HIREQUEST, INC. Management’s Discussion and Analysis of Financial Conditions and Operating Results (Form 10-K)

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



This section of this Annual Report on Form 10-K generally discusses 2021 and
2020 items and year-to-year comparisons between 2021 and 2020. Discussions of
2020 items and year-to-year comparisons between 2020 and 2019 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, 2020 which we filed with the SEC on March 25, 2021.



Additionally, we use a non-GAAP financial measure and a key performance
indicator to evaluate our results of operations. For important information
regarding the use of the non-GAAP measure, including a reconciliation to the
most comparable GAAP measure, see the section titled "Use of non-GAAP Financial
Measure: Adjusted EBITDA" below. For important information regarding the use of
the key performance indicator, see the section titled "Key Performance
Indicator: System-Wide Sales" below.



Overview



We are a leading nationwide franchisor of offices providing direct-dispatch and
commercial staffing solutions in the light industrial and blue-collar
industries. Through our franchisees, we provided various types of temporary
personnel in 2021 via two primary business models operating under the trade
names "HireQuest Direct", "HireQuest," "LINK," and "Snelling". HireQuest Direct
specializes primarily in unskilled and semi-skilled industrial and construction
personnel. HireQuest, LINK, and Snelling specialize primarily in skilled and
semi-skilled industrial personnel as well as clerical and administrative
personnel. As of December 31, 2021 we had 216 franchisee-owned offices and 1
company owned office in 36 states and the District of Columbia. We provide
employment for an estimated 73,000 temporary employees annually working for
thousands of clients in many industries including construction, recycling,
warehousing, logistics, auctioneering, manufacturing, hospitality, landscaping,
and retail.



The COVID-19 pandemic materially adversely impacted our business in 2020 and, to
a much lesser extent, in 2021. Comparisons between 2021 and 2020 should be
viewed through a COVID-19 lens with the understanding that 2020 was a year in
which our revenues and expenses were significantly lower than they otherwise
would have been. 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. Also
affecting comparisons between 2021 and 2020 were the 2021 Acquisitions.



We finished 2021 with a strong balance sheet. Our assets exceeded liabilities by
approximately $47 million. Throughout 2021, we improved our liquidity position,
even with significant organizational changes brought on by the March 2021
Acquisitions. Current assets increased from $39.0 million on December 31, 2020
to $42.0 million on December 31, 2021.



On a year-over-year basis, we saw a 68.1% increase in our system-wide-sales from
$210.9 million in 2020 to $354.5 million in 2021. This improvement was across
the board, as we saw increased sales from existing offices, increased sales from
new offices, and sales added through the 2021 Acquisitions.



We recorded record profits in 2021. Largely driven by the increase in
system-wide-sales and resulting royalty revenue, we were also able to maintain
our cost structure and not add selling, general, and administrative expense
("SG&A") in the same proportion as revenue. Even 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 the year, and may
continue to do so.



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Results of Operations



The following table displays our consolidated statements of operations for the
years ended December 31, 2021 and December 31, 2020 (in thousands, except
percentages):



                                                                     Year ended
                                                  December 31, 2021             December 31, 2020
Franchise royalties                            $   21,317          94.4 %    $   12,793          92.6 %
Staffing revenue, owned locations                     231           1.0 %             -             - %
Service revenue                                     1,212           5.4 %         1,016           7.4 %
Total revenue                                      22,760         100.8 %        13,809         100.0 %
Cost of staffing revenue, owned locations            (171 )        (0.8 )%            -             - %
Gross profit                                       22,589         100.0 %        13,809         100.0 %
Selling, general and administrative expenses       13,364          59.2 %         8,700          63.0 %
Depreciation and amortization                       1,563           6.9 %           129           0.9 %
Income from operations                              7,662          33.9 %         4,979          36.1 %
Other miscellaneous income                          4,571          20.2 %         1,171           8.5 %
Interest income                                       412           1.8 %             -             - %
Interest and other financing expense                 (157 )        (0.7 )%          (50 )        (0.4 )%
Net income before income taxes                     12,488          55.3 %         6,100          44.2 %
Provision for income taxes                            638           2.8 %           741           5.4 %
Net income                                     $   11,850          52.5 %    $    5,359          38.8 %
Non-GAAP data
Adjusted EBITDA                                $   14,744          65.3 %    $    9,553          69.2 %

1. See the definition and reconciliation of Adjusted EBITDA in the

immediately following the section titled “Use of Non-GAAP Financial Measures:

     Adjusted EBITDA."

