Good day, ladies and gentlemen, and welcome to the HireQuest Incorporated Second Quarter 2020 Earnings Conference Call. All lines have been placed on a listen-only mode and the floor will be open for your questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Mr. Brett Maas of Hayden IR. Sir, the floor is yours.

Thank you, operator. I would like to welcome everybody to the call. Hosting the call today are HireQuest 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 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 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 SEC, 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 hirequest.com or the SEC’s website at sec.gov. The company does not undertake to publicly update or revise any forward-looking statements after the call or the date of this call. I would also like to remind everyone that this call will be available for replay through August 25th. A link to the website replay of the call is also provided in the earnings release and it is available on the company’s website at hirequest.com. I would now turn the call over to CEO of HireQuest, Rick Hermanns. Rick?

Thank you for joining us. Since we completed our combination with Command Center and became a public company, we have been speaking about the benefits of our franchising model, which significantly mitigates the risks involved in the staffing industry and positions us for sustainable profitability. These benefits were clearly on display in the second quarter as our industry experienced severe disruptions due to the COVID impact and the resulting economic shutdowns. Despite these significant challenges, HireQuest remain profitable and we continue to maintain a strong balance sheet. To be sure, this quarter was particularly challenging for our franchises. One of the benefits of our model is that each unit is independently owned. This enables our franchise owners to move quickly based on local conditions. We provided strong guidance to our franchises as this situation began to unfold, and I'm proud of the way that they moved quickly to mitigate the impact, cutting costs, communicating with key accounts, and taking other actions to help weather the storm. Many of our franchises were able to secure PPP loans to help them through the crisis, and these loans were important and effective, achieving exactly what they were intended to do. Our results were also impacted as system-wide sales decreased by 15.2% compared to the second quarter last year. And with it, royalty revenue declined 11.5%. Nevertheless, we generated $0.09 per share of earnings and $4 million of free cash flow from operations during the quarter, a testament to our business model. As the economy begins to reopen, we expect that we are well-positioned with a national footprint. We can provide temporary staffing to customers rapidly and reliably oftentimes faster than their HR teams can move to ramp up permanent staffing. Early in the year as this pandemic began to unfold, some of our…

Thank you, Rick, and good afternoon, everyone. Total revenue in the second quarter of 2020 was $2.9 million, compared to $3.2 million in the second quarter of 2019, a decrease of 10.5%. Our total revenue is made up of two components, franchise royalties, which make up roughly 90% of total revenue and service revenue. This year, our -- this year, over the year-over-year decrease we saw in total revenue this quarter was overwhelmingly due to lower royalty revenue, which was down 11.5% to $2.6 million from $3.0 million in 2019. This decrease in royalty revenue was a reflection of lower system-wide sales directly related to the ongoing COVID pandemic and associated economic shutdowns. It is important to note, franchise revenue attributable to the branches acquired in the merger was approximately $570,000. Service revenue, which is generated from interest charge to our franchisees on overdue accounts receivable and fees for various optional services we provide, was up slightly to $262,000 in the second quarter of 2020, compared to $257,000 last year. Selling, general, and administrative expenses in the second quarter of 2020 were $1.9 million compared to $871,000 in the second quarter of 2019, an increase of approximately $1.1 million. This increase included an additional $151,000 added to the reserve placed on promissory notes we issued to finance the sale of offices we acquired in the merger with Command Center. This reserve is directly related to the negative impact that COVID pandemic is having on the economy. The remainder of this increase in SG&A was related to additional costs associated with being a public company, inclusive of stock-based compensation and board fees of $293,000, which we did not incur in 2019. Higher computer related service and consulting costs of $116,000, and a relative increase in our workers' compensation cost of $495,000, related to a reduction in accruals that was recorded last year prior to the merger. Net income in the second quarter of 2020 was $1.2 million or $0.09 per diluted share, compared to $2.3 million or $0.23 per diluted share in the second quarter of last year. Moving on to the balance sheet, we were able to continue to strengthen our balance sheet on the heels of another profitable quarter. Current assets on June 30th were $38.6 million, which included cash of $13.7 million and accounts receivable of $19.6 million. At the end of 2019, current assets were $37 million and included cash of $4.2 million and accounts receivable of $28.2 million. Property and equipment increased by approximately $890,000 to $2.8 million, at June 30th, as we continue construction on a new building adjacent to our corporate headquarters. Our current cash balance, which has increased by $9.6 million in 2020, is sufficient to continue to fund our ongoing operations for the foreseeable future, while still funding other important initiatives. And with that, I will turn the call back over to our operator for Q&A.

