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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
FORM 10-Q/A
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the thirdsecond quarterly period ended September June 30,, 2017 2020.
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to __________.
Commission file number 0-27408
SPAR GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware | 33-0684451 |
(State or other jurisdiction of |
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333 Westchester Avenue, | 10604 |
(Address of principal executive | |
(Zip Code) | |
Registrant'sRegistrant's telephone number, including area code: (914) 332-4100(248) 364-7727
Indicate by check mark whether the registrantRegistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12twelve months (or for such shorter period that the registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
days. YES ☒ Yes NO ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES ☒ Yes NO ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company"company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.). (Check one):
Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Non-Accelerated Filer ☐ | Smaller reporting |
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| Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.Act ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) .Act.) YES ☐ YesNO ☒ No
The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on April 30, 2020, based on the closing price of the Common Stock as reported by the Nasdaq Capital Market on such date, was approximately $6.8 million.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading
| Name of each exchange on which registered |
Common | SGRP | Nasdaq |
| The number of shares of the Registrant's Common Stock outstanding as of August 7, 2020, was 21,108,352 shares. |
Index
The purpose of this Form 10-Q/A to SPAR Group, Inc. Quarterly Report on Form 10-Q for the quarter ended June 30, 2020, filed with the Securities and Exchange Commission ("SEC") on August 14, 2020 (The "Form 10-Q") is to correct several typographical errors, cross references, incomplete deletions and the names of the signatories and signing dates for the certifications on Exhibits 31.1, 31.2, 32.1 and 32.2, and to delete the reference to Exhibit 3.3 (which was previously filed with the SEC) and amend, restate and supersede the previously filed Form 10-Q.
No other changes have been made to the Form 10-Q previously filed. This Amendment speaks as of the original filing date of the Form 10-Q, does not reflect events that may have occurred subsequent to the original filing date and does not modify or update in any way disclosures made in the original Form 10-Q.
PART I: | FINANCIAL INFORMATION |
Item 1 | ||
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| Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Item 2 |
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Item 3 | ||
Item 4 |
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| PART II: | OTHER INFORMATION | ||
Item 1 | |||
Item 1A |
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Item 2 | |||
Item 3 | |||
Item 4 | |||
Item 5 | |||
Item 6 | |||
SIGNATURES | |||
PART I: | FINANCIAL INFORMATION |
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Condensed Consolidated Financial Statements |
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share and per share data)
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 13,676 | $ | 10,458 | ||||
| Accounts receivable, net | 42,911 | 49,299 | ||||||
| Prepaid expenses and other current assets | 1,871 | 2,404 | ||||||
| Total current assets | 58,458 | 62,161 | ||||||
| Property and equipment, net | 2,793 | 2,848 | ||||||
| Operating lease right-of-use assets | 3,488 | 4,948 | ||||||
| Goodwill | 3,756 | 3,784 | ||||||
| Intangible assets, net | 2,512 | 2,796 | ||||||
| Deferred income taxes | 1,644 | 1,883 | ||||||
| Other assets | 1,259 | 1,115 | ||||||
Total assets | $ | 73,910 | $ | 79,535 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
| Accounts payable | $ | 6,841 | $ | 9,186 | ||||
| Accrued expenses and other current liabilities | 20,278 | 18,548 | ||||||
| Due to affiliates | 3,780 | 4,666 | ||||||
| Customer incentives and deposits | 416 | 594 | ||||||
| Lines of credit and short-term loans | 8,103 | 8,932 | ||||||
| Current portion of operating lease liabilities | 1,779 | 2,828 | ||||||
| Total current liabilities | 41,197 | 44,754 | ||||||
| Operating lease liabilities, less current portion | 1,709 | 2,120 | ||||||
| Long-term debt and other liabilities | 1,300 | 1,300 | ||||||
| Total liabilities | 44,206 | 48,174 | ||||||
Commitments and contingencies – See Note 8 | ||||||||
Equity: | ||||||||
SPAR Group, Inc. equity | ||||||||
| Preferred stock, $.01 par value: Authorized and available shares– 2,445,598 Issued and outstanding shares – None – Balance at June 30, 2020 and December 31, 2019 | - | - | ||||||
Common stock, $.01 par value: Authorized shares – 47,000,000 Issued shares – 21,108,352 – Balance at June 30, 2020, and 21,102,335 – December 31, 2019 | 211 | 211 | ||||||
| Treasury stock, at cost 1,697 shares – Balance at June 30, 2020, and December 31, 2019 | (2 | ) | (2 | ) | ||||
| Additional paid-in capital | 16,606 | 16,511 | ||||||
| Accumulated other comprehensive loss | (5,106 | ) | (3,616 | ) | ||||
| Retained earnings | 6,044 | 5,851 | ||||||
| Total SPAR Group, Inc. equity | 17,753 | 18,955 | ||||||
| Non-controlling interest | 11,951 | 12,406 | ||||||
| Total equity | 29,704 | 31,361 | ||||||
Total liabilities and equity | $ | 73,910 | $ | 79,535 | ||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive (Loss) Income
(unaudited)
(In thousands, except share and per share data)
September 30, 2017 | December 31, | |||||||
| (Unaudited) | (revised) (1) | |||||||
Assets |
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Current assets: | ||||||||
Cash and cash equivalents | $ | 7,662 | $ | 7,324 | ||||
Accounts receivable, net | 36,824 | 33,669 | ||||||
Prepaid expenses and other current assets | 1,629 | 1,299 | ||||||
Total current assets | 46,115 | 42,292 | ||||||
Property and equipment, net | 2,551 | 2,536 | ||||||
Goodwill | 1,841 | 1,847 | ||||||
Intangible assets, net | 1,900 | 2,340 | ||||||
Deferred income taxes | 4,468 | 4,694 | ||||||
Other assets | 1,683 | 1,142 | ||||||
Total assets | $ | 58,558 | $ | 54,851 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 7,783 | $ | 5,567 | ||||
Accrued expenses and other current liabilities | 13,598 | 9,766 | ||||||
Due to affiliates | 4,008 | 3,349 | ||||||
Customer incentives and deposits | 1,587 | 1,305 | ||||||
Lines of credit and short-term loans | 6,222 | 9,778 | ||||||
Total current liabilities | 33,198 | 29,765 | ||||||
Long-term debt and other liabilities | 33 | 4 | ||||||
Total liabilities | 33,231 | 29,769 | ||||||
Commitments and Contingencies – See Note 9 | ||||||||
Equity: | ||||||||
SPAR Group, Inc. equity | ||||||||
Preferred stock, $.01 par value: Authorized and available shares– 2,445,598 Issued and outstanding shares– None – September 30, 2017, and December 31, 2016 | – | – | ||||||
Common stock, $.01 par value: Authorized shares – 47,000,000 Issued shares – 20,680,717 – September 30, 2017, and December 31, 2016 | 207 | 207 | ||||||
Treasury stock, at cost 115,123 shares – September 30, 2017, and 37,877 shares – December 31, 2016 | (127 | ) | (51 | ) | ||||
Additional paid-in capital | 16,234 | 16,093 | ||||||
Accumulated other comprehensive loss | (2,060 | ) | (2,407 | ) | ||||
Retained earnings | 6,246 | 5,835 | ||||||
Total SPAR Group, Inc. equity | 20,500 | 19,677 | ||||||
Non-controlling interest | 4,827 | 5,405 | ||||||
Total equity | 25,327 | 25,082 | ||||||
Total liabilities and equity | $ | 58,558 | $ | 54,851 | ||||
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Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Net revenues | $ | 50,944 | $ | 68,223 | $ | 112,292 | $ | 125,383 | ||||||||
Cost of revenues | 41,072 | 54,159 | 90,632 | 100,685 | ||||||||||||
Gross profit | 9,872 | 14,064 | 21,660 | 24,698 | ||||||||||||
Selling, general and administrative expense | 7,370 | 9,306 | 17,141 | 17,699 | ||||||||||||
Depreciation and amortization | 539 | 528 | 1,079 | 1,038 | ||||||||||||
Operating income | 1,963 | 4,230 | 3,440 | 5,961 | ||||||||||||
Interest expense | 84 | 187 | 312 | 388 | ||||||||||||
Other income, net | (50 | ) | (192 | ) | (58 | ) | (257 | ) | ||||||||
Income before income tax expense | 1,929 | 4,235 | 3,186 | 5,830 | ||||||||||||
Income tax expense | 624 | 1,428 | 959 | 1,986 | ||||||||||||
Net income | 1,305 | 2,807 | 2,227 | 3,844 | ||||||||||||
Net (income) attributable to non-controlling interest | (1,408 | ) | (1,284 | ) | (2,034 | ) | (1,705 | ) | ||||||||
Net (loss) income attributable to SPAR Group, Inc. | $ | (103 | ) | $ | 1,523 | $ | 193 | $ | 2,139 | |||||||
Basic and diluted income per common share: | $ | (0.00 | ) | $ | 0.07 | $ | 0.01 | $ | 0.10 | |||||||
Weighted average common shares – basic | 21,108 | 20,816 | 21,107 | 20,796 | ||||||||||||
Weighted average common shares – diluted | 21,125 | 21,104 | 21,157 | 21,080 | ||||||||||||
Net income | $ | 1,305 | $ | 2,807 | $ | 2,227 | $ | 3,844 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Foreign currency translation adjustments | (79 | ) | 59 | (3,979 | ) | 167 | ||||||||||
Comprehensive (loss) income | 1,226 | 2,866 | (1,752 | ) | 4,011 | |||||||||||
Comprehensive (income) loss attributable to non-controlling interest | (1,365 | ) | (1,358 | ) | 455 | (1,808 | ) | |||||||||
Comprehensive (loss) income attributable to SPAR Group, Inc. | $ | (139 | ) | $ | 1,508 | $ | (1,297 | ) | $ | 2,203 | ||||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Income and ComprehensiveIncome (Loss)
(unaudited)
(In thousands, except per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(revised) (1) | (revised) (1) | |||||||||||||||
Net revenues | $ | 48,752 | $ | 33,438 | $ | 131,361 | $ | 89,781 | ||||||||
Cost of revenues | 39,960 | 26,162 | 105,563 | 69,309 | ||||||||||||
Gross profit | 8,792 | 7,276 | 25,798 | 20,472 | ||||||||||||
Selling, general and administrative expense | 7,477 | 6,360 | 21,988 | 17,637 | ||||||||||||
Depreciation and amortization | 487 | 486 | 1,526 | 1,459 | ||||||||||||
Operating income | 828 | 430 | 2,284 | 1,376 | ||||||||||||
Interest expense | 110 | 51 | 117 | 111 | ||||||||||||
Other (income), net | (78 | ) | (78 | ) | (275 | ) | (183 | ) | ||||||||
Income before income tax expense | 796 | 457 | 2,442 | 1,448 | ||||||||||||
Income tax expense (benefit) | 210 | (31 | ) | 907 | 200 | |||||||||||
Net income | 586 | 488 | 1,535 | 1,248 | ||||||||||||
Net income attributable to non-controlling interest | (340 | ) | (546 | ) | (1,189 | ) | (1,164 | ) | ||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 246 | $ | (58 | ) | $ | 346 | $ | 84 | |||||||
Basic and diluted income per common share: | $ | 0.01 | $ | – | $ | 0.02 | $ | – | ||||||||
Weighted average common shares – basic | 20,602 | 20,607 | 20,633 | 20,580 | ||||||||||||
Weighted average common shares – diluted | 21,320 | 20,607 | 21,331 | 21,299 | ||||||||||||
Net income | $ | 586 | $ | 488 | $ | 1,535 | $ | 1,248 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Foreign currency translation adjustments | (61 | ) | 206 | 681 | (495 | ) | ||||||||||
Comprehensive income | 525 | 694 | 2,216 | 753 | ||||||||||||
Comprehensive income attributable to non-controlling interest | (318 | ) | (651 | ) | (1,523 | ) | (807 | ) | ||||||||
Comprehensive income (loss) attributable to SPAR Group, Inc. | $ | 207 | $ | 43 | $ | 693 | $ | (54 | ) | |||||||
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See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Equity
(unaudited) (revised) (1)
(In thousands)
Common Stock | Treasury Stock | Additional | Accumulated Other | Non- | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In | Comprehensive | Retained Earnings | Controlling Interest | Total | ||||||||||||||||||||||||||||
Balance at January 1, 2017 | 20,681 | $ | 207 | 38 | $ | (51 | ) | $ | 16,093 | $ | (2,407 | ) | $ | 5,835 | $ | 5,405 | $ | 25,082 | ||||||||||||||||||
Share-based compensation | – | – | – | – | 178 | – | – | – | 178 | |||||||||||||||||||||||||||
Purchase of treasury shares | – | – | 111 | (121 | ) | – | – | – | – | (121 | ) | |||||||||||||||||||||||||
Reissued treasury shares – RSU's | – | – | (12 | ) | 16 | (16 | ) | – | – | – | – | |||||||||||||||||||||||||
Exercise of stock options | – | – | (22 | ) | 29 | (21 | ) | – | – | – | 8 | |||||||||||||||||||||||||
Distributions to non-controlling investors | – | – | – | – | – | – | – | (2,101 | ) | (2,101 | ) | |||||||||||||||||||||||||
Adoption of ASU 2016-09 (Note 12) | – | – | – | – | – | – | 65 | – | 65 | |||||||||||||||||||||||||||
Other comprehensive income | – | – | – | – | – | 347 | – | 334 | 681 | |||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 346 | 1,189 | 1,535 | |||||||||||||||||||||||||||
Balance at September 30, 2017 | 20,681 | $ | 207 | 115 | $ | (127 | ) | $ | 16,234 | $ | (2,060 | ) | $ | 6,246 | $ | 4,827 | $ | 25,327 | ||||||||||||||||||
Common Stock | Treasury Stock | Additional | Accumulated Other | Non- | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Loss | Retained Earnings | Controlling Interest | Total Equity | ||||||||||||||||||||||||||||
Balance at January 1, 2020 | 21,102 | $ | 211 | 2 | $ | (2 | ) | $ | 16,511 | $ | (3,616 | ) | $ | 5,851 | $ | 12,406 | $ | 31,361 | ||||||||||||||||||
| Exercise of stock options | 6 | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||
Share-based compensation | – | – | – | ��� | 25 | – | – | – | 25 | |||||||||||||||||||||||||||
Other comprehensive (loss) | – | – | – | – | – | (1,456 | ) | – | (2,444 | ) | (3,900 | ) | ||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 296 | 626 | 922 | |||||||||||||||||||||||||||
Balance at March 31, 2020 | 21,108 | $ | 211 | 2 | $ | (2 | ) | $ | 16,536 | $ | (5,072 | ) | $ | 6,147 | $ | 10,588 | $ | 28,408 | ||||||||||||||||||
| Share-based compensation | – | – | – | – | 70 | – | – | – | 70 | |||||||||||||||||||||||||||
| Other comprehensive (loss) | – | – | – | – | – | (34 | ) | – | (45 | ) | (79 | ) | ||||||||||||||||||||||||
| Net income (loss) | – | – | – | – | – | – | (103 | ) | 1,408 | 1,305 | ||||||||||||||||||||||||||
| Balance at June 30, 2020 | 21,108 | $ | 211 | 2 | $ | (2 | ) | $ | 16,606 | $ | (5,106 | ) | $ | 6,044 | $ | 11,951 | $ | 29,704 | ||||||||||||||||||
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SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Equity
(unaudited continued)
(In thousands)
Common Stock | Treasury Stock | Additional | Accumulated Other | Non- | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Loss | Retained Earnings | Controlling Interest | Total Equity | ||||||||||||||||||||||||||||
Balance at January 1, 2019 | 20,785 | $ | 208 | 8 | $ | (8 | ) | $ | 16,304 | $ | (3,638 | ) | $ | 3,432 | $ | 8,476 | $ | 24,774 | ||||||||||||||||||
Share-based compensation | – | – | – | – | 49 | – | – | – | 49 | |||||||||||||||||||||||||||
Other comprehensive income (loss) | – | – | – | – | – | 98 | (18 | ) | 28 | 108 | ||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 616 | 421 | 1,037 | |||||||||||||||||||||||||||
Balance at March 31, 2019 | 20,785 | $ | 208 | 8 | $ | (8 | ) | $ | 16,353 | $ | (3,540 | ) | $ | 4,030 | $ | 8,925 | $ | 25,968 | ||||||||||||||||||
| Share-based compensation | – | – | – | – | 51 | – | – | – | 51 | |||||||||||||||||||||||||||
| Exercise of stock options | 65 | 1 | (6 | ) | (7 | ) | 6 | – | – | – | – | |||||||||||||||||||||||||
| Other comprehensive income (loss) | – | – | – | – | – | (16 | ) | – | 75 | 59 | ||||||||||||||||||||||||||
| Net income | – | – | – | – | – | – | 1,523 | 1,284 | 2,807 | |||||||||||||||||||||||||||
| Balance at June 30, 2019 | 20,850 | $ | 209 | 2 | $ | (15 | ) | $ | 16,410 | $ | (3,556 | ) | $ | 5,553 | $ | 10,284 | $ | 28,885 | ||||||||||||||||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Nine Months Ended September 30, | Six Months Ended June 30, | |||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||
Operating activities | ||||||||||||||||
Net income | $ | 1,535 | $ | 1,248 | $ | 2,227 | $ | 3,844 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||||||||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||||||||||
Depreciation and amortization | 1,526 | 1,459 | 1,079 | 1,038 | ||||||||||||
| Non-cash lease expense | 1,562 | 1,071 | ||||||||||||||
Bad debt expense, net of recoveries | 93 | 317 | 64 | (229 | ) | |||||||||||
Share based compensation | 178 | 271 | ||||||||||||||
| Share-based compensation | 95 | 100 | ||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||
Accounts receivable | (3,250 | ) | (4,643 | ) | 6,404 | (11,109 | ) | |||||||||
Prepaid expenses and other assets | (583 | ) | (105 | ) | 619 | (1,112 | ) | |||||||||
Accounts payable | 2,234 | 1,000 | (2,334 | ) | 1,654 | |||||||||||
| Operating lease liabilities | (1,562 | ) | (1,071 | ) | ||||||||||||
Accrued expenses, other current liabilities and customer incentives and deposits | 4,679 | 2,548 | 618 | 4,632 | ||||||||||||
Net cash provided by operating activities | 6,412 | 2,095 | ||||||||||||||
| Net cash provided by (used in) operating activities | 8,772 | (1,182 | ) | |||||||||||||
Investing activities | ||||||||||||||||
Purchases of property and equipment and capitalized software | (1,046 | ) | (1,153 | ) | (786 | ) | (935 | ) | ||||||||
Purchases of Brazil subsidiary, net of cash | – | (306 | ) | |||||||||||||
Net cash used in investing activities | (1,046 | ) | (1,459 | ) | (786 | ) | (935 | ) | ||||||||
Financing activities | ||||||||||||||||
Net (payments) borrowing on lines of credit | (2,953 | ) | 2,015 | |||||||||||||
Proceeds from stock options exercised | 8 | 22 | ||||||||||||||
Proceeds from local investors in Brazil | – | 102 | ||||||||||||||
| Net (payments)/borrowings on lines of credit | (792 | ) | 12,338 | |||||||||||||
| Payoff of bank line of credit | - | (9,598 | ) | |||||||||||||
Payments on term debt | (543 | ) | (21 | ) | - | (74 | ) | |||||||||
Payments on capital lease obligations | (15 | ) | – | - | (56 | ) | ||||||||||
Purchase of treasury shares | (121 | ) | (12 | ) | ||||||||||||
Distribution to non-controlling investors | (2,101 | ) | (286 | ) | ||||||||||||
Net cash (used in) provided by financing activities | (5,725 | ) | 1,820 | (792 | ) | 2,610 | ||||||||||
Effect of foreign exchange rate changes on cash | 697 | (672 | ) | (3,976 | ) | 222 | ||||||||||
Net change in cash and cash equivalents | 338 | 1,784 | 3,218 | 715 | ||||||||||||
Cash and cash equivalents at beginning of year | 7,324 | 5,718 | 10,458 | 7,111 | ||||||||||||
Cash and cash equivalents at end of period | $ | 7,662 | $ | 7,502 | $ | 13,676 | $ | 7,826 | ||||||||
Supplemental disclosure of cash flows information | ||||||||||||||||
Supplemental disclosure of cash flows information: | ||||||||||||||||
Interest paid | $ | 216 | $ | 108 | $ | 413 | $ | 375 | ||||||||
Income taxes paid | $ | 247 | $ | 126 | ||||||||||||
Increase in deferred tax asset due to adoption of ASU 2016-09 (Note 12) | $ | 65 | $ | - | ||||||||||||
Income taxes paid | $ | 36 | $ | 541 | ||||||||||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. | Basis of Presentation |
The unaudited, interim condensed consolidated financial statements of SPAR Group, Inc., a Delaware corporation ("SGRP"), and its subsidiaries (together with SGRP, collectively, the "Company" or the "SPAR Group"),Company, accompanying this Quarterly Report on Form 10-Q10-Q/A for the thirdsecond quarter ended SeptemberJune 30, 20172020 (this "Quarterly Report"), have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. The consolidated balance sheet as of December 31, 2016,2019, has been compiledprepared from the Company's audited consolidated balance sheet as of such date. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation have been included in these interim financial statements. However, these interim financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto for the Company as contained in the SGRP's Annual Report on Form 10-K for the year ended December 31, 2016,2019, as filed with the Securities and Exchange Commission (the "SEC") on April 17, 201714, 2020 (the "2016 Annual"Annual Report"), and SGRP's Proxy Statement for its 2017 Annual Meeting of Stockholders as filed with the SEC on April 28, 2017 (the "2017 Proxy Statement"). Particular attention should be given to Items 1 and 1A of the 2016 Annual Report respecting the Company's Business and Risk Factors, respectively and the following parts of SGRP's 2017 Proxy Statement: (i) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, (ii) CORPORATE GOVERNANCE, (iii) EXECUTIVE COMPENSATION, DIRECTORS AND OTHER INFORMATION and (iv) EXECUTIVE COMPENSATION, EQUITY AWARDS AND OPTIONS.. The Company's results of operations for the interim period are not necessarily indicative of its operating results for the entire year.
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In connection with the preparation of the Company's consolidated financial statements Except for the three months ended March 31, 2017,change noted below, the Company identified an error inhas consistently applied the recognition of accumulated other comprehensive loss both in the equity section of the consolidated balance sheet, consolidated statement of equity and the comprehensive loss portion of the consolidated statement of income and comprehensive loss. In accordance with Staff Accounting Bulletin ("SAB") No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the error and determined that the related impact was not materialaccounting policies to the results of operations or financial position for any prior annual or interim period. The correction of this error required reclassification of $1.6 million between comprehensive loss attributable to the Company and comprehensive loss attributable to non-controlling interest for the year ended December 31, 2016. Accordingly, the Company corrected the consolidated balance sheet and consolidated statement of income and comprehensive loss as of and for the year ended December 31, 2016, and will correct these errors for all prior periods presented by revising the appropriatein these condensed consolidated financial statements. The impact to the consolidated balance sheet as of September 30, 2016, and December 31, 2016, and the consolidated statements of income and comprehensive loss for the three and nine months ended September 30, 2016, and the year ended December 31, 2016, is as follows:
Consolidated Balance Sheets (in thousands):
As of September 30, 2016 | As of December 31, 2016 | |||||||||||||||||||||||
As Reported | Adjusted | As Revised | As Reported | Adjusted | As Revised | |||||||||||||||||||
Accumulated other comprehensive loss | $ | (3,364 | ) | $ | 1,373 | $ | (1,991 | ) | $ | (3,995 | ) | $ | 1,588 | $ | (2,407 | ) | ||||||||
Total SPAR Group, Inc. equity | $ | 18,572 | $ | 1,373 | $ | 19,945 | $ | 18,089 | $ | 1,588 | $ | 19,677 | ||||||||||||
Non-controlling interest | $ | 6,574 | $ | (1,373 | ) | $ | 5,201 | $ | 6,993 | $ | (1,588 | ) | $ | 5,405 | ||||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Consolidated Statement of Income and Comprehensive Loss (in thousands):
Three months ended September 30, 2016 | Nine months ended September 30, 2016 | |||||||||||||||||||||||
As Reported | Adjusted | As Revised | As Reported | Adjusted | As Revised | |||||||||||||||||||
Comprehensive income attributable to non-controlling interest | $ | (546 | ) | $ | (105 | ) | $ | (651 | ) | $ | (1,164 | ) | $ | 357 | $ | (807 | ) | |||||||
Comprehensive loss attributable to SPAR Group, Inc. | $ | 148 | $ | (105 | ) | $ | 43 | $ | (411 | ) | $ | 357 | $ | (54 | ) | |||||||||
Twelve months ended December 31, 2016 | ||||||||||||
As Reported | Adjusted | As Revised | ||||||||||
Comprehensive income attributable to non-controlling interest | $ | (1,583 | ) | $ | 572 | $ | (1,011 | ) | ||||
Comprehensive loss attributable to SPAR Group, Inc. | $ | (953 | ) | $ | 572 | $ | (381 | ) | ||||
| Business and Organization |
The Company is a supplier of merchandising and other marketing services throughout the United States and internationally. The Company provides merchandising and other marketing services to manufacturers, distributors and retailers worldwide, primarily in mass merchandiser, office supply, grocery, drug, dollar, independent, convenience, toy, home improvement and electronics stores, as well as providing furniture and other product assembly services, audit services, in-store events, technology services and marketing research.
Merchandising services primarily consist of regularly scheduled, special project and other product services provided at the store level, and the Company may be engaged by either the retailer or the manufacturer. Those services may include restocking and adding new products, removing spoiled or outdated products, resetting categories in accordance with client or store schematics, confirming and replacing shelf tags, setting new sale or promotional product displays and advertising, replenishing kiosks, providing in-store event staffing and providing assembly services in stores, homes and offices. Other merchandising services include whole store or departmental product sets or resets, including new store openings, new product launches and in-store demonstrations, audit services, special seasonal or promotional merchandising, focused product support and product recalls. The Company also provides technology services and marketing research services.
As of SeptemberJune 30, 2017,2020, the Company operates in 10 countries and divides its operations into two reportable segments: its Domestic Division, which has provided services in the United States of America since certain of its predecessors were formed in 1979, and its International Division, which began operations in May 2001 and provides similar merchandising, marketing, audit and in-store event staffing services in Australia, Brazil, Canada, China, India, Japan, Mexico, South Africa and Turkey.
Novel Coronavirus (COVID-19) Outbreak
In March 2020, the World Health Organization declared the novel strain of Coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce.
