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Note 2 - Acquisitions | 9 Months Ended
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Sep. 30, 2022
Notes to Financial Statements |
Mergers, Acquisitions and Dispositions Disclosures [Text Block] | Note 2 - Acquisitions Business Combinations Snelling Staffing On March 1, 2021, we completed our acquisition of certain assets of Snelling in accordance with the terms of the Asset Purchase Agreement dated January 29, 2021 (the “Snelling Agreement”). Founded in 1951, Snelling is a well-known staffing company previously headquartered in Richardson, TX. Pursuant to the Snelling Agreement, HQ Snelling Corporation (“HQ Snelling”), our wholly-owned subsidiary, acquired substantially all of the operating assets and assumed certain liabilities of the sellers for a purchase price of approximately $17.9 million. Also on March 1, 2021, HQ Snelling entered into the First Amendment to the Purchase Agreement, pursuant to which HireQuest, Inc. agreed to advance $2.1 million to the sellers at closing so the seller could facilitate payment on behalf of HQ Snelling to settle accrued payroll liabilities HQ Snelling assumed pursuant to the Snelling Agreement. Where we assumed franchisor status in this transaction, locations converting to the HireQuest model have subsequently signed our HireQuest franchise agreement but will continue to operate under the Snelling tradename. The following table summarizes the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date. From the date of acquisition through December 31, 2021, the fair value of assets acquired and liabilities assumed were adjusted in conjunction with the net working capital reconciliation. These adjustments included an increase in accounts receivable of approximately $1.1 million, a decrease in other current assets of approximately $9 thousand, an increase in current liabilities of approximately $77 thousand, an increase in other liabilities of approximately $217 thousand, and an increase in the bargain purchase gain of approximately $662 thousand. No adjustments were made during 2022. The following table summarizes the estimated fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash consideration |  | $ | 17,851 |
Accounts receivable |  | $ | 13,418 |
Workers' compensation deposit |  |  | 7,200 |
Franchise agreements |  |  | 11,034 |
Customer lists |  |  | 1,690 |
Other current assets |  |  | 100 |
Workers' compensation claims liability |  |  | (4,891 | )
Accrued payroll |  |  | (2,100 | )
Current liabilities |  |  | (740 | )
Other liabilities |  |  | (2,239 | )
Bargain purchase |  |  | (5,621 | )
Purchase price allocation |  | $ | 17,851 |
The bargain purchase is attributable to the financial position of the seller and because there were few suitable potential buyers. This gain is included in the line item, “Other miscellaneous income (expense),” in our consolidated statement of income. The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Snelling had occurred on January 1, 2020, (b) all of Snelling’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $1.1 million and approximately $3.4 million is included in our consolidated statement of income for the three and nine months ended September 30, 2022, respectively.
|  | Three months ended |  |  | Nine months ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Total revenue |  | $ | 9,361 |  |  | $ | 6,881 |  |  | $ | 26,794 |  |  | $ | 16,801 |
Net income |  |  | 4,246 |  |  |  | 3,193 |  |  |  | 9,741 |  |  |  | 7,045 |
Basic earnings per share |  | $ | 0.31 |  |  | $ | 0.24 |  |  | $ | 0.72 |  |  | $ | 0.52 |
Basic weighted average shares outstanding |  |  | 13,610 |  |  |  | 13,482 |  |  |  | 13,598 |  |  |  | 13,461 |
Diluted earnings per share |  | $ | 0.31 |  |  | $ | 0.24 |  |  | $ | 0.71 |  |  | $ | 0.52 |
Diluted weighted average shares outstanding |  |  | 13,677 |  |  |  | 13,622 |  |  |  | 13,688 |  |  |  | 13,588 |
These calculations reflect increased amortization expense, increased payroll expense, the elimination of gains associated with the transaction, the elimination of transaction related costs, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2020. In connection with the acquisition, we sold the 10 locations that had been company-owned by Snelling located in Bakersfield, CA; Albany, NY; Arlington Heights, IL; Amherst, NY; Dallas, TX; Hayward, CA; Hoffman Estates, IL; Lathrop, CA; Ontario, CA; and Tracy, CA. Two of these locations were sold to franchisees. Four locations were sold to a third-party purchaser. Four offices were sold to a California purchaser (the “California Purchaser”) and operate under the Snelling name pursuant to a license agreement with us. The aggregate sale price for these 10 locations consisted of (i) $1.0 million in the form of a promissory note that bears interest at 6.0% per annum, (ii) the right to receive 1.5% of revenue generated at the Ontario location for the next 12 months, subject to certain conditions being satisfied (the "California Conditions"), (iii) the right to receive 2.5% of revenue generated at the Tracy and Lathrop locations for the next 12 months, subject to the California Conditions, (iv) the right to receive 2.0% of revenue generated at the Princeton location for the next 36 months, and (v) approximately $1 million in cash. There were no remaining company-owned locations at March 31, 2021. One of the California locations operates pursuant to a license agreement whereby the California Purchaser licenses the Snelling trademark and pays us a royalty of 9% of their gross margin. In conjunction with the sale of assets acquired in this transaction, we recognized a gain of $-0- and approximately $638 thousand which is reflected on the line item, "Other miscellaneous income," in our consolidated statement of income for the three and nine months ended September 30, 2021, respectively. Temporary Alternatives 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 $7.0 million, inclusive of a prescribed amount of net working capital. 