Use of Non-GAAP Financial Measures: Adjusted EBITDA

Earnings before interest, taxes, depreciation and amortization, and non-cash
compensation, or adjusted EBITDA, is a non-GAAP measure that represents our net
income before interest expense, income tax expense, depreciation and
amortization, non-cash compensation, costs related to the work opportunity tax
credit ("WOTC") and other charges we consider non-recurring. 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. 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 bear
little or no relationship to our operating performance. By excluding interest
expense, adjusted EBITDA measures our financial performance irrespective of our
capital structure or how we finance our operations. By excluding taxes on
income, we believe adjusted EBITDA provides a basis for measuring the financial
performance of our operations excluding factors that are beyond our control. By
excluding depreciation and amortization expense, adjusted EBITDA measures the
financial performance of our operations without regard to their historical cost.
By excluding non-cash compensation, adjusted EBITDA provides a basis for
measuring the financial performance of our operations excluding the value of our
restricted stock and stock option awards. By excluding WOTC related costs,
adjusted EBITDA provides a basis for measuring the financial performance of our
operations excluding the costs associated with qualifying for this tax credit.
In addition, by excluding certain non-recurring charges, adjusted EBITDA
provides a basis for measuring financial performance without non-recurring
charges. For all of these reasons, we believe that adjusted EBITDA provides us,
and investors, with information that is relevant and useful in evaluating our
business.



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



                                                                     Year ended
                                                           December 31,      December 31,
                                                               2021              2020
Net income                                                 $  11,849,934     $  5,359,414
Interest expense                                                 157,234           49,664
Provision for income taxes                                       638,064          741,038
Depreciation and amortization                                  1,563,088          129,182
WOTC related costs                                               594,931          448,033
EBITDA                                                        14,803,251        6,727,331
Non-cash compensation                                          2,326,772        1,226,890
Non-recurring acquisition related charges, net                (2,693,094 )              -
Non-recurring charge to notes receivable                         307,440        1,598,673
Adjusted EBITDA                                            $  14,744,370     $  9,552,894




Total Revenue

Our total revenue consists of franchise royalties, service revenue and staffing
revenue with respect to our owned locations. 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.



Total revenue for the year ended December 31, 2021 was approximately
$22.8 million compared to $13.8 million for the year ended December 31, 2020, an
increase of 64.8%. This increase is consistent with the 68.1% increase in
underlying system-wide-sales. Revenue includes sales at company-owned offices.
Once a company-owned office is sold, disposed off, or otherwise classified as
available-for-sale, it would not be reflected in gross profit and instead
reported as "Income from discontinued operations, net of tax."



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Franchise Royalties

We charge our franchisees a royalty fee on the basis of one of two models. Under
the HireQuest Direct model, the royalty fee charged ranges from 6% of gross
billings to 8% of gross billings. Royalty fees are charged at 8% for the first
$1,000,000 of billing with the royalty fee dropping 0.5% for every $1,000,000 of
billing thereafter until the royalty fee is 6% once gross billings reach
$4,000,000 annually. The smaller royalty fee is charged only on the incremental
dollars resulting in an effective royalty fee at a blended rate of between 6%
and 8%. We grant our franchisees credits for low margin business. For the
HireQuest, Snelling, LINK, and DriverQuest model, our royalty fee is 4.5% of the
temporary payroll we fund plus 18% of the gross margin for the territory.