In the USA, many of our clients have been affected by business closure and stay at home orders, which has hampered our ability to perform in-store services since March 2020. As of the date of this filing, many of our Company subsidiaries globally have been impacted by temporary retail closures or reduced in-store hours, although most of our customer’s locations remain open to provide essential products. New store openings and remodels with the Company's assistance are particularly susceptible to such external factors and are being delayed by many of the Company's clients due to the effects of the Novel Coronavirus. The Company has initiated mitigation efforts and is monitoring the situation on a country-by-country basis. The Company has also implemented several cost savings measures which include a reduction in the use of contracted workers, furloughing employees, reducing hours and a reduction in other corporate and non-critical expenses.
Due in part to the uncertainty stemming from the COVID-19 pandemic as described above the Company experienced a decrease in market capitalization near the end of the first quarter that has continued into the subsequent period. As a result of this condition, the Company reviewed for any triggering event and the need to perform quantitative interim impairment testing over the Company’s goodwill assets as of June 30, 2020. The Company concluded that a triggering event did not occur based on qualitative factors assessed as part of the annual impairment test previously performed, such as actual results to date in comparison to previous forecasts and assumptions based on current projections, including projected revenue, projected operational profit, terminal growth rates, and the cost of capital, and accordingly did not record any asset impairment charges on its goodwill. In performing its assessment, the Company believes it has made reasonable accounting estimates based on the facts and circumstances that were available as of the reporting date considering the developing situation resulting from the COVID-19 pandemic. If actual results are not consistent with the assumptions and judgments used, there may be exposure to future impairment losses that could be material to the Company’s results of operations.
Given the daily evolution of the COVID-19 outbreak and the global responses to curb its spread, the Company cannot reasonably estimate the length or severity of this pandemic, however we currently anticipate a material adverse impact on our consolidated financial position, results of operations, and cash flows in fiscal 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. We are analyzing the various aspects of the CARES Act to determine the impact specific provisions may have on us.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
| Earnings Per Share |
The following table sets forth the computations of basic and diluted net income per share (in thousands, except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Numerator: | ||||||||||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 246 | $ | (58 | ) | $ | 346 | $ | 84 | |||||||
Denominator: | ||||||||||||||||
Weighted average shares used in basic net income per share calculation | 20,602 | 20,607 | 20,633 | 20,580 | ||||||||||||
Weighted average shares used in diluted net income per share calculation | 21,320 | 20,607 | 21,331 | 21,299 | ||||||||||||
Basic and diluted net income per common share | $ | 0.01 | $ | – | $ | 0.02 | $ | – | ||||||||
Three Months End | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Numerator: | ||||||||||||||||
Net income attributable to SPAR Group, Inc. | $ | (103 | ) | $ | 1,523 | $ | 193 | $ | 2,139 | |||||||
Denominator: | ||||||||||||||||
Shares used in basic net income per share calculation | 21,108 | 20,816 | 21,107 | 20,796 | ||||||||||||
Effect of diluted securities: | ||||||||||||||||
Stock options and unvested restricted shares | 17 | 288 | 50 | 284 | ||||||||||||
Shares used in diluted net income per share calculations | 21,125 | 21,104 | 21,157 | 21,080 | ||||||||||||
Basic net income per common share: | $ | (0.00 | ) | $ | 0.07 | $ | 0.01 | $ | 0.10 | |||||||
Diluted net income per common share: | $ | (0.00 | ) | $ | 0.07 | $ | 0.01 | $ | 0.10 | |||||||
4. | Credit Facilities and Other Debt |
5.Domestic Credit Facilities
SterlingPNC Credit Facility:Facility
SGRPIn January 2018, the Company repaid and certain ofreplaced its UScredit facility with Sterling Bank with a secured revolving credit facility in the United States and Canadian subsidiaries (namely SPAR Marketing Force, Inc., SPAR Assembly & Installation, Inc. (F/K/A SPAR National Assembly Services, Inc.), SPAR Group International, Inc., SPAR Trademarks, Inc., SPAR Acquisition, Inc., SPAR Canada Inc.), and SPAR Canada Company ("SCC") (together with SGRP and SCC, each a "Borrower") are parties to a Revolving Loan and Security Agreement dated July 6, 2010, as amended in June 2011, July 2012, January 2013, July 2013, October 2013, June 2014, September 2015, December 2016, March 2017, April 2017, June 2017 and September 2017 (as amended the "Sterling Loan Agreement"), with Sterling National Bank (the "Lender"), and their Secured Revolving Loan Note in the amended maximum principal amounts of $9.0 million (see below) to the Lender (as amended by all loan amendments, the "Sterling Note"), to document and govern their credit facility with the Lender (including such agreement and note, the "Sterling"PNC Credit Facility"). The Sterling Credit Facility currently is scheduled to expire and the Borrowers' loans thereunder will become due on January 15, 2018. with PNC Bank, National Association.
The Sterling Loan Agreement currently requires the Borrowers to pay interest on the loans thereunder equal to the Agent's floating Prime Rate (as defined in such agreement) plus one half of one percent (1/2%) per annum, and a fee on the maximum unused line thereunder equal to one-eighth of one percent (0.125%) per annum.
Revolving loans of up to $9.0 million are available to the Borrowers under the Sterling Credit Facility based upon the borrowing base formula defined in the Sterling Loan Agreement (principally 85% of "eligible" US and Canadian accounts receivable less certain reserves). The Sterling Credit Facility is secured by substantially all of the assets of the Borrowers (other than SGRP's non-Canadian foreign subsidiaries, certain designated domestic subsidiaries, and their respective equity and assets).
TheAn amendment to the Sterling Loan AgreementPNC Credit Facility dated as of December 22, 2016,July 3, 2018, among other things, increased the maximum principal amount of the Secured Revolving Loan NoteLoans to $9.0 million until January 31, 2017,$9.5 million.
On April 10, 2019, the Company repaid and increasedreplaced its credit facility with PNC Bank, National Association with a new secured revolving credit facility in the interest rate to Prime plus one half of one percent. The amendment to the Sterling Loan Agreement dated as of March 3, 2017, among other things, extended the Secured Revolving Loan Note of $9.0 million until July 6, 2017,United States and the amendment dated as of April 13, 2017, among other things, provided for a waiver of the Company's default on its Fixed Charge RatioCanada (the "NM Credit Facility") with North Mill Capital, LLC ("FCR"NM") for the year ended December 31, 2016, and provided for an adjustment to its FCR for 2017. The June 27, 2017, amendment to the Sterling Loan Agreement extended the termination date to September 6, 2017. The September 6, 2017, amendment to the Sterling Loan Agreement extended the termination date to January 15, 2018..
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
North Mill Capital Credit Facility
On April 10, 2019, the Company repaid and replaced its 2018 credit facility with PNC Bank, National Association ("PNC"), with the NM Credit Facility with NM.
In order to obtain, document and govern the NM Credit Facility: SGRP and certain of its direct and indirect subsidiaries in the United States and Canada, namely SPAR Marketing Force ("SMF"), Inc., and SPAR Canada Company ("SCC") (each, an "NM Borrower" and collectively, the "NM Borrowers"), and SPAR Canada, Inc., SPAR Acquisition, Inc., SPAR Assembly and Installation, Inc., and SPAR Trademarks, Inc. (together with SGRP, each a "NM Guarantor" and collectively, the "NM Guarantors"), entered into eighteen (18) month individual Loan and Security Agreements with NM dated as of April 10, 2019 (the "NM Loan Agreements"), which governs the obligations of the NM Loan Parties to NM and secures them with pledges of substantially all of the assets of the NM Loan Parties (other than SGRP's foreign subsidiaries, certain designated domestic subsidiaries, and their respective equity and assets); the SMF Borrower issued its $12.5 million Revolving Credit Master Promissory Note to NM dated April 10, 2019, and the SCC Borrower issued its $2.5 million Revolving Credit Master Promissory Note to NM dated April 10, 2019 (the "NM Notes"), which evidences the NM Borrowers' loans and other obligations to NM; the NM Guarantors entered into a Guaranty Agreement with NM dated as of April 10, 2019 (the "NM Guaranty"), which guaranties the NM Borrowers' loans and other obligations to NM. The Sterling Loan AgreementNM Credit Facility, was subsequently extended until October 2021.
On April 10, 2019, the Company drew down an initial advance under the NM Credit Facility of approximately $9.8 million, which was used to repay the Company's existing credit facility with PNC.
The NM Note currently requires the NM Borrowers to maintain certain financial covenants, including maintenancepay interest on the loans thereunder equal to (A) Prime Rate designated by the Borrowers ofWells Fargo Bank, plus (B) one hundred twenty five basis points (1.25%) or a minimum combined tangible net worth of $7.4 million and minimum consolidated tangible net worth of $10.0 million, with those figures increasing by at least 50% of combined and consolidated net profit each year, respectively.6.75%. In addition, the BorrowersCompany is paying a fee to NM of $180,000 payable at $10,000 per month over the term of the agreement. The Company utilized a broker to assist in this financing and has paid a fee of $120,000 for their services. On June 30, 2020, the aggregate interest rate under that formula was 6.75% per annum, and the Company must not exceedoutstanding loan balance was $6.6 million. Outstanding amounts are classified as short-term debt.
Revolving loans are available to the Borrowers under the NM Credit Facility based upon the borrowing base formula defined in the NM Loan Agreement (principally 85% of "eligible" accounts receivable less certain reserves and 60% of eligible unbilled accounts receivable at a maximum combined indebtedness to tangible net worth ratiolimit of 3.0 to 1.0,$4.5 million).
The NM Credit Facility contains certain financial and other restrictive covenants and also limits certain expenditures by the Borrowers must maintainNM Loan Parties, including, maintaining a minimum fixed charge coverage ratio of 1.5 to 1.0. Also,positive trailing EBITDA for each Borrower and limits on capital expenditures for the Borrowers cannot exceed $2.0 million during any fiscal year, and on a consolidated basis, the Company's year-end operations may not result in a loss or deficit, as determined in accordance with GAAP.other investments. The Company was in compliance with its financialof such covenants at Septemberas of June 30, 2017.2020.
Fifth Third Credit Facility
One of the Company's consolidated subsidiaries, Resource Plus of North Florida ("Resource Plus"), is a party to a revolving line of credit facility (the "Fifth Third Credit Facility") from Fifth Third Bank for $3.5 million, which was scheduled to become due on April 23, 2020. Effective April 16, 2020, the term of the Fifth Third Credit Facility was extended and is currently scheduled to become due on June 16, 2022.
Revolving loans of up to $3.5 million are available to Resource Plus under the Fifth Third Credit Facility based upon the borrowing base formula defined in the agreement (principally 80% of "eligible" accounts receivable less certain reserves). As of June 30, 2020, there was a balance of $700,000. The Fifth Third Credit Facility is secured by substantially all assets of Resource Plus.
The Fifth Third Credit Facility currently requires Resource Plus to pay interest on the loans thereunder equal to (A) the Daily LIBOR Rate (as defined in the agreement) per annum, plus (B) two hundred fifty basis points (2.50%). On June 30, 2020, the aggregate interest rate under that formula was 3.60% per annum.
Other Debt
Effective with the closing of the Resource Plus acquisition, the Company entered into promissory notes with the sellers totaling $2.3 million. The notes are payable in annual installments at various amounts due on December 31st of each year starting with December 31, 2018 and continuing through December 31, 2023. As such these notes are classified as both short term and long term for the appropriate amounts. The total balance owed at June 30, 2020 was approximately $1.6 million.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
International Credit Facilities:
SPARFACTS Australia Pty. Ltd. has a secured line of credit facility with Oxford Funding Pty Ltd.National Australia Bank, effective October 31, 2017, for $1.2 million$800,000 (Australian) or approximately $940,000550,000 USD (based upon the exchange rate at SeptemberJune 30, 2017)2020). The facility provides for borrowing based upon a formula, as defined in the agreement (principally 80% of eligible accounts receivable less certain deductions). The agreement expired on October 31, 2012, but was extended from month to month at the Company’s request. A new credit facility was signed in July 2017outstanding balance with National Australia Bank Limited and went into effect on October 31, 2017. The outstanding balance with Oxford as of SeptemberJune 30, 20172020 was $334,000 USD.$21,000 (Australian) or $15,000 USD and is due on demand.
On March 7, 2011, the Japanese subsidiary,October 5, 2018, SPAR FM Japan, Inc., a wholly owned subsidiary,Brazil secured a term loanline of credit facility with Mizuho Bank in the amount of 20.0 million Yen (Japanese),Banco Santander for approximately 381,000 Brazilian Real or approximately $178,000 USD. The loan is payable in monthly installments of 238,000 Yen or approximately $2,100 USD at an interest rate of 0.1% per annum with a maturity date of February 28, 2018. The outstanding balance at September 30, 2017, was approximately 1.2 million Yen or $11,00070,000 USD (based upon the exchange rate at June 30, 2020). The outstanding balance as of June 30, 2020 was approximately 13,000 Brazilian Real or approximately $2,000 USD. This note is due September 30, 2017), all of which is now classified as short term.2020.
On November 29, 2016, SPAR Brazil establishedTodopromo has secured a line of credit facility with Itau BankSteel Factoring for 1.55.0 million Brazilian RealMexican Pesos or approximately $475,000217,000 USD (based upon the exchange rate at SeptemberJune 30, 2017)2020). The revolving line of credit was secured on December 13, 2019, and expires November 29, 2017, and the currentDecember 2020. The fixed interest rate for the Steel Factoring facility is 2.08% per month.18%, as of June 30, 2020. The outstanding balance at Septemberas of June 30, 20172020 was zero.
On December 26, 2016, SPAR Brazil secured a term loan with Bradesco Bank for 2.0$5,000,000 million Brazilian RealPesos or approximately $633,000217,000 USD (based upon the exchange rate at SeptemberJune 30, 2017)2020). The term loan is payable in monthly installments
Effective February 4, 2020, SPAR Todopromo established a line of 184,000 Brazilian Realcredit facility with Ve Por Mas for 5.2 million Mexican Pesos or approximately $58,000$226,000 USD at an annual interest rate of 17.3% with a maturity date of December 15, 2017. As of September 30, 2017, 497,000 Brazilian Real or $157,000 USD was outstanding (based upon the exchange rate at SeptemberJune 30, 2017)2020). The line expires on February 4, 2021. The variable interest rate is TIIE plus 3.0% resulting in a rate of 9.1% as of June 30, 2020. The outstanding balance was 4.7 million Mexican Pesos or approximately $205,000 USD (based upon the exchange rate at June 30, 2020).
SPAR Todopromo has secured a line of credit facility with BBVA Bancomer Bank for 5.0 million Mexican Pesos or approximately $274,000$217,000 USD (based upon the exchange rate at SeptemberJune 30, 2017)2020). The revolving line of credit was secured on March 15, 2016, and expires March 2018.expired April 2020 but has been extended to May 2021. The variable interest rate is TIIE (Interbank Interest Rate) +4%, which resultedplus 5.2% resulting in an annual interesta rate of 11.4% at the end10.9% as of September 2017. TheJune 30, 2020. There was no outstanding balance at Septemberas of June 30, 2017 was zero.2020.
The Company had scheduled future maturities of loans as of September 30, 2017, approximately as follows (dollars in thousands):
Interest Rate as of September 30, 2017 | 2017 | 2018 | ||||||||||
USA - Sterling National Bank | 4.8 | % | $ | – | 5,720 | |||||||
Japan - Mizuho Bank | 0.1 | % | 7 | $ | 4 | |||||||
Australia - Oxford Funding Pty Ltd. | 6.4 | % | 334 | – | ||||||||
Brazil – Bradesco Bank | 17.3 | % | 157 | – | ||||||||
Total | $ | 498 | $ | 5,724 | ||||||||
Interest Rate | ||||||||||||||||||||||||||||
as of | ||||||||||||||||||||||||||||
June 30, 2020 | 2020 | 2021 | 2022 | 2023 | 2024 | 2025 | ||||||||||||||||||||||
| Australia - National Australia Bank | 6.56 | % | 15 | - | - | - | - | - | ||||||||||||||||||||
Brazil - Santander | 16.52 | % | 2 | - | - | - | - | - | ||||||||||||||||||||
| Mexico - Steel Factoring | 18.00 | % | 217 | - | - | - | - | - | ||||||||||||||||||||
| Mexico - Ve Por Mas | 9.10 | % | 205 | - | - | - | - | - | ||||||||||||||||||||
| Mexico - Bancomer Bank | 10.90 | % | - | - | - | - | - | - | ||||||||||||||||||||
| USA – North Mill Capital | 6.75 | % | 6,631 | - | - | - | - | - | ||||||||||||||||||||
| USA - Fifth Third Bank | 3.60 | % | 700 | - | - | - | - | - | ||||||||||||||||||||
| USA – Resource Plus Seller Notes | 1.85 | % | 333 | 300 | 300 | 700 | - | - | ||||||||||||||||||||
Total | $ | 8,103 | $ | 300 | $ | 300 | $ | 700 | $ | - | $ | – | ||||||||||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Summary of Unused Company Credit and Other Debt Facilities (in thousands):
September 30, 2017 | December 31, 2016 | June 30, | December 31, | |||||||||||||
Unused Availability: | ||||||||||||||||
United States | $ | 3,280 | $ | 500 | ||||||||||||
2020 | 2019 | |||||||||||||||
Unused Availability: | ||||||||||||||||
United States / Canada | $ | 8,169 | $ | 3,694 | ||||||||||||
Australia | 606 | 688 | 536 | 423 | ||||||||||||
Mexico | 274 | 241 | 237 | - | ||||||||||||
Brazil | 475 | – | 68 | 49 | ||||||||||||
Total Unused Availability | $ | 4,635 | $ | 1,429 | $ | 9,010 | $ | 4,166 | ||||||||
Management believes that based upon the continuation of the Company'sCompany's existing credit facilities, projected results of operations, vendor payment requirements and other financing available to the Company (including amounts due to affiliates), sources of cash availability should be manageable and sufficient to support ongoing operations over the next year. However, delays in collection of receivables due from any of the Company's major clients, or a significant reduction in business from such clients and possible litigation expenses could have a material adverse effect on the Company's cash resources and its ongoing ability to fund operations. See Note 9 - Commitments and Contingencies: Legal Mattersand Potential Adverse Effects of the SBS Litigation, below.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
| Related-Party Transactions |
SGRP'sSGRP's policy respecting approval of transactions with related persons, promoters and control persons is contained in the SPAR Group Code of Ethical Conduct for its Directors, Senior Executives, Officers, Employees, Consultants and Employeesother Representatives Amended and Restated (as of) August 13, 2015March 15, 2018 (the "Ethics Code""Ethics Code"). The Ethics Code is intended to promote and reward honest, ethical, respectful and professional conduct by each director, executive, officer, employee, consultant and other representative of any of SGRP and its subsidiaries (together with SGRP, the "Company") and each other Covered Person (as defined in the Ethics CodeCode) in his or her position with the Company anywhere in the world, including (among other things) serving each customer, dealing with each vendor and treating each other with integrity and respect, and behaving honestly, ethically and professionally with each customer, each vendor, each other and the Company. Article II of the Ethics Code specifically prohibits various forms of self-dealing (including dealing with relatives) and collusion and Article V of the Ethics Code generally prohibits each "Covered Person" (including SGRP's officers and directors) from using or disclosing the Confidential Information of the Company or any of its customers or vendors, seeking or accepting anything of value from any competitor, customer, vendor, or other person relating to doing business with the Company, or engaging in any business activity that conflicts with his or her duties to the Company, and directs each "Covered Person" to avoid any activity or interest that is inconsistent with the best interests of the SPAR Group, in each case except for any "Approved Activity" (as such terms are defined in the Ethics Code). Examples of violations include (among other things) having any ownership interest in, acting as a director or officer of or otherwise personally benefiting from business with any competitor, customer or vendor of the Company other than pursuant to any Approved Activity. Approved Activities include (among other things) any contract with an affiliated person (each an "Approved"Approved Affiliate Contract"Contract") or anything else disclosed to and approved by SGRP's Board of Directors (the "Board""Board"), its Governance Committee or its Audit Committee, as the case may be, as well as the ownership, board, executive and other positions held in and services and other contributions to affiliates of SGRP and its subsidiaries by certain directors, officers or employees of SGRP, any of its subsidiaries or any of their respective family members. The Company's senior management is generally responsible for monitoring compliance with the Ethics Code and establishing and maintaining compliance systems, including those related to the oversight and approval of conflicting relationships and transactions, subject to the review and oversight of SGRP's Governance Committee as provided in clause IV.11 of the Governance Committee's Charter, and SGRP's Audit Committee as provided in clause I.2(l) of the Audit Committee's Charter. The Governance Committee and Audit Committee each consist solely of independent outside directors.directors (see Domestic Related Party Services, International Related Party Services, SBS Bankruptcy, Settlement and March 2020 Claim, Summary of Certain Related Party Transactions, Infotech Litigation and Settlement, Affinity Insurance, and Other Related Party Transactions and Arrangements, below).
SGRP'sSGRP's Audit Committee has the specific duty and responsibility to review and approve the overall fairness and terms of all material related-party transactions. The Audit Committee receives affiliate contracts and amendments thereto for its review and approval (to the extent approval is given), and these contracts are periodically (often annually) again reviewed, in accordance with the Audit Committee Charter, the Ethics Code, the rules of the Nasdaq Stock Market Inc.LLC ("Nasdaq"Nasdaq"), and other applicable law to ensure that the overall economic and other terms will be (or continue to be) no less favorable to the Company than would be the case in an arms-length contract with an unrelated provider of similar services (i.e., its overall fairness to the Company, including pricing, payments to related parties, and the ability to provide services at comparable performance levels). The Audit Committee periodically reviews all related party relationships and transactions described below.
Domestic Related Party Services:
SPAR Business Services, Inc. ("SBS"), SPAR Administrative Services, Inc. ("SAS"), and SPAR InfoTech, Inc. ("Infotech"), have provided services from time to time to the Company and are related parties and affiliates of SGRP, but are not under the control or part of the consolidated Company. SBS is an affiliate because it is owned by SBS LLC which in turn is beneficially owned by Robert G. Brown. SAS is an affiliate because it is owned by William H. Bartels and certain relatives of Robert G. Brown or entities controlled by them (each of whom are considered affiliates of the Company for related party purposes). Infotech is an affiliate because it is owned principally by Robert G. Brown. Mr. Robert G. Brown and Mr. Bartels (the "Majority Stockholders") (see below), are members of a 13D control group and founders of SGRP, Mr. Robert G. Brown was Chairman and an officer and director of SGRP through May 3, 2018 (when he retired), and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels. Mr. Bartels was and continues to be Vice Chairman and a director of SGRP, but retired as an employee of SGRP as of January 1, 2020 (seeBartels' Retirement and Director Compensation, below). Mr. Robert G. Brown and Mr. Bartels also have been and are stockholders, directors and executive officers of various other affiliates of SGRP. See Note 8 to the Company's Consolidated Financial Statements - Commitments and Contingencies – Legal Matters, and SBS Bankruptcy, Settlement and March 2020 Claimand Infotech Litigation and Settlement, below.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
In addition, in order to (among other things) assist the Board and the Audit Committee in connection with an overall review of the Company's related party transactions and certain worker classification-related litigation matters, in April 2017 the Board formed a special subcommittee of the Audit Committee (the "Special Subcommittee") to (among other things) review the structure, documentation, fairness, conflicts, fidelity, appropriateness, and practices respecting each of the relationships and transactions discussed in this Note 6 (including those described in this Note under Domestic Related Party Services, below). The Special Subcommittee commenced that review in the first quarter of 2017 with the assistance of special auditors and counsel and is currently reviewing the preliminary results of such review, including the feedback received from its special auditors and counsel. The Company is currently unable to predict the remaining duration and final results of this review by the Special Subcommittee. See Note 9 to the Company's Consolidated Financial Statements – Commitments and Contingencies – Legal Matters, below.
Domestic Related Party Services:
SPAR Business Services, Inc. ("SBS"), SPAR Administrative Services, Inc. ("SAS"), and SPAR InfoTech, Inc. ("SIT"), are affiliates of SGRP but are not under the control or part of the consolidated Company. Mr. Robert G. Brown, a Director, Chairman and a major stockholder of SGRP, and Mr. William H. Bartels, a Director, Vice Chairman and a major stockholder of SGRP, are the sole stockholders of SBS. Mr. Brown is the sole stockholder of SIT. Mr. Brown is a director and officer of SBS and SIT. Mr. Bartels is a director and officer of SAS. The stockholders of SAS were Mr. Bartels and parties related to Mr. Brown, each of whom is considered an affiliate of the Company for related party purposes because of their family relationships with Mr. Brown.
The Company executes its domestic field services through the services it provides to its domestic clients primarily through independentof field merchandising, auditing, assembly and other field personnel (each a "Field Specialist""Field Specialist"), substantially all of whom are provided to the Company and engaged by SBS,independent third parties and administers thoselocated, scheduled, deployed and administered domestically through the services throughof local, regional, district and regional administrators,other personnel (each a "Field Administrator"), and substantially all of whomthe Field Administrators are providedin turn are employed by SAS. The Company paid $19.6 million and $15.8 million duringother independent third parties.
Due to (among other things) the nine months ended September 30, 2017 andadverse determination in 2016 respectively, to SBS for its provision as needed of approximately 6,400 of SBS's available Field Specialists in the U.S.A. (which amounted to approximately 75% and 78% of the Company's total domestic Field Specialist expense for the nine months ended September 30, 2017 and 2016, respectively). The Company paid $3.2 and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively, to SAS for its provision of its 60 and 61 full-time regional, district and office administrators as of September 30, 2017 and 2016, respectively (which amounted to approximately 90% and 92% of the Company's total domestic field administrative service cost for the nine months ended September 30, 2017 and 2016, respectively). In addition to these field service and administration expenses, SAS also incurs other administrative expenses related to benefit and employment tax expenses of SAS and payroll processing, legal and other administrative expenses and SBS incurs expenses for processing vendor payments, legal defense and other administrative expenses (but those expenses are only reimbursed by SGRP to the extent approved by the Company as described below). The total cost recorded by the Company for the expenses of SBS and SAS in providing their services to the Company, including the "Cost Plus Fee" arrangementClothier case (as defined and discussed below) and other expenses paid directly by the Company on behalf of and invoiced to SBS and SAS, was $22.8 and $19.0 million, for the nine months ended September 30, 2017 and 2016, respectively.
