expectations.
The primary competitive factors in our staffing markets include price, the ability to provide the requested workers on a timely basis, and success in meeting customer expectations. Secondary factors include customer relationships, name recognition, and established reputation.
McAnnar served in the litigation departments of Carmody MacDonald, P.C., and Armstrong Teasdale, LLP, an Am Law 200 firm, where he focused on complex commercial litigation, corporate, and employment law. He is the co-founder of ArchCity Defenders, a non-profit organization in St. Louis, Mo., that led the push for change in Missouri’s municipal court system following the Ferguson unrest.
McAnnar served in the litigation departments of Carmody MacDonald, P.C., and Armstrong Teasdale, LLP, an Am Law 200 firm, where he focused on complex commercial litigation, corporate, and employment law. Since July 2023, he has served on the Board of Directors and the Audit, Compensation, and Nominations and Governance Committees of Scott's Liquid Gold, Inc. (OTC:SLGD).
The Dental Power Acquisition On December 6, 2021 we completed our acquisition of the Dental Power Staffing division ("Dental Power") of Dental Power International, Inc. (“DPI”) in accordance with the terms of the Asset Purchase Agreement dated November 2, 2021, for approximately $1.9 million.
We funded this acquisition with existing cash on hand, and a draw on our existing line of credit with Truist. 2023 Acquisitions The TEC Acquisition On December 4, 2023 we completed our acquisition of ten locations of TEC Staffing Services ("TEC") in Arkansas in accordance with the terms of an Asset Purchase Agreement dated October 23, 2023 for approximately $9.8 million.
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Please see “Management's Discussion and Analysis of Financial Condition and Results of Operations” of this Annual Report on Form 10-K for a description of the effects COVID-19 has had on the Company.
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TEC has been a provider of industrial staffing services to the employers and workers in Northwest and Central Arkansas for over 40 years.
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Recruit Media is a tuck-in acquisition whose intellectual property compliments our technological structure allowing us to accelerate improvements to our platform. We funded this acquisition with existing cash on hand and a draw on our then-existing line of credit with Truist.
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On a net basis, we closed 8 offices in 2023 (acquiring 7, opening 12, and closing 27). We also licensed our tradenames to approximately 10 locations in California. In addition, there were 7 MRI locations that provided contract staffing services only.
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We funded this acquisition with existing cash on hand, seller financing of $1.5 million, and a draw on our existing line of credit with Truist.
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Immediately prior to joining the Company and since 2014, Mr. Crane served as Founder and Managing Partner of Touchpoint Search, LLC, a finance consulting and recruiting business directed at filling finance and accounting positions as well as providing interim finance and accounting services. From 2007 through 2014, Mr. Crane served as Chief Financial Officer of ModusLink Global Solutions, Inc.
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We also licensed our tradenames to 10 locations in California. There were 12 MRI locations that provided contract staffing only which are not included in the office count. We provide incentives to our existing franchisees, including assistance with start-up funding and acquisition costs, to encourage them to expand into new markets and industries.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeAs 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 systems. Further information on this material weakness, which has not been resolved as of December 31, 2022, is included in “
Biggest changeAs 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 systems. Further information on this material weakness, which has not been resolved as of December 31, 2023, is included in “

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeAt December 31, 2022, we leased approximately 9 thousand square feet of office space in our headquarters to two unaffiliated companies. These leases were at the market rate. At December 31, 2022 we had a term loan secured by a mortgage on our real property.
Biggest changeAt December 31, 2023, we leased approximately 5 thousand square feet of office space in our headquarters to an unaffiliated company. This lease was at the market rate. We are unaware of any material liens or other encumbrances on our real property, other than as general collateral for our revolving line of credit.
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The term loan was scheduled to mature in June 2036 and accrued interest at a variable rate equal to LIBOR plus a margin of 2.0%. Our monthly payment consisted of a fixed principal payment of approximately $17,500 plus interest. In March 2023, we refinanced our line of credit and paid off the term loan.
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See the "Liquidity and Capital Resources" section for more information. 22 Table of Contents
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The real estate is now part of the overall security on our line of credit. See "Liquidity and Capital Resources" section below for more information regarding this subsequent event. We are unaware of any material liens or other encumbrances on our real property, other than as general collateral as noted above.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeWe 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. The Company and its consolidated subsidiaries file tax returns in multiple jurisdictions and are subject to occasional audits and routine examinations.
