SPAR (US:SGRP)2021-11-15 21:01PART I: FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, including income, balance sheets, cash flows, and detailed notes on accounting policies and key events Item 1. Consolidated Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for SPAR Group, Inc. as of September 30, 2021, including statements of income, balance sheets, equity, and cash flows, along with detailed notes explaining the basis of presentation, significant accounting policies, and key events during the period, such as business combinations and related-party transactions Condensed Consolidated Statements of Income and Comprehensive Income For the third quarter of 2021, net revenues increased by 14.4% year-over-year to $67.4 million, but operating income decreased from $3.3 million to $2.7 million, with net income attributable to SPAR Group relatively flat at $1.18 million, while for the nine-month period, revenues grew 14.3% to $195.7 million, and net income attributable to SPAR Group nearly doubled to $2.6 million from $1.3 million in the prior year Condensed Consolidated Statements of Income (in thousands) | Financial Metric | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net revenues | $67,423 | $58,865 | $195,696 | $171,157 | | Gross profit | $12,610 | $12,016 | $36,875 | $33,679 | | Operating income | $2,675 | $3,341 | $7,282 | $6,783 | | Net income | $2,139 | $2,445 | $5,052 | $4,672 | | Net income attributable to SPAR Group, Inc. | $1,180 | $1,144 | $2,611 | $1,337 | | Basic and diluted income per common share | $0.06 | $0.05 | $0.12 | $0.06 | Condensed Consolidated Balance Sheets As of September 30, 2021, the company's total assets grew to $97.7 million from $84.0 million at year-end 2020, driven primarily by an increase in accounts receivable, while total liabilities also increased to $56.5 million from $45.4 million, largely due to higher lines of credit and accrued expenses, with total equity rising to $41.2 million Condensed Consolidated Balance Sheets (in thousands) | Account | September 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :--- | :--- | | Total current assets | $79,854 | $66,517 | | Total assets | $97,711 | $84,029 | | Total current liabilities | $54,423 | $42,905 | | Total liabilities | $56,489 | $45,407 | | Total SPAR Group, Inc. equity | $24,372 | $22,159 | | Total equity | $41,222 | $38,622 | Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash provided by operating activities was $1.1 million, a significant decrease from $7.2 million in the prior-year period, mainly due to a large increase in accounts receivable, while net cash used in investing activities was $2.4 million, primarily for business acquisition and equipment purchases, and net cash from financing activities was $4.4 million, driven by net borrowings on lines of credit Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,119 | $7,223 | | Net cash used in investing activities | ($2,432) | ($1,248) | | Net cash provided by financing activities | $4,374 | $3,207 | | Effect of foreign exchange rate changes on cash | ($3,733) | ($3,890) | | Net change in cash and cash equivalents | ($672) | $5,292 | | Cash and cash equivalents at end of period | $15,300 | $15,750 | Notes to Condensed Consolidated Financial Statements (Unaudited) The notes provide detailed explanations of the company's accounting policies and financial results, including the acquisition of Bordax in South Africa, details of domestic and international credit facilities, extensive related-party transactions, ongoing legal contingencies, and a breakdown of performance by business segment and geography - On July 15, 2021, the Company acquired Bordax Retail Services in South Africa for a total purchase price of approximately $1.6 million, with an initial payment of $1.1 million3032 - The company has significant related-party transactions, including services provided by affiliates totaling $7.2 million for the first nine months of 202169 - The company is involved in several legal disputes, including a demand for $901,000 from an affiliate (fully reserved), and rejected claims from directors Robert G. Brown and William H. Bartels valued at up to $5.6 million112116123 Segment Revenue and Operating Income (Nine Months Ended Sep 30, 2021, in thousands) | Segment | Revenue | Operating Income | | :--- | :--- | :--- | | United States | $79,623 | $2,176 | | International | $116,073 | $5,106 | | Total | $195,696 | $7,282 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results for the third quarter and first nine months of 2021, noting strong revenue growth both domestically and internationally driven by business development and economic recovery, despite gross margin compression due to increased wage pressures and an unfavorable mix of project work, while liquidity remains sufficient, though cash from operations decreased due to higher