The terms of the Amended and Restated Field Service Agreement with SBS dated as of January 1, 2004, as amended in 2011, and the Amended and Restated Field Management Agreement with SAS dated as of January 1, 2004 (each a "Prior Agreement"), defined reimbursable expenses and established a "Cost Plus Fee" arrangement where the Company paid SBS and SAS for their costs of providing those services plus a fixed percentage of such reimbursable expenses (the "Cost Plus Fee"). The parties have had negotiations respecting replacement agreements since the Prior Agreements expired on November 30, 2014. As further described below, a new Field Administration Agreement was entered into with SAS in 2016.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The Company and SBS have agreed in principle to a revised Cost Plus Fee arrangement equal to 2.96% of the Field Specialists and certain other approved reimbursable expenses incurred by SBS in performing services for the Company, subject to certain offsetting credits. This agreement in principle went into effect on and has applied since December 1, 2014.
No SBS compensation to any officer, director or other related party has been reimbursed or approved to date by the Company, and no such compensation reimbursements were made or approved under SBS's Prior Agreement. This is not a restriction on SBS since SBS is not controlled by the Company and may pay any compensation to any person that SBS desires out ofhad misclassified its own funds. However, SBS has invoiced the Company monthly for certain such compensation payments from July of 2015 through December 2016, and again from July 2017 to September 30, 2017, but the Company has rejected those invoices as non-reimbursable expenses. Since SBS is a "Subchapter S" corporation, all income from SBS is allocated to its stockholders (see above).
The Company has determined that the rates charged by SBS for the services of its field merchandising, auditing, assembly and other field personnel (each a "Field Specialist") are favorable to the Company when compared to other possible non-affiliate providers. SBS has advised the Company that those favorable rates are dependent (at least in part) on SBS's ability to continue to use independent contractors as its Field Specialists, that such Field Specialists generally provide greater flexibility and performance quality at lower total costs as a result of their business independence and initiative, and that it has an agreement with each Field Specialist clearly confirming his, her, or its status as an independent contractor.
The appropriateness of SBS's treatment of its Field Specialistsemployees as independent contractors has been periodically subject to legal challenge (both currently and historically) by various states and others, SBS's expenses of defending those challenges and other proceedings have historically been reimbursed by the Company under SBS's Prior Agreement, and SBS's expenses of defending those challenges and other proceedings were reimbursed by the Company for the nine months ended September 30, 2017 and 2016 (in the amounts of $218,000 and $587,000, respectively), after determination (on a case by case basis) that those defense expenses were costs of providing services to the Company. The Company has advised SBS that, since there is no currently effective comprehensive written services agreement with SBS, the Company will continue to review and decide each request by SBS for reimbursement of its legal defense expenses (including appeals) on a case-by-case basis in its discretion, including the relative costs and benefits to the Company. The Company has not agreed, and does not currently intend, to reimburse SBS for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceeding against or involving SBS, and the Company does not believe it has ever done so (other than in insignificant nuisance amounts). However, there can be no assurance thatongoing proceedings against SBS will be able to satisfy any such judgment or similar amount resulting from any adverse legal determination, that SBS or someone else will not claim, or that SBS will be able to successfully defend any claim, that the Company is liable (through reimbursement, indemnification or otherwise) for any such judgment or similar amount imposed against SBS. Furthermore, there can be no assurance that SBS will succeed in defending any such legal challenge, the legal expenses of prolonged litigation and appeals(which could continue to be (and have from time to time been) significant, and prolonged litigation and appeals and any adverse determination in any such challenge could havehad a material adverse effect on SBS's ability to provide future services needed by the CompanyCompany), SBS' continued higher charges and expense reimbursement disputes, and the Company's costsidentification of doing business. an experienced independent third party company (the "Independent Field Vendor") who would provide comparable services on substantially better terms, the Company terminated the services of SBS effective July 27, 2018, and the Company has engaged that Independent Field Vendor to replace those field services previously provided by SBS (other than in California). The Company similarly terminated SAS and has engaged another independent third party company to replace those administrative services formerly provided by SAS, effective August 1, 2018 (the "Independent Field Administrator").
Current material and potentially material proceedings againstOn May 7, 2018, the Company gave a termination notice to SAS specifying July 31, 2018, as the end of the Service Term under (and as defined in) SAS Agreement signed in 2016. The Company has reached a non-exclusive agreement with an independent third party vendor to provide substantially all of the domestic Independent Field Administrators used by the Company.
Although SAS has not provided or been authorized to perform any services to the Company after their terminations described above effective on or before July 31, 2018. While SAS has apparently continued to operate for its own benefit and/or the winding down of its operations, the Company has determined that it is not obligated to reimburse any post-termination expense. However, in the spirit of settlement, the Company had offered to reimburse SAS $237,500 for claimed transition expenses to be offset by $226,000 owed by SAS to the Company, for a net payment to SAS of $11,500. SAS has not accepted the Company's offer.
The Company expects that SBS and in one instance,SAS may use every available means to attempt to collect reimbursement from the Company are described infor the foreseeable future for all of their post-termination expense, including repeated litigation. See Note 98 to the Company's Consolidated Financial Statements – -Commitments and Contingencies – -- Legal Mattersand SBS Bankruptcy, Settlement and March 2020 Claim, below. These descriptions are based on an independent review by the Company and do not reflect the views of SBS, its management or its counsel.
Any prolonged continuation of or material increase in the legal defense costs of SBS (and thus the reimbursable expenses SBS may charge to and that may be paidclaim by the Company to the extent reimbursement is approved by the Company in its discretion), the failure of SBS to satisfy any such judgment or similar amount resulting from any adverse legal determination against SBS, any claim byRobert G. Brown, William H. Bartels, SBS, SAS, any other related party or any third party that the Company is somehow liable for any such judgment or similar amount imposed against SBS or SAS or any other related party, any judicial determination that the Company is somehow liable for any such judgment or similar amount imposed against SBS or SAS or any other related party, (in whole or in part), any decrease in SBS's or SAS's performance (quality or otherwise), any inability by SBS or SAS to execute the services for the Company, or any increase in the Company's use of employees (rather than the services of independent contractors) as its domesticcontractors provided by third parties) to perform Field Specialists,Specialist services domestically, in each case in whole or in part, could have a material adverse effect on the Company or its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected. See Note 8 to the Company's Consolidated Financial Statements - Commitments and Contingencies -- Legal Matters, below.
Current material and potentially material legal proceedings impacting the Company are described in Note 8 to the Company's Consolidated Financial Statements - Commitments and Contingencies - Legal Matters, below. These descriptions are based on an independent review by the Company and do not reflect the views of SBS, its management or its counsel. Furthermore, even though SBS was solely responsible for its operations, methods and legal compliance, in connection with any proceedings against SBS, SBS continues to claim that the Company is somehow liable to reimburse SBS for its expenses in those proceedings. The Company does not believe there is any basis for such claims and would defend them vigorously.
Infotech sued the Company in New York seeking reimbursement for approximately $190,000 respecting alleged lost tax benefits and other expenses it claims to have incurred in connection with SGRP's acquisition of its Brazilian subsidiary and previously denied on multiple occasions by both management and SGRP's Audit Committee, whose approval was required because Infotech is a related party. Infotech also threatened to sue the Company in Romania for approximately $900,000 for programming services allegedly owed to the Company's former Romanian subsidiary (sold at book value to Infotech in 2013) and not provided to Infotech, for which the Company vigorously denies liability. The Company and Infotech settled this matter. See Note 8 to the Company's Consolidated Financial Statements - Commitments and Contingencies - Legal Matters, below.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
On June 14, 2016, SAS and SPAR Marketing Force, Inc. ("SMF") entered into a new Field Administration Agreement (the "SAS Agreement"). In order to provide continuity with SAS's Prior Agreement, the SAS Agreement is effective and governs the relationship of the parties as of December 1, 2014, and amends, restates and completely replaces SAS's Prior Agreement. The SAS Agreement more clearly defines reimbursable and excluded expenses and the budget and approval procedures and continues the indemnifications and releases provided by SAS's Prior Agreement (which indemnifications and releases were and are comparable to those applicable to SGRP's directors and executive officers under its By-Laws and applicable law). Specifically, the SAS Agreement reduced the Cost Plus Fee from 4% to 2% effective as of June 1, 2016.
SGRP's Audit Committee has approved the SAS Agreement pursuant to its specific duty and responsibility to review and approve the overall fairness of all material related-party transactions, as more fully provided above in this Note 6 to the Company's Consolidated Financial Statements.
No SAS compensation to any officer, director or other related party (other than Mr. Peter W. Brown pursuant to previously approved budgets)was appointed as a Director on the Board as of May 3, 2018, replacing Mr. Robert G. Brown upon his retirement from the Board and Company at that date. He has recently been reimbursed or approved to datedeemed independent by the Company,Board except for with respect to related party matters and no such compensation reimbursements were made or approved under SAS's Prior Agreement. Thisfor matters concerning SPAR Brasil Servicos de Merchandising e Tecnologia S.A., a Brazilian corporation and SGRP subsidiary ("SPAR BSMT"). Peter Brown is notan affiliate and related party respecting SGRP and was proposed by Mr. Robert G. Brown to represent the Brown family interests. He worked for and is a restriction onstockholder of SAS since SAS is not controlled by the Company(see above) and may pay any compensation to any person that SAS desires outcertain of its own funds. Since SAS is a "Subchapter S" corporation, all income from SAS is allocated to its stockholders (see above). Peter W. Brown ("Peter Brown") is an employee of SAS,affiliates, he is the nephew of SGRP's Chairman, Mr. Robert G. Brown, an officer and employee of the Company's affiliate, SIT (which is owned by Mr. Robert G. Brown), andhe is a director of SPAR BSMT and owns Earth Investments LLC, ("EILLC (see International Related Party Services"), below). Peter Brown was an official observer atwhich owns 10% interest in the meetings of SGRP's Board from 2014 through December 2016. Accordingly, PeterBrazilian subsidiary. Mr. Robert G. Brown is a related party in respectsignificant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director and became a director again on April 24, 2020, pursuant to the written consents of the Company.Brown Group and Mr. Bartels.
National Merchandising Services, LLC ("NMS"NMS"), is a consolidated domestic subsidiary of the Company and is owned jointly by SGRP through its indirect ownership of 51% of the NMS membership interests and by National Merchandising of America, Inc. ("NMA"NMA"), through its ownership of the other 49% of the NMS membership interests. Mr. Edward Burdekin is the Chief Executive Officer and President and a director of NMS and also is an executive officer and director of NMA. Ms. Andrea Burdekin, Mr. Burdekin'sBurdekin's wife, is the sole stockholder and a director of NMA and a director of NMS. NMA is an affiliate of the Company but is not under the control of or consolidated with the Company. Mr. Burdekin also owns 100% of National Store Retail Services ("NSRS"). Since September 2018, NSRS provided substantially all of the domestic merchandising specialist field force used by NMS. For those services, NMS agrees to reimburse NSRS the total costs for providing those services and to pay NSRS a premium equal to 1.0% of its total cost.
Also, NMS leases office and operational space that is owned personally by Mr. Burdekin. The lease expense is $2,000 a month. While there is no formal signed agreement, there is no expected change to the arrangement.
On August 10, 2019, NMS, to protect continuity of its Field Specialist nationwide, petitioned for bankruptcy protection under chapter 11 of the United States Bankruptcy Code in the U.S. District for Nevada (the "NMS Chapter 11 Case"), and as a result, the claims of NMS' creditors must now generally be pursued in the NMS Chapter 11 Case. On August 11, 2019, NSRS and Mr. Burdekin also filed for reorganization in the NMS Chapter 11 Case, NMS is part of the consolidated Company. Currently the Company believes that the NMS Chapter 11 Case is not likely to have a material adverse effect on the Company, and the Company's ownership of and involvement in NMS is not likely to change as a result of the NMS Chapter 11 Case or any resulting NMS reorganization.
Resource Plus of North Florida, Inc. "Resource Plus" or "RPI" is a consolidated domestic subsidiary of the Company and is owned jointly by SGRP through its indirect ownership of 51% of the RPI membership interests and by Mr. Richard Justus through his ownership of the other 49% of the RPI membership interests. Mr. Justus has a 50% ownership interest in RJ Holdings which owns the buildings where RPI is headquartered and operates. Both buildings are subleased to RPI.
SBS Bankruptcy, Settlement and March 2020 Claim
On November 23, 2018, SBS petitioned for bankruptcy protection under chapter 11 of the United States Bankruptcy Code in the U.S. District for Nevada (the "SBS Chapter 11 Case"). On March 18, 2019, the Company filed claims in the SBS Chapter 11 Case seeking reimbursement for $378,838 for SMF's funding of the Affinity Security Deposits and $12,963 for SMF's funding of the field payment checks that would have otherwise bounced, and $1,839,459 for indemnification of SGRP for its settlement (see below) of the Clothier class action case in California ("Clothier") and legal costs and an unspecified amount for indemnification of SGRP for the Hogan action (see below) and other to be discovered indemnified claims.
On August 6, 2019, SGRP, and its subsidiaries SPAR Marketing Force, Inc. ("SMF"), a Nevada corporation, and SPAR Assembly & Installation, Inc., f/k/a SPAR National Assembly Services, Inc., a Nevada corporation, submitted to the U.S. District Court in Nevada (the "Bankruptcy Court") their Compromise and Settlement Agreement, dated July 26, 2019 (the "Settlement Agreement"), with SBS, a Nevada corporation formerly known as SPAR Marketing Services, Inc., debtor and debtor-in-possession, and SBS, LLC, a Nevada limited liability company. The Settlement Agreement was submitted in the SBS Chapter 11 Case. Pursuant to the Settlement Agreement, the Company settled its claims for (among other things) indemnification from SBS in Clothier and the Rodgers class action case in Texas ("Rodgers").
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
On August 6, 2019, the Bankruptcy Court approved the Settlement Agreement and the SBS reorganization pursuant to SBS' First Amended Chapter 11 Plan of Reorganization, as amended by the Settlement Agreement (the "Plan of Reorganization"). Pursuant to its Plan of Reorganization, SBS also settled its potential liability in the Clothier and Rodgers cases, but the Company believes that Robert G. Brown and William H. Bartels were not released from Clothier, any related case or Rodgers. See Note 8 to the Company's Consolidated Financial Statements in the Commitments and Contingencies --Legal Proceedings -- SBS Bankruptcy, Settlement and March 2020 Claim, SBS Clothier Litigations, andSBS Rodgers Litigation, below. In the Settlement Agreement, except for the carve out described in the next paragraph, SBS completely released the Company from all obligations that may be owed to SBS.
On August 6, 2019, with the support of (among others) the Clothier and Rodgers plaintiffs and the Company, the Court approved the SBS Settlement Agreement and the SBS Reorganization pursuant to the SBS Plan (as defined in the SBS Settlement Release). The SBS Settlement Agreement provides for a mutual release of claims (including the SBS Claims and the SGRP Claims, as defined therein), except for the following:
(i) the Company’s $2.2 million in claims were settled for $174,097 payable by SBS over 24 monthly installments of $7,254 per month starting January 1, 2020, and without any interest (collectively, the "Discounted Claim Payments"), as such terms are defined in the SBS Settlement Agreement and the Company accrued $174,097 for the Discounted Claim Payments; and
(ii) SMF will pay to SBS the Proven Unpaid A/R (as defined in the SBS Settlement Agreement) upon its determination (as described below).
In the SBS Settlement Agreement, the parties agreed to have a third party financial and accounting services firm, independently determine the Proven Unpaid A/R based on parameters set forth in the SBS Settlement Agreement. In the SBS Settlement Agreement, the parties will accept the determination of the third party financial and accounting services firm as final and binding, and all other claims and amounts are released. The third party financial and accounting services firm has determined that the Company had paid all amounts due to SBS and that the Proven Unpaid A/R equals zero.
The Company has recorded the total settlement amount of $174,097 as of December 31, 2019. This settlement amount is payable in 24 equal monthly payments of $7,254 starting January 1, 2020. To date SBS is in default of the first six payments totaling $43,524 and formal default notices have been sent to SBS. SBS has responded and claimed an offset respecting its undocumented and unproven claims. As of June 30, 2020, the total settlement has been reserved.
On March 6, 2020, Robert G. Brown on behalf of SBS sent an email communication to Arthur B. Drogue, to which he copied Arthur H. Baer, demanding payment of $1,707,374 to SBS from SMF pursuant to (among other things) the SBS Settlement Agreement (the "March 2020 Claim"). The Company has reviewed the March 2020 Claim in detail (although Brown has provided no backup or proof) and the Company strongly disagrees that any such amount is owed. The Company believes that the robust and comprehensive mutual releases and other provisions in the SBS Settlement Agreement provide valuable relief from such claims and potential future claims and litigation by SBS respecting the Company's past involvement with SBS, including the March 2020 Claim. However, Robert G. Brown, president, director and indirect owner of SBS, since and notwithstanding the Court's approval of the SBS Settlement Agreement, has continued to make unproven and undocumented claims that amounts that were fully released pursuant to the SBS Settlement Agreement and approved by the bankruptcy court are nevertheless due to SBS from the Company, and the Company strongly disagrees. The Company is prepared to take action in Nevada Bankruptcy Court by reopening the SBS bankruptcy case and petitioning official settlement of this matter. Since all such claims have been completely released by SBS (with Mr. Robert G. Brown's approval), the Company owes nothing and has not accrued anything respecting Mr. Robert G. Brown's renewed claims. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels.
At SGRP's March 2020 Board meeting, Mr. Bartels was requested by an independent director to compile a list of unproven and undocumented claims that he and Mr. Brown believe are owed by the Company. On March 17, 2020, that list was given to the Audit Committee Chairman and included additional claims, net of an anticipated reduction, totaling approximately $1.3 million, bringing their total claims to approximately $3 million. The Company has completely rejected these claims, and believes it was released from all such claims by SBS in the SBS bankruptcy reorganization.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The March 2020 Claim includes estimates for the individual legal defenses of Robert G. Brown and William H. Bartels in the private attorney general action in California ("PAGA") and Texas ("Rodgers") in cases that do not involve and never included the Company and for which the Company believes it has no liability. The March 2020 Claim also includes defense expenses for SBS Clothier case, which expenses SBS settled for a highly discounted amount in its bankruptcy reorganization but now wants the Company to pay in full. SBS in its bankruptcy reorganization but SBS now wants the Company to pay in full. SBS in its bankruptcy reorganization settled its potential liability in the Rodgers and Clothier cases and SBS has, and since July 2019 had, no more defense expenses in those cases. Subsidiaries of SGRP were at one time in the Clothier case but were dismissed without prejudice leaving SGRP subject to potential liability. Accordingly, SGRP settled the Clothier case separately. SGRP was never named in the Rodgers case. However, the alleged continued willful misclassification by SBS of its independent contractors after the Clothier misclassification determination is a claimed basis for the PAGA lawsuit against Brown and Bartels. See Note 8 to the Company's Consolidated Financial Statements in the Commitments and Contingencies -- Legal Proceedings -- SBS Field Specialist Litigation, SBS Clothier Litigation, and SGRP Hogan Litigation. Mr. Bartels' list also includes payments of $500,000 per year to Robert G. Brown for extended retirement and advisory fees, although the Company has never proposed, committed or agreed to them and on several occasions specifically rejected Mr. Brown's proposals in various forms for them.
Infotech Litigation and Settlement
On September 19, 2018, SGRP was served with a Summons and Complaint by SPAR InfoTech, Inc. ("Infotech"), an affiliate of SGRP that is owned principally by Mr. Robert G. Brown (one of the Majority Stockholders) as plaintiff commencing a case against SGRP (the "Infotech Action"). The Infotech Action sought payment from SGRP of approximately $190,000 for alleged lost tax benefits and other expenses that it claims to have incurred in connection with SGRP's acquisition of its Brazilian subsidiary and that were previously denied on multiple occasions by both management and SGRP's Audit Committee (whose approval was required because Infotech is a related party).
In 2016, SGRP acquired SPAR Brasil Serviços de Merchandising e Tecnologia S.A. ("SPAR BSMT"), its Brazilian subsidiary, with the assistance of Mr. Robert G. Brown (while he was still Chairman and an officer and director of SGRP) and his nephew, Peter W. Brown, who became an indirect 10% owner of SPAR BSMT, and later became a director of SGRP on May 3, 2018. Mr. Robert G. Brown used his private company, Infotech and undisclosed foreign companies to structure the acquisition for SGRP.
Mr. Robert G. Brown incurred his alleged expenses associated with the transaction through Infotech, including salary allocations for unauthorized personnel and claims for his "lost tax breaks". Mr. Robert G. Brown submitted his unauthorized, unproven and undocumented "expenses" to SGRP, and SGRP's Audit Committee allowed approximately $50,000 of them (which was paid) and disallowed approximately $150,000 of them. His claim increased to over $190,000 in the Infotech Action. The Company vigorously denied owing any of those amounts.
In 2018, Infotech also threatened to sue the Company in Romania for approximately $900,000 for programming services allegedly owed to the Company's former Romanian subsidiary (sold at book value to Infotech in 2013) and not provided to Infotech (the "Romanian Claim"). Infotech gave a draft complaint to the Company in 2018. The Company also vigorously denied owing any of those obligations or amounts.
In order to avoid the expenses of protracted litigation, SGRP's Management and the Audit Committee agreed that it would be in the best interest of all stockholders to reach a reasonable settlement of both the Infotech Action and the Romanian Claim for installment payments in reasonable amounts and mutual releases of all other related claims. Management had offered $225,000 to settle both, but at the urging of the Board and assurances of several Board members that it would help them persuade Mr. Robert G. Brown to settle, management agreed to increase the settlement offer to a total of $275,000. After extensive negotiation between the Company and Infotech, Mr. Robert G. Brown accepted the $275,000 offer and the parties entered into the Confidential Settlement Agreement and Mutual Release on October 8, 2019 (the "Infotech Settlement Agreement"), which was approved and ordered by the Court on October 30, 2019, and the Infotech Action was discontinued (dismissed) with prejudice.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The Infotech Settlement Agreement required the Company to make payments totaling $275,000 in four installments: (i) $75,000 following Court approval (which Payment has already been made); (ii) $75,000 within 30 days following discontinuance of the Infotech Action (which was discontinued on October 30, 2019); (iii) $75,000 within 60 days following discontinuance of the Infotech Action; and (iv) $50,000 within 90 days following discontinuance of the Infotech Action. The Infotech Settlement was paid in accordance with the agreement and is therefore paid in full effective January 2020.
The Company believes that the robust and comprehensive mutual releases in the Infotech Settlement Agreement provide valuable relief from potential future claims and litigation by Infotech respecting the Company's past involvement with Infotech in the Brazilian and Romanian transactions.
International Related Party Services:
SGRP Meridian (Pty), Ltd. ("Meridian") is a consolidated international subsidiary of the Company and is owned 51% by SGRP, 23% by Friedshelf 401 Proprietary Limited and 49%26% by the following individuals: Mr. Brian Mason,Lindicom Empowerment Holdings Proprietary Limited. Mr. Garry Bristow, and Mr. Adrian Wingfield. Mr. Masonwho is Presidentan executive at SGRP Meridian and a director and Mr. BristowDirector of CMR Meridian, is an officer and directorone of Meridian. Mr. Mason is also an officer and director and 50% shareholderthe beneficial owners of Merhold Property Trust ("MPT"). Mr. Mason and Mr. Bristow are both officers and directors and both own 50% of Merhold Cape Property Trust ("MCPT"). Mr. Mason, Mr. Bristow and Mr. Wingfield are all officers and own 46.7%, 20% and 33.3%, respectively of Merhold Holding Trust ("MHT"), which provides services similar to those provided by MPT. MPT. Mr. Adrian Wingfield, who is a Director of CMR Meridian, is one of the beneficial owners of MHT. MHT owns the building where Meridian is headquartered and is subleasedalso owns 32 vehicles which are leased to Meridian. MCPT provides a fleet of approximately 160173 vehicles to Meridian under a 4 year lease program. These leases are provided to Meridian at local market rates included in the summary table below.
SPAR Todopromo is a consolidated international subsidiary of the Company and is owned 51% by SGRP and 49% by the following individuals: Mr. Juan F. Medina Domenzain, Juan Medina Staines, Julia Cesar Hernandez Vanegas, and Jorge Medina Staines. Mr. Juan F. Medina Domenzain is an officer and director of SPAR Todopromo and is also majority shareholder (90%) of CONAPAD ("CON"CON"), which has supplied administrative and operational consulting support to SPAR Todopromo for the three and nine month periods ended September 30, 2017 andsince 2016.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
In August 2016, Mr. Juan F. Medina Domenzain ("JFMD"JFMD"), partner in SPAR Todopromo, purchased theleased a warehouse that was being leased byto SPAR Todopromo. A newThe lease expiringexpires on December 31, 2017, was entered into with SPAR Todopromo with the same terms and cost as with the previous owner.2020.
On September 8, 2016, the Company (through one of its subsidiaries, SPAR International Ltd.) acquired 100% ownership of SGRP Brasil Participações Ltda. ("SGRP Holdings"), a Brazilian limitada (which is a form of limited liability company), from its affiliate, SIT, at cost (including approved expenses). SGRP Holdings then completed the formation and acquired a majority of the stock of SPAR Brasil Serviços de Merchandising e Tecnologia S.A., a Brazilian corporation ("SPAR BSMT"). SGRP Holdings and SPAR BSMT are consolidated subsidiaries of the Company. SPAR BSMT" is owned 51% by the Company, 39% by JK Consultoria Empresarial Ltda.-ME, a Brazilian limitada ("JKC"JKC"), and 10% by Earth Investments, LLC, a Nevada limited liability company ("EILLC"EILLC").
JKC is owned by Mr. Jonathan Dagues Martins, a Brazilian citizen and resident ("JDM"JDM") and his sister, Ms. Karla Dagues Martins, a Brazilian citizen and resident. JDM is the Chief Executive Officer and President of each SPAR Brazil company pursuant to a Management Agreement between JDM and SPAR BSMT dated September 13, 2016. JDM also is a director of SPAR BSMT. Accordingly,Accordingly, JKC and JDM are each a related party in respect ofrespecting the Company. EILLC is owned by Mr. Peter W. Brown, who is a citizen and resident of the USA ("PWB") and a director of SPAR BSMT and SGRP and nephew of Robert G. Brown. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels. Accordingly, PWB and EILLC are each a related party in respect ofrespecting the Company (SeeDomestic Related Party Services, above). Accordingly, EILLC also is a related party in respect of the Company.
SPAR BSMT has contracted with Ms. Karla Dagues Martins, a Brazilian citizen and resident and JDM'sJDM's sister and a part owner of SPAR BSMT, to handle the labor litigation cases for SPAR BSMT and its subsidiaries. These legal services are being provided to them at local market rates by Ms. Martins'sMartins' company, Karla Martins Sociedade de Advogados ("KMSA"KMSA"). Accordingly, Mr. Jonathan Dagues Martins and Ms. Karla Dagues Martins are each an affiliate and a related party respecting the Company.
