SPAR (SGRP) - 2022 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for SPAR Group, Inc Item 1. Condensed Consolidated Financial Statements This section presents SPAR Group's unaudited condensed consolidated financial statements, including income, balance sheets, cash flows, and notes, for Q2 and H1 2022 Condensed Consolidated Statements of Income and Comprehensive Income (Loss) This statement details SPAR Group's revenues, gross profit, operating income, and net income for the three and six months ended June 30, 2022 and 2021 Condensed Consolidated Statements of Income and Comprehensive Income (Loss) (In thousands) | | Three Months Ended June 30, | Six Months Ended June 30, | | :--- | :--- | :--- | | | 2022 | 2021 | 2022 | 2021 | | Net revenues | $67,799 | $67,176 | $126,794 | $128,273 | | Gross profit | $12,948 | $12,006 | $24,780 | $24,265 | | Operating income | $2,357 | $1,887 | $4,425 | $4,606 | | Net income | $1,613 | $1,132 | $3,068 | $2,913 | | Net income attributable to SPAR Group, Inc. | $1,149 | $514 | $1,821 | $1,431 | | Basic and diluted EPS | $0.05 | $0.02 | $0.08 | $0.07 | Condensed Consolidated Balance Sheets This statement provides a snapshot of SPAR Group's assets, liabilities, and equity as of June 30, 2022, and December 31, 2021 Condensed Consolidated Balance Sheets (In thousands) | | June 30, 2022 (Unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Assets | | | | Cash, cash equivalents and restricted cash | $12,402 | $13,473 | | Total current assets | $81,807 | $72,026 | | Total assets | $100,217 | $89,016 | | Liabilities and Equity | | | | Total current liabilities | $58,932 | $50,206 | | Total liabilities | $60,275 | $51,668 | | Total equity | $39,942 | $37,348 | | Total liabilities and equity | $100,217 | $89,016 | Condensed Consolidated Statements of Cash Flows This statement outlines SPAR Group's cash flows from operating, investing, and financing activities for the six months ended June 30, 2022 and 2021 Condensed Consolidated Statements of Cash Flows (In thousands) | | Six Months Ended June 30, | | :--- | :--- | | | 2022 | 2021 | | Net cash (used in) provided by operating activities | $(3,528) | $1,009 | | Net cash (used in) investing activities | $(794) | $(886) | | Net cash provided by financing activities | $7,439 | $2,025 | | Effect of foreign exchange rate changes on cash | $(4,188) | $(1,419) | | Net change in cash and cash equivalents | $(1,071) | $729 | | Cash, cash equivalents and restricted cash at end of period | $12,402 | $16,701 | Notes to Consolidated Financial Statements This section provides detailed disclosures supporting the consolidated financial statements, covering operations, credit facilities, related-party transactions, and segment information - The company operates as a global merchandising and brand marketing services firm across nine countries, organized into three segments: Americas, Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA)[25][26] - The COVID-19 lockdown in Shanghai during Q2 2022 significantly impacted the company's joint venture in China, causing a net loss attributable to SPAR of $329,000 for the quarter due to a 50% revenue decrease while expenses continued[27] - In January 2022, the company entered into a Change of Control, Voting and Restricted Stock Agreement with its Majority Stockholders, involving the issuance of 2,000,000 shares of Series B Preferred Stock, a $250,000 cash payment, and assumption of certain liabilities, with a total value of approximately $4.5 million[51][52][54] Segment Performance (In thousands) | Segment | Q2 2022 Revenue | Q2 2021 Revenue | Q2 2022 Operating Income | Q2 2021 Operating Income | | :--- | :--- | :--- | :--- | :--- | | Americas | $53,274 | $51,251 | $2,636 | $1,667 | | Asia - Pacific | $5,386 | $7,401 | $(713) | $(147) | | EMEA | $9,139 | $8,524 | $434 | $367 | | Total | $67,799 | $67,176 | $2,357 | $1,887 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, liquidity, capital resources, and cash flow activities for the three and six months ended June 30, 2022 Results of Operations - Three Months Ended June 30, 2022 This section analyzes SPAR Group's