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. The fair values of the assets acquired were determined based on information available to us. From the date of acquisition through September 30, 2022, the fair value of assets acquired were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in customer lists of approximately $375 thousand, a decrease in accounts receivable of approximately $3 thousand, and the recognition of approximately $375 thousand of goodwill. The following table summarizes the revised values of the identifiable assets acquired as of the acquisition date (in thousands).
Cash consideration |  | $ | 6,707 |
Net working capital payable |  |  | 336 |
Total consideration |  | $ | 7,043 |
Customer lists |  | $ | 4,000 |
Accounts receivable |  |  | 2,668 |
Goodwill |  |  | 375 |
Purchase price allocation |  | $ | 7,043 |
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Temporary Alternatives. Goodwill is deductible for income tax purposes. The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Temporary Alternatives had occurred on January 1, 2021, (b) all of Temporary Alternative’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $72 thousand and approximately $252 thousand is included in our consolidated statement of income for the three and nine months ended September 30, 2022, respectively.
|  | Three months ended |  |  | Nine months ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Total revenue |  | $ | 9,361 |  |  | $ | 7,159 |  |  | $ | 26,940 |  |  | $ | 16,825 |
Net income |  |  | 4,246 |  |  |  | 3,414 |  |  |  | 10,595 |  |  |  | 10,269 |
Basic earnings per share |  | $ | 0.31 |  |  | $ | 0.26 |  |  | $ | 0.78 |  |  | $ | 0.76 |
Basic weighted average shares outstanding |  |  | 13,610 |  |  |  | 13,482 |  |  |  | 13,598 |  |  |  | 13,461 |
Diluted earnings per share |  | $ | 0.31 |  |  | $ | 0.26 |  |  | $ | 0.78 |  |  | $ | 0.76 |
Diluted weighted average shares outstanding |  |  | 13,677 |  |  |  | 13,622 |  |  |  | 13,688 |  |  |  | 13,588 |
These calculations reflect increased amortization expense, increased SG&A expense, the elimination of losses associated with the transaction, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2021. In connection with the acquisition, we sold certain assets related to the operations of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was approximately $2.9 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.1 million which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income. The franchisee is a related party. See Note 3 - Related Party Transactions for more information regarding the Worlds Franchisees. We provisionally recognized a loss of approximately $1.5 million. Subsequently, the fair value of assets acquired were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in the loss of approximately $375 thousand, which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income for the nine months ended September 30, 2022. The Dubin Group, Inc., and Dubin Workforce Solutions 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. Dubin provides executive placement services and commercial staffing in the Philadelphia metro area. The acquisition of Dubin will help expedite growth into a new staffing vertical, expand our national footprint, and grow our franchise base. The fair values of the assets acquired were determined based on information available to us. From the date of acquisition through September 30, 2022, the fair value of assets acquired were adjusted in conjunction with a third-party valuation. These adjustments included an increase in customer relationships of approximately $972 thousand, a decrease in customer lists of approximately $772 thousand, and the recognition of approximately $200 thousand of goodwill. The following table summarizes the revised values of the identifiable assets acquired as of the acquisition date (in thousands):
Cash consideration |  | $ | 2,100 |
Note payable & net working capital payable |  |  | 362 |
Total consideration |  | $ | 2,462 |
Customer relationships |  | $ | 1,600 |
Customer lists |  |  | 200 |
Accounts receivable |  |  | 462 |
Goodwill |  |  | 200 |
Purchase price allocation |  | $ | 2,462 |
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Dubin. Goodwill is deductible for income tax purposes. The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Dubin had occurred on January 1, 2021, (b) all of Dubin’s operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $56 thousand and approximately $107 thousand is included in our consolidated statement of income for the three and nine months ended September 30, 2022, respectively.