Thank you. Ladies and gentlemen, the floor is now open for question [Operator Instructions]. We'll take our first question from Peter Rabover with Artko Capital. Please go ahead.

Hi guys. Nice way to power through the, such a terrible economic scenario. I wanted to ask you about, your I guess, opportunities with the cash, you announced a stock buyback, both that you are looking at distressed assets in general. So just curious how you're thinking about the allocation and, I guess, how you're thinking about executing the buyback? Thanks.

Thank you, Peter. So as was announced, we've filed a 10b-5 plan to begin, sort of, purchasing shares. And we have begun purchasing shares under the terms of the buyback. So far, the amount of share purchases has been relatively small, but we are committed to continue to buy them back so long as the price stays at a level that we consider to be well below the intrinsic value of the company. The -- but as laid out as well is we are on the hunt for acquisitions and opportunities, and it's kind of funny right before the call. In fact, my VP of Operations texts me the fact that, a -- one of our competitors just went out of business. And so while, obviously, I don't wish that upon any of my competitors -- any of our competitors per se, it indicates that opportunities are probably starting to -- will start to present themselves. And so I would pretty much argue that, that would be probably the biggest area in which the funds will be deployed. But we do still have to -- it's really important that we take a disciplined approach to it as well. A bad acquisition is worse than no acquisition at all. And but like I said, I fully expect -- the problem is that you had a lot of people who are still wishing for price that was based on 2019 performance. And of course, we're in a completely different world here in August of 2020 than what we were in August 2019. And so part of that, it will take some reality to set in as well. I hope that answers your question.

Yes. No, that does. That was great. A couple of other questions. One, maybe comment on your -- where you're seeing pockets of strength and the weaknesses in the economies and geographies that you serve, just so maybe something to keep track of performance a little better. And I'll follow-up with another one after this.

That's a good question. Obviously, we are struggling most in areas that the lockdown is being, sort of, kept at a higher level. So like the state of Washington is particularly in Oregon, are two particularly difficult jurisdictions. Others are a bit better. So I mean, our comparisons are a bit worse in places like that. At the end of the day, it's not so much -- it's still -- this kind of goes back to what I said after the first quarter call is that realistically until you start seeing people at baseball games, at basketball games, at football games, it's going to have a negative impact. And so it really goes down to -- it's not always necessarily gee, St. Louis is -- St. Louis is way off, because St. Louis is off it may well be because prior -- it historically has been more geared towards hospitality. And so hospitality is still really way off. And again, until people are clear to go back into stadiums, I just -- we're just not going to recover that. As far as relative strengths, Florida, really, the Southeast is still trending pretty strong, probably -- is probably the single strongest area. Again, because commercial construction remains relatively strong.

Great. And then maybe the follow-up question. I think you guys generated something like $8.3 million in free cash flow so far this year. And obviously, that's a result of -- from working capital release. And so I'm just curious how much cash do you anticipate using -- or a good way to think about it, this is probably a better way to ask that for as your same-store sales start -- your franchise sales are going up. What's the percentage of AR should we think about as, I guess, your franchise fees, et cetera?

Yes. So you're correct in pointing out, obviously, the bulk of the cash balance increase or at least on -- it's kind of fun -- it's almost uncanny how the amount of let's say, the decline in the AR almost equals the cash balance increase. However, it's not quite that simple either because a number of our accruals and, let's say, the amount due to our franchisees, has also declined, meaning, obviously, we've paid more. So, I would suggest to you that, so it's not quite that simple. We also had a fairly large deferred tax liability that we paid down as well. So realistically, if our sales, I mean the way I'd kind of look at it is we pretty much advance about 70% -- if we have a 20% increase in sales, it pretty much means that our AR will go up by about 70% of that absolute dollar increase in sales. If that makes any sense. So if our sales go up $5 million a month, let's say, let's just say, a cure is found tomorrow, and things go back to normal and our sales go up $5 million a month. Our AR will go up -- our net cash will go down by about 70% of that $5 million per month increase for about -- really about 1.5 months. Typically, our AR runs around 49 days outstanding. So you could expect somewhere in the neighborhood of like a $5 million increase in net working capital needs.

Okay, great. Thank you so much. I appreciate the color.

Sure.

[Operator Instructions] We'll take our next question from Paul Cranking, Private Investor. Please go ahead.