Franchise royalties for the year ended December 31, 2021 were approximately
$21.3 million compared to $12.8 million for the year ended December 31, 2020, an
increase of 66.6%, also in line with the increase in system-wide-sales. The
blended effective royalty rate for both 2021 and 2020 was 6.0%. The $8.5 million
increase in total revenue was primarily attributable to the following factors:
(a) a $3.8 million increase in revenue from existing offices, and (b) a
$4.7 million increase in revenue from offices added through the 2021
Acquisitions. The $3.8 million increase in revenue from existing offices is
primarily due to an increase in number of hours worked over the prior year,
which was diminished due to the COVID-19 pandemic.

Service revenue

Service revenue consists of interest we charge our franchisees on overdue
customer accounts receivable and other miscellaneous fees for optional services
we provide. 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 84 days are charged back
to the franchisee and no longer incur interest. Some of our franchisees elect to
charge back accounts that age over 42 days in order to avoid the interest
charge.



Service revenue for the year ended December 31, 2021 was approximately $1.2
million compared to $1.0 million for the year ended December 31, 2020, an
increase of 19.3%. This increase follows the overall increase in accounts
receivable, although relatively few age over 42 days and result in service
revenue for us. In addition, for the year ended December 31, 2021, more
franchisees elected to charge back accounts early in order to avoid the interest
charge. Therefore, there will not be a proportionally large increase in service
revenue even when there is a large increase in accounts receivable. We pride
ourselves on maintaining quality, creditworthy customers who pay timely. The
Company does not strive to increase interest on aged accounts receivable.

Selling, general and administrative (“SG&A”) expenses

SG&A for the year ended December 31, 2021 was approximately $13.4 million
compared to $8.7 million for the year ended December 31, 2020, an increase of
53.6%. This increase in 2021 is primarily due to expenses related to the March
2021 Acquisitions. These transaction related costs were approximately $1.8
million, and consist of professional fees, severance payments, reorganizational
and rebranding expenses, and other non-recurring expenses. Also contributing to
the increase was additional stock-based compensation to employees and directors
of approximately $400,000. Performance bonuses tied to the Company's growth and
other key factors was approximately $1.7 million higher in 2021 than it was in
2020.



During 2020, some of our note holders experienced significant economic hardships
due to the impacts of COVID-19. As a result, we recognized approximately $1.6
million in allowance for losses on notes receivable in 2020, and another $0.3
million in 2021.

The remainder of the increase is primarily related to variable general and administrative expenses which increased due to increased daily transactions and the cost of providing administrative support to our franchisees. Overall, general and administrative expenses represented 3.8% of system-wide sales in 2021 compared to 4.1% of system-wide sales in 2020 (3.6% without the provision for losses on loans). Typically, we were able to leverage a lot of the increased revenue by using existing resources.

Depreciation and amortization

Depreciation and amortization for the year ended December 31, 2021 was
approximately $1.6 million compared to $130,000 for the year ended December 31,
2020. The increase of almost $1.5 million was due to additional amortization
stemming from acquisitions. We acquired $21.9 million of franchise agreements
and $9.0 million of other intangibles in the 2021 Acquisitions. Of the $9.0
million in other intangibles, $2.2  million is indefinite lived and is not
amortized. Future years will continue to have a full year of amortization until
the underlying intangibles are disposed of, impaired or fully amortized. Future
acquisitions are expected to further increase tangible and intangible assets on
our balance sheet, and correspondingly increase depreciation and amortization.



Other income and expense

Other miscellaneous income includes all nonoperating income and expense other
than interest and taxes. For the year ended December 31, 2021 other
miscellaneous income was approximately $4.6 million, compared to $460,000 for
the year ended December 31, 2020. The 2021 period includes a bargain purchase
gain of approximately $5.6 million, which is recorded net of deferred taxes.
This gain was offset by losses on the transfer of unwanted assets acquired in
the Link transaction to the California Purchaser of approximately $1.9 million.
The remaining items of other miscellaneous income consist of small gains and
losses resulting from the conversion of Snelling owned stores to franchises, and
gross rents from leasing excess space at our corporate headquarters to third
parties.