|  | Three months ended |  |  | Nine months ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Total revenue |  | $ | 9,361 |  |  | $ | 7,609 |  |  | $ | 27,146 |  |  | $ | 18,172 |
Net income |  |  | 4,246 |  |  |  | 3,348 |  |  |  | 9,712 |  |  |  | 10,301 |
Basic earnings per share |  | $ | 0.31 |  |  | $ | 0.25 |  |  | $ | 0.71 |  |  | $ | 0.77 |
Basic weighted average shares outstanding |  |  | 13,610 |  |  |  | 13,482 |  |  |  | 13,598 |  |  |  | 13,461 |
Diluted earnings per share |  | $ | 0.31 |  |  | $ | 0.25 |  |  | $ | 0.71 |  |  | $ | 0.76 |
Diluted weighted average shares outstanding |  |  | 13,677 |  |  |  | 13,622 |  |  |  | 13,688 |  |  |  | 13,588 |
These calculations reflect increased amortization expense, increased payroll expense, increased SG&A expense, the elimination of gains associated with the transaction, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2021. In connection with the acquisition, we divided Dubin into separate businesses and sold certain assets related to the operations of one of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was $350 thousand. In conjunction with the sale of assets acquired in this transaction, we recognized a gain of approximately $150 thousand which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income. We provisionally recognized a loss of approximately $478 thousand. Subsequently, the fair value of assets acquired were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in the loss of approximately $628 thousand, which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income for the nine months ended September 30, 2022. The remaining assets related to the operations of the other acquired locations have not been sold and as of September 30, 2022 are classified as available-for-sale and the operating results are reported as “Income from discontinued operations, net of tax.” We are actively working to sell these assets. In the meantime, we operate the Philadelphia Snelling franchise as company-owned. The income from discontinued operations amounts as reported on our consolidated statements of income is comprised of the following amounts (in thousands):
|  | Three months ended |  |  | Nine months ended |
|  | September 30, 2022 |  |  | September 30, 2022 |
Revenue |  | $ | 302 |  |  | $ | 882 |
Cost of staffing services |  |  | 171 |  |  |  | 501 |
Gross profit |  |  | 131 |  |  |  | 381 |
SG&A |  |  | 1 |  |  |  | 15 |
Net income before tax |  |  | 130 |  |  |  | 366 |
Provision for income taxes |  |  | 32 |  |  |  | 89 |
Net income |  | $ | 98 |  |  | $ | 277 |
Northbound Executive Search On February 28, 2022 we completed our acquisition of certain assets of Northbound Executive Search, LTD (“Northbound”) in accordance with the terms of an Asset Purchase Agreement dated January 25, 2022, for approximately $11.4 million, inclusive of a $1.5 million note payable and a prescribed amount of working capital. 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. The fair values of the assets acquired and the liabilities assumed were determined based on information available to us. From the date of acquisition through September 30, 2022, the fair value of assets acquired and liabilities assumed were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in customer relationships of approximately $389 thousand, a decrease in trade name of approximately $111 thousand, an increase in accounts receivable of approximately $363 thousand, a decrease in other current assets of approximately $34 thousand, an increase in other current liabilities of approximately $64 thousand, and the recognition of approximately $500 thousand of goodwill. The following table summarizes the revised values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):
Cash consideration |  | $ | 9,600 |
Net working capital payable |  |  | 328 |
Note payable |  |  | 1,500 |
Total consideration |  | $ | 11,428 |
Customer relationships |  | $ | 7,700 |
Trade name |  |  | 1,400 |
Accounts receivable |  |  | 3,386 |
Other current assets |  |  | 94 |
Goodwill |  |  | 500 |
Current liabilities assumed |  |  | (1,652 | )
Purchase price allocation |  | $ | 11,428 |