The NM Acquisition (as defined below in Note 11
SPAR Group, Inc. and Subsidiaries
Notes to the Company's Consolidated Financial Statement - Purchase of Interest in Subsidiaries) and associated related party transactions were reviewed and approved by the Audit Committee of SGRP's Board of Directors.Statements
The Company believes it is the largest and most important customer of SBS, SAS, NRS, MPT, MCPT, MHT, CON, JFMD and KMSA (and from time to time may be each entity's only customer), and accordingly the Company generally has been able to negotiate better terms, receives more personal and responsive service and is more likely to receive credits and other financial accommodations from SBS, SAS, NRS, MPT, MCPT, MHT, CON, JFMD and KMSA than the Company could reasonably expect to receive from an unrelated service provider who has significant other customers and business. SBS, SAS and other material affiliate contracts and arrangements are annually reviewed and considered for approval by SGRP's Audit Committee, subject to the ongoing negotiations with SBS as described above. (unaudited) (continued)
Summary of Certain Related Party Services:Transactions:
The following costs of affiliates were charged to the Company (in thousands):
Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | June 30, | June 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||
Services provided by affiliates: | ||||||||||||||||||||||||||||||||
Field merchandiser and other expenses (SBS) | $ | 6,788 | $ | 5,491 | $ | 19,593 | $ | 15,828 | ||||||||||||||||||||||||
Field administration and other expenses (SAS) | 1,044 | 1,011 | 3,178 | 3,138 | ||||||||||||||||||||||||||||
Office and vehicle rental expenses (MPT) | 30 | 8 | 46 | 32 | ||||||||||||||||||||||||||||
National Store Retail Services (NSRS) | 1,050 | 260 | 2,392 | 385 | ||||||||||||||||||||||||||||
Office lease expenses (Mr. Burdekin) | 6 | - | 12 | - | ||||||||||||||||||||||||||||
Office lease expenses (RJ Holdings) | 177 | 97 | 350 | 199 | ||||||||||||||||||||||||||||
Office and vehicle lease expenses (MPT) | 11 | 16 | 27 | 32 | ||||||||||||||||||||||||||||
Vehicle rental expenses (MCPT) | 579 | 245 | 870 | 618 | 281 | 297 | 580 | 587 | ||||||||||||||||||||||||
Office and vehicle rental expenses (MHT) | 85 | 34 | 126 | 85 | 58 | 68 | 131 | 132 | ||||||||||||||||||||||||
Field merchandiser expenses (NDS Reklam) | – | 1 | – | 1 | ||||||||||||||||||||||||||||
Consulting and administrative services (CON) | 61 | 74 | 181 | 241 | 11 | 37 | 23 | 74 | ||||||||||||||||||||||||
Legal Services (KMSA) | 31 | – | 79 | – | 34 | 21 | 57 | 43 | ||||||||||||||||||||||||
Warehousing rental (JFMD) | 13 | 3 | 38 | 3 | 12 | 12 | 25 | 24 | ||||||||||||||||||||||||
| Consulting and administrative fees (SPARFACTS) | 41 | - | 72 | - | ||||||||||||||||||||||||||||
Total services provided by affiliates | $ | 8,631 | $ | 6,867 | $ | 24,111 | $ | 19,946 | $ | 1,681 | $ | 808 | $ | 3,669 | $ | 1,476 | ||||||||||||||||
Due to affiliates consists of the following (in thousands): | June 30, | December 31, | ||||||
2020 | 2019 | |||||||
Loans from local investors:(1) | ||||||||
Australia | $ | 696 | $ | 467 | ||||
| Mexico | 623 | 623 | ||||||
| Brazil | 140 | 139 | ||||||
| China | 1,387 | 2,271 | ||||||
| South Africa | 403 | 635 | ||||||
| Resource Plus | 531 | 531 | ||||||
Total due to affiliates | $ | 3,780 | $ | 4,666 | ||||
(1) | Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms and are due on demand and as such have been classified as current liabilities in the Company's consolidated financial statements. |
Affinity Insurance:
SMF, a wholly-owned subsidiary of SGRP that provides merchandising and marketing service to its clients throughout the United States through (among other things) services provided by others, is owed $675,000 for security deposit advances and $226,000 for quarterly premium advances made by SMF (as described below) to SAS. Prior to the termination of the services provided by SAS and SBS (effective at the end of July 2018), SMF engaged SAS as an independent contractor to provide the services of Field Administrators to domestically schedule, deploy and administer the independent Field Specialists provided by SBS as an independent contractor under a similar engagement.
Affinity Insurance Company, Ltd. ("Affinity") is a captive insurance company that provides insurance and reinsurance products to its shareholders and their affiliates in exchange for payment of premium installments, posting of security collateral and other requirements, and subject to adjustments and assessments. SAS is, and has been, a shareholder and member of Affinity and has been since approximately 2000. SMF became a direct shareholder and member of Affinity in March 2018 in order to directly procure insurance for the domestic employees of the Company.
The business services SAS provided to, or on behalf of, SMF included insurance coverages for SMF and other SGRP employees domestically prior to March 2018, for SAS' Field Administrators and other employees through the termination by SMF of SAS' services effective on or about July 31, 2018, and for the Field Specialists provided by SBS to SMF through the termination by SMF of SBS’ services effective on or about July 31, 2018, all in connection with services provided by SMF to its clients. In connection with the business services provided by SAS, and based on informal arrangements between the parties, the Affinity insurance premiums for such coverage were ultimately charged (through SAS) for their fair share of the costs of that insurance to SMF, SAS (which then charges the Company) and SBS. The Company also advanced money to SAS to prepay Affinity insurance premiums.
SAS has received and may shortly be receiving returns of those security deposit advances and quarterly premium advances from Affinity totaling approximately $921,000. SMF has demanded repayment of its advances to SAS from these recent refunds received from Affinity, but SAS has refused and appears to have distributed the moneys to other SAS related parties. SAS has recently stated it has no funds available to remit to SMF even though they have repeatedly acknowledged SAS owes these advances to SMF and in fact, it has been documented that these liabilities were properly reported in SAS' financial statements.
On July 8, 2020 the Company issued a demand notice to SAS for the return of $901,000 (the $675,000 security advances and the $226,000 premium advances) but to-date SAS has refused to comply with this demand.
The Company has prepared the draft of a complaint to be filed in the Supreme Court of the State of New York in Westchester County, NY, seeking appropriate relief and recovery from SAS and other related parties, which it prepared with the support of SGRP's Audit Committee (which has certain oversight responsibilities respecting related party matters). However, because of the pending changes in the SGRP' CEO and CFO positions, the Audit Committee recommended that management delay filing the complaint until it can be reviewed and pursued by SGRP's new CEO and CFO (upon their selection and appointment) if and as they determine appropriate.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Due to affiliates consists of the following (in thousands): | September 30, | December 31, | ||||||
2017 | 2016 | |||||||
Loans from local investors:(1) | ||||||||
Australia | $ | 250 | $ | 231 | ||||
Mexico | 1,001 | 1,001 | ||||||
Brazil | 139 | 139 | ||||||
China | 720 | 761 | ||||||
South Africa | 15 | – | ||||||
NMS LLC | – | 348 | ||||||
Accrued Expenses due to affiliates: | ||||||||
SBS/SAS | 1,883 | 869 | ||||||
Total due to affiliates | $ | 4,008 | $ | 3,349 | ||||
(1) Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment termsBartels' Retirement and are due on demand and as such have been classified as current liabilities in the Company's consolidated financial statements.Director Compensation
William H. Bartels retired as an employee of the Company as of January 1, 2020. However, he will continue to serve as Vice Chairman and a member of SGRP's Board of Directors (the "Board"), positions he has held since July 8, 1999.
Effective as of January 18, 2020, SGRP's Governance Committee proposed and unanimously approved the following benefits for the five year period commencing January 1, 2020, and ending December 31, 2024 (the "Five Year Period"), for Mr. Bartels in connection with his retirement: (a) retirement payments of $100,000 per year ("Retirement Compensation"); (b) the then applicable regular non-employee director fees ("Regular Fees"), currently $55,000 per year, and a supplemental Board fee of $50,000 per year ("Supplemental Fees"); and (c) the same medical, dental, eye and life insurance benefits he received as of December 31, 2019, under an arrangement whereby Mr. Bartels shared part of the cost of Medicare and supplemental health benefits, currently valued at approximately $15,588 per year ("Medical Benefits"); in each case paid in accordance with SGRP's payroll schedule and policies, and payable whether or not Mr. Bartels remains a director of SGRP for any reason.
The Retirement Compensation, Regular Fees and Supplemental Fees that remain unpaid during the Five Year Period: (i) shall be accelerated and paid to Mr. Bartels (or his heirs or assigns) in full upon the sale to a third party of a majority of the SGRP Shares or all or substantially all of SGRP's assets; and (ii) shall survive and be payable in full to his heirs and assigns in the event of the death of Mr. Bartels.
Based on current rates and benefits, the aggregate value of such compensation, fees and benefits payable to Mr. Bartels will be approximately $220,558 per year and a total of $1,102,790 for the Five Year Period. Such compensation, fees and benefits (in whole or in part) may be extended beyond the Five Year Period in the discretion of the Board. The Company recognized $700,000 of retirement benefit expense during the six-month period ended June 30, 2020, representing the present value of the future payments due Mr. Bartels.
In the event of any future business transaction involving Mr. Bartels and SGRP for which Bartels may receive additional compensation as mutually agreed at the time of or in connection with such transaction, which under applicable law also will require approval of SGRP's Audit Committee as a related party payment or transaction (as Mr. Bartels will still be a related party if he is then a director or significant stockholder), such retirement compensation, fees or benefits will not offset, replace or limit any such additional approved transactional compensation payable to Mr. Bartels.
Mr. Bartels is one of the founders and a significant stockholder of SGRP (holding approximately 25.1% of the SGRP Shares). He also is part of a control group holding a majority of the SGRP Shares with Robert G. Brown (together with Mr. Bartels), which group most recently acted to (1) unilaterally select, appoint and elect Panagiotis ("Panos") N. Lazaretos to serve on the board of directors of SGRP, effective on December 10, 2019, and unilaterally select, appoint and elect Robert G. Brown to serve on the board of directors of SGRP, effective as of April 24, 2020.
Other Related Party Transactions and ArrangementsArrangements:
In July 1999, SMF, SBS and SIT entered into a perpetual software ownership agreement providing that each party independently owned an undivided share of and hadhas the right to unilaterally license and exploit their "Business Manager" Internet job scheduling software (which had been jointly developed by such parties), and all related improvements, revisions, developments and documentation from time to time voluntarily made or procured by anycertain portions of them at its own expense. Business Manager and its otherthe Company's proprietary software and applications are used by the Company for (among other things) the scheduling, tracking, coordination, reporting and reporting of its merchandisingexpense software (the "Co-Owned Software") are co-owned with SBS and marketing servicesInfotech and are accessible viaeach entered into a non-exclusive royalty-free license from the Internet or other applicable telecommunication network byCompany to use certain "SPAR" trademarks in the authorized representativesUnited States (the "Licensed Marks"). As a result of the CompanySBS Chapter 11 Case, SBS' rights in the Co-Owned Software and its clients through their respective computers and mobile devices. In addition, SPAR Trademarks, Inc., a wholly owned subsidiaryLicensed Marks are assets of SGRP ("STM"), SBS and SIT entered into separate perpetual trademark licensing agreements whereby STM has granted non-exclusive royalty-free licensesSBS' estate, subject to SIT and SBS (and through them to their commonly controlled subsidiaries and affiliates by sublicenses, including SAS) for their continued use of the name "SPAR" and certain other trademarks and related rights of STM. SBS and SAS provide servicessale or transfer in any court approved reorganization or liquidation. See Note 8 to the Company, as described above, SIT assisted in the Brazilian acquisition at a costCompany's Consolidated Financial Statements - Commitments and Contingencies -- Legal Matters, Related Party Litigation and SBS Bankruptcy, below.
SPAR Group, Inc. and Subsidiaries
Notes to the Company of $49,000, as described below, and SIT no longer provides services to and does not compete with the Company.Consolidated Financial Statements
(unaudited) (continued)
Through arrangements with the Company, SBS (owned by Mr. Bartels and Mr. Brown), SAS (owned by Mr. Bartels and family members of Mr. Robert G. Brown), and other companies owned by Mr. Brown or Mr. Bartels participate in various benefit plans, insurance policies and similar group purchases by the Company, for which the Company charges them their allocable shares of the costs of those group items and the actual costs of all items paid specifically for them. All such transactions between the Company and the above affiliates are paid and/or collected by the Company in the normal course of business.
In addition to the above, SAS purchases insurance coverage for worker compensation, casualty and property insurance risk for itself, for SBS for its Field Specialists that require such insurance coverage, and for the Company from Affinity Insurance, Ltd. ("Affinity"). SAS owns a minority (less than 1%) of the common stock in Affinity. The Affinity insurance premiums for such coverage are ultimately charged to SAS, which then charges the Company and SBS for their fair share of the insurance cost based on informal arrangements between the parties.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
| Preferred Stock |
SGRP'sSGRP's certificate of incorporation authorizes it to issue 3,000,000 shares of preferred stock with a par value of $0.01 per share (the "SGRP Preferred Stock"), which may have such preferences and priorities over the SGRP Common Stock and other rights, powers and privileges as the Company's Board of Directors may establish in its discretion from time to time. The Company has created and authorized the issuance of a maximum of 3,000,000 shares of Series A Preferred Stock pursuant to SGRP's Certificate of Designation of Series "A" Preferred Stock (the "SGRP"SGRP Series A Preferred Stock"Stock"), which have dividend and liquidation preferences, have a cumulative dividend of 10% per year, are redeemable at the Company's option and are convertible at the holder's option (and without further consideration) on a one-to-one basis into SGRP Common Stock. The Company issued 554,402 of SGRP shares to affiliated retirement plans, which were all converted into common shares in 2011 (including dividends earned thereon), leaving 2,445,598 shares of remaining authorized preferred stock. At SeptemberJune 30, 2017,2020, no shares of SGRP Series A Preferred Stock were issued and outstanding.
| Stock-Based Compensation and Other Plans |
SGRP has granted restricted stock and stock option awards to its eligible directors, officers and employees and certain employeesAs of its affiliates respectingJune 30, 2020, there were Awards representing 585,000 shares of SGRP's Common Stock issued by SGRP ("SGRP Shares") pursuant to SGRP's 2008 Stock Compensationthat had been granted under the 2018 Plan (as amended, the "2008 Plan"),(565,000 of which was approved by SGRP's stockholders in May of 2008 and 2009. The 2008 Plan provides for the granting of restricted SGRP shares, stock options to purchase SGRP shares (either incentive or nonqualified)remain outstanding), and restricted stock units, stock appreciation rights and other awards based on SGRPAwards representing 3,044,927 shares ("Awards") to SGRP Directors and the Company's specified executives, employees and consultants (which are employees of certain of its affiliates), although to date SGRP has not issued any permissible form of Award other than stock option, restricted share awards, and performance stock units. As of September 30, 2017, approximately 677,488 SGRP shares were available for Award grantsSGRP's Common Stock outstanding under the amended 2008 Plan. InAfter May 31, 2019, the third quarter, there were 733,000 options awarded; 550,000 to officers2018 Plan ended and 183,000 to certain employeesno further grants can be made under the 2018 Plan respecting such shares of SPAR Group, Inc.SGRP's Common Stock. There is no new plan in place for stock compensation.
The Company recognized $37,000$70,000 and $86,000$66,000 in stock-based compensation expense relating to stock option awards during the three month periods ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The tax benefit available from stock based compensation expense related to stock option during both the three months ended SeptemberJune 30, 20172020 and 20162019 was approximately $14,000$11,000 and $33,000$17,000 respectively. The Company recognized $146,000$95,000 and $220,000$96,000 in stock-based compensation expense relating to stock option Awardsawards during the ninesix month periods ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The tax benefit available to the Company, from stock based compensation expense related to stock optionsoption during both the ninesix months ended SeptemberJune 30, 20172020 and 20162019 was approximately $55,000$17,000 and $84,000,$24,000 respectively. As of SeptemberJune 30, 2017,2020, total unrecognized stock-based compensation expense related to stock options was $505,000.$202,000.
During the three months ended SeptemberJune 30, 20172020 and 2016,2019, the Company recognized approximately $11,000$0 and $9,000,$3,000, respectively of stock based compensation expense related to restricted stock. The tax benefit available to the Company from stock based compensation expense related to restricted stock during both three months ended September 30, 2017 and 2016 was approximately $4,000. During the nine months ended September 30, 2017 and 2016, the Company recognized approximately $32,000 and $39,000, respectively, of stock-based compensation expense related to restricted stock. The tax benefit available to the Company from stock based compensation expense related to restricted stock during the ninethree months ended SeptemberJune 30, 20172020 and 20162019 was approximately $12,000$0 and $15,000,$1,000, respectively. During the six months ended June 30, 2020 and 2019, the Company recognized approximately $0 and $5,000, respectively of stock based compensation expense related to restricted stock. The tax benefit available to the Company from stock based compensation expense related to restricted stock during the three months ended June 30, 2020 and 2019 was approximately $0 and $1,000, respectively. As of SeptemberJune 30, 2017, total2020, there was no unrecognized stock-based compensation expense related to unvested restricted stock Awards was $24,000.awards.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
| Commitments and Contingencies |
Legal Matters
The Company is a party to various legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company'sCompany's management, dispositionresolution of these matters areis not anticipated to have a material adverse effect on the Company or its estimated or desired affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
RELATED PARTIES AND RELATED PARTY LITIGATION:
SBS, SPAR Administrative Services, Inc. ("SAS"), and SPAR InfoTech, Inc. ("Infotech"), have provided services from time to time to the Company and are related parties and affiliates of SGRP, but are not under the control or part of the consolidated Company. SBS is an affiliate because it is owned by an entity controlled by Robert G. Brown and prior to November 2018 was owned by Robert G. Brown and William H. Bartels. SAS is an affiliate because it is owned by William H. Bartels, Peter W. Brown and certain other relatives of Robert G. Brown or entities controlled by them (each of whom are considered affiliates of the Company for related party purposes). Infotech is an affiliate because it is owned by Robert G. Brown. Messrs. Brown and Bartels (including, as applicable, certain related parties, the "Majority Stockholders") collectively own approximately 53.2% of SGRP's common stock and are the founders of SGRP. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels. Mr. Bartels is Vice Chairman and a director of SGRP. Mr. Bartels retired as an employee of the Company as of January 1, 2020 (in accordance with the actions of SGRP's Compensation Committee on January 22, 2020). See Bartels' Retirement and Director Compensation, above. Messrs. Brown and Bartels also are stockholders, directors and/or executive officers of various affiliates of SGRP.
SGRP claims against SAS re Affinity
The Company executeshas prepared the draft of a complaint to be filed in the Supreme Court of the State of New York in Westchester County, NY, seeking appropriate relief and recovery from SAS and other related parties, which it prepared with the support of SGRP's Audit Committee (which has certain oversight responsibilities respecting related party matters). However, because of the pending changes in the SGRP CEO and CFO positions, the Audit Committee recommended that management delay filing the complaint until it can be reviewed and pursued by SGRP's new CEO and CFO (upon their selection and appointment) if and as they determine appropriate. See Affinity Insurance in Related Part Transactions in Note 5, above.
Delaware Litigation Settlement
On September 4, 2018, SGRP filed in the Court of Chancery of the State of Delaware (the "Chancery Court") a claim, which it amended on September 21, 2018 (the "By-Laws Action"), in a Verified Complaint Seeking Declaratory Judgment and Injunctive Relief against the Majority Stockholders. SGRP sought to invalidate the proposed amendments to SGRP's By-Laws put forth in a written consent by the Majority Stockholders (the "Proposed Amendments") because the Board's Governance Committee believed that the Proposed Amendments would have negatively impacted all stockholders (particularly minority stockholders) by (among other things) weakening the independence of the Board through new supermajority requirements, eliminating the Board's independent majority requirement, and subjecting various functions of the Board respecting vacancies on the Board to the prior approval of the holders of a majority of the Common Stock (i.e., the Majority Stockholders), and thus also potentially reducing the representation of SGRP's minority stockholders.
On September 18, 2018, Robert G. Brown (one of the Majority Stockholders) commenced an action in the Chancery Court pursuant to 8 Del. C. §225(a) from (C.A. No. 2018-00687-TMR) (the "225 Action") against the 225 Defendants seeking to remove Lorrence T. Kellar from the Board and add Jeffrey Mayer to the Board.
On January 18, 2019, SGRP, Messrs. Brown and Bartels, Christiaan Olivier (Chief Executive Officer, President and a Director of SGRP), and all four of the members of the Governance Committee at that time, namely Lorrence T. Kellar (Chairman), Jack W. Partridge, Arthur B. Drogue and R. Eric McCarthey (together with Mr. Olivier, the "225 Defendants"), reached a settlement (the "Delaware Settlement") in the By-Laws Action and the 225 Action (together, the "Delaware Actions") and had the Delaware Actions then dismissed.
In the Delaware Settlement, the parties agreed to amend and restate SGRP's By-Laws (the "2019 Restated By-Laws") with negotiated changes to the Proposed Amendments that preserved the current roles of the Governance Committee and Board in the location, evaluation, and selection of candidates for director and in the nominations of those candidates for the annual stockholders meeting and appointment of those candidates to fill Board vacancies (other than those under a stockholder written consent making a removal and appointment, which is unchanged). The Board approved and adopted the 2019 Restated By-Laws on January 18, 2019. The Governance Committee and the Board intended that those changes in the 2019 Restated By-Laws will help the Corporation maintain the independent Board desired by them.
Additionally, as part of the Delaware Settlement, the parties to the Delaware Actions executed a Limited Mutual Release Agreement limited to the Delaware Actions and subject to specific exclusions (the "Delaware Releases"), and the parties to the Delaware Actions mutually agreed upon Stipulations of Dismissal ending those actions without prejudice and without admission or retraction of any fact cited therein, and the parties caused them to be filed with the Chancery Court on January 18, 2019.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The Delaware Releases are limited to matters related to those actions described therein and subject to specific exclusions, and the parties expressly preserved all unrelated actions and claims. Accordingly, there remain a number of unresolved claims and actions (each a "Non-Settled Matter") between the Company and certain related parties, including (without limitation) post termination claims by and against SBS (which has been resolved in a voluntary bankruptcy proceeding in Nevada by SBS -- see SBS Bankruptcy, Settlement, and March 2020 Claim, below) and SAS and the lawsuit by Infotech against the Company (which has been resolved in a settlement – see Infotech Litigation and Settlement, below), and the claims by Messrs. Brown and Bartels for advancement and indemnification of legal fees and expenses in connection with the Delaware Actions and certain related party claims (see Advancement Claims, below).
Advancement Claims
From October 2018 through January 2019, the Majority Stockholders, in a series of correspondence, demanded from SGRP advancement and indemnification of their respective shares of legal fees and expenses incurred by them in connection with the By-Laws Action and the 225 Action and other related party litigation matters.
On November 2, 2018, in a letter from his counsel, Mr. Bartels demanded advancement of his proportionate share of the legal fees and expenses incurred in his defense of the By-Laws Action against him.
SGRP's Audit Committee determined on November 5, 2018, that Mr. Bartels was not entitled to indemnification by SGRP for his fees and expenses incurred in his defense of the By-Laws Action because (among other things) Mr. Bartels was sued predominately as a stockholder in the By-Laws Action and not as a director and the By-Laws Action alleged numerous instances of improper conduct by Mr. Bartels that could preclude indemnification under the Corporation's By-Laws. However, the Audit Committee made no determination regarding improper conduct or the issue of advancement.
On November 28, 2018, Mr. Bartels filed with the Court a Verified Complaint For Advancement against SGRP (the "Bartels Advancement Complaint") seeking advancement of his proportionate share of the legal fees and expenses incurred in the By-Laws Case against him ("Allocated By-Laws Expenses"). In evaluating the Bartels Advancement Complaint, counsel advised SGRP that generally advancement was somewhat different than indemnification in that money was advanced on the condition (which Bartels have accepted in writing) that the advances be repaid if indemnification was determined to be improper on the grounds of improper conduct or otherwise.
In December 2018 SGRP reached an agreement with Mr. Bartels through counsel to conditionally make his reasonably documented Allocated By-Laws Expenses (the "Bartels Advancement Settlement"), pursuant to which payment to Mr. Bartels of the accepted Allocated By-Laws Expenses was paid approximately $106,000 in April 2019. If Mr. Bartels is ultimately determined to not be entitled to indemnification, he could still be obligated to return all amounts advanced to him by SGRP.
On December 3, 2018, Robert G. Brown sent an email to Mr. McCarthey, Chairman of SGRP's Audit Committee, demanding advancement from SGRP for his proportionate share of the legal fees and expenses incurred by him in the By-Laws Action against him (the "Brown Advancement Demand").
Counsel advised that Brown had been sued as a stockholder and conspirator in the By-Laws Action against him, and not as a director, and they didn't believe Brown could reasonably and successfully bring or wage a lawsuit for advancement. SGRP, with the support of its Audit Committee, rejected the Brown Advancement Demand, stating that "The bylaw action does not sue you in your capacity as an officer or director of the company. Section 6.02 of the bylaws requires the proceeding subject to advancement to be brought "by /reason of the Indemnitee's position with the Corporation or any of its subsidiaries … at the request of the Corporation …." This provision does not, and was not intended to, cover shareholders for advancement.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
On January 27, 2019, Mr. Robert G. Brown sent a draft of his proposed Delaware litigation complaint in an email to Arthur Drogue, SGRP's Chairman, threatening to sue SGRP respecting the Brown Advancement Demand, which he repeated in an email to Mr. McCarthey on February 2, 2019. On March 21, 2020, Mr. Robert G. Brown repeated the Brown Advancement Demand and sent a slightly revised draft complaint that would purportedly change the contemplated litigation jurisdiction from Delaware to Massachusetts. No explanation was given for this alleged change in jurisdiction. On August 1, 2020, Robert G. Brown sent a slightly revised complaint to William H. Bartels (who forwarded it to Arthur H. Baer, Chairman of the Board and Audit Committee) changing the contemplated litigation jurisdiction from Massachusetts back to Delaware. Although it was signed and notarized and said by Robert G. Brown in his email to be in the process of being filed, no such complaint has been filed by Mr. Brown through August 11, 2020, and SGRP continues to deny the Brown Advancement Demand. In addition, SGRP believes that the Delaware Court has exclusive jurisdiction pursuant to SGRP's 2019 Restated By-Laws and the Settlement. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels.