Biggest changeWe believe the outcomes of the proceedings in which we are currently involved, even if determined adversely, will not have a material adverse effect on our business, financial condition, results of operations, or liquidity and capital resources. The Company and its consolidated subsidiaries file tax returns in multiple jurisdictions and are subject to occasional audits and routine examinations.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeTransfer Agent and Registrar Our transfer agent is Continental Stock Transfer & Trust Company located at 17 Battery Street, 8th Floor, New York, New York, 10004. 22 Table of Contents Purchase of Equity Securities by the Issuer and Affiliated Purchasers In July 2020, our Board of Directors authorized a one-year repurchase plan for up to 1 million shares of our common stock.
Biggest changeTransfer Agent and Registrar Our transfer agent is Continental Stock Transfer & Trust Company located at 17 Battery Street, 8th Floor, New York, New York, 10004. 23 Table of Contents Item 6. Reserved
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Information for our Common Stock Our common stock is listed on the Nasdaq Capital Market under the symbol “HQI.” Holders of Our Common Stock As of March 20, 2023, we had approximately 186 holders of record of our common stock.
Item 5. Market for Registrant ’ s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Market Information for our Common Stock Our common stock is listed on the Nasdaq Capital Market under the symbol “HQI.” Holders of Our Common Stock As of March 19, 2024, we had approximately 72 holders of record of our common stock.
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We did not purchase any shares under this plan in 2021. We purchased 23,638 shares under this plan in 2020 at an average price of $6.20 per share. This plan expired pursuant to its own terms on July 29, 2021, and has not been renewed. Item 6. Reserved
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Issuer Purchases of Equity Securities There were no purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) of its common stock under the Exchange Act) during the three months ended December 31, 2023.

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeEven with these results, we believe the sweeping and persistent nature of the COVID-19 pandemic still depressed system-wide sales, resulting revenue, and net income during 2022, and may continue to do so. 23 Table of Contents Results of Operations The following table displays our consolidated statements of operations for the years ended December 31, 2022 and December 31, 2021 (in thousands, except percentages): Year ended December 31, 2022 December 31, 2021 Franchise royalties $ 28,897 93.4 % $ 21,317 94.6 % Service revenue 2,055 6.6 % 1,212 5.4 % Total revenue 30,952 100.0 % 22,529 100.0 % Selling, general and administrative expenses 12,874 41.6 % 13,328 59.2 % Depreciation and amortization 2,040 6.6 % 1,551 6.9 % Income from operations 16,038 51.8 % 7,650 34.0 % Other miscellaneous income (2,047 ) (6.6 )% 4,570 20.3 % Interest income 247 0.8 % 413 1.8 % Interest and other financing expense (368 ) (1.2 )% (157 ) (0.7 )% Net income before income taxes 13,870 44.8 % 12,476 55.4 % Provision for income taxes 1,895 6.1 % 635 2.8 % Net income from continuing operations 11,975 38.7 % 11,841 52.6 % Income from discontinued operations, net of tax 483 1.6 % 9 0.0 % Net income $ 12,458 40.2 % $ 11,850 52.6 % Non-GAAP data Adjusted EBITDA $ 22,045 71.2 % $ 12,324 54.7 % 1.
Biggest changeAt 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. 24 Table of Contents Results of Operations The following table displays our consolidated statements of operations for the years ended December 31, 2023 and December 31, 2022 (in thousands, except percentages): Year ended December 31, 2023 December 31, 2022 Franchise royalties $ 35,813 94.5 % $ 28,897 93.4 % Service revenue 2,069 5.5 % 2,055 6.6 % Total revenue 37,882 100.0 % 30,952 100.0 % Selling, general and administrative expenses 24,448 64.5 % 12,874 41.6 % Depreciation and amortization 2,793 7.4 % 2,040 6.6 % Income from operations 10,641 28.1 % 16,038 51.8 % Other miscellaneous expense (1,738 ) (4.6 )% (2,047 ) (6.6 )% Interest income 263 0.7 % 247 0.8 % Interest and other financing expense (1,386 ) (3.7 )% (368 ) (1.2 )% Net income before income taxes 7,780 20.5 % 13,870 44.8 % Provision for income taxes 1,345 3.6 % 1,895 6.1 % Net income from continuing operations 6,435 17.0 % 11,975 38.7 % Net (loss) income from discontinued operations, net of tax (300 ) (0.8 )% 483 1.6 % Net income $ 6,135 16.2 % $ 12,458 40.2 % Non-GAAP data Adjusted EBITDA $ 16,487 43.5 % $ 22,045 71.2 % 1.
We utilize adjusted EBITDA as a financial measure as management believes investors find it a useful tool to perform more 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.
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.
For the Snelling 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.
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.
