SPAR (SGRP) - 2022 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION This section presents the company's consolidated financial statements, management's discussion and analysis, market risk disclosures, and internal controls Item 1. Consolidated Financial Statements (Unaudited) For the nine months ended September 30, 2022, SPAR Group reported net revenues of $196.6 million, with net income attributable to the company decreasing to $1.8 million and total assets increasing to $104.2 million, while operating activities used $4.2 million in cash Consolidated Statement of Income Highlights (in thousands) | Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | :--- | :--- | | Net Revenues | $69,832 | $67,423 | $196,626 | $195,696 | | Gross Profit | $12,840 | $12,610 | $37,619 | $36,875 | | Operating Income | $1,720 | $2,675 | $6,143 | $7,282 | | Net Income | $900 | $2,139 | $3,969 | $5,052 | | Net Income (Loss) Attributable to SPAR Group, Inc. | $(32) | $1,180 | $1,789 | $2,611 | | Diluted EPS | $(0.00) | $0.06 | $0.08 | $0.12 | Consolidated Balance Sheet Highlights (in thousands) | Metric | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $86,308 | $72,026 | | Total Assets | $104,204 | $89,016 | | Total Current Liabilities | $61,577 | $50,206 | | Total Liabilities | $64,344 | $51,668 | | Total Equity | $39,860 | $37,348 | Consolidated Statement of Cash Flows Highlights (Nine Months Ended, in thousands) | Metric | Sep 30, 2022 | Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(4,162) | $1,119 | | Net cash used in investing activities | $(1,237) | $(2,432) | | Net cash provided by financing activities | $9,247 | $4,374 | | Net change in cash and cash equivalents | $(1,352) | $(672) | | Cash, cash equivalents and restricted cash at end of period | $12,121 | $15,300 | Notes to Condensed Consolidated Financial Statements These notes detail the company's segment operations, the financial impact of COVID-19 on China, significant related-party transactions, and an interim goodwill impairment test - The company operates under three segments: Americas, Asia-Pacific (APAC), and Europe, Middle East and Africa (EMEA)[26] - The joint venture in China was negatively impacted by COVID-19 lockdowns in Q2 and Q3 2022, resulting in a net loss attributable to SPAR Group of $348,000 for the nine-month period, compared to a net income of $23,000 in the prior year[27] - The company entered into a Change of Control, Voting and Restricted Stock Agreement with its Majority Stockholders, with financial terms totaling $4,477,585, including the issuance of 2,000,000 shares of Series B Preferred Stock[50][51][54] - An interim quantitative assessment was performed on the goodwill and intangible assets of the Resource Plus reporting unit due to the loss of a significant customer and reduced forecasts. The company concluded that no impairment was needed as of September 30, 2022[75][76] Segment Revenue (Nine Months Ended, in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Americas | $149,992 | $146,213 | | Asia - Pacific | $19,351 | $23,584 | | EMEA | $27,283 | $25,899 | | Total Revenue | $196,626 | $195,696 | Segment Operating Income (Nine Months Ended, in thousands) | Segment | 2022 | 2021 | | :--- | :--- | :--- | | Americas | $5,862 | $6,203 | | Asia - Pacific | $(1,491) | $(300) | | EMEA | $1,772 | $1,379 | | Total Operating Income | $6,143 | $7,282 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial performance, highlighting flat revenue, decreased profitability due to higher expenses, negative operating cash flow, and affirming sufficient liquidity Results of Operations (Three Months Ended September 30, 2022) Q3 2022 saw a 3.6% net revenue increase driven by Americas growth, offset by APAC and EMEA declines, with increased SG&A expenses leading to lower operating income and a net loss Q3 2022 vs Q3 2021 Financial Performance (in thousands) | Metric | Q3 2022 | Q3 2021 | | :--- | :--- | :--- | | Net Revenues | $69,832 | $67,423 | | Gross Profit | $12,840 | $12,610 | | Operating Income | $1,720 | $2,675 | | Net Income (Loss) Attributable to SPAR Group, Inc. | $(32) | $1,180 | - Americas net revenue increased by $3.9 million (7.8%), primarily due to organic growth in the US and Brazil[113] - APAC net revenue decreased by $0.8 million (9.8%) due to COVID-19 effects in China and foreign exchange impacts in Japan[114] - SG&A expenses increased year-over-year due to planned investments in business development, marketing, technology, and one-time costs related to a strategic alternatives initiative[121] Results of Operations (Nine Months Ended September 30, 2022) Nine-month net revenues remained flat, with Americas and EMEA growth offset by a significant APAC decline, while increased SG&A expenses led to reduced operating and net income Nine Months 2022 vs 2021 Financial Performance (in thousands) | Metric | Nine Months 2022 | Nine Months 2021 | | :--- | :--- | :--- | | Net Revenues | $196,626 | $195,696 | | Gross Profit | $37,619 | $36,875 | | Operating Income | $6,143 | $7,282 | | Net Income Attributable to SPAR Group, Inc. | $1,789 | $2,611 | - APAC net revenues decreased by $4.2 million (17.9%) primarily due to the continuing effects of COVID-19 in China and Japan[135] - EMEA net revenues increased by $1.4 million (5.3%) due to organic growth and the acquisition of Bordax in South Africa, partially offset by foreign exchange impact[136] Critical Accounting Estimates The company performed an interim goodwill impairment test on its Resource Plus unit, concluding no impairment was necessary despite a narrow fair value margin, noting future impairment is possible - The company performed an interim quantitative assessment for goodwill and intangible assets related to the Resource Plus reporting unit[156] - The results indicated the fair value of the reporting unit exceeded the carrying value by 2.3% as of September 30, 2022, and no impairment was recorded[156] - Fair value determinations are sensitive to assumptions about future cash flows, discount rates, and growth rates, and future impairment is possible if expectations are not met[157] Liquidity and Capital Resources The company reported $24.7 million in net working capital and a 1.4 current ratio, with negative operating cash flow offset by financing activities, affirming sufficient liquidity for the next twelve months - Net cash used in operating activities was $4.2 million for the nine months ended Sep 30, 2022, a decrease from $1.1 million provided in the same period in 2021[160] - Net cash provided by financing activities was $9.3 million, primarily from net higher draws on lines of credit[164] - The company had net working capital of $24.7 million and a current ratio of 1.4 as of September 30, 2022[166] Item 3. 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 - As a smaller reporting company, SPAR Group, Inc. is not required to provide quantitative and qualitative disclosures about market risk[167] Item 4. Controls and Procedures The CEO and CFO concluded that the company's disclosure controls and procedures were effective, with no material changes to internal controls during Q3 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[168] - No material changes were made to the company's internal controls over financial reporting during the third quarter of fiscal year 2022[169] PART II: OTHER INFORMATION This section covers legal proceedings, risk factors, and exhibits filed with the report Item 1. Legal Proceedings The company is involved in various legal actions arising in the normal course of business, which management believes will not have a material adverse effect on financial condition or results of operations - The company is a party to various legal actions arising in the normal course of business[172] - Management does not anticipate that the resolution of these matters will have a no material adverse effect on the company[172] Item 1A. Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021 - There have been no material changes in the Company's risk factors since the Annual Report for the year ended December 31, 2021[174] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and Inline XBRL data files - The report includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002[183] - Inline XBRL Instance Documents and related taxonomy files are included as exhibits[183]