Interest income for the year ended December 31, 2021 was approximately $400,000
compared to $700,000 for the year ended December 31, 2020. Interest income
represents interest related to the financing of franchised locations , and one
note to the California Purchaser. The decrease is consistent with a decrease in
principal related to the financing of franchised locations from approximately
$8.0 million at December 31, 2020 to $4.4 million at December 31, 2021. During
2021, we sold approximately $5.3 million of notes receivable for no gain or loss
in order to mitigate credit risk and potential future losses. In addition, in
2020 we impaired the note to the California Purchaser and stopped accruing
interest.



Interest and other financing expense relates primarily to the Revolving Credit
and Term Loan Agreement with Truist. Interest and other financing expense
increased approximately $107,000 to $157,000 at December 31, 2021 from December
31, 2020, when it was $50,000. Interest and other financing expense will
fluctuate as we utilize the line of credit for acquisitions or other short-term
liquidity needs.



Provision for income tax

Income tax expense was approximately $638,000 in 2021 and $741,000 in 2020. The
effective tax rates for 2021 and 2020 were 5.1% and 12.1% 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. Other factors reducing our effective rate in 2021
include the non-taxable bargain purchase gain recognized in 2021, and windfall
tax deductions related to stock-based compensation. Bargain purchase gains are
recorded net of deferred taxes, and are treated as permanent differences,
resulting in a lower effective tax rate in the period recorded. 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,



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Income from discontinued operations, net of tax

There were no discontinued operations in 2021 or 2020, however, company-owned
offices could be disposed of by sale, disposed of other than by sale or
classified as held for sale and would in such case be reported separately as
discontinued operations. In addition, a newly acquired business that on
acquisition meets the held-for-sale criteria will be reported as discontinued
operations.

Cash 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. 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, 2021, our current assets exceeded our current liabilities by
approximately $20.5 million. Our current assets included approximately $1.3
million of cash and $38.2 million of accounts receivable, which our franchisees
have billed to customers and which we own in accordance with our franchise
agreements. Our largest current liabilities include approximately $4.6 million
due to our franchisees, $4.6 million of accrued wages, benefits and payroll
taxes, and $4.5 million related to our workers' compensation claims liability.
As of December 31, 2021, the outstanding balance under our line of credit with
Truist was $171,286, with approximately $19 million available for borrowing
under the line as of such date, assuming compliance with necessary conditions.



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



We believe that our current cash balance, together with the future cash
generated from operations, principal and interest payments on notes receivable,
and our borrowing capacity under our line of credit, will be sufficient to
satisfy our working capital needs, capital asset purchases, future dividends,
and other liquidity requirements associated with our continuing operations
for the next 12 months. We also believe that future cash generated from
operations, principal and interest payments on notes receivable, and our
borrowing capacity under our line of credit, will be sufficient to satisfy our
working capital needs, capital asset purchases, future dividends, and other
liquidity requirements associated with our continuing operations beyond the next
12 months. Our access to, and the availability of, financing on acceptable terms
in the future will be affected by many factors including overall liquidity in
the capital or credit markets, the state of the economy and our credit strength
as viewed by potential lenders. We cannot provide assurances that we will have
future access to the capital or credit markets on acceptable terms.



Cash Flows



Operating Activities

During 2021, net cash generated by operating activities was approximately
$17.4 million. Operating activity for the year included net income of
approximately $11.9 million and a decrease in balance sheet assets combined with
an increase in balance sheet liabilities totaling approximately $8.8 million. We
also had significant non-cash expenses in 2021, including approximately $1.6
million in stock-based compensation and $1.6 million in depreciation and
amortization. These provisions of cash were partially offset by a decrease in
deferred taxes of approximately $2.4 million, and the bargain purchase gain of
$5.6 million. During 2020, net cash generated by operating activities was
approximately $10.9 million. Operating activity for the year included net income
of approximately $5.4 million and a decrease in accounts receivable of
approximately $6.9 million. We also had non-cash expenses in 2020, including
approximately $1.2 in stock-based compensation and an increase in our allowance
for losses on notes receivable of approximately $1.6 million. These provisions
of cash were partially offset by a decrease in deferred taxes of approximately
$1.8 million, and a decrease in our risk management incentive program liability
of approximately $953,000.