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 Notes receivable consist primarily of amounts due to us related to the financing of franchised locations.
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 Notes receivable from franchisees consist primarily of amounts due to us related to the financing of franchised locations.
Revenue Recognition Our primary source of revenue comes from royalty fees based on the operation of our franchised offices. Royalty fees from our HireQuest Direct business model are based on a percentage of sales for services our franchisees provide to customers, which ranges from 6% to 8%.
Revenue Recognition Our primary source of revenue comes from royalty fees based on the operation of our franchised offices. Royalty fees from our HireQuest Direct business model are based on a percentage of sales for services our franchisees provide to customers, which ranges from 6.0% to 8.0%.
“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 2022 and 2021 items and year-to-year comparisons between 2022 and 2021.
“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 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.
If the actual costs of the claims exceed the amount estimated, we may incur additional charges. 30 Table of Contents 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.
If the actual costs of the claims exceed the amount estimated, we may incur additional charges. 31 Table of Contents 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 report notes receivable at the principal balance outstanding less an allowance for losses. We charge interest at a fixed rate and interest income is calculated by applying the effective rate to the outstanding principal balance. Notes receivable are generally secured by the assets of each location and the ownership interests in the franchise.
We 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 will perform our next annual goodwill impairment tests as of August 31, 2023; 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.
We will perform our next annual goodwill impairment tests as of August 31, 2024; 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.
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, sale/leaseback transactions, speculative hedging, and sale of assets.
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.
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 little or no relationship to our operating performance.
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.
Other current liabilities include approximately $9.8 million due to our franchisees, $5.6 million of accrued wages, benefits and payroll taxes, and $3.4 million related to our workers’ compensation claims liability. Our working capital requirements are driven largely by temporary employee payroll, which is typically daily or weekly, and weekly cash settlements with our franchises.
Other current liabilities include approximately $9.9 million due to our franchisees, $4.3 million of accrued wages, benefits and payroll taxes, and $3.9 million related to our workers’ compensation claims liability. Our working capital requirements are driven largely by temporary employee payroll, which is typically daily or weekly, and weekly cash settlements with our franchises.
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,” "Northbound Executive Search", "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. ● Snelling, and HireQuest 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 and MRI focus on executive, managerial, and professional recruitment services, although they also offer short-term consultant services.
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.. ● HireQuest Direct focuses on daily-work/daily-pay jobs primarily for construction and light industrial customers. ● Snelling and HireQuest 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. ● TradeCorp focuses on short-term skilled construction jobs. ● Northbound, MRI, SearchPath, and Sales Consultants focus on executive, managerial, and professional recruitment services, although they also offer short-term consultant services.
Discussions of 2021 items and year-to-year comparisons between 2021 and 2020 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, 2021 which we filed with the SEC on March 15, 2022.
Discussions of 2022 items and year-to-year comparisons between 2022 and 2021 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, 2023.
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. Any contingent consideration is measured at fair value at the date of acquisition.
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.
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, 2022, our current assets exceeded our current liabilities by approximately $15.1 million.
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, 2023 our current assets exceeded our current liabilities by approximately $15.7 million.
Royalty fees from our HireQuest business line, including HireQuest franchisees, DriverQuest franchisees, and Snelling and LINK franchisees who executed new franchise agreements upon closing, are 4.5% of the payroll we fund plus 18% of the gross margin for the territory.
Royalty fees from our HireQuest business line, including HireQuest franchisees, DriverQuest franchisees, the Northbound franchisee, the HireQuest Health franchisees, and Snelling and LINK franchisees who executed new franchise agreements upon closing, are 4.5% of the payroll we fund plus 18.0% of the gross margin for the territory.
For the HireQuest, Snelling, and DriverQuest 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% - 7% of direct placement sales.
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.
Our customers are invoiced every week and we do not require payment prior to the delivery of service. Substantially all of our contracts include payment terms of 30 days or less and are short-term in nature. Because of our payment terms with our customers, there are no significant contract assets or liabilities.
Our customers are invoiced every week and we rarely require payment prior to the delivery of service. Substantially all of our contracts include payment terms of 30 days or less and are short-term in nature. Because of our payment terms with our customers, there are no significant contract assets or liabilities. We do not extend payment terms beyond one year.
Operating activity for the year included net income of approximately $12.5 million offset by a decrease in balance sheet assets and an increase in balance sheet liabilities totaling approximately $2.6 million.
Operating activity for the year included net income of approximately $6.1 million offset by a decrease in balance sheet assets and an increase in balance sheet liabilities totaling approximately $2.8 million.