Hey, Rick.

Hey, Paul.

I had noticed -- it seems sort of looking at the balance sheet that what you had just mentioned that the decline in accounts receivable correlated pretty closely with the increase in cash. At this time of year, is the accounts receivable generally rising? Aside -- I know this is a -- we're in a COVID year, but generally, with our AR be increasing at this time of year.

The answer -- so yes, the answer to that question is, yes. The accounts receivable even as we speak, they're increasing, which, of course, is a good thing, right, because it means our sales are up, which is seasonal. And so they absolutely are up. So -- and I would expect that. And so I would not -- it would not surprise me if our cash balance goes down during the third quarter. That's all…

Right. I would say -- the other point was that just we'll be funding additional payroll at the $13.7 million as possible that that would be declining or may have already declined.

Yeah. I mean, I would expect it. Obviously, as AR goes up, and that's the whole thing. As AR goes up, certainly, our cash will go down. But look, if you strip away even just the changes in working capital. I think the most important part is we're still profitable. We're still earning -- we're -- not only did we earn more than $2 million in the first half of the year. We're also collecting on the notes related to the command sale as well. So, we are generating strong underlying cash flow as well. Never mind the changes in cash. And it is true. We are very seasonal. We're in -- or a bit of a challenging business from that perspective, not only are we seasonal, but we are cyclical. And so, something like COVID obviously impacts our operations, and then on top of it, you have the seasonality. But that's just an ongoing -- that's always occurring. Again, the key is not to lose sight of the most important part, which is we continue to earn -- we continue to earn real money. And the -- generally speaking, the notes are performing well.

Are we just reserving for the one group of the California? Is everything...

So the answer to that question is, no. That's not just one -- that's just not one. It's a fairly -- we're required to take a comprehensive look at all of the notes. So it's just one part of it.

Okay. I just had one other question. Looking at the consolidated statements of income. Looking at the three months ended and the sox months ended comparing this year with last year. Are those -- were those are HQ numbers alone or were those HQ because there weren't franchise royalties from Command Center prior to July, right, of 2019?

That's right. So HQ -- so those were HQ alone. So what you'll see in the third quarter because the merger took place on July 15, the third quarter will be truly sort of the combined results of Command and HireQuest compared to the company.

And that's what I was thinking, it's really hard to get a picture of what's -- what -- what's -- what was added from Command Center since they weren't on the franchise, they weren't -- they had no franchise revenue at that time. But in the next quarter, we will see what's been added and where we were a year ago, correct?

That's correct.

Okay.

Of course, the third quarter will also conclude the comparisons of all of the merger-related costs. And all of the sort of the onetime tax issues that took place in the third quarter. So...

Why does -- why is the deferred tax liability decreased so much in one year? When are we doing a four-year spreads on that?

I'm going to leave that question for Cory.

The deferred tax liability, we -- it's made up primarily of workers' compensation reserves as well as that spread. The reason...

The 41 adjustment, okay.

Yes.

Okay, good.

[Operator Instructions] We'll take our next question from Aaron Edelheit with Mindset Capital. Please go ahead.

Hey, thanks for taking my question. I had a question for how things are trending. I'm assuming that April was real low and things have been trending back since. But I was wondering if you could just give some color or commentary on how you see the business trending now that we're 1.5 months into the next quarter? And just give some overall views of how things are.

That's a good question. So at the beginning -- around the end of March, our year-to-year comparisons were off nearly -- well, in some cases, more than 40%, we'll just say roughly 40%. The -- we are seeing a lot of improvements but part of those are based on seasonal factors. July, August, September, October are always our four best months. So part of the improvements we've seen in absolute dollars since March, are just related to normal seasonal factors. However, the year-over-year comparisons have improved to the point where we're off, typical week, we're off somewhere between 26% and 28%, 29% from the prior year.

Thanks.

[Operator Instructions] There appear to be no further questions at this time. We'll turn the floor back to Mr. Hermanns for closing remarks. Please go ahead.

Thank you, everybody, for participating in the call. Again, hopefully, what you can discern from both the earnings release and from the comments is the company is well positioned to grow in the future due to the strong balance sheet and again, an important part as viewing your holdings in the company is to recognize that that we have really good protection against a decline in the economy. And again, that uniquely positions us to take advantage of the situation going forward and still make meaningful investments in our business going forward, and we're not just in a preservation mode. So again, I thank you for joining us. And look forward to a good third quarter. Thanks a lot.

Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.