SBS Bankruptcy, Settlement and March 2020 Claim
On November 23, 2018, SBS petitioned for bankruptcy protection under chapter 11 of the United States Bankruptcy Code in the U.S. District for Nevada (the "SBS Chapter 11 Case"). On March 18, 2019, the Company filed claims in the SBS Chapter 11 Case seeking reimbursement for $378,838 for SMF's funding of the Affinity Security Deposits and $12,963 for SMF's funding of the field payment checks that would have otherwise bounced, and $1,839,459 for indemnification of SGRP for its settlement (see below) of the Clothier class action case in California ("Clothier") and legal costs and an unspecified amount for indemnification of SGRP for the Hogan action (see below) and other to be discovered indemnified claims.
On August 6, 2019, SGRP, and its subsidiaries SPAR Marketing Force, Inc. ("SMF"), a Nevada corporation, and SPAR Assembly & Installation, Inc., f/k/a SPAR National Assembly Services, Inc., a Nevada corporation, submitted to the U.S. District Court in Nevada (the "Bankruptcy Court") their Compromise and Settlement Agreement, dated July 26, 2019 (the "Settlement Agreement"), with SBS, a Nevada corporation formerly known as SPAR Marketing Services, Inc., debtor and debtor-in-possession, and SBS, LLC, a Nevada limited liability company. The Settlement Agreement was submitted in the SBS Chapter 11 Case. Pursuant to the Settlement Agreement, the Company settled its claims for (among other things) indemnification from SBS in Clothier and the Rodgers class action case in Texas ("Rodgers").
On August 6, 2019, the Bankruptcy Court approved the Settlement Agreement and the SBS reorganization pursuant to SBS' First Amended Chapter 11 Plan of Reorganization, as amended by the Settlement Agreement (the "Plan of Reorganization"). Pursuant to its Plan of Reorganization, SBS also settled its potential liability in the Clothier and Rodgers cases, but the Company believes that Robert G. Brown and William H. Bartels were not released from Clothier, any related case or Rodgers. See SBS Rodgers Litigation, below. In the Settlement Agreement, except for the carve out described in the next paragraph, SBS completely released the Company from all obligations that may be owed to SBS.
On August 6, 2019, with the support of (among others) the Clothier and Rodgers plaintiffs and the Company, the Court approved the SBS Settlement Agreement and the SBS Reorganization pursuant to the SBS Plan (as defined in the SBS Settlement Release). The SBS Settlement Agreement provides for a mutual release of claims (including the SBS Claims and the SGRP Claims, as defined therein), except for the following:
(i) the Company’s $2.2 million in claims were settled for $174,097.34 payable by SBS over 24 monthly installments of $7,254.06 per month starting January 1, 2020, and without any interest (collectively, the "Discounted Claim Payments"), as such terms are defined in the SBS Settlement Agreement; and
(ii) SMF will pay to SBS the Proven Unpaid A/R (as defined in the SBS Settlement Agreement) upon its determination (as described below).
In the SBS Settlement Agreement, the parties agreed to have a third party financial and accounting services firm, independently determine the Proven Unpaid A/R based on parameters set forth in the SBS Settlement Agreement. In the SBS Settlement Agreement, the parties will accept the determination of the third party financial and accounting services firm as final and binding, and all other claims and amounts are released. The third party financial and accounting services firm, has determined that the Company had paid all amounts due to SBS and has no further obligation.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The Company has recorded the total settlement amount of $174,097 as of December 31, 2019. This settlement amount is payable in 24 equal monthly payments of $7,254 starting January 1, 2020. To date SBS is in default of the first six payments totaling $43,524 and formal default notices have been sent to SBS. SBS has responded and claimed an offset respecting its undocumented and unproven claims. As of June 30, 2020, the total settlement has been reserved.
On March 6, 2020, Robert G. Brown on behalf of SBS sent an email communication to Arthur B. Drogue, to which he copied Arthur H. Baer, demanding payment of $1,707,374 to SBS from SMF SGRP pursuant to (among other things) the SBS Settlement Agreement (the "March 2020 Claim"). The Company has reviewed the March 2020 Claim in detail (although Brown has provided no backup or proof) and the Company strongly disagrees that any such amount is owed. The Company believes that the robust and comprehensive mutual releases and other provisions in the SBS Settlement Agreement provide valuable relief from such claims and potential future claims and litigation by SBS respecting the Company's past involvement with SBS, including the March 2020 Claim. However, Robert G. Brown, president, director and indirect owner of SBS, since and notwithstanding the Court's approval of the SBS Settlement Agreement, has continued to make unproven and undocumented claims that amounts that were fully released pursuant to the SBS Settlement Agreement and approved by the bankruptcy court are nevertheless due to SBS from the Company, and the Company strongly disagrees. The Company is prepared to take action in Nevada Bankruptcy Court by reopening the SBS bankruptcy case and petitioning official settlement of this matter. Since all such claims have been completely released by SBS (with Mr. Robert G. Brown's approval), the Company owes nothing and has not accrued anything respecting Mr. Robert G. Brown's renewed claims. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels.
At SGRP's March 2020 Board meeting, Mr. Bartels was requested by an independent director to compile a list of claims that he and Mr. Brown believe are owed by the Company. On March 17, 2020, that list was given to the Audit Committee Chairman and included additional claims, net of an anticipated reduction, totaling approximately $1.3 million, bringing their total claims to approximately $3 million. The Company has completely rejected these claims, and believes it provideswas released from all such claims by SBS in the SBS bankruptcy reorganization.
The March 2020 Claim includes estimates for the individual legal defenses of Robert G. Brown and William H. Bartels in the private attorney general action in California ("PAGA") and Texas ("Rodgers") in cases that do not involve and never included the Company and for which the Company believes it has no liability. The March 2020 Claim also includes defense expenses for SBS Clothier case, which expenses SBS settled for a highly discounted amount in its bankruptcy reorganization but now wants the Company to pay in full. SBS in its bankruptcy reorganization settled its potential liability in the Rodgers and Clothier cases has, and since July 2018 had, no more defense expenses in those cases. SGRP settled Clothier separately and was never in the Rodgers case. However, the alleged continued willful misclassification by SBS of its independent contractors after the Clothier misclassification determination is the basis for the PAGA lawsuit against Brown and Bartels. See Legal Proceedings -- SBS Field Specialist Litigation, SBS Clothier Litigation, and SGRP Hogan Litigation in this note. Mr. Bartels' list also includes payments of $500,000 per year to Robert G. Brown for extended retirement and advisory fees, although the Company has never proposed, committed or agreed to them and on several occasions specifically rejected Mr. Brown's proposals in various forms for them.
Infotech Litigation and Settlement
On September 19, 2018, SGRP was served with a Summons and Complaint by SPAR InfoTech, Inc. ("Infotech"), an affiliate of SGRP that is owned principally by Robert G. Brown (one of the Majority Stockholders) as plaintiff commencing a case against SGRP (the "Infotech Action"). The Infotech Action sought payment from SGRP of approximately $190,000 for alleged lost tax benefits and other expenses that it claims to have incurred in connection with SGRP's acquisition of its Brazilian subsidiary and that were previously denied on multiple occasions by both management and SGRP's Audit Committee (whose approval was required because Infotech is a related party).
In 2016, SGRP acquired SPAR Brasil Serviços de Merchandising e Tecnologia S.A. ("SPAR BSMT"), its Brazilian subsidiary, with the assistance of Robert G. Brown (while he was still Chairman and an officer and director of SGRP) and his nephew, Peter W. Brown, who became an indirect 10% owner of SPAR BSMT, and later became a director of SGRP on May 3, 2018. Robert G. Brown used his private company, Infotech and undisclosed foreign companies to structure the acquisition for SGRP.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Robert G. Brown incurred his alleged expenses associated with the transaction through Infotech, including salary allocations for unauthorized personnel and claims for his "lost tax breaks". Robert G. Brown submitted his unauthorized and unsubstantiated "expenses" to SGRP, and SGRP's Audit Committee allowed approximately $50,000 of them (which was paid by the Company) and disallowed approximately $150,000 of them. His claim increased to over $190,000 in the Infotech Action. The Company vigorously denied owing any of those amounts.
In 2018, Infotech also threatened to sue the Company in Romania for approximately $900,000 for programming services allegedly owed to the Company's former Romanian subsidiary (sold at book value to Infotech in 2013) and not provided to Infotech (the "Romanian Claim"). Infotech gave a draft complaint to the Company in 2018. The Company also vigorously denied owing any of those obligations or amounts.
In order to avoid the expenses of protracted litigation, SGRP's Management and the Audit Committee agreed that it would be in the best interest of all stockholders to reach a reasonable settlement of both the Infotech Action and the Romanian Claim for installment payments in reasonable amounts and mutual releases of all other related claims. Management had offed $225,000 to settle both, but at the urging of the Board and assurances of several Board members that it would help them persuade Robert G. Brown to settle, management agreed to increase the settlement offer to a total of $275,000. After extensive negotiation between the Company and Infotech, Robert G. Brown accepted the $275,000 offer and the parties entered into the Confidential Settlement Agreement and Mutual Release on October 8, 2019 (the "Infotech Settlement Agreement"), which was approved and ordered by the Court on October 30, 2019, and the Infotech Action was discontinued (dismissed) with prejudice.
The Infotech Settlement Agreement requires the Company to make payments totaling $275,000 in four installments: (i) $75,000 following Court approval (which Payment has already been made); (ii) $75,000 within 30 days following discontinuance of the Infotech Action (which was discontinued on October 30, 2019); (iii) $75,000 within 60 days following discontinuance of the Infotech Action; and (iv) $50,000 within 90 days following discontinuance of the Infotech Action. The Company has paid all the installments including the final payment to Infotech in January 2020.
The Company believes that the robust and comprehensive mutual releases in the Infotech Settlement Agreementprovide valuable relief from potential future claims and litigation by Infotech respecting the Company's past involvement with Infotech in the Brazilian and Romanian transactions.
SBS Field Specialist Litigation
The Company's merchandising, audit, assembly and other services for its domestic clients primarily through independentare performed by field merchandising, auditing, assembly and other field personnel (each a "Field Specialist""Field Specialist"), almost furnished by others and substantially all of whom are engagedwhose services were provided to the Company prior to August 2018 by SBS, the Company's affiliate, SBS is not a subsidiary or in any way under the control of SGRP, SBS is not consolidated in the Company's financial statements, SGRP did not manage, direct or control SBS, and provided as independent contractorsSGRP did not participate in or control the defense by SBS.SBS of any litigation against it. The Company terminated its relationship with SBS and received no services from SBS after July 27, 2018. For affiliation, termination, contractual details and payment amounts, see Note 6 to the Company's Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services, above.
The appropriateness of SBS'sSBS' treatment of its Field Specialists as independent contractors hashad been periodically subject to legal challenge (both currently and historically) by various states and others, SBS'sothers. SBS' expenses of defending those challenges and other proceedings have historically beengenerally were, through but not after the termination of the SBS services, reimbursed by the Company under SBS's Prior Agreement,after and SBS's expenses of defending those challenges and other proceedings were reimbursed byto the extent the Company during the three month periods ended September 30, 2017 and 2016 (in the amounts of $39,000 and $144,000, respectively), and the nine month periods ended September 30, 2017 and 2016 (in the amounts of $218,000 and $587,000, respectively), after determinationdetermined (on a case by case basis) that those defense expenses were costs of providing services to the Company.
The Company settled its potential liability (as a current or former party) under two class action lawsuits against SBS, namely Clothier and Hogan. SBS was separately dismissed from the Hogan class action prior to the Company's settlement. SBS settled with Clothier and Rodgers in the SBS Bankruptcy, but Robert G. Brown and William H. Bartels were not released from Clothier, any related case or Rodgers (see above). The Company has advisednever been a party to the Rodgers case.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Any claim made and proven by Robert G. Brown, William H. Bartels, SBS, SAS, any other related party or any third party that since there is no currently effective comprehensive written services agreement with SBS, the Company will continue to review and decide each request by SBS for reimbursement of its legal defense expenses (including appeals) on a case-by-case basis in its discretion, including the relative costs and benefits to the Company. The Company has not agreed, and does not currently intend, to reimburse SBSis somehow liable (through indemnification or otherwise) for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceedingimposed against or involving SBS, and the Company does not believe it has ever done so (other than in insignificant nuisance amounts). However, there can be no assurance that SBS will be able to satisfy any such judgment or similar amount resulting from any adverse legal determination, thatMr. Brown, Mr. Bartels, SBS or someone else will not claim,SAS or that SBS will be able to successfully defend any claim, that the Company is liable (through reimbursement, indemnificationother related party, in each case in whole or otherwise) for any such judgment or similar amount imposed against SBS. Furthermore, there can be no assurance that SBS will succeed in defending any such legal challenge, the legal expenses of prolonged litigation and appeals could continue to be (and have from time to time been) significant, and prolonged litigation and appeals and any adverse determination in any such challengepart, could have a material adverse effect on SBS's ability to provide services needed by the Company and the Company'sor its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs of doing business.liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected.
Current material and potentially material proceedings against SBS and, in one instance, the Company are described below. These descriptions are based on an independent review by the Company and do not reflect the views of SBS, its management or its counsel.
SBS Clothier Litigation
Melissa Clothier was engaged by SBS (then known as SPAR Marketing Services, Inc.) and provided services pursuant to the terms of an "Independent Merchandiser Agreement" with SBS (prepared solely by SBS) acknowledging her engagement as an independent contractor. On June 30, 2014, Ms. Clothier filed suit against SBS and the Company styled Case No. RG12 639317, in the Superior Court in Alameda County, California (the "Clothier Case"), in which Ms. Clothier asserted claims on behalf of herself and a putative class of similarly situated merchandisers in California who are or were classified by SBS as independent contractors at any time between July 16, 2008, and June 30, 2014. Ms. Clothier alleged that she and other class members were misclassified by SBS as independent contractors (instead of as employees) and that, as a result of this misclassification, the defendants improperly underpaid them in violation of various California minimum wage and overtime laws. The Company was originally a defendant in the Clothier Case but was subsequently dismissed from the action without prejudice. prejudice (meaning it could have joined back into the case).
The court ordered that the case be heard in two phases. Phase one was limited to the determination of whether members of the class were misclassified as independent contractors. After hearing evidence, receiving post-trial briefings and considering the issues, the Court issued its Statement of Decision on September 9, 2016, finding that the class members had been misclassified by SBS as independent contractors rather than employees.employees (the "Clothier Misclassification Determination"). The parties have nowplaintiffs and SBS then moved into phase two to determine damages (if any), which has included discovery as to the measure of damages in this case.
Facing significant potential damages in the Clothier Case, SGRP chose, and on June 7, 2018, entered into mediation with the plaintiffs and plaintiff's counsel in the Clothier Case to try to settle any potential future liability for any possible judgment against SGRP in that case. TrialSGRP asked SBS to participate financially and provide its knowledge in that mediation, but SBS and its stockholders wanted SGRP to bear the full cost of any settlement and on phase twoseveral occasions they declined or failed to participate in that mediation. SGRP disagreed, insisting on the Majority Stockholders' and SBS' economic participation. After extensive discussions, SGRP reached a settlement and entered into a memorandum of settlement agreement, subject to the final court approval (the "Clothier Settlement"). Final approval was scheduled forgranted on September 11, 2017, but was postponed. The Court has scheduled a case management conference for December 19, 2017, to establish a new trial date for phase two. SBS has advised20, 2019, and the Company that SBS could appealwas released by plaintiff and the adverse phase one determination when permittedsettlement class from all other liability under the court's rules.Clothier Case. The Company recorded a $1.3 million charge for the Clothier Settlement during 2018, when the agreement in the Clothier Settlement was reached. Pursuant to the Clothier Settlement SGRP will pay a maximum settlement amount of $1.3 million, payable in four equal annual installments that commenced with the first payment of $325,000 in December 2019. The $975,000 balance was accrued as of June 30, 2020.
Since SGRP has no further involvement in the Clothier Case, SGRP stopped paying (as of June 7, 2018) for SBS' legal expenses (defense and appeal) in the Clothier Case and notified SBS. Defendants continue to demand that those expenses be reimbursed by SGRP. SBS did not participate in the Clothier Settlement and was not released. Rather than proceed to the damage portion of the trial respecting trial the Clothier Misclassification Determination, SBS filed for bankruptcy protection.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
SBS Rodgers Litigation
Maceo Rodgers was engaged by and provided services to SBS pursuant to the terms of his "Master Agreements" with SBS acknowledging his engagement as an independent contractor. On February 21, 2014, Rodgers filed suit against SBS, Robert G. Brown and William H. Bartels, styled Civil Action No. 3:14-CV-00055, in the U.S. District Court for the Southern District of Texas (Galveston Division). Plaintiff asserted claims on behalf of himself and an alleged class of similarly situated individuals who provided services to SBS as independent contractors at any time on or after July 15, 2012, claiming they all were misclassified as independent contractors and that, as a result of this misclassification, the Defendants improperly underpaid them in violation of the Fair Labor Standards Act's overtime and minimum wage provisions. Although the Court conditionally certified the class on December 8, 2015, only 61 individuals joined the action as opt-in plaintiffs, and all but 11 of them have potentially disqualifying arbitration provisions, residences outside the class's geographic area, or late opt-in filings, and were challenged by the Defendants in various motions, including a motion to decertify the class. The Court, however, did not rule on these motions and instead stayed the case on September 19, 2017 to allow the parties to mediate. On October 24, 2017, the Court granted the parties' joint motion to extend the stay order until January 31, 2018.
SBS and SGRP Hogan Litigation
Paradise Hogan was engaged by and provided services to SBS as an independent contractor pursuant to the terms of an "Independent Contractor Master Agreement" with SBS (prepared solely by SBS) acknowledging his engagement as an independent contractor. On January 6, 2017, Hogan filed suit against SBS and SGRP (and part of the Company), styled Civil Action No. 1:17-cv-10024-LTS, in the U.S. District Court for District of Massachusetts. Hogan initially asserted claims on behalf of himself and an alleged nationwide class of similarly situated individuals who provided services to SBS and SGRP as independent contractors. Hogan alleged that he and other alleged class members were misclassified by SBS as independent contractors (instead of as employees), and as a result of this purported misclassification, Hogan asserted claims on behalf of himself and the alleged Massachusetts class members under the Massachusetts Wage Act and Minimum Wage Law for failure to pay overtime and minimum wages, as well as state law claims for breach of contract, unjust enrichment, quantum meruit, and breach of the covenant of good faith and fair dealing. In addition, Hogan asserted claims on behalf of himself and the nationwide class for violation of the Fair Labor Standards Act's overtime and minimum wage provisions. On March 28, 2017, the CompanySGRP moved to refer Hogan's claim to arbitration pursuant to his agreement, to dismiss or stay Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted. Plaintiff's
On March 12, 2018, the Court denied the Motion to Compel Arbitration as to SGRP because as drafted by SBS, the arbitration clause did not reference or protect SGRP according to the Court. However, the Court eventually granted SBS the right to arbitrate without SGRP. SGRP appealed to the First Circuit contesting the District Court's decision that the arbitration clause (as written by SBS) did not protect SGRP.
On January 25, 2019, the First Circuit issued a judgment affirming the District Court's decision that the arbitration clause (as written by SBS) did not protect SGRP and remanding the case back to the District Court for further proceedings. As a result, SGRP would have been required to go to trial without SBS.
Facing lengthy and costly litigation and significant potential damages in the Hogan Case, on March 27, 2019, SGRP entered into mediation with the plaintiffs and plaintiff's counsel subsequently notified SGRP's attorneyin the Hogan Case to try to settle any potential future liability for any possible judgment against SGRP in that case. SBS and its stockholders were no longer involved in that case and so were not involved in that mediation. After extensive discussions, SGRP reached a settlement and entered into a memorandum of their intent to amend their Complaint without prejudice. The Amended Complaint,settlement agreement (the "Hogan Settlement"), which was approved by the court and became final in November 2019, and the Company was released by plaintiff and the settlement class from all other liability under the Hogan Case. Pursuant to the Hogan Settlement, SGRP agreed to a maximum settlement amount of $250,000 (in three installments), which payments commenced in December 2019 with the first payment of $150,000, $50,000 paid in March 2020 and the remaining $50,000 paid in June 2020.
SBS Rodgers Litigation
Maceo Rodgers was engaged by and provided services to SBS pursuant to the terms of his "Master Agreements" with SBS acknowledging his engagement as an independent contractor. On February 21, 2014, Rodgers filed suit against SBS, Robert G. Brown and William H. Bartels, styled Civil Action No. 3:14-CV-00055, in the U.S. District Court for the Southern District of Texas (Galveston Division). Plaintiff asserted claims on May 2, 2017, eliminated allbehalf of Plaintiff's claims except for a single claim against SGRP for failure to pay Hoganhimself and aan alleged class of similarly situated class of Massachusettsindividuals who provided services to SBS as independent contractors at any time on or after July 15, 2012, claiming they all wages under the Massachusetts Wage Actwere misclassified by SBS independent contractors and that, as a separate, but identical claim against SBS. The result of this misclassification, the amendment significantly narrowed the scopeDefendants improperly underpaid them in violation of the litigation and eliminated the original nationwide Fair Labor Standards Act claims. The Company was granted leave to refile theirAct's overtime and minimum wage provisions. Although the Court conditionally certified the class on December 8, 2015, 61 individuals joined the action as opt-in plaintiffs, and all but 11 of them have potentially disqualifying arbitration provisions, residences outside the class's geographic area, or late opt-in filings, and were challenged by the Defendants in various motions, including a motion to compel arbitrationdecertify the class. The Court, however, did not rule on these motions and instead stayed the case on September 19, 2017 to dismiss Hogan's case pending arbitration, andallow the parties to dismiss Hogan's case for failuremediate. On October 24, 2017, the Court granted the parties' joint motion to state a specific claim upon which relief could be granted. The Company's motion was filed on June 7, 2017, Plaintiff's opposition toextend the Company's motion was filed on June 21, 2017 and the Company thereafter filed a reply brief in support of its motion on June 30, 2017. The parties currently await a hearing date on the Company's motion. stay order until January 31, 2018.
Potential Adverse EffectsRodgers settled for a claim of the approximately $618,000 against SBS Litigation
Any prolonged continuation of(but not any claims against Brown or material increaseBartels), in the legal defense costsSBS bankruptcy case, and in full settlement of that claim they agreed upon a discounted payment amount of approximately $48,000, payable in equal quarterly installments over a five (5) year period. See SBS (and thus the reimbursable expenses SBS may charge toBankruptcy, Settlement and that may be paid by the Companyto the extent reimbursement is approved by the Company in its discretion), the failure of SBS to satisfy anysuchjudgment or similar amount, any claim by SBS, any other related party or any third party that the Company is somehow liable for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceeding imposed against or involving SBS or other related party, any judicial determination that the Company is somehow liable for any such judgment or similar amount imposedagainst SBS or other related party (in whole or in part), any decrease in SBS's performance (quality or otherwise), any inability by SBS to execute the services for the Company, or any increase in the Company's use of employees (rather than independent contractors) as its domestic Field Specialists, in each case in whole or in part, could have a material adverse effect on the Company or its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected. See Note 6 to the Company's Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services,March 2020 Claim, above.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
10. Segment Information
9. | Segment Information |
The Company reports net revenues from operating income by reportable segment. Reportable segments are components of the Company for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing performance.
The Company provides similar merchandising,, business technology and marketing services throughout the world, operating within two reportable segments, its Domestic Division and its International Division. The Company uses those divisions to improve its administration and operational and strategic focuses, and it tracks and reports certain financial information separately for each of those divisions. The Company measures the performance of its Domestic and International Divisions and subsidiaries using the same metrics. The primary measurement utilized by management is operating profits, historically the key indicator of long-term growth and profitability, as the Company is focused on reinvesting the operating profits of each of its international subsidiaries back into its local markets in an effort to improve market share and continued expansion efforts.