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Investing Activities

During 2021, net cash used by investing activities was approximately
$29.4 million and included cash paid for acquisitions of $33.8 million. These
were partially offset by a net change on the principal balance of notes
receivable of approximately $5.1 million, and proceeds from the conversion of
Snelling company-owned offices into franchises of $1.0 million. This provision
was offset by the purchase of property and equipment of approximately $1.4
million, most of which was related to the construction of a new building at our
corporate headquarters. During 2020, net cash provided by investing activities
was approximately $36,000 and included proceeds from payments on notes
receivable of approximately $2.0 million. This provision was offset by the
purchase of property and equipment of approximately $1.4 million, most of which
was related to the construction of a new building at our corporate headquarters.



Financing Activities

During 2021, net cash used by financing activities was approximately $347,000
which was primarily due to the payment of dividends of approximately $3.1
million offset by transactions on our line of credit and term loan amounting to
$2.8 million, net. During 2020, net cash used by financing activities was
approximately $1.4 million which was primarily due to the payment of dividends
of approximately $1.4 million and the purchase of treasury stock of
approximately $146,000.



Capital Resources

Revolving Credit and Term Loan Agreement with Truist

On June 29, 2021 the Company and all of its subsidiaries as borrowers
(collectively, the "Borrowers") entered into a Revolving Credit and Term Loan
Agreement with Truist Bank, as Administrative Agent, and the lenders from time
to time made a party thereto (the "Credit Agreement"), pursuant to which the
lenders extended the Borrowers (i) a $60 million revolving line of credit with a
$20 million sublimit for letters of credit (the "Line of Credit") and (ii) a
$3,153,500 term loan (the "Term Loan"). Truist Bank may also make Swingline
Loans available in its discretion. The Credit Agreement replaced the Company's
prior $30 million credit facility with BB&T, now Truist. The Credit Agreement
provides for a borrowing base on the Line of Credit that is derived from the
Borrowers' accounts receivable subject to certain reserves and other
limitations. 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. In each case, the applicable margin is determined by the Company's
Average Excess Availability on the Line of Credit, as defined in the Credit
Agreement. Interest will accrue on the Term Loan at a variable rate equal to (a)
the LIBOR Index Rate plus 2.0% per annum or (b) the then applicable Base Rate
plus 1.0% per annum. In addition to interest on outstanding principal under the
Credit Agreement, the Borrowers will pay a commitment fee on the unused portion
of the Line of Credit in an amount equal to 0.25% per annum. All loans made
pursuant to the Line of Credit mature on June 29, 2026. The Term Loan will be
paid in equal monthly installments based upon a 15-year amortization of the
original principal amount of the Term Loan and will be payable in monthly
installments with the remaining principal balance due and payable in full on the
earlier of the date of termination of the commitments on the Line of Credit and
June 29, 2036.



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 also contain customary events of default
including, without limitation, payment default, material breaches of
representations and warranties, breach of covenants, cross-default on material
indebtedness, certain bankruptcies, certain ERISA violations, material
judgments, change in control, termination or invalidity of any guaranty or
security documents, and defaults under other loan documents. The 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 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.



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The Company utilized the proceeds of the 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 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.



At December 31, 2021, availability under the line of credit was approximately
$19.2 million based on eligible collateral, less letter of credit reserves, bank
product reserves, and current advances. On March 1, 2022, our workers'
compensation provider agreed to reduce the required collateral deposit from
$14.3 million to $10.7 million. The collateral is currently accomplished by
delivering letters of credit under the Credit Agreement. The reduction directly
increases our availability under the letter of credit.