accounts receivable, with the acquisition of Bordax in South Africa highlighted as a key event Results of Operations For the nine months ended September 30, 2021, net revenues increased 14.3% to $195.7 million, with domestic revenue up 9.8% and international revenue up 17.7%, while gross profit increased to $36.9 million, but the gross margin percentage slightly decreased to 18.8% from 19.7% due to higher labor costs, and net income attributable to the company nearly doubled to $2.6 million, or $0.12 per diluted share Revenue Growth (Nine Months Ended Sep 30, 2021 vs 2020) | Segment | 2021 Revenue (in millions) | 2020 Revenue (in millions) | Growth % | | :--- | :--- | :--- | :--- | | Domestic | $79.6 | $72.5 | 9.8% | | International | $116.1 | $98.7 | 17.7% | | Total | $195.7 | $171.2 | 14.3% | - The increase in cost of revenues as a percentage of sales was primarily due to increased wage pressures and an unfavorable mix of project work, particularly in the domestic segment187 - Net income attributable to SPAR Group, Inc. for the nine months ended September 30, 2021, was $2.6 million ($0.12 per diluted share), compared to $1.3 million ($0.06 per diluted share) for the same period in 2020197 Liquidity and Capital Resources The company's working capital increased to $25.4 million as of September 30, 2021, with net cash from operations at $1.1 million, significantly lower than the prior year due to an increase in accounts receivable from higher revenue, while $2.4 million was used in investing activities, including the Bordax acquisition, and $4.4 million was generated from financing activities through draws on its credit lines, with management believing existing cash and credit facilities are sufficient to meet working capital needs for the next twelve months - Net cash provided by operating activities decreased to $1.1 million for the first nine months of 2021 from $7.2 million in 2020, primarily due to an increase in accounts receivable driven by higher revenue199 - Net cash used in investing activities of $2.4 million was due to fixed asset additions and the acquisition of Bordax in South Africa200 - Working capital was $25.4 million at September 30, 2021, up from $23.6 million at December 31, 2020, with the current ratio at 1.5203 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is a smaller reporting company and is not required to provide the information for this item - As a smaller reporting company defined by Rule 12b-2 of the Exchange Act, the Company is not required to provide quantitative and qualitative disclosures about market risk204 Item 4. Controls and Procedures Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were not effective due to a material weakness in internal control over financial reporting related to the resignation of all three members of the Audit Committee in June 2021, which resulted in a lack of required oversight, though the company regained compliance with Nasdaq rules by appointing new independent directors on October 14, 2021, and expects the material weakness to be remediated in the fourth quarter of 2021 - Management concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2021205 - A material weakness existed related to the oversight by the Board of Directors, specifically due to the resignation of all three Audit Committee members on June 9, 2021, leaving the company non-compliant with Nasdaq's majority independent board and audit committee requirements209210 - The company regained compliance with Nasdaq's audit committee requirements on October 14, 2021, after the reporting period, by filling the vacancies, and management expects the material weakness to be corrected during the fourth quarter of 2021215 PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, other disclosures, and a list of exhibits filed with the report Item 1. Legal Proceedings The company is party to various legal actions in the normal course of business, but management does not anticipate these to have a material adverse effect, with further details on specific legal matters cross-referenced to Note 9 of the financial statements - The Company is involved in various legal proceedings arising from the normal course of business, which management believes will not have a material adverse effect on its financial condition or results of operations219 Item 1A. Risk Factors There have been no material changes to the company's risk factors since those disclosed in its Annual Report on Form 10-K - There have been no material changes in the Company's risk factors since the Annual Report222 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - Not applicable223 Item 5. Other Information This item is not applicable for the reporting period - Not applicable226 Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including severance agreements and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act