The accounting policies of each of the reportable segments are the same as those described in the Summary of Significant Accounting Policies. Management evaluates performance as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue: | ||||||||||||||||
United States | $ | 15,062 | $ | 11,332 | $ | 40,069 | $ | 32,268 | ||||||||
International | 33,690 | 22,106 | 91,292 | 57,513 | ||||||||||||
Total revenue | $ | 48,752 | $ | 33,438 | $ | 131,361 | $ | 89,781 | ||||||||
Operating income (loss): | ||||||||||||||||
United States | $ | 343 | $ | (184 | ) | $ | 701 | $ | (120 | ) | ||||||
International | 485 | 614 | 1,583 | 1,496 | ||||||||||||
Total operating income | $ | 828 | $ | 430 | $ | 2,284 | $ | 1,376 | ||||||||
Interest expense (income): | ||||||||||||||||
United States | $ | 56 | $ | 36 | $ | 158 | $ | 88 | ||||||||
International | 54 | 15 | (41 | ) | 23 | |||||||||||
Total interest expense | $ | 110 | $ | 51 | $ | 117 | $ | 111 | ||||||||
Other (income), net: | ||||||||||||||||
United States | $ | – | $ | – | $ | – | $ | – | ||||||||
International | (78 | ) | (78 | ) | (275 | ) | (183 | ) | ||||||||
Total other (income), net | $ | (78 | ) | $ | (78 | ) | $ | (275 | ) | $ | (183 | ) | ||||
Income (loss) before income tax expense: | ||||||||||||||||
United States | $ | 287 | $ | (220 | ) | $ | 543 | $ | (208 | ) | ||||||
International | 509 | 677 | 1,899 | 1,656 | ||||||||||||
Total income before income tax expense | $ | 796 | $ | 457 | $ | 2,442 | $ | 1,448 | ||||||||
Income tax (benefit) expense: | ||||||||||||||||
United States | $ | 14 | $ | (306 | ) | $ | (71 | ) | $ | (394 | ) | |||||
International | 196 | 275 | 978 | 594 | ||||||||||||
Total income tax (benefit) expense | $ | 210 | $ | (31 | ) | $ | 907 | $ | 200 | |||||||
Net income: | ||||||||||||||||
United States | $ | 273 | $ | 86 | $ | 614 | $ | 186 | ||||||||
International | 313 | 402 | 921 | 1,062 | ||||||||||||
Total net income | $ | 586 | $ | 488 | $ | 1,535 | $ | 1,248 | ||||||||
Depreciation and amortization: | ||||||||||||||||
United States | $ | 339 | $ | 334 | $ | 1,018 | $ | 1,014 | ||||||||
International | 148 | 152 | 508 | 445 | ||||||||||||
Total depreciation and amortization | $ | 487 | $ | 486 | $ | 1,526 | $ | 1,459 | ||||||||
Capital expenditures: | ||||||||||||||||
United States | $ | 172 | $ | 291 | $ | 683 | $ | 798 | ||||||||
International | 183 | 151 | 363 | 376 | ||||||||||||
Total capital expenditures | $ | 355 | $ | 442 | $ | 1,046 | $ | 1,174 | ||||||||
|
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||
Revenue: | ||||||||||||||||
United States | $ | 22,123 | $ | 28,006 | $ | 45,412 | $ | 46,662 | ||||||||
International | 28,821 | 40,217 | 66,880 | 78,721 | ||||||||||||
Total revenue | $ | 50,944 | $ | 68,223 | $ | 112,292 | $ | 125,383 | ||||||||
Operating income: | ||||||||||||||||
United States | $ | 315 | $ | 2,608 | $ | 623 | $ | 3,360 | ||||||||
International | 1,648 | 1,622 | 2,817 | 2,601 | ||||||||||||
Total operating income | $ | 1,963 | $ | 4,230 | $ | 3,440 | $ | 5,961 | ||||||||
Interest expense (income): | ||||||||||||||||
United States | $ | 144 | $ | 185 | $ | 276 | $ | 246 | ||||||||
International | (60 | ) | 2 | 36 | 142 | |||||||||||
Total interest expense | $ | 84 | $ | 187 | $ | 312 | $ | 388 | ||||||||
Other (income), net: | ||||||||||||||||
United States | $ | (1 | ) | $ | (1 | ) | $ | (1 | ) | $ | (1 | ) | ||||
International | (49 | ) | (191 | ) | (57 | ) | (256 | ) | ||||||||
Total other (income), net | $ | (50 | ) | $ | (192 | ) | $ | (58 | ) | $ | (257 | ) | ||||
Income before income tax expense: | ||||||||||||||||
United States | $ | 172 | $ | 2,424 | $ | 348 | $ | 3,115 | ||||||||
International | 1,757 | 1,811 | 2,838 | 2,715 | ||||||||||||
Total income before income tax expense | $ | 1,929 | $ | 4,235 | $ | 3,186 | $ | 5,830 | ||||||||
Income tax expense: | ||||||||||||||||
United States | $ | 124 | $ | 501 | $ | 199 | $ | 702 | ||||||||
International | 500 | 927 | 760 | 1,284 | ||||||||||||
Total income tax expense | $ | 624 | $ | 1,428 | $ | 959 | $ | 1,986 | ||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
September 30, | December 31, | |||||||||||||||||||||||
2017 | 2016 | |||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||
Net income: | ||||||||||||||||||||||||
United States | $ | 21,804 | $ | 22,189 | $ | 48 | $ | 1,923 | $ | 149 | $ | 2,413 | ||||||||||||
International | 36,754 | 32,662 | 1,257 | 884 | 2,078 | 1,431 | ||||||||||||||||||
Total assets | $ | 58,558 | $ | 54,851 | ||||||||||||||||||||
Total net income | $ | 1,305 | $ | 2,807 | $ | 2,227 | $ | 3,844 | ||||||||||||||||
Net (income) attributable to non-controlling interest: | ||||||||||||||||||||||||
United States | $ | (519 | ) | $ | (679 | ) | $ | (583 | ) | $ | (775 | ) | ||||||||||||
International | (889 | ) | (605 | ) | (1,451 | ) | (930 | ) | ||||||||||||||||
Total net (income) attributable to non-controlling interest | $ | (1,408 | ) | $ | (1,284 | ) | $ | (2,034 | ) | $ | (1,705 | ) | ||||||||||||
Net income (loss) attributable to SPAR Group, Inc.: | ||||||||||||||||||||||||
United States | $ | (471 | ) | $ | 1,244 | $ | (434 | ) | $ | 1,638 | ||||||||||||||
International | 368 | 279 | 627 | 501 | ||||||||||||||||||||
Total net income (loss) attributable to SPAR Group, Inc. | $ | (103 | ) | $ | 1,523 | $ | 193 | $ | 2,139 | |||||||||||||||
Depreciation and amortization: | ||||||||||||||||||||||||
United States | $ | 419 | $ | 382 | $ | 832 | $ | 754 | ||||||||||||||||
International | 120 | 146 | 247 | 284 | ||||||||||||||||||||
Total depreciation and amortization | $ | 539 | $ | 528 | $ | 1,079 | $ | 1,038 | ||||||||||||||||
Capital expenditures: | ||||||||||||||||||||||||
United States | $ | 288 | $ | 344 | $ | 669 | $ | 722 | ||||||||||||||||
International | 156 | 127 | 117 | 213 | ||||||||||||||||||||
Total capital expenditures | $ | 444 | $ | 471 | $ | 786 | $ | 935 | ||||||||||||||||
Note: There were no inter-company sales for the six months ended June 30, 2020 or 2019.
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Assets: | ||||||||
United States | $ | 30,697 | $ | 24,927 | ||||
| International | 43,213 | 54,608 | ||||||
Total assets | $ | 73,910 | $ | 79,535 | ||||
June 30, | December 31, | |||||||
2020 | 2019 | |||||||
Long lived assets: | ||||||||
United States | $ | 4,182 | $ | 4,957 | ||||
| International | 3,358 | 3,954 | ||||||
Total long lived assets | $ | 7,540 | $ | 8,911 | ||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Geographic Data (in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | % of | % of | % of | % of | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | consolidated | consolidated | consolidated | consolidated | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
International revenue: | % of consolidated net revenue | % of consolidated net revenue | % of consolidated net revenue | % of consolidated net revenue | net revenue | net revenue | net revenue | net revenue | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Brazil | $ | 11,132 | 22.8 | % | $ | 1,850 | 5.5 | % | $ | 29,232 | 22.3 | % | $ | 1,850 | 2.1 | % | $ | 10,539 | 20.7 | % | $ | 16,612 | 24.3 | % | $ | 26,103 | 23.2 | % | $ | 32,145 | 25.6 | % | ||||||||||||||||||||||||||||||||
South Africa | 6,703 | 13.7 | 5,936 | 17.8 | 19,646 | 15.0 | 14,871 | 16.6 | 6,088 | 12.0 | 6,442 | 9.4 | 13,002 | 11.6 | 12,976 | 10.3 | ||||||||||||||||||||||||||||||||||||||||||||||||
Mexico | 6,115 | 12.5 | 5,495 | 16.4 | 16,177 | 12.3 | 15,600 | 17.4 | 4,820 | 9.5 | 5,664 | 8.3 | 10,667 | 9.5 | 10,951 | 8.7 | ||||||||||||||||||||||||||||||||||||||||||||||||
China | 2,868 | 5.9 | 3,029 | 9.1 | 7,396 | 5.6 | 8,646 | 9.6 | 2,756 | 5.4 | 3,180 | 4.7 | 5,320 | 4.7 | 6,459 | 5.2 | ||||||||||||||||||||||||||||||||||||||||||||||||
India | 1,915 | 3.8 | 2,065 | 3.0 | 4,207 | 3.7 | 4,271 | 3.4 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Japan | 2,426 | 5.0 | 1,799 | 5.4 | 5,970 | 4.5 | 5,157 | 5.7 | 1,649 | 3.2 | 2,865 | 4.2 | 4,431 | 3.9 | 5,595 | 4.5 | ||||||||||||||||||||||||||||||||||||||||||||||||
India | 1,947 | 4.0 | 1,523 | 4.6 | 5,397 | 4.1 | 4,203 | 4.7 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Canada | 1,499 | 3.1 | 1,453 | 4.3 | 4,544 | 3.5 | 4,582 | 5.1 | 1,004 | 2.0 | 2,459 | 3.6 | 2,720 | 2.4 | 4,563 | 3.6 | ||||||||||||||||||||||||||||||||||||||||||||||||
Australia | 935 | 1.9 | 945 | 2.8 | 2,741 | 2.1 | 2,359 | 2.6 | 50 | 0.1 | 863 | 1.3 | 430 | 0.4 | 1,627 | 1.3 | ||||||||||||||||||||||||||||||||||||||||||||||||
Turkey | 65 | 0.1 | 76 | 0.2 | 189 | 0.1 | 245 | 0.3 | - | - | 67 | 0.1 | - | - | 134 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||||||||
Total international revenue | $ | 33,690 | 69.0 | % | $ | 22,106 | 66.1 | % | $ | 91,292 | 69.5 | % | $ | 57,513 | 64.1 | % | $ | 28,821 | 56.7 | % | $ | 40,217 | 58.9 | % | $ | 66,880 | 59.4 | % | $ | 78,721 | 62.7 | % | ||||||||||||||||||||||||||||||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Long lived assets: | ||||||||
United States | $ | 8,061 | $ | 8,594 | ||||
International | 4,382 | 3,965 | ||||||
Total long lived assets | $ | 12,443 | $ | 12,559 | ||||
10. | Recent Accounting Pronouncements |
11. Purchase of Interests in SubsidiariesThe Company reviews new accounting pronouncements as they are issued or proposed by the Financial Accounting Standards Board (“FASB”).
In September 2016, after acquiring SGRP Brasil Participações Ltda. ("SGRP Holdings"), a Brazilian limitada (which is a form of limited liability company), and establishing SPAR Brasil Serviços de Merchandising e Tecnologia S.A., a Brazilian corporation ("SPAR BSMT"), in a series ofDecember 2019, the FASB issued ASU 2019-12 simplifying various aspects related party transactions (See Note 6 to the Company's Consolidated Financial Statements - Related Party Transactions–International Related Party Services, above), SGRP Holdingsaccounting for income taxes. The guidance removes exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and SPAR BSMT (the "Purchasers") entered into a Quota Purchase Agreement dated September 13, 2016 (the "NM QPA"),the recognition of deferred tax liabilities for outside basis differences. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with Interservice Publicidade Sociedade Ltda., a Brazilian limitada, Momentum Promoções Ltda., a Brazilian limitada, and IPG Nederland B.V., a Netherlands company (collectively,early adoption permitted. The Company is currently evaluating the "Sellers"). The Sellers are subsidiaries of The Interpublic Group of Companies, Inc., a Delaware corporation ("Interpublic"), which is a global provider of advertising, media and other business services. The NM QPA provided for the acquisition by the Purchasers from the Sellers (the "NM Acquisition") of allimpact of the equity shares (called "quotas") in New Momentum Ltda., a Brazilian limitada,new guidance on our consolidated financial statements and New Momentum Serviços Temporários Ltda., a Brazilian limitada (each a "NM Company" or collectively the "NM Companies"), two of Interpublic's "In Store" companies in Brazil. SPAR BSMT acquired 99% of the quotas issued by each NM Company and SGRP Holdings acquired 1% of the quotas issued by each NM Company pursuant to the NM QPA. The closing of the acquisition of the NM Companies was completed with the disbursement of the purchase price to the Sellers on September 19, 2016, effective as of close of business on September 13, 2016. The purchase price for the NM Companies was R$1,312,000 (approximately US$401,000). The Company has since changed the names of the NM Companies to SPAR Brasil Serviços LTDA. and SPAR Brasil Serviços Temporários LTDA.related disclosures.
Momentum Promoções Ltda., oneIn August 2018, the FASB issued ASU 2018-13 which eliminates, adds and modifies certain fair value measurement disclosures. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual periods, with early adoption permitted. The adoption of this standard did not have a material impact to the consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the Sellers, also agreed to provide certain transition services and continued usecurrent two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of certain existing office space to SPAR BSMT and eacha reporting unit’s carrying amount over its fair value (Step 1 of the NM Companies (collectively, "SPAR Brazil"), pursuant tocurrent two-step goodwill impairment test). The ASU is effective prospectively for reporting periods beginning after December 15, 2019. The adoption of this standard did not have a Transition Services Agreement dated September 13, 2016 (the "Transition Agreement"), and a Sublease Agreement dated September 13, 2016 (the "Sublease"), respectively. The Sublease has an initial term of 12 months and requires monthly rent and back office support payments of R$205,417 (approximately $65,000 USD). After December 31, 2016,material impact on the Transition Agreement relating to Accounting Service, terminated on April 30, 2017, and for IT service, terminated on September 13, 2017.goodwill impairment testing process or the consolidated financial statements.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The Company has completed its preliminary calculation of the fair value and related allocation of assets between goodwill and other. The amounts listed below reflect the results of our preliminary assessment and may be updated should additional information become available related to this acquisition. A summary of assets acquired, goodwill and liabilities assumed and net of purchase price are as follows (in thousands):
Cash | $ | 484 | ||
Net Working Capital, net of cash | (155 | ) | ||
Fixed Assets | 22 | |||
Intangible Assets | 336 | |||
Goodwill | 133 | |||
Assumed Liabilities | (419 | ) | ||
Net Fair Value of Assets Acquired | $ | 401 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The following table contains unaudited pro forma revenue and net income for SPAR Group, Inc. assuming SPAR Brasil closed on January 1, 2016 (in thousands):
Revenue | Net (Loss) | |||||||
Consolidated supplemental pro forma for the nine month period ended September 30, 2016 | $ | 113,783 | $ | (194 | ) | |||
The pro forma in the table above includes adjustments for, amortization of intangible assets and acquisition costs to reflect results that are more representative of the results of the transactions as if the SPAR Brasil acquisition closed on January 1, 2016. This pro forma information utilizes certain estimates, is presented for illustrative purposes only and may not be indicative of the results of operation that would have actually occurred. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, such as anticipated cost savings from operating synergies.
12. Summary of Significant Accounting Policies
New Accounting Pronouncements
ASU 2017-09, Scope of Modification Accounting, clarifies Topic 718, Compensation – Stock Compensation, such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification. The ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact the adoption of ASU 2017-09 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standard Update 2017-04 (ASU 2017-04), Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. With ASU 2017-04, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively for reporting periods beginning after December 31, 2017. The impact on the Company's consolidated financial statements will depend on the facts and circumstances of any specific future transactions.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
ASU 2016-17, Interests Held through Related Parties That Are under Common Control, amends the variable interest entity (VIE) guidance within Topic 810, Consolidation. It does not change the two required characteristics for a single decision maker to be the primary beneficiary ("power" and "economics"), but it revises one aspect of the related analysis. The amendments change how a single decision maker of a VIE treats indirect variable interests held through related parties that are under common control when determining whether it is the primary beneficiary of that VIE. The ASU requires consideration of such indirect interests on a proportionate basis, instead of being the equivalent of direct interests in their entirety, thereby making consolidation less likely. ASU 2016-17 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, ASU 2016-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. However, if an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of that fiscal year. Entities that have not yet adopted ASU 2015-02 are required to adopt ASU 2016-17 at the same time they adopt ASU 2015-02 and should apply the same transition method elected for ASU 2015-02. Entities that have already adopted ASU 2015-02 are required to apply ASU 2016-17 retrospectively to all relevant prior periods beginning with the fiscal year in which ASU 2015-02 initially was applied.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows ("ASU 2016-15"), which reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The new standard is effective for reporting periods after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, amending how entities will measure credit losses“Financial Instruments (Topic 326) Credit Losses”. Topic 326 changes the impairment model for most financial assets and certain other instrumentsinstruments. Under the new standard, entities holding financial assets and net investment in leases that are not measuredaccounted for at fair value through net income. The guidance requiresincome are to be presented at the application of a currentnet amount expected credit loss model, which is a new impairment model based on expected losses. Under this model, an entity recognizes anto be collected. An allowance for expected credit losses basedwill be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This ASUfinancial asset. Topic 326 is effective for interim and annual reporting periodsas of January 1, 2020, although in November 2019, the FASB delayed the effective date until fiscal years beginning after December 15, 2019 with early2022 for Security Exchange Commission ("SEC") filers eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company qualifies as a smaller reporting company under the SEC’s definition. Early adoption permitted for annual reporting periods beginning after December 15, 2018.is permitted. The Company is currently evaluating the impact of the new guidanceTopic 326 on its consolidated financialbalance sheets, statements of operations, statements of cash flows and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) ("ASU 2016-09"). The guidance changes how companies account for certain aspects of equity-based payments to employees. Entities will be required to recognize income tax effects of awards in the income statement when the awards vest or are settled. The guidance also allows an employer to repurchase more of an employee's shares than it can under current guidance for tax withholding purposes providing for withholding at the employee's maximum rate as opposed to the minimum rate without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The updated guidance is effective for annual periods beginning after December 15, 2016. Effective January 1, 2017, the Company adopted the accounting guidance contained within ASU 2016-09.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability willare initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S. Generally Accepted Accounting Principles ("GAAP"),GAAP, the presentation of expenses and cash flows will dependdepends primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization'sorganization’s leasing activities. This ASU is effective for annual periods,An additional optional transition method to adopt the new lease standard at the adoption date, as compared to the beginning of the earliest period presented, and interim periods within those annual periods,recognize a cumulative-effect adjustment to the beginning after December 15, 2018 and requires modified retrospective application. Earlybalance of retained earnings in the period of adoption is permitted. allowed. The Company adopted this guidance with the optional transition method effective January 1, 2019.
11. | Leases |
The Company is currently evaluatinga lessee under certain operating leases for office space and equipment.
ASC 842 requires lessees to recognize leases on the impactbalance sheet as a lease liability with a corresponding right of use ("ROU") asset, subject to certain permitted accounting policy elections.
Under ASC 842, SPAR determines, at the inception of the new guidancecontract, whether the contract is or contains a lease based on our consolidated financial statements and related disclosures. As our operations are conducted in leased facilities, this ASU may require uswhether the contract provides SPAR the right to disclose additional information about our leasing activities. The Company plans to evaluatecontrol the impactuse of a physically distinct asset or substantially all of the new guidancecapacity of an asset.
Many of SPAR's equipment leases are short-term or cancellable with notice. SPAR’s office space leases have remaining lease terms between one and approximately eleven years, many of which include one or more options to extend the term for periods thereafter. Certain leases contain options to terminate the lease early, which may include a penalty for exercising the option. Many of the termination options require notice within a specified period, after which the option is no longer available to SPAR if not exercised. The extension options and termination options may be exercised at SPAR’s sole discretion. SPAR does not consider in the measurement of ROU assets and lease liabilities an option to extend or terminate a lease if SPAR is not reasonably certain to exercise the option. As of the end of this reporting period, SPAR has not included any options to extend or terminate in its measurement of ROU assets or lease liabilities.
Certain of SPAR’s leases include covenants that oblige SPAR, at its sole expense, to repair and maintain the leased asset periodically during the lease term. SPAR is not a party to any leases that contain residual value guarantees nor is SPAR a party to any leases that provide an option to purchase the underlying asset.
Many of SPAR's office space leases include fixed and variable payments. Variable payments relate to real estate taxes, insurance, operating expenses, and common area maintenance, which are usually billed at actual amounts incurred proportionate to SPAR's rented square feet of the building. Variable payments that do not depend on an index or rate are expensed by SPAR as they are incurred and are not included in the measurement of the lease liability.
Some of SPAR's leases contain both lease and non-lease components. Fixed and variable payments are allocated to each component relative to observable or estimated standalone prices. SPAR measures its consolidated financial statements and related disclosures.variable lease costs as the portion of variable payments that are allocated to lease components.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
In November 2015,SPAR measures its lease liability for each leased asset as the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classificationpresent value of Deferred Taxes, simplifyinglease payments, as defined in ASC 842, allocated to the balance sheet classification of deferred taxes by requiring all deferred taxes, along with any related valuation allowance,lease component, discounted using an incremental borrowing rate specific to be presented as noncurrent. This ASU is effective for the Company beginning inunderlying asset. SPAR's ROU assets are equal to the first quarter of 2017, whichlease liability. SPAR estimates its incremental borrowing rate based on the Company has applied retroactively. Upon the adoption of the guidance, the Company has reclassified $471,000 from current assetsinterest rate SPAR would incur to non-current assets, and reduced both non-current and current liabilities by $2,389,000.
In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. GAAP. The new standard, along with amendments in 2015 and 2016, focuses on creating a single source of revenue guidance for revenue arising from contracts with customers. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers atborrow an amount that represents whatequal to the company expects to be entitled tolease payments on a collateralized basis over a similar term in exchange for those goods or services. Additionally, the new standard requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurement and recognition. The standard, as amended, will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period.similar economic environment.
The Company, alongcomponents of SPAR's lease expenses for the six months ended June 30, 2020 and 2019, which are included in the condensed consolidated income statement, are as follows (in thousands):
Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | |||||||||||||||
Lease Costs | Classification | June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | |||||||||||||
Operating lease cost | Selling, General and Administrative Expense | $ | 694 | $ | 534 | $ | 1,368 | $ | 1,067 | |||||||||
Short-term lease cost | Selling, General and Administrative Expense | $ | 100 | $ | 28 | 213 | 57 | |||||||||||
Variable costs | Selling, General and Administrative Expense | $ | 97 | $ | 290 | 194 | 585 | |||||||||||
Total lease cost | $ | 891 | $ | 852 | $ | 1,775 | $ | 1,709 | ||||||||||
Supplemental cash flow information related to SPAR’s leases for six months ended June 30, 2020 and 2019 is as follows (in thousands):
Three Months Ended | Three Months Ended | Six Months Ended | Six Months Ended | ||||||||||||||
June 30, 2020 | June 30, 2019 | June 30, 2020 | June 30, 2019 | ||||||||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 794 | $ | 562 | $ | 1,514 | $ | 1,071 | |||||||||
Assets obtained in exchange for new operating lease liabilities | |||||||||||||||||
Operating lease | $ | 741 | $ | 5,736 | $ | 1,463 | $ | 5,736 | (a) | ||||||||
At June 30, 2020, SPAR had the following maturities of lease liabilities related to office space and equipment, all of which are under non-cancellable operating leases (in thousands):
Period Ending June 30, | Amount | |||
2020 | $ | 1,779 | ||
2021 | 1,153 | |||
2022 | 629 | |||
2023 | 106 | |||
2024 | - | |||
| Total Lease Payments | 3,667 | |||
| Less: imputed interest | 179 | |||
Total | 3,488 | |||
12. | Subsequent Events |
Resignation of Christiaan M. Olivier asChief Executive Officer (Principal Executive Officer), President and Director
After the close of business on July 15, 2020, the Corporation received the voluntary resignation of Christiaan M. Olivier as Chief Executive Officer (Principal Executive Officer), President and a director of SGRP, and from all positions with its third-party advisor, is currently performing an analysis that the new standard will have on its revenue for both the domestic and international segments. This analysis includes evaluating which, if any, practical expedients the Company will elect upon adoption. Based on analysis to date, we currently believe our revenue recognition under the new standard will be mostly consistentSGRP's subsidiaries, effective with the current standard, with performance obligations being satisfied over time as our customers simultaneously receive and consume the benefitsclose of our performance obligations. We expect that the disclosures in the notes to our consolidated financial statements related to revenue recognition will be significantly expanded under the new standard, specifically regarding quantitative and qualitative information about performance obligations.business on August 7, 2020 (the "CEO Effective Time").
The Company expectsMr. Olivier has said that his resignation is due to adopt the standard using the modified retrospective approach, under which the cumulative effecthis assertion that actions of the initial applicationCorporation's two largest shareholders (Robert G. Brown and William H. Bartels), at times supported by some independent directors, have led to dysfunctional governance and disagreements with the Board over director and related party accountability and corporate strategy. Mr. Olivier has provided written correspondence to SGRP discussing his beliefs respecting the circumstances of his resignation.
On July 17, 2020, the Board of Directors of SGRP (the "Board") accepted Mr. Olivier's resignation. The Board plans to appoint an interim successor Chief Executive Officer and President.
Retirement of James R. Segreto as Chief Financial Officer (Principal Financial and Accounting Officer), Treasurer and Secretary
After the close of business on July 15, 2020, the Corporation received the notice of the new standard will be recognizedvoluntary retirement of James R. Segreto as an adjustmentChief Financial Officer (Principal Financial and Accounting Officer), Treasurer and Secretary of SGRP, and from all positions with SGRP's subsidiaries, effective with the close of business on August 7, 2020 (the "CFO Effective Time").
Mr. Segreto's retirement letter expressed similar concerns outlined by Mr. Olivier and as reported and supported in various SEC filings. Mr. Segreto has provided written correspondence to SGRP discussing his beliefs respecting the circumstances of his retirement.
On July 17, 2020 the Board accepted Mr. Segreto's notice of retirement. Several candidates have been identified by management and recommended to the opening balance of retained earnings in the first quarter of 2018. As we are still in the process of evaluating ASU 2014-09 along with the subsequent amendments our initial assessment may change as we continue to refine our systems, processes, controlsCorporation's Audit Committee and assumptions.Governance Committee.
13. Capital Lease Obligations
The Company has an outstanding capital lease obligation with an interest rate of 5.8%. The related capital lease assets balances are detailed below (in thousands):
Start Date: | Original Cost | Accumulated Amortization | Net Book Value at September 30, 2017 | |||||||||
January 2017 | $ | 76 | $ | 19 | $ | 57 | ||||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Annual future minimum lease payments required under the leases, together with the present value as of September 30, 2017, are as follows (in thousands):
Year Ending |
| |||
2017 | $ | 7 | ||
2018 | 28 | |||
2019 | 28 | |||
Total | 63 | |||
Less amount representing interest | 4 | |||
Present value of net minimum lease payments included in accrued expenses and other current liabilities, and long term debt | $ | 59 | ||
SPAR Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Quarterly Report") contains "forward-looking statements" within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, made by, or respecting, SPAR Group, Inc. ("SGRP") and its subsidiaries (together with SGRP, the "SPAR Group" or the "Company"), and this Quarterly Report has been filed by SGRP with the Securities and Exchange Commission (the "SEC"). There also are "forward-looking statements" contained in SGRP's Annual Report on Form 10-K for its fiscal year ended December 31, 2016 (as2019(as filed, the "Annual Report"), as filed with the SEC on April 17, 2017,14, 2020, in SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders to be held on May 18, 2017 (the "Proxy Statement")13, 2020, which SGRP filed with the SEC on May 1, 2020 (the "Proxy Statement"), SGRP's definitive Proxy Statement and Information Statement (the "First Special Meeting Proxy/Information Statement"), filed with the SEC on April 28, 2017, 3, 2020, and SGRP's Current Report on Form 8-K respecting the First Special Meeting voting results as filed with the SEC on May 4, 2020 (the "First Special Meeting Report"). and SGRP's Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and statements as and when filed with the SEC (including this Quarterly Report, the Annual Report and the Proxy Statement, the First Special Meeting Proxy/Information Statement and the First Special Meeting Report, each a "SEC Report"). "Forward-looking statements" are defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other applicable federal and state securities laws, rules and regulations, as amended (together with the Securities Act and Exchange Act, the "Securities Laws").