In 2022, we added 218 offices on a net basis by opening or acquiring 223 and closing 5. In 2021, we added 78 offices on a net basis by opening or acquiring 79 and closing 1. The following table accounts for the number of offices opened and closed in 2022 and 2021.
In 2022, we added 218 offices on a net basis by opening or acquiring 223 and closing 5. The following table accounts for the number of offices opened and closed in 2023 and 2022.
The Company utilized the proceeds of the new Credit Facility (i) first to pay off its existing credit agreement with Truist, (ii) second, to pay off its existing term loan with Truist, and (iii) third, to pay transaction fees and expenses incurred in connection with closing the transactions described above.
The Company utilized the proceeds of the Senior Credit Facility (i) to pay off its existing credit agreement with Truist, (ii) to pay off its existing term loan with Truist (described below) and (iii) to pay transaction fees and expenses incurred in connection with closing the transactions described above.
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 2022, nearly all of our offices were franchised with the only exception being Dental Power locations acquired in December 2021 and the Philadelphia office acquired in February 2022.
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 2023, all of our offices were franchised with the only exception being the Philadelphia office acquired in February 2022.
Franchised offices, December 31, 2020 139 Purchased in 2021 (net of sold locations) 65 Opened in 2021 14 Closed in 2021 (1 ) Franchised offices, December 31, 2021 217 Purchased in 2022 (net of sold locations) 207 Opened in 2022 16 Closed in 2022 (5 ) Franchised offices, December 31, 2022 435 29 Table of Contents Seasonality Our revenue fluctuates quarterly and is generally higher in the second and third quarters of our year.
Franchised offices, December 31, 2021 217 Purchased in 2022 (net of sold locations) 207 Opened in 2022 16 Closed in 2022 (5 ) Franchised offices, December 31, 2022 435 Purchased in 2023 7 Opened in 2023 14 Closed in 2023 (29 ) Franchised offices, December 31, 2023 427 30 Table of Contents Seasonality Our revenue fluctuates quarterly and is generally higher in the second and third quarters of our year.
As of December 31, 2022 we had approximately 433 franchisee-owned offices and 2 company-owned offices in 45 states, the District of Columbia, and 13 countries outside of the United States. We licensed our tradenames to 10 offices in California. In addition, there were 12 MRI locations that provided contract staffing services only.
As of December 31, 2023 we had approximately 427 franchisee-owned offices and 1 company-owned office in 45 states, the District of Columbia, and 13 countries outside of the United States. We licensed our tradenames to approximately 10 offices in California. In addition, there were 7 MRI locations that provided contract staffing services only.
Our current assets included approximately $3.0 million of cash and $45.7 million of accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements.
Our current assets included approximately $1.3 million of cash and $44.4 million of accounts receivable, which our franchisees have billed to customers and which we own in accordance with our franchise agreements.
We cannot provide assurances that we will have future access to the capital or credit markets on acceptable terms. 27 Table of Contents Cash Flows Operating Activities During 2022, net cash generated by operating activities was approximately $16.9 million.
We cannot provide assurances that we will have future access to the capital or credit markets on acceptable terms. 28 Table of Contents Cash Flows Operating Activities During 2023, net cash generated by operating activities was approximately $10.6 million.
We also had significant non-cash expenses in 2022, including approximately $2.4 million in stock-based compensation, $2.0 million in depreciation and amortization, and a loss on conversion of acquired operations into franchises of $2.2 million Investing Activities During 2022, net cash used by investing activities was approximately $23.6 million and included cash paid for acquisitions of $32.4 million.
We also had significant non-cash expenses in 2023, including approximately $1.7 million in stock-based compensation, $2.8 million in depreciation and amortization, and a loss on conversion of acquired operations into franchises of $2.0 million Investing Activities During 2023, net cash used in investing activities was approximately $7.1 million and included cash paid for acquisitions of $9.8 million.
The Company intends to utilize the proceeds of any loans made under the Line of Credit and the remainder of the Term Loan for working capital, acquisitions, required letters of credit, and general corporate purposes in accordance with the terms of the Credit Agreement.
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.
The test completed as of October1, 2022 indicated no impairment. 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.
The test completed for 2023 indicated the fair value of goodwill exceeds its carrying value. 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.
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.
For additional information related to the letter of credit securing our workers’ compensation obligations see Note 5 - Workers’ Compensation Insurance and Reserves. 29 Table of Contents 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.
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.
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.
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.
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.
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, ” and “ Critical Accounting Estimates – Revenue Recognition ,” which disclosure is incorporated herein by reference.