Goodwill represents the expected synergies with our existing business, the acquired assembled workforce, potential new customers, and future cash flows after the acquisition of Northbound. Goodwill is deductible for income tax purposes. The following table presents unaudited pro forma information (in thousands, except per share data) assuming (a) the acquisition of Northbound had occurred on January 1, 2021, (b) all of Northbound's operations had been converted to franchises on such date, and (c) none of the other acquisitions discussed in this Note 2 had occurred. The unaudited pro forma information is not necessarily indicative of the results of operations that would have been achieved if the acquisition had in fact taken place on that date. Gross profit attributable to the acquiree of approximately $286 thousand and approximately $717 thousand is included in our consolidated statement of income for the three and nine months ended September 30, 2022, respectively.
|  | Three months ended |  |  | Nine months ended |
|  | September 30, 2022 |  |  | September 30, 2021 |  |  | September 30, 2022 |  |  | September 30, 2021 |
Total revenue |  | $ | 9,361 |  |  | $ | 7,163 |  |  | $ | 26,982 |  |  | $ | 16,736 |
Net income |  |  | 4,246 |  |  |  | 3,426 |  |  |  | 10,793 |  |  |  | 10,232 |
Basic earnings per share |  | $ | 0.31 |  |  | $ | 0.26 |  |  | $ | 0.79 |  |  | $ | 0.76 |
Basic weighted average shares outstanding |  |  | 13,610 |  |  |  | 13,482 |  |  |  | 13,598 |  |  |  | 13,461 |
Diluted earnings per share |  | $ | 0.31 |  |  | $ | 0.26 |  |  | $ | 0.79 |  |  | $ | 0.75 |
Diluted weighted average shares outstanding |  |  | 13,677 |  |  |  | 13,622 |  |  |  | 13,688 |  |  |  | 13,588 |
These calculations reflect increased amortization expense, increased SG&A expense, the elimination of losses associated with the transaction, and the consequential tax effects that would have resulted had the acquisition closed on January 1, 2021. In connection with the Northbound acquisition, we entered into an amortizing term loan from the seller for $1.5 million scheduled to mature on March 1, 2025 that bears interest at 4.0%. The term loan is unsecured and subordinated to our senior instruments (Truist line of credit and Truist term loan). The Northbound term loan is payable in 36 monthly installments beginning on April 1, 2022 until March 1, 2025. We may prepay the Northbound term loan in whole or in part at any time or from time to time without penalty or premium by paying the principal amount to be prepaid together with accrued interest thereon to the date of prepayment. Immediately after the acquisition, we sold certain assets related to the operations of the acquired locations. In connection with their purchase, the buyers executed franchise agreements with us and became franchisees. The aggregate sale price for the operating assets was $6.4 million. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.3 million which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income. The franchisee that purchased these operating assets is a related party. For more information. See Note 3 - Related Party Transactions regarding the Worlds Franchisees. We provisionally recognized a loss of approximately $1.7 million. Subsequently, the fair value of assets acquired were adjusted in conjunction with a third-party valuation and the net working capital reconciliation. These adjustments included a decrease in the loss of approximately $389 thousand, which is reflected on the line item, "Other miscellaneous income (expense)," in our consolidated statement of income for the nine months ended September 30, 2022. Asset Acquisitions LINK Staffing On March 22, 2021, we completed our acquisition of the franchise relationships and similar assets of LINK in accordance with the terms of the Asset Purchase Agreement dated February 12, 2021 (the "LINK Agreement"). LINK is a family-owned staffing company headquartered in Houston, TX. Pursuant to the LINK Agreement, HQ Link Corporation ("HQ Link"), our wholly-owned subsidiary, acquired franchise agreements for approximately 35 locations, and other assets of LINK Staffing for a purchase price of $11.1 million. Substantially all of the locations where we assumed franchisor status in this transaction have subsequently signed our HireQuest franchise agreement and all but one operate under the Snelling tradename. The following table summarizes the estimated fair values of the identifiable assets acquired as of the acquisition date (in thousands):