KPI: System wide sales

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

In 2021, almost all of our offices were franchised, with the sole exception of the DPS locations acquired in the fourth quarter. In 2020, all of our offices were franchised. The following table reflects our system-wide sales broken down into its components for the periods indicated:

                      December 31,      December 31,
                          2021              2020
Franchise sales       $ 354,265,352     $ 212,750,963
Company-owned sales         230,668                 -
System-wide sales     $ 354,496,020     $ 212,750,963




System-wide sales were $354.5 million in 2021, an increase of 68.1%, from $210.9
million in 2020. The increase in system-wide sales is related to acquisitions
completed in 2021 along with organic growth related to the rebound from the
economic downturn experienced in 2020 due to COVID-19. System-wide sales
attributable to acquisitions in 2021 were approximately $89 million. Organic
growth from offices that were not acquired was approximately $55
million. Organic growth stems from additional revenues to existing customers,
expansion to new customers, including national accounts, and expansion into new
staffing verticals such as medical or commercial trucking.



Number of Offices



We examine the number of offices we open and close every year. The number of
offices is directly tied to the amount of royalty and service revenue we earn.
In 2021, we added 78 offices on a net basis by opening or acquiring 79 and
closing 1. In 2020, we closed 8 offices on a net basis by opening 5 and closing
13 offices. The majority of the closures in 2020 were related to the economic
shutdown due to COVID-19.

The following table shows the number of offices opened and closed in 2021 and 2020.

Franchised offices, December 31, 2019         147
Opened in 2020                                  5
Closed in 2020                                (13 )
Franchised offices, December 31, 2020         139
Purchased in 2021 (net of sold locations)      65
Opened in 2021                                 14
Closed in 2021                                 (1 )

franchise offices, December 31, 2021 217

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Seasonality



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

Critical accounting estimates

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



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



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



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

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%. 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 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. The fees could be lower in certain situations, depending on the
franchisee-specific operations. Our franchisees are responsible for taking
customer orders, providing customers with services, establishing the prices
charged for services, and controlling other aspects related to providing service
to customers prior to the service being transferred to the customer, such as
determining which temporary employees to dispatch to the customer and
establishing pay rates for the temporary employees. 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. In addition to royalty fees,
we also charge a license fee to some locations that utilize our intellectual
property that are not franchisees. License fees are 9% of the gross margin for
the location. We have no employees and provide no services at the licensed
locations.



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. 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. 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. 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.



For owned locations, we account for revenue when both parties to the contract
have approved the contract, the rights and obligations of the parties are
identified, payment terms are identified, and collectability of consideration is
probable. Revenue derived from owned locations is recognized at the time we
satisfy our performance obligation. Our contracts have a single performance
obligation, which is the transfer of services. Because our customers receive and
consume the benefits of our services simultaneously, our performance obligations
are satisfied when our services are provided. Revenue from owned locations is
reported net of customer credits, discounts, and taxes collected from customers
that are remitted to taxing authorities. 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. We do not extend payment terms
beyond one year.

Liability for Workers’ Compensation Claims

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 $8.2 million at December
31, 2021, versus $4.6 million at December 31, 2020. The increase was primarily
due to growth in the number of temporary employees, particularly after the 2021
Acquisitions. Annually, we engage an independent actuary to estimate the future
costs of these claims. Quarterly, we use development factors provided by an
independent actuary to estimate the future costs of these claims. We make
adjustments as necessary. If the actual costs of the claims exceed the amount
estimated, we may incur additional charges.



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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
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.

Admissible ratings

Notes receivable consist primarily of amounts due to us related to the financing
of franchised locations. 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 monitor the financial
condition of our debtors and record provisions for estimated losses when we
believe it is probable that our debtors will be unable to make their required
payments. We evaluate the potential impairment of notes receivable based on
various analyses, including estimated discounted future cash flows, at least
annually and whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. When a specific note
receivable is deemed impaired, we discontinue accruing interest and only
recognize interest income when payment is received. Our allowance for losses on
notes receivable was approximately $1.9 million and $1.6 million at December 31,
2021 and December 31, 2020, respectively.

Business combinations

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

Asset purchases

When we purchase a group of assets in a transaction that is not accounted for as
a business combination, usually because the group of assets does not meet the
definition of a business, we account for the transaction using a cost
accumulation model, with the cost of the acquisition allocated to the acquired
assets based on their relative fair values. Goodwill is not recognized. In an
asset acquisition, direct transaction costs are treated as consideration
transferred to acquire the group of assets and are capitalized as a component of
the cost of the assets acquired.

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