All statements (other than those that are purely historical) are forward-looking statements. Words such as "may," "will," "expect," "intend", "believe", "estimate", "anticipate," "continue," "plan," "project," or the negative of these terms or other similar expressions also identify forward-looking statements. Forward-looking statements made by the Company in this Quarterly Report or the Annual Report may include (without limitation) statements regarding: risks, uncertainties, cautions, circumstances and other factors ("Risks"); and plans, intentions, expectations, guidance or other information respecting the potential negative effects of the Coronavirus and COVID-19 pandemic on Company's business, cash flow or financial condition, the Company's cash flow later this year, or the pursuit or achievement of the Company'sCompany's five corporate objectives (growth, customer value, employee development, greater productivity & efficiency, and increased earnings per share), building upon the Company'sCompany's strong foundation, leveraging compatible global opportunities, growing the Company'sCompany's client base and contracts, continuing to strengthen its balance sheet, growing revenues and improving profitability through organic growth, new business development and strategic acquisitions, and continuing to control costs.costs. The Company'Company's forward-looking statements also include (without limitation) those made in the Annual Report in "Business", "Risk Factors", "Legal Proceedings", "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Directors, Executive Officers and Corporate Governance", "Executive Compensation", "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters", and "Certain Relationships and Related Transactions, and Director Independence".
You should carefully review and consider the Company's's forward-looking statements (including all risk factors and other cautions and uncertainties) and other information made, contained or noted in or incorporated by reference into this Quarterly Report, the Annual Report, the Proxy Statement, the First Special Meeting Proxy/Information Statement and the First Special Meeting Report and the other applicable SEC Reports, but you should not place undue reliance on any of them. The results, actions, levels of activity, performance, achievements or condition of the Company (including its affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, performance, prospects, sales, strategies, taxation or other achievement, results, risks, trends or condition) and other events and circumstances planned, intended, anticipated, estimated or otherwise expected by the Company (collectively, "Expectations"), and our forward-looking statements (including all Risks) and other information reflect the Company's current views about future events and circumstances. Although the Company believes those Expectations and views are reasonable, the results, actions, levels of activity, performance, achievements or condition of the Company or other events and circumstances may differ materially from our Expectations and views, and they cannot be assured or guarantiedguaranteed by the Company, since they are subject to Risks and other assumptions, changes in circumstances and unpredictable events (many of which are beyond the Company's control). In addition, new Risks arise from time to time, and it is impossible for the Company to predict these matters or how they may arise or affect the Company. Accordingly, the Company cannot assure you that its Expectations will be achieved in whole or in part, that it has identified all potential Risks, or that it can successfully avoid or mitigate such Risks in whole or in part, any of which could be significant and materially adverse to the Company and the value of your investment in the Company's Common Stock.
These forward-looking statements reflect the Company's Expectations, views, Risks and assumptions only as of the date of this Quarterly Report, and the Company does not intend, assume any obligation, or promise to publicly update or revise any forward-looking statements (including any Risks or Expectations) or other information (in whole or in part), whether as a result of new information, new or worsening Risks or uncertainties, changed circumstances, future events, recognition, or otherwise.
SPAR Group, Inc. and Subsidiaries
GENERAL
The Company is a diversified international merchandising, business technology and marketing services company and provides a broad array of services worldwide to help companies improve their sales, operating efficiency and profits at retail locations. The Company provides its merchandising and other marketing services to manufacturers, distributors and retailers worldwide, primarily in mass merchandise, office supply, value, grocery, drug, independent, convenience, toy, home improvement and electronics stores. The Company also provides furniture and other product assembly services in stores, homes and offices. The Company has supplied these services in the United States since certain of its predecessors were formed in 1979 and internationally since the Company acquired its first international subsidiary in Japan in May of 2001. The Company currently does business in 10 countries that encompass approximately 50% of the total world population through its operations in the United States, Australia, Brazil, Canada, China, India, Japan, Mexico, South Africa and Turkey.
Merchandising services primarily consist of regularly scheduled, special project and other product services provided at store level, and the Company may be engaged by either the retailer or the manufacturer. Those services may include restocking and adding new products, removing spoiled or outdated products, resetting categories "on the shelf" in accordance with client or store schematics, confirming and replacing shelf tags, setting new sale or promotional product displays and advertising, replenishing kiosks, demonstrating or promoting a product, providing on-site audit and in-store event staffing services and providing product assembly services in stores, homes and offices. Other merchandising services include whole store or departmental product sets or resets, including new store openings, new product launches and in-store demonstrations, special seasonal or promotional merchandising, focused product support and product recalls. The Company continues to seek to expand its merchandising, assembly and marketing services business throughout the world.
An OverviewSummaries of the Merchandisingour business and Marketing Services Industry
The merchandising and marketing services industry includes manufacturers, retailers, brokers, distributors and professional service merchandising companies. Merchandising services primarily involve placing orders, shelf maintenance, display placement, reconfiguring products on store shelves and replenishing product inventory. Additional marketing services include but are not limited to new store sets and remodels, audits, sales assist, installation and assembly, product demos/sampling, promotion and various others. The Company believes that merchandising and marketing services add value to retailers, manufacturers and other businesses and enhance sales by making a product more visible and more available to consumers.
Historically, retailers staffed their stores as needed to provide these services to ensure that manufacturers' inventory levels, the advantageous display of new items on shelves, and the maintenance of shelf schematics and product placement were properly merchandised. However, retailers in an effort to improve their margins, have decreased their own store personnel and increased their reliance on manufacturers to perform such services. At one time, manufacturers attempted to satisfy the need for merchandising and marketing services in retail stores by utilizing their own sales representatives. Additionally, retailers also used their own employees to merchandise their stores to satisfy their own merchandising needs. However, both manufacturers and retailers discovered that using their own sales representatives and employees for this purpose was expensive and inefficient. In addition, the changing retail environment, driven by the rise of digital and mobile technology, is fostering even more challenges to the labor model of retailers and manufacturers. These challenges include increased consumer demand for more interaction and engagement with retail sales associates, stores remodels to accommodate more technology, installation and continual maintenance of in-store digital and mobile technology, in-store pick-up and fulfillment of online orders and increased inventory management to reduce out-of-stocks from omnichannel shopping.
Most manufacturers and retailers have been, and SPAR Group believes they will continue, outsourcing their merchandising and marketing service needs to third parties capable of operating at a lower cost by (among other things) serving multiple manufacturers simultaneously. The Company also believes that it is well positioned, as a domestic and international merchandising and marketing services company, to provide these services to retailers, manufacturers and other businesses around the world more effectively and efficiently than other available alternatives.
SPAR Group, Inc. and Subsidiaries
Another significant trend impacting the merchandising and marketing services business is the continued preference of consumers to shop in stores and their tendency to make product purchase decisions once inside the store. Accordingly, merchandising and marketing services and in-store product promotions have proliferated and diversified. Retailers are continually re-merchandising and re-modeling entire departments and stores in an effort to respond to new product developments and changes in consumer preferences. We estimate that these activities have increased in frequency over the last few years. Both retailers and manufacturers are seeking third party merchandisers to help them meet the increased demand for these labor-intensive services.
In addition, the consolidation of many retailers and changing store formats have created opportunities for third party merchandisers when an acquired retailer's stores are converted to the look and formatset forth below. Please see Item 1 of the acquiring retailer. In many of those cases, stores are completely remodeled and re-merchandised to implement the new store formats.
SPAR Group believes the current trend in business toward globalization fits well with its expansion model. As companies expand into foreign markets they will need assistance in merchandising or marketing their products. As evidenced in the United States, retailer and manufacturer sponsored merchandising and marketing programs are both expensive and inefficient. The Company also believes that the difficulties encountered by these programs are only exacerbated by the logistics of operating in foreign markets. This environment has created an opportunityAnnual Report for the Company to exploit its global Internet and data network based technology (through computers or mobile devices) and its business model worldwide.
The Company's Domestic and International Geographic Segments:
The Company provides similar merchandising, business technology and marketing services throughout the world, operating within two reportable segments, its Domestic and International Divisions. The Company tracks and reports certain financial information separately for these two segments using the same metrics. The primary measurement utilized by management is operating profit level, historically the key indicator of long-term growth and profitability, as the Company is focused on reinvesting the operating profits of each of its international subsidiaries back into local markets in an effort to improve its market share and continued expansion efforts. Certain financial information regarding eacha more detailed description of the Company's two segments, which includes, among other items, their respective net revenues, operating incomeBusiness, and net income for eachthe following parts of the threeProxy Statement (which were incorporated by reference into the Annual Report): (i) Security Ownership of Certain Beneficial Owners and nine month periods ended September 30, 2017Management, (ii) Corporate Governance, (iii) Executive Compensation, Directors and 2016,Other Information and their respective assets as(iv) Executive Compensation, Equity Awards and Options. Please also see, review and give particular attention, to the Risk Factors in Item 1A of September 30, 2017,the Annual Report (including, without limitation, Dependence Upon and December 31, 2016, is provided aboveCost of Services Provided by Affiliates and Use of Independent Contractors,Potential Conflicts in Services Provided by Affiliates,Risks Related to the Company's Significant Stockholders: Potential Voting Control and Conflicts, and Risks of a Nasdaq Delisting and Penny Stock Trading), to Note 108 to the Company's Condensed Consolidated Financial Statements – Segment Commitments and Contingencies -InformationLegal Matters.
The Company's international business in each territory outside the United States is conducted through a foreign subsidiary incorporated in its primary territory. The primary territory establishment date (which may include predecessors), the percentage ofabove, and to Note 5 to the Company's equity ownership, and the principal office location for its US (domestic) subsidiaries and each of its foreign (international) subsidiaries is as follows:Condensed Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services, above.
Primary Territory | Date Established | SGRP Percentage Ownership |
Principal Office Location | |||
United States of America | 1979 | 100% | White Plains, New York, United States of America | |||
Japan | May 2001 | 100% | Tokyo, Japan | |||
Canada | June 2003 | 100% | Vaughan, Canada | |||
South Africa | April 2004 | 51% | Durban, South Africa | |||
India | April 2004 | 51% | New Delhi, India | |||
Australia | April 2006 | 51% | Melbourne, Australia | |||
China | March 2010 | 51% | Shanghai, China | |||
Mexico | August 2011 | 51% | Mexico City, Mexico | |||
Turkey | November 2011 | 51% | Istanbul, Turkey | |||
Brazil1 | September 2016 | 51% | Sao Paolo, Brazil |
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SPAR Group, Inc. and Subsidiaries
Critical Accounting Policies
Other than the adoption of accounting pronouncements as described above, there have been no significant changes to the Company's accounting policies since it filed its audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016, with the SEC on April 17, 2017.
Results of Operations
Three months ended September June 30,, 2017 2020, compared to three months ended June 30, 2019September 30, 2016
The following table sets forth selected financial data and data as a percentage of net revenues for the periods indicated (in thousands, except percent data).
Three Months Ended September 30, | Three Months Ended June 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2020 | 2019 | |||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
Net revenues | $ | 48,752 | 100.0 | % | $ | 33,438 | 100.0 | % | $ | 50,944 | 100.0 | % | $ | 68,223 | 100.0 | % | ||||||||||||||||
Cost of revenues | 39,960 | 82.0 | 26,162 | 78.2 | 41,072 | 80.6 | 54,159 | 79.4 | ||||||||||||||||||||||||
Gross profit | 8,792 | 18.0 | 7,276 | 21.8 | 9,872 | 19.4 | 14,064 | 20.6 | ||||||||||||||||||||||||
Selling, general & administrative expense | 7,477 | 15.3 | 6,360 | 19.0 | 7,370 | 14.5 | 9,306 | 13.6 | ||||||||||||||||||||||||
Depreciation & amortization | 487 | 1.0 | 486 | 1.5 | 539 | 1.1 | 528 | 0.8 | ||||||||||||||||||||||||
Operating income | 828 | 1.7 | 430 | 1.3 | 1,963 | 3.8 | 4,230 | 6.2 | ||||||||||||||||||||||||
Interest expense, net | 110 | 0.2 | 51 | 0.2 | 84 | 0.2 | 187 | 0.3 | ||||||||||||||||||||||||
Other (income), net | (78 | ) | (0.2 | ) | (78 | ) | (0.2 | ) | ||||||||||||||||||||||||
Other income, net | (50 | ) | - | (192 | ) | (0.3 | ) | |||||||||||||||||||||||||
Income before income taxes | 796 | 1.7 | 457 | 1.3 | 1,929 | 3.6 | 4,235 | 6.2 | ||||||||||||||||||||||||
Income tax expense (benefit) | 210 | 0.4 | (31 | ) | (0.1 | ) | ||||||||||||||||||||||||||
Income tax expense | 624 | 1.2 | 1,428 | 2.1 | ||||||||||||||||||||||||||||
Net income | 586 | 1.3 | 488 | 1.4 | 1,305 | 2.4 | 2,807 | 4.1 | ||||||||||||||||||||||||
Net income attributable to non-controlling interest | (340 | ) | (0.7 | ) | (546 | ) | (1.6 | ) | (1,408 | ) | (2.8 | ) | (1,284 | ) | (1.9 | ) | ||||||||||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 246 | 0.6 | % | $ | (58 | ) | (0.2 | )% | |||||||||||||||||||||||
Net income attributable to SPAR Group, Inc. | $ | (103 | ) | (0.4 | )% | $ | 1,523 | 2.2 | % | |||||||||||||||||||||||
Net Revenues
Net revenues for the three months ended SeptemberJune 30, 2017,2020, were $48.8$50.9 million, compared to $33.4$68.2 million for the three months ended SeptemberJune 30, 2016, an increase2019, a decrease of $15.3$17.3 million or 45.8%25.3%. The increase in net revenue is primarily attributable to the acquisition of our Brazil subsidiary, which contributed $9.3 million. In addition, the remainder of our international segment increased $2.3 million, and our domestic segment increased $3.7 million.
Domestic net revenues totaled $15.1$22.1 million in the three months ended SeptemberJune 30, 2017,2020, compared to $11.3$28.0 million for the same period in 2016, an increase2019. The decrease of 32.9%. The increase$5.9 million was primarily due to an increase in project work compared to last year.the impact of Covid-19.
International net revenues totaled $33.7$28.8 million for the three months ended SeptemberJune 30, 2017,2020, compared to $22.1$40.2 million for the same period in 2016, an increase2019, a decrease of $11.6$11.4 million or 52.4%28.2%. The increasedecrease in international net revenues was primarily due to foreign currency translation and the September 2016 acquisitionimpact of our Brazilian operation, which added $9.3 million, an increase in South Africa of $0.8 million, and an increase in Japan of $0.6 million.Covid-19.
Cost of Revenues
The Company's cost of revenues consists of its on-site labor and field administrationadministration fees, travel and other direct labor-related expenses and was 82.0%80.6% of its net revenues for the three months ended SeptemberJune 30, 2017,2020, and 78.2%79.4% of its net revenues for the three months ended SeptemberJune 30, 2016.2019.
Domestic cost of revenues was 76.5%79.1% of net domestic revenues for the three months ended SeptemberJune 30, 2017,2020, and 73.5%74.0% of net domestic revenues for the three months ended SeptemberJune 30, 2016.2019. The increase in cost of revenues was due primarily to an unfavorable mix of project work.
Internationally, the cost of revenues as a percentage of net international revenues of 3.0 percentage points was due primarily to continued price pressure81.8% and an unfavorable mix of project work compared to the same period last year. For83.1% for the three months ended SeptemberJune 30, 20172020 and 2016, approximately 68% and 76%2019, respectively, of the Company's domestic cost of revenues resulted from in-store merchandiser specialist, on-site assembly technician and field administration services, purchased from certain of the Company's affiliates, SBS, and SAS, respectively. (See Note 6 to the Condensed Consolidated Financial Statements - Related-Party Transactions.)
SPAR Group, Inc. and Subsidiaries
Internationally, the cost of revenues increased to 84.4% of net revenues for the three months ended September 30, 2017, compared to 80.7% of net revenues for the three months ended September 30, 2016. The cost of revenue increase of 3.7 percentage points was primarily due to a mix of higher cost margin business in Brazil, China and Mexico.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of the Company include its corporate overhead, project management, information technology, executive compensation, human resources, legal and accounting expenses. Selling, general and administrative expenses werewere approximately $7.5$7.4 million and $6.4$9.3 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
Domestic selling, general and administrative expenses totaled $2.9$3.9 million and $4.3 million for both the three month periodsmonths ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
International selling, general and administrative expenses totaled $4.6$3.4 million and $5.0 million for the three months ended SeptemberJune 30, 2017, compared to $3.5 million for the same period in 2016. The increase of approximately $1.1 million was primarily attributable to the Brazil acquisition.2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization charges totaled $487,000$539,000 and $528,000 for the three months ended SeptemberJune 30, 2017,2020 and $486,000 for the same period in 2016.2019, respectively.
Interest Expense
The Company's net interest expense was $110,000$84,000 for the three months ended SeptemberJune 30, 2017, compared to $51,0002020, and $187,000 for the three months ended September 30, 2016. The change is due primarily to increased domestic average borrowing and interest rate and lower interest income due to distribution of cashsame period in the form of a dividend from South Africa. 2019.
Other Income
Other income totaled $78,000was $50,000 and $192,000 for both the three month periodsmonths ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
Income Taxes
Income tax expense was $210,000 for the three months ended September 30, 2017, compared to a net tax benefit of $31,000$624,000 for the three months ended SeptemberJune 30, 2016. The change is due primarily to improved domestic performance2020, compared to prior year.$1.4 million for the three months ended June 30, 2019.
Non-controlling Interest
Net operating profits from thethe non-controlling interest, from the Company's 51% owned subsidiaries, resulted in a reduction of net income attributable to SPAR Group, Inc. of $340,000$1.4 million and $546,000$1.3 million for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
Net Income
The CompanyCompany reported net income of $246,000-$103,000 for the three months ended SeptemberJune 30, 2017,2020, or $0.01$0.00 per diluted share, compared to a net lossincome of $58,000,$1.5 million, or $0.00$0.07 per diluted share, for the corresponding period last year. The change is due primarily to increased domestic and international sales.
SPAR Group, Inc. and Subsidiaries
NineSixmonths ended September June 30, 20172020, compared to ninesixmonths ended June 30, 2019September 30, 2016
The following table sets forth selected financial data and data as a percentage of net revenues for the periods indicated (in thousands, except percent data).
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
Net revenues | $ | 131,361 | 100.0 | % | $ | 89,781 | 100.0 | % | ||||||||
Cost of revenues | 105,563 | 80.4 | 69,309 | 77.2 | ||||||||||||
Gross profit | 25,798 | 19.6 | 20,472 | 22.8 | ||||||||||||
Selling, general & administrative expense | 21,988 | 16.7 | 17,637 | 19.7 | ||||||||||||
Depreciation & amortization | 1,526 | 1.2 | 1,459 | 1.6 | ||||||||||||
Operating income | 2,284 | 1.7 | 1,376 | 1.5 | ||||||||||||
Interest expense, net | 117 | 0.1 | 111 | 0.1 | ||||||||||||
Other (income), net | (275 | ) | (0.2 | ) | (183 | ) | (0.2 | ) | ||||||||
Income before income taxes | 2,442 | 1.8 | 1,448 | 1.6 | ||||||||||||
Income tax expense | 907 | 0.7 | 200 | 0.2 | ||||||||||||
Net income | 1,535 | 1.1 | 1,248 | 1.4 | ||||||||||||
Net income attributable to non-controlling interest | (1,189 | ) | (0.9 | ) | (1,164 | ) | (1.3 | ) | ||||||||
Net income attributable to SPAR Group, Inc. | $ | 346 | 0.2 | % | $ | 84 | 0.1 | % | ||||||||
Six Months Ended June 30, | ||||||||||||||||
2020 | 2019 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
Net revenues | $ | 112,292 | 100.0 | % | $ | 125,383 | 100.0 | % | ||||||||
Cost of revenues | 90,632 | 80.7 | 100,685 | 80.3 | ||||||||||||
Gross profit | 21,660 | 19.3 | 24,698 | 19.7 | ||||||||||||
Selling, general & administrative expense | 17,141 | 15.3 | 17,699 | 14.1 | ||||||||||||
Depreciation & amortization | 1,079 | 1.0 | 1,038 | 0.8 | ||||||||||||
Operating income | 3,440 | 3.0 | 5,961 | 4.8 | ||||||||||||
Interest expense, net | 312 | 0.3 | 388 | 0.3 | ||||||||||||
Other income, net | (58 | ) | (0.1 | ) | (257 | ) | (0.2 | ) | ||||||||
Income before income taxes | 3,186 | 2.8 | 5,830 | 4.6 | ||||||||||||
Income tax expense | 959 | 0.9 | 1,986 | 1.6 | ||||||||||||
Net income | 2,227 | 1.9 | 3,844 | 3.1 | ||||||||||||
Net income attributable to non-controlling interest | (2,034 | ) | (1.8 | ) | (1,705 | ) | (1.4 | ) | ||||||||
Net income attributable to SPAR Group, Inc. | $ | 193 | 0.1 | % | $ | 2,139 | 1.7 | % | ||||||||
Net Revenues
Net revenues for the ninesix months ended SeptemberJune 30, 2017,2020, were $131.3$112.3 million, compared to $89.8$125.4 million for the ninesix months ended SeptemberJune 30, 2016, an increase2019, a decrease of $41.5$13.1 million or 46.3%10.4%. The increase in net revenue attributable to our international segment was $33.8 million, primarily from our Brazil, India and South Africa operations. Our domestic segment contributed an increase of $7.8 million compared to last year.
Domestic net revenuesrevenues totaled $40.1$45.4 million in the ninesix months ended SeptemberJune 30, 2017,2020, compared to $32.3$46.7 million for the same period in 2016, an increase of 24.2%2019. The increasedecrease of $1.3 million was primarily due to an increase in project work compared to last year.the impact of Covid-19.
International net revenuesrevenues totaled $91.3$66.9 million for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $57.5$78.7 million for the same period in 2016, an increase2019, a decrease of $33.8$11.8 million or 58.7%15.0%. The increasedecrease in international net revenues was primarily due to foreign currency translation and the September 2016 acquisitionimpact of our Brazilian operation, which contributed $27.3 million, and an increase in South Africa by $4.8 million.Covid-19.
Cost of Revenues
The Company's cost of revenues consists of its on-site labor and field administration fees, travel and other direct labor-related expenses and was 80.4%80.6% of its net revenues for the ninesix months ended SeptemberJune 30, 2017,2020, and 77.2%80.3% of its net revenues for the ninesix months ended SeptemberJune 30, 2016.2019.
Domestic cost of revenues was 73.6%77.6% of net domestic revenues for the ninesix months ended SeptemberJune 30, 2017, and 71.5%2020, and 74.3% of net domestic revenues for the ninesix months ended SeptemberJune 30, 2016.2019. The increase in cost of revenues was due primarily to an unfavorable mix of project work.
Internationally, the cost of revenues as a percentage of net international revenues of 2.1 percentage points was due primarily to continued price pressure82.8% and an unfavorable mix of project work compared to83.8% for the same period last year. For the ninesix months ended SeptemberJune 30, 20172020 and 2016, approximately 77% and 80%2019, respectively, of the Company's domestic cost of revenues resulted from in-store merchandiser specialist, on-site assembly technician and field administration services, purchased from certain of the Company's affiliates, SBS and SAS, respectively. (See Note 6 to the Condensed Consolidated Financial Statements - Related-Party Transactions.)
SPAR Group, Inc. and Subsidiaries
Internationally, the cost of revenues increased to 83.3% of net revenues for the nine months ended September 30, 2017, compared to 80.4% of net revenues for the nine months ended September 30, 2016. The cost of revenue increase of 2.9 percentage points was primarily due to a mix of higher cost margin business in Brazil and Mexico.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of the Company include its corporate overhead, project management, information technology, executive compensation, human resources, legal and accounting expenses. Selling, general and administrative expenses werewere approximately $22.0$17.1 million and $17.6 $17.7million for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
Domestic selling, general and administrative expenses totaled $8.9$8.7 million and $8.3$7.9 million for the nine month periodssix months ended SeptemberJune 30, 20172020 and 2016,2019, respectively. The increase in selling, general and administrative expense was directly relatedis primarily due to increased spending on accounting and legal services.an accrual for retirement benefits.
International selling, general and administrative expenses totaled $13.18.3 million and $9.8 million for the ninesix months ended SeptemberJune 30, 2017, compared to $9.3 million for the same period in 2016. The increase of approximately $3.8 million was primarily attributable to the Brazil acquisition.2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization charges totaled $1.5$1.1 million and $1.0 million for both the ninesix months ended SeptemberJune 30, 2017,2020 and 2016.2019, respectively.
Interest Expense
The Company's net interest expense was $117,000$312,000 for the ninesix months ended SeptemberJune 30, 2017, compared to net interest expense of $111,0002020, and $388,000 for the nine months ended September 30, 2016.same period in 2019.
Other Income
Other income totaled $275,000was $58,000 and $183,000$257,000 for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively, with the increase primarily in South Africa.2019, respectively.
Income Taxes
Income tax expense was $907,000$959,000 for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $200,000$2.0 million for the ninesix months ended SeptemberJune 30, 2016. The change is due primarily to improved domestic performance compared to prior year.2019.
Non-controlling Interest
Net operating profits from the non-controlling interest, from the Company's 51% owned subsidiaries, resulted in a reduction of net income attributable to SPAR Group, Inc. of $1.2$2.0 million and $1.7 million for both the ninesix months ended SeptemberJune 30, 20172020 and 2016.2019, respectively.
Net Income
The Company reported a net income of $346,000$193,000 for the ninesix months ended September 30, 2017,June 30, 2020, or $0.02$0.01 per diluted share, compared to $84,000,a net income of $2.1 million, or $0.00$0.10 per diluted share, for the corresponding period last year.
Liquidity and Capital Resources
In the ninesix months ended SeptemberJune 30, 2017,2020, the Company had a net income before non-controllingnon-controlling interest of $1.5$2.2 million.
Net cash provided by operating activities was $8.8 million for the six months ended June 30, 2020, compared to cash used by operating activities of $1.2 million for the six months ended June 30, 2019. The net cash provided by operating activities during the six months ended June 30, 2020, was primarily due to an increase in accounts receivable and accrued expenses offset by a decrease in accounts payable and operating lease liabilities. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and the other risks detailed in the section titled "Risk Factors" included elsewhere in our Annual Report. However, we believe that our existing cash, cash equivalents, short-term investment balances, funds available under our debt agreement, and cash generated from operations, will be sufficient to meet our working capital and capital expenditure requirements for at least the next twelve months.
Net cash used in investing activities was $786,000 for the six months ended June 30, 2020, compared to $935,000 for the six months ended June 30, 2019. The net cash used in investing activities during the six months ended June 30, 2020, was due to fixed asset additions, primarily capitalized software.