financial performance for Q2 2022, highlighting revenue, gross profit, and net income trends by segment Key Financial Metrics - Q2 Performance | Metric | Q2 2022 | Q2 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenues | $67.8M | $67.2M | +0.9% | | Gross Profit | $12.9M | $12.0M | +7.9% | | Gross Margin | 19.1% | 17.9% | +1.2 pts | | Operating Income | $2.4M | $1.9M | +24.9% | | Net Income (to SGRP) | $1.1M | $0.5M | +123.5% | - Americas Revenue: Increased by 3.9% due to organic growth in the US and Brazil, partially offset by a decrease in Mexico from labor regulation changes[106] - APAC Revenue: Decreased by 27.0% primarily due to the continuing effects of COVID-19 in China and Japan[107] - EMEA Revenue: Increased by 7.1% from organic growth and the acquisition of Bordax in South Africa[107] Results of Operations - Six Months Ended June 30, 2022 This section analyzes SPAR Group's financial performance for H1 2022, detailing revenue, gross profit, and net income trends by segment Key Financial Metrics - H1 Performance | Metric | H1 2022 | H1 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenues | $126.8M | $128.3M | -1.2% | | Gross Profit | $24.8M | $24.3M | +2.1% | | Gross Margin | 19.5% | 18.9% | +0.6 pts | | Operating Income | $4.4M | $4.6M | -4.0% | | Net Income (to SGRP) | $1.8M | $1.4M | +27.3% | - Americas Revenue: Remained flat, with growth in the US and Brazil offset by a significant reduction in Mexico due to new labor laws[125] - APAC Revenue: Decreased by 22.3% due to COVID-19 impacts in China and Japan[126] - EMEA Revenue: Increased by 13.0% due to organic growth and the Bordax acquisition[126] Liquidity and Capital Resources This section assesses SPAR Group's working capital, cash flow activities, and capital resources as of June 30, 2022 - Net cash used in operating activities was $3.5 million for H1 2022, compared to $1.0 million provided in H1 2021, primarily due to increased accounts receivable, higher prepaid expenses, and payments under the Majority Stockholders CIC Agreement[141] - Net cash provided by financing activities increased to $7.4 million in H1 2022 from $2.0 million in H1 2021, mainly due to higher net draws on lines of credit[144] Liquidity Metrics | Metric | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Net Working Capital | $22.9M | $21.8M | | Current Ratio | 1.4 | 1.4 | Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, SPAR Group is exempt from providing quantitative and qualitative disclosures about market risk - As a smaller reporting company, SPAR Group, Inc. is not required to provide quantitative and qualitative disclosures about market risk[147] Item 4. Controls and Procedures Management concluded that SPAR Group's disclosure controls and procedures were effective, with no material changes to internal controls during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of June 30, 2022[148] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting[151] PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, and other miscellaneous information for SPAR Group Item 1. Legal Proceedings The company is involved in various legal actions arising from normal business operations, not expected to have a material adverse impact - The company is involved in various legal proceedings arising from normal business operations, which are not expected to have a material adverse impact[152] Item 1A. Risk Factors No material changes have occurred in the company's risk factors since the filing of its Annual Report on Form 10-K - No material changes have occurred in the company's risk factors since the filing of its Annual Report[155] Other Items (2, 3, 4, 5) Items 2, 3, 4, and 5 of Part II are reported as "Not applicable" for this reporting period - Items 2, 3, 4, and 5 of Part II are reported as 'Not applicable'[156][157][158][159] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including credit facility modifications and executive certifications - Exhibits filed include the Fourth Modification Agreement with North Mill Capital, amended change in control severance agreements for executives, and Sarbanes-Oxley certifications[162]