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, ” and “ Critical Accounting Estimates – Revenue Recognition ,” which disclosure is incorporated herein by reference. 25 Table of Contents Total revenue for the year ended December 31, 2023 was approximately $37.9 million compared to $30.9 million for the year ended December 31, 2022, an increase of 22.4%.
Quarterly, we use development factors provided by an independent actuary to estimate the future costs of these claims. We make adjustments as necessary.
The increase is due to claims developing higher than expected. 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.
The effective tax rates for 2022 and 2021 were 13.7% and 5.1% respectively. The effective tax rate is primarily driven by the federal Work Opportunity Tax Credit, 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.
The effective tax rate is primarily driven by the federal Work Opportunity Tax Credit, which reduced our effective tax rate by 11.9% and 9.1% for the years ended December 31, 2023 and December 31, 2022, 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.
Depreciation and Amortization Depreciation and amortization for the year ended December 31, 2022 was approximately $2.0 million compared to $1.6 million for the year ended December 31, 2021. The increase was due to additional amortization stemming from acquisitions. We acquired $19.9 million of franchise agreements and $7.3 million of other intangibles in the 2021 acquisitions.
Depreciation and Amortization Depreciation and amortization for the year ended December 31, 2023 was approximately $2.8 million compared to $2.0 million for the year ended December 31, 2022. The increase was due to additional amortization stemming from acquisitions. In the 2022 acquisitions we acq uired $5.6 million of franchise related intangibles, and $3.6 million of other intangibles.
The income from discontinued operations amounts as reported on our consolidated statements of operations was comprised of the following amounts (in thousands): Year ended December 31, December 31, 2022 2021 Revenue $ 6,313 $ 231 Cost of staffing services 4,505 171 Gross profit 1,808 60 Selling, general and administrative expense 795 36 Amortization 384 12 Net income before tax 629 12 Provision for income taxes 146 3 Net income $ 483 $ 9 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 owned locations.
The (loss) income from discontinued operations amounts as reported on our consolidated statements of operations was comprised of the following amounts (in thousands): Year ended December 31, December 31, 2023 2022 Revenue $ 1,777 $ 6,313 Cost of staffing services 1,145 4,505 Gross profit 632 1,808 Selling, general and administrative expense (713 ) (795 ) Gain on sale of intangible assets 197 - Amortization - (384 ) Impairment of intangible asset (514 ) - Net (loss) income before income taxes (398 ) 629 (Benefit) provision for income taxes (98 ) 146 Net (loss) income $ (300 ) $ 483 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.
On February 28, 2023, subsequent to the date of these financial statements, the Company and all of its subsidiaries as borrowers entered into a Revolving Credit and Term Loan Agreement with Bank of America, N.A. for a $50 million revolving facility, which includes a $20 million sublimit for the issuance of standby letters of credit.
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.
We cannot accurately predict the effects of workers' compensation in future periods, and historical trends are not indicative of future results. 25 Table of Contents Other Selling, General and Administrative Expenses (“SG&A”) Excluding workers' compensation, SG&A for the year ended December 31, 2022 was approximately $14.8 million compared to $14.1 million for the year ended December 31, 2021, an increase of 5.5%.
We cannot accurately predict the effects of workers' compensation in future periods, and historical trends may not be indicative of future results. 26 Table of Contents Other Selling, General and Administrative Expenses (“SG&A”) SG&A for the year ended December 31, 2023 was approximately $24.4 million compared to $12.9 million for the year ended December 31, 2022, an increase of $11.6 million.
We also offer various incentive programs for franchisees including royalty incentives, royalty credits, and other support initiatives. These incentives and credits are provided to encourage new office development and organic growth, and to limit workers' compensation exposure. We present franchise royalty fees net of these incentives and credits.
These incentives and credits are provided to encourage new office development and organic growth, and to limit workers' compensation exposure. We present franchise royalty fees net of these incentives and credits.
The following table reflects our system-wide sales broken into its components for the periods indicated (in thousands): Year ended December 31, December 31, 2022 2021 Franchise sales $ 465,917 $ 354,265 Company-owned sales 6,313 231 System-wide sales $ 472,230 $ 354,496 System-wide sales were $472.2 million in 2022, an increase of 33.2%, from $354.5 million in 2021.
The following table reflects our system-wide sales broken into its components for the periods indicated (in thousands): Year ended December 31, December 31, 2023 2022 Franchise sales $ 603,365 $ 465,910 Company-owned sales 1,777 6,320 System-wide sales $ 605,142 $ 472,230 System-wide sales were $605.1 million in 2023, an increase of 28.1%, from $472.2 million in 2022.