Cash consideration |  | $ | 11,123 |
Franchise agreements |  |  | 10,886 |
Notes receivable |  |  | 237 |
Purchase price allocation |  | $ | 11,123 |
We determined the LINK transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the franchise agreements. Accordingly, no pro forma financial information is presented. We assigned six of the franchise agreements we purchased in the transaction, all located in California, to the California Purchaser. These six franchisees operate pursuant to a LINK trademark sublicense agreement whereby they pay us 9% of the gross margin of their offices in exchange for a sublicense to utilize the LINK tradename. In conjunction with the sale of assets acquired in this transaction, we recognized a loss of approximately $1.9 million which is reflected on the line item, "Other miscellaneous income," in our consolidated statement of income. Recruit Media On October 1, 2021 we completed our acquisition of Recruit Media in accordance with the Stock Purchase Agreement dated October 1, 2021 (the “Recruit Agreement”). Pursuant to the Recruit Agreement, we purchased all of the outstanding shares of Recruit Media for approximately $4.4 million. Recruit Media was a pre-revenue information technology company whose intellectual property will allow us to accelerate improvements to our platform. The following table summarizes the values of the identifiable assets acquired as of the acquisition date (in thousands):
Cash consideration |  | $ | 3,283 |
Liabilities assumed |  |  | 1,044 |
Transaction costs |  |  | 23 |
Total consideration |  | $ | 4,350 |
Purchased software |  |  | 3,200 |
Domain name |  |  | 2,226 |
Deferred tax liability |  |  | (1,076 | )
Purchase price allocation |  | $ | 4,350 |
We determined the Recruit Media transaction was an asset acquisition for accounting purposes as it did not meet the definition of a business. Accordingly, no pro forma financial information is presented. Dental Power On December 6, 2021, we completed our acquisition of the Dental Power Staffing division (“Dental Power”) in accordance with the terms of the Asset Purchase Agreement dated November 2, 2021 (the "Dental Power Agreement") for $1.9 million, inclusive of contingent consideration. DPI is a 46-year-old dental staffing company headquartered in Carrboro, North Carolina. Dental Power is a provider of temporary, long-term contract, and direct-hire staffing services to dental practices across the U.S. The addition of Dental Power brings additional resources and experience to HQI that will help expedite growth into a new staffing vertical. The following table summarizes the values of the identifiable assets acquired as of the acquisition date (in thousands):
Cash consideration |  | $ | 1,480 |
Contingent consideration |  |  | 382 |
Total consideration |  | $ | 1,862 |
Customer lists |  | $ | 1,862 |
The contingent consideration consists of estimated future payments based on the achievement of performance metrics over the following 3 years. Through September 30, 2022, we have paid out approximately $159 thousand in contingent consideration. We determined the Dental Power transaction was an asset acquisition for accounting purposes as substantially all of the fair value of the gross assets acquired was concentrated in the customer list. Accordingly, no pro forma financial information is presented.

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- Definition The entire disclosure for business combinations, including leverage buyout transactions (as applicable), and divestitures. This may include a description of a business combination or divestiture (or series of individually immaterial business combinations or divestitures) completed during the period, including background, timing, and assets and liabilities recognized and reclassified or sold. This element does not include fixed asset sales and plant closings. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 205 -SubTopic 20 -URI https://asc.fasb.org/subtopic&trid=2122178 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI https://asc.fasb.org/topic&trid=2303972 + Details
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