Good day, everyone, and welcome to the HireQuest Third Quarter 2019 Earnings Call. Today's call is being recorded. And at this time, I'd like to turn the call over to Brett Maas for opening remarks. Please go ahead, sir. .

Thank you, operator. I'd like to welcome everyone to the call. Hosting the call today are HireQuest's CEO, Rick Hermanns; and CFO, Cory Smith..

Please be aware that some of the comments made during our call may include forward-looking statements within the meaning of the federal securities laws. Statements about our beliefs and expectations containing words such as may, could, would, will, should, believe, expect, anticipate and similar expressions constitute forward-looking statements.

These statements involve risks and uncertainties regarding our operations and future results that could cause HireQuest's results to differ materially from management's current expectations.

We encourage you to review the safe harbor statements and risk factors contained in the company's earnings release and in its filings with the Securities and Exchange Commission, including, without limitation, the most recent annual report on Form 10-K, the most recent quarterly report on Form 10-Q and other periodic reports which identify specific risk factors that also may cause actual results or events to differ materially from those described in forward-looking statements.

Copies of the company's most recent reports on Forms 10-K and 10-Q may be obtained on the company's website at hirequestllc.com or at the SEC's website at sec.gov. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call..

I'd like to remind everyone that the call will be available for replay through November 26 starting at 7:30 p.m. Eastern today. A link to the website replay of the call was also provided in the earnings release, which is also available on the company's website at, again, hirequestllc.com.

Any redistribution, retransmission or rebroadcast of this call in any way without the expressed written consent of HireQuest is strictly prohibited..

I'd now like to turn the call to CEO of HireQuest, Rick Hermanns.

Rick?.

Thank you all for joining. This was a very productive quarter for HireQuest. As I discussed in our second quarter call in August, we have a well-defined strategy to integrate HireQuest and the former Command Center businesses, creating efficiencies as we go and then growing the combined business profitably.

Let me break down the steps into more detail..

First, we needed to adjust -- or we need to adjust the legacy Command Center locations to fit our franchise model. I'm happy to report that we have now completed the conversion to the franchise model. In the third quarter, we sold all company-owned locations that we planned to convert to franchise owners.

Going forward, after recognizing all residual revenues and costs related to -- relating to these offices in the fourth quarter of 2019 and first quarter 2020, all of our revenues will be from franchise royalties and service revenue, which includes miscellaneous revenue items related to the branch locations..

We also completed our planned exit from California -- from the California market by selling our 4 California locations to an independent third party. These sales were a major step for us, enabling us to adjust our cost structure and focus on the next steps of our evolution..

Second, we needed to rationalize our expense infrastructure, eliminating duplication wherever possible. We've made great progress in this regard. By the end of November, our headcount will match our goal levels. However, some personnel are still focused on legacy issues such as collecting Command Center's legacy accounts receivable.

There are some legacy issues, including leases and contractual obligations, that we cannot eliminate until, in some instances, the end of May 2021. But all targeted costs we have the ability to cut should be eliminated by the middle of the first quarter 2020..

The third phase involves refocusing personnel on more productive endeavors such as growing our business. This will occur as legacy issues are resolved over the next several months..

Finally, the fourth phase is organic and inorganic growth. This means working with high-performing franchises to give them the tools and in some cases, assistance to enable them to grow in their existing markets or to expand.

In some cases, we provide financing or other assistance to enable this expansion, knowing that a high producing owner is motivated and likely to succeed. Historically, investment in this type of expansion has created a significant return in a short period of time.

Our franchisees have paid us back, and we have created new lucrative streams of revenue for years to come..

Once the legacy projects are completed, we expect to consider accretive tuck-in acquisitions as part of our strategy. We take a disciplined approach to acquisitions, seeking to add markets where we lack a presence or perhaps access to national accounts.

Our goal of almost any acquisition would be the transition locations to our franchise model as quickly as possible.

In many cases, we carry the note for this sale, meaning we have to provide the financing upfront, but we believe based on experience with this model in the past that it benefits us in the long run as the vast majority of our franchisees have paid such notes with interest and we earn the revenue stream from royalties for years to come..

As we grow, we increase our ability to secure national accounts. These accounts help our franchisees by providing a solid baseline of revenue, albeit typically at lower margins. Pursuing national accounts will be a key part of our strategy in 2020..

Let me turn the call over now to Cory to discuss the third quarter results. However, I want to note that these historical results do not reflect the business we have today as the transition from corporate-owned locations to franchise-owned locations was ongoing during the third quarter.

In addition, the results are impacted by approximately $4.8 million worth of merger-related expenses.

Cory?.

Thank you, Rick, and good afternoon, everyone. As a reminder, as of the end of our third quarter, all of our company-owned locations have been sold to franchisees as part of our strategy to convert all of our corporate-owned locations to franchisees.

In addition, we sold the assets related to our 4 California branches outside of our franchise system to an unaffiliated third party as part of our strategy to exit the California market. As a result of these changes, our financial results include income from discontinued operations.