This increase follows the overall increase 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.
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 increased by approximately $514 thousand and is related to the MRI acquisition.
Service revenue for the year ended December 31, 2022 was approximately $2.1 m illion compared to $1.2 million for the year ended December 31, 2021, an increase of $843 thousand, or 69.6% Interest on overdue accounts increased approximately $311 thousand from $635 thousand at December 31, 2021 to $946 thousand at December 31, 2022.
Service revenue for the year ended December 31, 2023 was approximately $2.1 m illion compared to $2.1 million for the year ended December 31, 2022, a slight increase. Interest on overdue accounts decreased approximately $96 thousand from $946 thousand for the year ended December 31, 2022 to $850 thousand for the year ended at December 31, 2023.
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.
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.
As of December 31, 2022, the outstanding balance under our line of credit with Truist was $12.5 million, with approximately $12.2 million available for additional borrowing under the line as of such date, assuming compliance with necessary conditions.
As of December 31, 2023, the outstanding balance under our line of credit with Bank of America was $14.1 million, with approximately another $9.7 million utilized for the issuance of Letters of Credit, leaving approximately $26.2 million available for additional borrowing under the line as of such date, assuming compliance with necessary conditions.
Revenue does not include any company-owned offices, as both of the offices that we own are classified as held-for-sale. 24 Table of Contents 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.
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.
We do not extend payment terms beyond one year. 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.
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 $6.6 million at December 31, 2023, versus $5.9 million at December 31, 2022.
Year ended December 31, 2022 December 31, 2021 Net income $ 12,458 $ 11,850 Interest expense 368 157 Provision for income taxes 1,895 635 Depreciation and amortization 2,040 1,551 WOTC related costs 601 595 EBITDA 17,362 14,788 Non-cash compensation 1,673 1,628 Acquisition related charges 2,660 (4,399 ) Impairment of notes receivable 350 307 Adjusted EBITDA $ 22,045 $ 12,324 Revenue Our total revenue consists of franchise royalties, and service revenue we receive from our franchises.
Year ended December 31, 2023 December 31, 2022 Net income $ 6,135 16.2 % $ 12,458 40.2 % Interest and other financing expense 1,386 3.7 % 368 1.2 % Provision for income taxes 1,345 3.6 % 1,895 6.1 % Depreciation and amortization 2,793 7.4 % 2,040 6.6 % EBITDA 11,659 30.8 % 16,761 54.2 % WOTC related costs 461 1.2 % 601 1.9 % Non-cash compensation 1,483 3.9 % 1,673 5.4 % Acquisition related charges 2,344 6.2 % 2,660 8.6 % Impairment of notes receivable 540 1.4 % 350 1.1 % Adjusted EBITDA $ 16,487 43.5 % $ 22,045 71.2 % Revenue Our total revenue consists of franchise royalties, and service revenue we receive from our franchises.
Current assets increased from $42.0 million on December 31, 2021 to $51.9 million on December 31, 2022. On a year-over-year basis, we saw a 33.2% increase in our system-wide-sales from $354.5 million in 2021 to $472.2 million in 2022.
Our liquidity position stayed strong in 2023 with Current Assets at December 31, 2023 of $51.5 million staying approximately the same as at December 31, 2022 ($51.9 million). On a year-over-year basis, we saw a 28.1% increase in our system-wide-sales from $472.2 million in 2022 to $605.1 million in 2023.
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.
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.
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.
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, 2023 there was 1 company-owned location reported as discontinued operations: ● Certain assets acquired in the Dubin Agreement related to the operations of the Philadelphia franchise.
We do not expect that benefit to reoccur, but generally expect that our effective tax rate will be significantly lower than statutory rates due to ongoing Work Opportunity Tax Credits and stock-based compensation. 26 Table of Contents Income 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.
Other factors impacting our effective rate include windfall tax deductions related to stock-based compensation, and deduction limits on overall compensation. 27 Table of Contents (Loss) income 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.
Financing Activities During 2022, net cash provided by financing activities was approximately $8.5 million which was primarily due to net borrowings on our line of credit and term loan amounting to $12.4 million, offset by the payment of dividends of approximately $3.3 million.
These were partially offset by proceeds from the conversion of acquired offices into franchises of $2.3 million. Financing Activities During 2023, net cash used in financing activities was approximately $5.2 million which was primarily due to net payments on our revolving credit/term loan amounting to $1.6 million, and by the payment of dividends of approximately $3.3 million.
