Note 2 - Investment in MRINetwork Operations

Transaction Overview

On January 1, 2026, HQ MRI contributed certain assets associated with the permanent placement franchise base of MRI to MRINO, a newly formed entity, in exchange for an approximate 40% ownership interest. We evaluated our interest under U.S. GAAP and determined that we do not have a controlling financial interest in MRINO and we are not the primary beneficiary of a VIE. Accordingly, the investment is accounted for under the equity method of accounting. 

The assets transferred consisted primarily of franchise agreements and related prepaid assets. In connection with these franchise agreements, we had previously recorded deferred revenue related to nonrefundable upfront franchise fees and capitalized contract costs (broker fees).

Upon closing, we were no longer the franchisor for the MRI permanent placement franchise base and no longer have continuing involvement as the franchisor or remaining performance obligations associated with the transferred franchise agreements.

Accounting for the Transaction

The transaction was accounted for as a transfer of nonfinancial assets to a noncustomer. Control of the transferred assets passed to MRINO on January 1, 2026, and we derecognized the related assets and liabilities at that time. Deferred revenue associated with upfront franchise fees was derecognized upon transfer of the underlying contracts as we no longer have performance obligations. Capitalized contract costs were derecognized concurrently with the related contracts. These amounts were included in the carrying value of net assets derecognized in determining the gain on the transaction. The equity interest received was measured at fair value on the date of the transaction and recorded as an equity method investment which is included in the line item "Investment in unconsolidated affiliate" on our Consolidated Balance Sheets.

Post-Formation Funding

At formation, MRINO had limited initial working capital, and it was expected that HQI would provide funding to support initial operations. During the three months ended March 31, 2026, we funded approximately $480 thousand of MRINO-related costs. We evaluated the nature of this funding and determined that the amount representing our proportionate ownership, or approximately $192 thousand, was considered in determining the overall transaction economics from a market participant perspective. Accordingly, this amount was reflected as an adjustment to the gain on divestiture. The remaining portion of the funding of approximately $286 thousand is expected to be reimbursed based on contractual arrangements by MRINO and has been recorded as a note receivable as of March 31, 2026.

Gain on Divestiture

We recognized a gain on divestiture of approximately $248 thousand during the three months ended March 31, 2026, which is included in the line item "Gain on divestiture" on our Consolidated Statements of Income. The gain represents the difference between the fair value of the equity interest received, adjusted as described below, and the carrying value of the net assets derecognized.

The fair value of the equity interest received was determined based on a valuation of MRINO utilizing an income approach based on discounted cash flows, which incorporated Level 3 inputs, including projected future cash flows, estimated profitability, terminal growth assumptions and discount rates reflecting the risks associated with the business and projected cash flows. Management, with the assistance of a third-party valuation specialist, evaluated the reasonableness of the significant assumptions utilized in the valuation.

Equity Method Investment

HQI’s investment in MRINO is accounted for under the equity method of accounting. The initial carrying value of the investment was based on the fair value of the equity interest received at the transaction date. During the three months ended March 31, 2026, we increased our investment by approximately $192 thousand related to our proportionate share of funding provided to MRINO which represents an additional capital contribution to MRINO. We report our share of MRINO’s results of operations on a three-month lag, as MRINO’s financial information is not available on a sufficiently timely basis. Accordingly, our results for the three months ended March 31, 2026 do not include our share of MRINO’s earnings or losses for that period. The use of a reporting lag is applied consistently from period to period.

We evaluate events and transactions occurring between MRINO’s reporting date and our reporting date for materiality and record adjustments, as necessary, to reflect the impact of any significant intervening events.

We will recognize our share of MRINO’s earnings or losses in future periods in accordance with U.S. GAAP.