Please note my prepared remarks relate only to our continuing operations..

Franchise royalty revenue in the third quarter of 2019 was $3.1 million compared to $2.2 million in the year ago quarter, an increase of 44%. This increase is primarily due to the addition of the newly franchised branches related to our recent merger and organic growth at our previously existing HireQuest franchised locations..

Service revenue was up 45% to $241,000 compared to $166,000 in the third quarter of last year. Service revenue is generated from interest charge to our franchisees on overdue accounts receivable and from fees for various optional services we offer our franchisees.

The increase we experienced this year is primarily due to increased interest charges on overdue accounts receivable..

Total revenue in the third quarter of 2019 was $3.4 million compared to $2.3 million in the year ago quarter. This increase is primarily due to our merger with Command Center..

Selling, general and administrative expenses for the third quarter of 2019 were $7.4 million compared to $1.3 million for the third quarter last year.

This year-over-year increase is primarily due to merger-related expenses, including fees for investment bankers, attorneys and other professionals, increased compensation costs and rebranding and restructuring expenses..

Our net loss from continuing operations was $8.5 million or negative $0.65 per diluted share for the third quarter of 2019 compared to net income of $1.1 million or $0.11 per diluted share in the third quarter of 2018..

Moving on to the balance sheet. We had current assets of $46 million, including cash of $1.5 million and accounts receivable of $36 million as of September 29, 2019. At the end of last year, we had current assets of $22 million, which included $1.3 million of cash and $21 million of accounts receivable..

With that, I'll turn the call back over to the operator for Q&A.

Operator?.

[Operator Instructions] And first, we'll go to Peter Rabover from Artko Capital. .

So can you just give a little bit more color on what you expect your SG&A run rate to be once you're done with all the legacy one-off stuff and the headcount?.

The -- thank you for the question. Basically, we're looking at -- this is a rough figure, but around $4.5 million to $4.7 million for sort of basic salaries, and of course, on top of the benefits and taxes related to that.

The other expenses are harder to pin down just now because it's going to depend on exactly when we can shut down certain other contracts that we have. As we put out in the earnings release as an example, we're looking to close, for example, the Lakewood headquarters of legacy Command.

Whether that happens in December or March has obviously a significant impact on that. But our primary target is to keep all expenses within the range of what HireQuest had, had historically. .

Okay. That sounds about right.

And then maybe can you comment a little bit more on the increase in the notes receivable? I know that was the -- provided financing, but just maybe what are the terms? And what should we expect out of that?.

Sure. So the -- obviously, yes, those are the notes that were related to the sale of the legacy Command branches to franchisees. The typical note is 5 years at 6%. There are a couple of -- there are 1 or 2 variations, but that's the vast majority of them.

Also, although -- and again, it was in a separate press release, is the California branches were -- $1.8 million was the gross amount of the note, and that is the 3 -- Cory, correct me if I'm wrong, but that's a 3-year note at 10%. .

Yes, that's correct. .

Okay. And then your -- maybe you could talk a little bit about your accounts receivable balance. It's pretty significant relative to your quarterly revenue, and you're starting to recognize revenues from interest on bad accounts receivable. So I mean is it one bad account? Or why is it so large, I guess, is the question. .

That's a good question. And first of all, the -- I wouldn't refer to it as sort of receipt of interest on bad accounts receivable. It's just the way our franchise agreements are structured is once an account gets to 42 days old, then we begin collecting interest. So it's an ongoing revenue source and has been historically.

So to the extent -- so the reason why it increased was because we have a lot more franchisees, not because the book performed any worse. And of course, we're also -- a chunk of it is seasonality as well. Third quarter typically is the strongest quarter in our segment of the staffing business.

And so late September through Thanksgiving always corresponds to the highest point of AR. But overall, we're not seeing any significant increase in delinquencies or write-offs at the franchise level nor with the legacy Command offices as we run those off. .

But I guess I'm just -- the share numbers of it, like your quarterly run rate this quarter was $3.4 million. And so maybe $13 million annualized and $36 million in accounts receivable sounds like the average is 2.5 years. Is that... .

Well, again, that -- remember, our revenue is just the royalties. The underlying franchise revenues are substantially, substantially higher than that. Last year, I believe if you took -- and I could be off by a couple of million, but basically, the combined revenues between Command Center and HireQuest were around $285 million. And so... .

So there's a system-wide sale is what you're saying. .

Yes. That's exactly right. So that AR is system-wide sales. .

So the actual AR is whatever the franchise -- the average royalty for you is just 7% to 8%?.

No. We own the accounts receivable. So we fund -- the way our franchises are structured is we fund -- we, in many ways, serve as a factor. We fund effectively 100% of their billing. And then we own that AR, subject to the ability to charge it back to them if it goes 84 days past due. .

Okay.

So those are receivable from their clients but not from your franchisees to you?.