Interest will accrue on the outstanding balance of the Line of Credit at a variable rate equal to (a) the LIBOR Index Rate plus a margin between 1.25% and 1.75% per annum or (b) the then applicable Base Rate, as that term is defined in the Credit Agreement plus a margin between 0.25% and 0.75% per annum.
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.
We provide employment for an estimated 85 thousand temporary employees annually working for thousands of clients in many industries including construction, healthcare, recycling, warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping, and retail. The COVID-19 pandemic materially adversely impacted our business in 2020 and 2021 and to a much lesser extent, in 2022.
We provide employment for an estimated 73 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 2023 with a strong balance sheet. Our assets exceeded liabilities by over $62.7 million.
Royalty fees from the Snelling and LINK franchise agreements assumed and not renegotiated at closing range from 5.0% to 8.0% of sales for services our franchisees provide to customers. Royalty fees from the MRI franchise agreements assumed and not renegotiated range from 1% of cash in plus a minimum of $15,000 to 9% of cash in.
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. Royalty fees from the Snelling and SearchPath franchise agreements assumed and not renegotiated at closing range from 5.0% to 8.0% of sales for services our franchisees provide to customers.
Our performance obligations primarily take the form of a franchise license and promised services. Promised services consist primarily of paying temporary employees, completing all statutory payroll related obligations, and providing workers' compensation insurance on behalf of temporary employees.
Promised services consist primarily of paying temporary employees, completing all statutory payroll related obligations, and providing workers' compensation insurance on behalf of temporary employees. Because these performance obligations are interrelated, we do not consider them to be individually distinct and therefore account for them as a single performance obligation.
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, stock of the Company's subsidiaries, and intellectual property and the real estate owned by HQ Real Property Corporation. 28 Table of Contents The Company utilized the proceeds of the Line of Credit and Term Loan (i) first to pay off its existing credit facility with BB&T, now Truist, and (ii) second, to pay transaction fees and expenses incurred in connection with closing the transactions described above.
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.
Because these performance obligations are interrelated, we do not consider them to be individually distinct and therefore account for them as a single performance obligation. Because our franchisees receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Franchise royalties are billed on a weekly basis.
Because our franchisees receive and consume the benefits of our services simultaneously, our performance obligations are satisfied when our services are provided. Franchise royalties are billed on a weekly basis other than with MRI franchise royalties, which are billed on a monthly basis. We also offer various incentive programs for franchisees including royalty incentives, royalty credits, and other support initiatives.
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 license blocks.
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.
Accordingly, we present revenue from franchised locations on a net basis as agent as opposed to a gross basis as principal. With company-owned locations, we control the conditions under which we provide services to customers. Accordingly, we present revenue from owned locations on a gross basis as principal.
Accordingly, we present revenue from franchised locations on a net basis as agent as opposed to a gross basis as principal. For franchised locations, we recognize revenue when we satisfy our performance obligations. Our performance obligations primarily take the form of a franchise license and promised services.
At December 31, 2022, availability under the line of credit was approximatel y $12.2 million b ased on eligible collateral, less letter of credit reserves, bank product reserves, and current advances. On March 1, 2023, our workers' compensation provider agreed to reduce the required collateral deposit from $10.7 million to $9.2 million.
At December 31, 2023, availability under the Senior Credit Facility was approximately $26.2 million based on eligible collateral, less letter of credit reserves, bank product reserves and current advances assuming continued covenant compliance.
Franchise royalties for the year ended December 31, 2022 were approximately $28.9 million compared to $21.3 million for the year ended December 31, 2021, an increase of 35.6%, also in line with the increase in system-wide-sales. The blended effective royalty rate for 2022 was 6.2% versus 6.0% in 2021.
Franchise royalties for the year ended December 31, 2023 were approximately $35.8 million compared to $28.9 million for the year ended December 31, 2022, an increase of 23.9%, driven predominantly by the inclusion of a full year of MRI royalties in 2023 versus only approximately one month in 2022.
Other income and expense Other miscellaneous income includes all nonoperating income and expense other than interest and taxes. For the year ended December 31, 2022 other miscellaneous expense was approximately $2.0 million, compared to $4.6 million of other miscellaneous income for the year ended December 31, 2021.
For the year ended December 31, 2023, other miscellaneous expense was approximately $1.7 million, compared to $2.0 million of other miscellaneous expense for the year ended December 31, 2022. In 2023 the largest component of this loss is related to the loss of $2.0 million on disposition of the TEC assets.
Interest and other financing expense increased approximately $211 thousand to $368 thousand at December 31, 2022 from December 31, 2021, when it was $157 thousand . Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs.
Interest and other financing expense will fluctuate as we utilize the line of credit for acquisitions or other short-term liquidity needs. In addition, rising U.S. interest rates have been driven mainly by more aggressive action from the Federal Reserve to rein in inflation.
Subsequent changes in the recorded amount of contingent consideration are generally recognized as income or loss based on fair value each reporting period. Our allowance for losses on notes receivable was approximately $260 thousand and $1.9 million at December 31, 2022 and December 31, 2021, respectively.
Our allowance for losses on notes receivable was approximately $623 thousand and $260 thousand at December 31, 2023 and December 31, 2022, 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.
Service Revenue Service revenue consists of revenue generated from franchisees that are outside of our core services such as license fees and miscellaneous income. This includes interest we charge our franchisees on overdue customer accounts receivable and other miscellaneous fees for optional services we provide.
The blended effective royalty rate for 2023 and 2022 was 6.0% and 6.4%, 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.
The Credit Agreement also requires the Borrowers, on a consolidated basis, to comply with a fixed charge coverage ratio of at least 1.25:1.00 and a leverage ratio of not more than 3.0:1.0.
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.
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 also includes amounts charged for various optional services and cost-sharing arrangements such as bulk vender 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.
Rental income for the year ended December 31, 2022 is higher than the same period in 2021 after completion of the new building adjacent to our corporate headquarters. Interest income and expense Interest income for the year ended December 31, 2022 was approximately $247 thousand compared to $412 thousand for the year ended December 31, 2021.
Interest income and expense Interest income for the year ended December 31, 2023 was approximately $263 thousand compared to $247 thousand for the year ended December 31, 2022. Interest income represents interest related to the financing of franchised locations. Interest and other financing expense relates primarily to our revolving credit.
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.
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. 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.
The increase in system-wide sales is related to acquisitions completed in 2022 along with organic growth related to the rebound from the economic downturn experienced in 2021 due to COVID-19. System-wide sales attributable to acquisitions in 2022 were approximatel y $39.2 million. Organic growth from offices that were not acquired was approximately $47.7 million.
The increase in system-wide sales is primarily related to the acquisition of MRI in December 2022. System-wide sales attributable to acquisitions in 2023 were approximatel y $1.7 million.
Of the $7.3 million in other intangibles, $2.2 million is indefinite lived and is not amortized. In the 2022 acquisitions we acq uired $9.5 million of customer related intangibles, $5.6 million of franchise agreements and $1.4 million of other intangibles. Of the $1.4 million in other intangibles, $1.4 million is indefinite lived and is not amortized.
Of the $3.6 million in other intangibles, $3.6 million is indefinite lived and is not amortized. Other income and expense Other miscellaneous income and expense includes all non-operating income and expense other than interest and taxes.
Operating expenses Operating expenses for the year ended December 31, 2022 were approximately $14.9 million compared to $14.9 million for the year ended December 31, 2021, a decrease of 0.2%. The decrease primarily relates to variable administrative costs that decreased as a result of increased operating efficiencies of providing back-office support to our franchisees.
License fees from California locations were $136 thousand for the year ended December 31,2023. Operating expenses Operating expenses for the year ended December 31, 2023 were approximately $27.2 million compared to $14.9 million for the year ended December 31, 2022, an increase of $12.2 million.
Removed
Comparisons between 2022 and 2021 should be viewed through a COVID-19 lens with the understanding that for the year ended December 31, 2021 our revenues and expenses were impacted by COVID and were lower than they otherwise would have been.
Added
This increase was driven primarily by the full year effect of the MRI acquisition in December 2022.
Removed
A full economic recovery has been slow to occur, and it is uncertain if businesses will remain fully open, or another broad shutdown will occur due to a variant or new strain. The long-term effectiveness of economic stabilization efforts, including government payments to affected citizens and industries, and government vaccination efforts, is also uncertain.
Added
We recorded a 22.4% increase in total revenue from $30.9 million in 2022 to $37.9 million in 2023; however income from operations declined from $16.3 million in 2022 to $10.6 million in 2023 due to higher selling, general & administrative costs driven primarily by (i) a $5.6 million increase in workers compensation expense, (ii) $753 thousand in increased amortization, and (iii) $2.6 million of increased salaries and benefits predominately related to the MRI transaction.
Removed
Also affecting comparisons between 2022 and 2021 were the acquisitions consummated in 2021 and 2022 as described below. We finished 2022 with a strong balance sheet. Our assets exceeded liabilities by over $58 million. In 2022, we continued improving our liquidity position, even with significant organizational changes brought on by the acquisitions in 2021 and 2022.

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