That's correct. Yes. .

Got it. Got it. Okay. That makes a lot more sense. And then maybe just a last question. Just on the -- what your raw sense of the markets which you serve? And what are you seeing? It's 3.6% unemployment, and I think we're growing at a pretty steady clip. So are you seeing tailwinds, headwinds? Any kind of forecasting there would be great. .

I would say that it's flat basically. When I say flat, it's still growing a great economy. And there is still a short of workers that's partially then -- I think that's created a situation where a number of employers are looking more internally and, therefore, has stopped. 3, 4 years ago, the usage accounts was going up tremendously.

And I think you can see in any of our competitors' numbers as well is that number has somewhat flattened out, albeit at very strong numbers..

And so I would just -- so I would say that it was kind of neutral right now. There certainly aren't tailwinds, but there certainly aren't headwinds. And again, we're at a very high level right now, relatively speaking. .

Right.

Where are you seeing pockets of strength and weakness, I guess, within your own and within the others?.

The truth of the matter is that our business is really dependent -- is far more -- unless we go into a true recession or a true 3.5%, 4% growth of GDP, realistically, our results are far more based on the performance of our individual franchisees than it is necessarily characteristics of the market.

The -- you'd be surprised that we do better in some markets that are maybe 1/4 of the size of others, and it's really based on the experience and the caliber of the local franchisee..

So I wouldn't say that -- I'll give you an example, I won't use the city, but we had a branch that was doing horrible in a place with virtually no unemployment, and yet we were doing horrible. Bring in a new manager, and it went from negligible billing to 10x that in the space of 4 weeks. And that's why I'm loathed to say, gee, the D.C.

market is great and Atlanta stinks simply because it's typically local factors. .

[Operator Instructions] And now to Michael Potter from Monarch Capital Group. .

Just again, just some more clarity on, I guess, the quarter -- on the quarter's numbers. I guess we had $4.8 million of onetime charges associated with the quarter. So if we -- just back of the envelope math, if we add that back on an operating basis, we were profitable by about $800,000.

Is that correct?.

And I know we kind of went around and around last time, so I don't want to -- I'm trying not to do that with you this time. I'm really trying to be helpful with it. This quarter contains so many extraneous items that it becomes more of a -- it's more of an art than a science as to what's onetime.

And I'll just use as an example is why -- I just -- I'd rather not even speculate on this quarter that way is that, for example, when the branches were transitioned from company-owned, many of them were transitioned on July 15. We already paid the rent for the entire year, and we had vacation pay, things like that.

There's a lot of lingering expenses that came in that not all of them were "merger-related" and yet really are not recurring..

And so I would focus more on the fact that going forward, as a general rule, we're typically going to have a 3.5% to 4% operating earnings or earnings before taxes relative to system-wide revenue, plus or minus whatever we do in workers' comp. And so -- and there was nothing in the core of what we do that would alter that.

But again, we were running 2 separate -- like we were running 2 separate headquarters. So that's not even included -- for example, in -- that $4.8 million, double rent is not included. And so it's really hard to come up with that number because it colors everything. .

Okay. All right. So we can't -- we're not at a point yet where we start normalizing what profitability would be by backing out, I guess, some of the costs associated with rightsizing the company, with consolidating the company at some point. .

Not easily because they infiltrated so much of what we were doing. The important part, and that's part of the reason why we included it in the -- sort of in the earnings release is by the end of November, as an example, we should be at the correct -- what I would say is an ongoing correct staffing level from an employee standpoint..

So by the first quarter, we should be at a much more -- I'm saying we should be at -- really, we should be pretty darn close to what we should be permanently. Fourth quarter will be a lot closer to what we should be, even though there are still some lingering legacy costs. .

Rick, can you remind us just legacy-wise on HireQuest what was your historical operating margin?.

The -- historically, HireQuest LLC would run at a 3.5% to 4% operating income margin -- basically pretax margin of system-wide revenues. .

Of gross revenue?.

Right. System-wide revenues. So in other words, including the franchise revenues. And then workers' comp would be in addition or reduced from that. .

So that's on a system-wide revenue.

So do we have those numbers based upon on how we are reporting based upon franchise royalties and service revenues?.

Not sure I understand the question. .

Because your -- it's 3.5% to 4% on a gross revenue basis basically on a pass-through. But that isn't how we report, how the company reports. You're just recording your royalty revenue. .

That's correct. But it's in the -- I mean it's disclosed in the notes what it is. So again, last year, on a combined basis, the 2 companies had combined system revenues, right, underlying franchise revenues of around $284 million. .

And with no further questions, I'll turn it back to management for closing remarks. .

Okay. Well, if there's no other questions, I guess we'll end with that. Thank you for joining the call and appreciate your time. And if there's -- we look forward to the next call in a few months. Thanks a lot. .

Thank you, everyone. .

And that does conclude our call for today. Thank you for your participation. You may now disconnect..