SPAR Group, Inc. and Subsidiaries
Net cash provided by operating activities was $6.4 million and $2.1 million for the nine months ended September 30, 2017 and 2016, respectively. The net cash provided by operating activities during the nine months ended September 30, 2017, was primarily due to cash-impacting earnings and an increase in accrued expenses, other current liabilities, customer incentives and deposits and accounts payable, partially offset by an increase in accounts receivable, prepaid expenses and other current assets.
Net cash used in investing activities was $1.0 million for the nine months ended September 30, 2017, compared to $1.5 million for the nine months ended September 30, 2016. The net cash used in investing activities during the nine months ended September 30, 2017, was due to fixed asset additions, primarily capitalized software.
Net cash used in financing activities for the nine months ended September 30, 2017, was approximately $5.7 million, compared to $1.8 million provided by financing activities for the ninesix months ended SeptemberJune 30, 2016.2020, was $792,000 compared to net cash provided by financing activities of $2.6 million for the six months ended June 30, 2019. Net cash used inby financing activities during the ninesix months ended SeptemberJune 30, 2017,2020, was primarily due to net payments on lines of credit, and a distribution to non-controlling local investors in South Africa.credit.
The aboveabove activity and the impact of foreign exchange rate changes resulted in an increase in cash and cash equivalents for the ninesix months ended SeptemberJune 30, 20172020 of approximately $338,000.$3.2 million.
At September 30, 2017, theThe Company had net working capital of $12.9 million, as compared to net working capital of $12.5$17.3 million at both June 30, 2020 and December 31, 2016.2019. The Company's current ratio was 1.4 at both SeptemberJune 30, 2017,2020, and December 31, 2016, respectively.2019.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.item.
Controls and Procedures |
Item 4. Controls and ProceduresManagement's Report on Internal Control Over Financial Reporting
RestatementThe Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the registrant, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management has designed such internal control over financial reporting by the Company to provide reasonable assurance regarding the reliability of Previously Issued Financial Statementsfinancial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
An evaluation was performed under the supervision and with the participation of ourThe Company's management including our Chief Executive Officer and our Chief Financial Officer, ofhas evaluated the effectiveness of the designCompany's internal control over financial reporting using the "Internal Control – Integrated Framework (2013)" created by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") framework. Based on this evaluation, management has concluded that internal controls over financial reporting were effective as of June 30, 2020.
Management's Evaluation of Disclosure Controls and operationProcedures
The Company's interim chief financial officer and chief operating officer have each reviewed and evaluated the effectiveness of ourthe Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2017. Thethe end of the period covered by this report, as required by Exchange Act Rules 13a-15(b) and Rule 15d-15(b). Based on that evaluation, of ourthe chief executive officer and chief financial officer have each concluded that the Company's current disclosure controls and procedures by our Chief Executive Officer and Chief Financial Officer included a review ofare effective to ensure that the restatement described in the filing of this Form 10-Q, where we restated our consolidated balance sheet, consolidated statements of operations and comprehensive income and consolidated statements of equity. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of September 30, 2017, at the reasonable assurance level, to enable us to record, process, summarize and report information required to be disclosed by usthe Company in reports that we fileit files, or submitsubmits under the Exchange Act were recorded, processed, summarized and reported within the time periodsperiod specified in the SECCommission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or forms duesubmits under the Exchange Act is accumulated and communicated to the material weakness described below.issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Material WeaknessChanges in Internal Control overControls Over Financial Reporting
A material weakness is defined as a deficiency or combination of deficienciesThere have been no changes in the Company's internal controlcontrols over financial reporting such that there is a reasonable possibilityoccurred during the Company's second quarter of its 2020 fiscal year that a material misstatement of annualmaterially affected, or interim consolidated financial statements will not be prevented or detected on a timely basis. In connection withare reasonably likely to materially affect, the evaluation of our disclosureCompany's internal controls and procedures as of September 30, 2017, we identified a material weakness in our internal control over financial reporting associated with the recognition of accumulated other comprehensive loss both in the equity section of the consolidated balance sheet and the comprehensive loss portion of the consolidated statement of income and comprehensive loss.
The Company did not design and maintain effective control over the assessment of the presentation of foreign currency translation adjustments when preparing the consolidated financial statements. While this is considered a material weakness in internal control over financial reporting, the Company determined that the related impact was not material to the results of operations or financial position for any prior annual or interim period as described above in Note 2 of the Company's prior period financial statements for the year ended December 31, 2016.reporting.
SPAR Group, Inc. and Subsidiaries
Changes in Internal Control over Financial Reporting
Other than the material weakness as set forth above during the quarter ended September 30, 2017, there have been no changes in our internal controls over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended September 30, 2017, identified in connection with our evaluation that has materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management's Remediation Initiatives
We have taken, and continue to take, the actions described below to remediate the identified material weakness. As we continue to evaluate and work to improve our internal controls over financial reporting, our senior management may determine to take additional measures to address control deficiencies or modify the remediation efforts, or in appropriate circumstances not to complete certain of the remediation measures described in this section. While the Audit Committee and senior management are closely monitoring the implementation, until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are completed, tested, and determined effective, the material weakness described above will continue to exist.
To address this material weakness, our management has implemented new procedures and internal controls surrounding the reporting of its majority owned international subsidiaries to ensure comprehensive income (loss) and non-controlling interest are properly adjusted to account for the impact of foreign currency translation.
SPAR Group, Inc. and Subsidiaries
PART II: OTHER INFORMATION
Legal Proceedings |
The Company is a party to various legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company'sCompany's management, dispositionresolution of these matters areis not anticipated to have a material adverse effect on the Company or its estimated or desired affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition.
Background: Related Parties And Related Party Litigation:
SPAR Business Services, Inc., f/k/a SPAR Marketing Services, Inc. ("SBS"), SPAR Administrative Services, Inc. ("SAS"), and SPAR InfoTech, Inc. ("Infotech"), have provided services from time to time to the Company and are related parties and affiliates of SGRP, but are not under the control or part of the consolidated Company. SBS is an affiliate because it is owned by an entity controlled by Robert G. Brown, and prior to November 2018, was owned by Robert G. Brown and William H. Bartels. SAS is an affiliate because it is owned by William H. Bartels, Peter W. Brown and certain other relatives of Robert G. Brown or entities controlled by them (each of whom are considered affiliates of the Company for related party purposes). Infotech is an affiliate because it is owned by Robert G. Brown. Messrs. Brown and Bartels (including, as applicable, certain related parties, the "Majority Stockholders") collectively own approximately 53.2% of SGRP's common stock and are the founders of SGRP. Mr. Brown was Chairman and an officer and director of SGRP through May 3, 2018 (when he retired) and became a director of SGRP on April 24, 2020, as discussed in INFORMATION IN CONNECTION WITH APPOINTMENT OF ROBERT G. BROWN AS A DIRECTOR in the First Special Meeting Proxy/Information Statement. Mr. Bartels retired as an employee of the Company as of January 1, 2020 (in accordance with the actions of SGRP's Compensation Committee on January 22, 2020). See Bartel's Retirement and Director Compensation in Note 5 to the Company's Consolidated Financial Statements - Related Party Transactions, above. Messrs. Brown and Bartels also are stockholders, directors and/or executive officers of various affiliates of SGRP.
For recent actions by the Majority Stockholders to change or potentially change the Board and 2019 By-Laws, see Risks Related to the Company's Significant Stockholders and Potential Voting Control and Conflicts in Part 1A-Risk Factors in the Annual Report
SGRP claims against SAS re Affinity
The Company executeshas prepared the draft of a complaint to be filed in the Supreme Court of the State of New York in Westchester County, NY, seeking appropriate relief and recovery from SAS and other related parties, which it prepared with the support of SGRP's Audit Committee (which has certain oversight responsibilities respecting related party matters). However, because of the pending changes in the SGRP CEO and CFO positions, the Audit Committee recommended that management delay filing the complaint until it can be reviewed and pursued by SGRP's new CEO and CFO (upon their selection and appointment) if and as they determine appropriate. See Affinity Insurance in Related Part Transactions in Note 5, above. For a more detailed explanation of the Affinity claims see the Corporation's Current Report on Form 8-K as filed with the SEC on July 31, 2020.
Delaware Litigation Settlement
On September 4, 2018, SGRP filed in the Court of Chancery of the State of Delaware (the "Chancery Court") a claim, C.A. No. 2018-0650, which it amended on September 21, 2018 (the "By-Laws Action"), in a Verified Complaint Seeking Declaratory Judgment and Injunctive Relief against the Majority Stockholders. SGRP sought to invalidate the proposed amendments to SGRP's By-Laws put forth in a written consent by the Majority Stockholders (the "Proposed Amendments") because the Board's Governance Committee believed that the Proposed Amendments would have negatively impacted all stockholders (particularly minority stockholders) by (among other things) weakening the independence of the Board through new supermajority requirements, eliminating the Board's independent majority requirement, and subjecting various functions of the Board respecting vacancies on the Board to the prior approval of the holders of a majority of the Common Stock (i.e., the Majority Stockholders), and thus also potentially reducing the representation of SGRP's minority stockholders.
On September 18, 2018, Robert G Brown (one of the Majority Stockholders) commenced an action in the Chancery Court pursuant to 8 Del. C. §225(a) from (C.A. No. 2018-00687-TMR) (the "225 Action") against the 225 Defendants seeking to remove Lorrence T. Kellar from the Board and add Jeffrey Mayer to the Board.
On January 18, 2019, SGRP, Messrs. Brown and Bartels, Christiaan Olivier (Chief Executive Officer, President and a Director of SGRP), and all four of the members of the Governance Committee at that time, namely Lorrence T. Kellar (Chairman), Jack W. Partridge, Arthur B. Drogue and R. Eric McCarthey (together with Mr. Olivier, the "225 Defendants"), reached a settlement (the "Delaware Settlement") in the By-Laws Action and the 225 Action (together, the "Delaware Actions") and had the Delaware Actions then dismissed.
SPAR Group, Inc. and Subsidiaries
In the Delaware Settlement, the parties agreed to amend and restate SGRP's By-Laws (the "2019 Restated By-Laws") with negotiated changes to the Proposed Amendments that preserved the current roles of the Governance Committee and Board in the location, evaluation, and selection of candidates for director and in the nominations of those candidates for the annual stockholders meeting and appointment of those candidates to fill Board vacancies (other than those under a stockholder written consent making a removal and appointment, which is unchanged). The Board approved and adopted the 2019 Restated By-Laws on January 18, 2019. The Governance Committee and the Board intended that those changes in the 2019 Restated By-Laws will help the Corporation maintain the independent Board desired by them.
Additionally, as part of the Delaware Settlement, the parties to the Delaware Actions executed a Limited Mutual Release Agreement limited to the Delaware Actions, subject to specific exclusions (the "Delaware Releases"), and the parties to the Delaware Actions mutually agreed upon Stipulations of Dismissal ending those actions without prejudice and without admission or retraction of any fact cited therein, and the parties caused them to be filed with the Chancery Court on January 18, 2019.
The Delaware Releases are limited to matters related to those actions described therein and subject to specific exclusions, and the parties expressly preserved all unrelated actions and claims. Accordingly, there remain a number of unresolved claims and actions (each a "Non-Settled Matter") between the Company and certain related parties, including (without limitation) post termination claims by and against SBS (which has been resolved in a voluntary bankruptcy proceeding in Nevada by SBS -- see SBS Bankruptcy, Settlement, and March 2020 Claim, below) and SAS and the lawsuit by Infotech against the Company (which has been resolved in a settlement – see Infotech Litigation and Settlement, below), by Messrs. Brown and Bartels for advancement and indemnification of legal fees and expenses in connection with the Delaware Actions and certain related party claims (see Advancement Claims, below). For further information regarding the details of the Delaware Settlement, the Delaware Releases, the Non-Settled Matters, see Note 8 to the Company's Consolidated Financial Statements in Commitments and Contingencies -- Legal Proceedings – Related Parties and Related Party Litigation – Delaware Litigation Settlement, Advancement Claims and Non-Settled Matters, SBS Field Specialist Litigation, SBS Clothier Litigation, and SGRP Hogan Litigation in SGRP's Quarterly Report on Form 10-Q filed with the SEC on August 14, 2019 (the "Q2 2019 Quarterly Report"). and Note 8 to the Company's Consolidated Financial Statements in the Commitments and Contingencies --Legal Proceedings -- SBS Rodgers Litigation in SGRP's Quarterly Report on Form 10-Q filed with the SEC on November 18, 2018 (the "Q3 2018 Quarterly Report").
Background: Recent Actions of the Majority Stockholders and their Control Group
On June 1, 2018, June 29, 2018, July 5, 2018, August 6, 2018, January 25, 2019, October 18, 2019, February 11, 2020 and March 11, 2020, the Majority Stockholders filed amended Schedule 13Ds with the SEC, in which they each acknowledged that they "may be deemed to comprise a 'group' within the meaning of [the Securities Exchange Act of 1934]" and "may act in concert with respect to certain matters", including various listed items. Pursuant to those Schedule 13D filings, the Majority Stockholders have acted as a control group and adopted written consents to unilaterally, and without the participation of the Board, Governance Committee or other stockholders, add Mr. Robert G. Brown, Mr. Panagiotis ("Panos") Lazaretos, and Mr. Jeffrey A. Mayer to the Board and remove Mr. Laurence T. Kellar from the Board without cause. Mr. Robert G. Brown was seated on the Board on or about April 24, 2020. See Risks of a Nasdaq Delisting and Penny Stock Trading in Part 1A - Risk Factors in the Annual Report, and INFORMATION IN CONNECTION WITH APPOINTMENT OF ROBERT G. BROWN AS A DIRECTOR in the Special Meeting Proxy Statement/Information Statement.
Prior to SGRP's 2019 annual stockholders' meeting (the "2019 Annual Meeting"), Jack Partridge, an independent director of SGRP, retired effective as of the close of business on May 15, 2019. Mr. Partridge indicated that he was prepared to serve on the Board for another year, but based on Mr. Partridge's discussions with Mr. Bartels and the preliminary vote totals (including Mr. Brown's votes), Mr. Partridge believed that the Majority Stockholders would vote "against" him, so he elected to retire before the 2019 Annual Meeting.
SPAR Group, Inc. and Subsidiaries
On July 10, 2019, Robert G Brown wrote in an email communication to Arthur B. Drogue, an independent director and Chairman of the Board, to which he copied Mr. Bartels, Mr. Peter W. Brown and Mr. Jeffery Mayer (each a director), expressing Mr. Brown's concerns with the positions of certain of SGRP's directors (the "July 10 Email"), including the independent directors. The concerns listed in the July 10 Email include SGRP's refusal to reimburse the alleged expenses of entities owned by, or affiliated with, the Majority Stockholders, that have not been approved by the Audit Committee and SGRP's management (collectively, the "Brown Demands"). Mr. Bartels has since repeated several of the Brown Demands. These amounts were included in his March 2020 Demand (See SBS Bankruptcy, Settlement, and March 2020 Claim, below). Mr. Brown further demanded in the July 10 Email that the directors change their positions and accept the Brown Demands or resign. In the July 10 Email, Mr. Brown indicated his desire to have SGRP's directors acquiesce to his requests or resign, neither of which SGRP's independent directors believe are in the best interests of SGRP and its stockholders, which Mr. Drogue communicated to the Majority Stockholders in response to the July 10 Email. For further information regarding Mr. Brown's demands, his threatened removal of directors who oppose such demands and the Majority Stockholders' request to hold a special stockholders meeting to affect such director removals. See SGRP's Current Report on Form 8-K filed with the SEC on August 23, 2019.
In furtherance of furthered such threats to remove directors who do not comply with his demands, Mr. Robert G. Brown and related parties have executed and delivered written requests forcing SGRP to call a special stockholders' meeting (currently scheduled for April 23, 2020) to consider (i) removal of Mr. Arthur B. Drogue, currently one of five independent directors of SGRP and its Chairman, from the Board, without cause,(ii) removal of Mr. R. Eric McCarthey, currently one of five independent directors of SGRP and Chairman of its Governance Committee (as of 3-1-2020), from the Board, without cause,), (iii) addition to the Board of Mr. James R. Brown Sr. (who is the brother of Robert G. Brown and the father of Peter W. Brown, a director who joined the Board in May 2018 to represent the Brown family interests), and (iv) adoption of various amendments to SGRP's By-Laws which are favorable to the Majority Stockholders and not approved or supported by a majority of SGRP's Board or Independent Directors. See Risks of a Nasdaq Delisting and Penny Stock Trading in Part 1A - Risk Factors in the Annual Report.. See SGRP's First Special Meeting Proxy/Information.
For additional recent actions by the Majority Stockholders to change or potentially change the Board and 2019 By-Laws, see Risks Related to the Company's Significant Stockholders and Potential Voting Control and Conflicts in Part 1A - Risk Factors in the Annual Report.
Advancement Claims
From October 2018 through January 2019, the Majority Stockholders, in a series of correspondence, demanded from SGRP advancement and indemnification of their respective shares of legal fees and expenses incurred by them in connection with the By-Laws Action and the 225 Action and other related party litigation matters.
On November 2, 2018, in a letter from his counsel, Mr. Bartels demanded advancement of his proportionate share of the legal fees and expenses incurred in his defense of the By-Laws Action against him.
SGRP's Audit Committee determined on November 5, 2018, that Mr. Bartels was not entitled to indemnification by SGRP for his fees and expenses incurred in his defense of the By-Laws Action because (among other things) Mr. Bartels was sued predominately as a stockholder in the By-Laws Action and not as a director and the By-Laws Action alleged numerous instances of improper conduct by Mr. Bartels that could preclude indemnification under the Corporation's By-Laws. However, the Audit Committee made no determination regarding improper conduct or the issue of advancement.
On November 28, 2018, Mr. Bartels filed with the Court a Verified Complaint For Advancement against SGRP (the "Bartels Advancement Complaint") seeking advancement of his proportionate share of the legal fees and expenses incurred in the By-Laws Case against him ("Allocated By-Laws Expenses"). In evaluating the Bartels Advancement Complaint, counsel advised SGRP that generally advancement was somewhat different than indemnification in that money was advanced on the condition (which Bartels have accepted in writing) that the advances be repaid if indemnification was determined to be improper on the grounds of improper conduct or otherwise.
In December 2018 SGRP reached agreement with Mr. Bartels through counsel to conditionally make his reasonably documented Allocated By-Laws Expenses (the "Bartels Advancement Settlement"), pursuant to which payment to Mr. Bartels of the accepted Allocated By-Laws Expenses was paid in April 2019. If Mr. Bartels is ultimately determined to not be entitled to indemnification, he could still be obligated to return all amounts advanced to him by SGRP.
SPAR Group, Inc. and Subsidiaries
On December 3, 2018, Robert G. Brown sent an email to Mr. McCarthey, Chairman of SGRP's Audit Committee, demanding advancement from SGRP for his proportionate share of the legal fees and expenses incurred by him in the By-Laws Action against him (the "Brown Advancement Demand").
Counsel advised that Brown had been sued as a stockholder and conspirator in the By-Laws Action against him, and not as a director, and they didn't believe Brown could reasonably and successfully bring or wage a lawsuit for advancement. SGRP, with the support of its Audit Committee, rejected the Brown Advancement Demand, stating that "The bylaw action does not sue you in your capacity as an officer or director of the company. Section 6.02 of the bylaws requires the proceeding subject to advancement to be brought "by /reason of the Indemnitee's position with the Corporation or any of its subsidiaries … at the request of the Corporation …." This provision does not, and was not intended to, cover shareholders for advancement.
On January 27, 2019, Mr. Robert G. Brown sent a draft of his proposed Delaware litigation complaint in an email to Arthur Drogue, SGRP's Chairman, threatening to sue SGRP respecting the Brown Advancement Demand, which he repeated in an email to Mr. McCarthey on February 2, 2019. On March 21, 2020, Mr. Robert G. Brown repeated the Brown Advancement Demand and sent a slightly revised draft complaint that would purportedly change the contemplated litigation jurisdiction from Delaware to Massachusetts. No explanation was given for this change and SGRP believes that Mr. Robert G. Brown does not live or work in Massachusetts, but Mr. Robert G. Brown's brother, James S. Brown, is a Massachusetts lawyer and was an unsuccessful candidate for election as a SGRP director at the April 30, 2020, special stockholder meeting at the unilateral direction of Mr. Robert G. Brown and related parties. On August 1, 2020, Robert G. Brown sent a slightly revised complaint to William H. Bartels (who forwarded it to Arthur H. Baer, (Chairman of the Board and Audit Committee) changing the contemplated litigation jurisdiction from Massachusetts back to Delaware. Although it was signed and notarized and said by Robert G. Brown in his email to be in the process of being filed, no such complaint has been filed by Mr. Brown through August 14, 2020, and SGRP continues to deny the Brown Advancement Demand. In addition, SGRP believes that the Delaware Court has exclusive jurisdiction pursuant to SGRP's 2019 Restated By-Laws and the Settlement. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels.
SBS Bankruptcy, Settlement and March 2020 Claim
On November 23, 2018, SBS petitioned for bankruptcy protection under chapter 11 of the United States Bankruptcy Code in the U.S. District for Nevada (the "SBS Chapter 11 Case"). On March 18, 2019, the Company filed claims in the SBS Chapter 11 Case seeking reimbursement for $378,838 for SMF's funding of the Affinity Security Deposits and $12,963 for SMF's funding of the field payment checks that would have otherwise bounced, and $1,839,459 for indemnification of SGRP for its settlement (see below) of the Clothier class action case in California ("Clothier") and legal costs and an unspecified amount for indemnification of SGRP for the Hogan action (see below) and other to be discovered indemnified claims.
On August 6, 2019, SGRP, and its subsidiaries SPAR Marketing Force, Inc. ("SMF"), a Nevada corporation, and SPAR Assembly & Installation, Inc., f/k/a SPAR National Assembly Services, Inc., a Nevada corporation, submitted to the U.S. District Court in Nevada (the "Bankruptcy Court") their Compromise and Settlement Agreement, dated July 26, 2019 (the "Settlement Agreement"), with SBS, a Nevada corporation formerly known as SPAR Marketing Services, Inc., debtor and debtor-in-possession, and SBS, LLC, a Nevada limited liability company. The Settlement Agreement was submitted in the SBS Chapter 11 Case. Pursuant to the Settlement Agreement, the Company settled its claims for (among other things) indemnification from SBS in Clothier and the Rodgers class action case in Texas ("Rodgers"), and SBS released all receivable and other claims against the Company. See Note 8 to the Company's Consolidated Financial Statements – Legal Proceedings – SBS Bankruptcy, Settlement, and March 2020 Claim, above.
On August 6, 2019, the Bankruptcy Court approved the Settlement Agreement and the SBS reorganization pursuant to SBS' First Amended Chapter 11 Plan of Reorganization, as amended by the Settlement Agreement (the "Plan of Reorganization"). Pursuant to its Plan of Reorganization, SBS also settled its potential liability in the Clothier and Rodgers cases, but Robert G. Brown and William H. Bartels were not released from Clothier, any related case or Rodgers. For further information regarding the Clothier and Rodgers cases, the SBS bankruptcy and the Settlement Agreement, including SBS's potential competition with SGRP and the potential involvement of certain SGRP directors in the management of SBS following the Plan of Reorganization, see SGRP's Current Report on Form 8-K filed with the SEC on Aug 8, 2019. See Note 8 to the Company's Consolidated Financial Statements in the Commitments and Contingencies --Legal Proceedings -- SBS Rodgers Litigation in the Q3 2018 Quarterly Report. In the Settlement Agreement, except for the carve out described in the next paragraph, SBS completely released the Company from all obligations that may be owed to SBS.
In the SBS settlement, the Company’s $2.2 million in claims were settled for $174,097.34 payable over 24 monthly installments of $7,254.06 per month starting January 1, 2020. To date SBS is in default of the first 5 months of installment payments totaling $36,270.30.
SPAR Group, Inc. and Subsidiaries
On March 6, 2020, Robert G. Brown demanded payment in full of $1,707,374 to SBS from SMF and SGRP pursuant to the SBS Settlement Agreement. The Settlement Agreement includes a specific carve out clause for the payment of specific fees for services provided by SBS to SMF. The clause required a special review, by a third party prominent auditing firm, as verification that SMF actually made those payments to SBS. The report has been completed and properly supports the Company’s position that all such fees were paid to SBS (the "March 2020 Claim"). The Company disagrees that such amount is owed. The Company believes that the robust and comprehensive mutual releases in the SBS Settlement Agreement provide valuable relief from potential future claims and litigation by SBS respecting the Company's past involvement with SBS, including the March 2020 Claim. However, Robert G. Brown, president, director and indirect owner of SBS, since and notwithstanding the Court's approval of the SBS Settlement Agreement, has continued to allege that the claims and amounts that were fully released pursuant to the SBS Settlement Agreement and approved by the bankruptcy court are due to SBS from the Company, and the Company strongly disagrees. Since all such SBS claims have been completely released by SBS (with Mr. Brown's approval), the Company owes nothing and will not accrue anything respecting Mr. Brown's renewed claims. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of the Brown Group and Mr. Bartels.
At SGRP’s March 2020 Board meeting, Mr. William H. Bartels was requested by an independent director to compile a list of claims that he and Mr. Brown believe are owed by the Company. On March 17, 2020, that list was given to the Audit Committee Chairman and included additional claims, net of an anticipated reduction, totaling approximately $1.3 million, bring their total claims to approximately $3 million. Since all such SBS claims have been completely released by SBS (with Mr. Brown's approval), the Company owes nothing and will not accrue anything respecting Mr. Brown's renewed claims.
The March 2020 Claim includes estimates for the legal defenses of Robert G. Brown and William H. Bartels in California ("PAGA") and Texas ("Rodgers") in cases that do not involve and never included the Company and for which the Company believes it provideshas no liability. The March 2020 Claim also includes defense expenses for SBS' Clothier case, which expenses SBS settled for a highly discounted amount in its bankruptcy reorganization but now wants the Company to pay in full. SBS in its bankruptcy reorganization settled its potential liability in the Rodgers and Clothier cases has, and since July 2019 had, no more defense expenses in those cases. SGRP settled Clothier separately and was never in the Rodgers case. However, the alleged continued willful misclassification by SBS of its ICs after the Clothier misclassification determination is the basis for the PAGA lawsuit against Brown and Bartels. See Note 8 to the Company's Consolidated Financial Statements in the Commitments and Contingencies -- Legal Proceedings -- SBS Field Specialist Litigation, SBS Clothier Litigation, and SGRP Hogan Litigation in SGRP's Quarterly Report in the Q2 2019 Quarterly Report, and Note 8 to the Company's Consolidated Financial Statements in the Commitments and Contingencies -- Legal Proceedings -- SBS Rodgers Litigation in SGRP's Quarterly Report on Form 10-Q filed with the SEC in the Q3 2018 Quarterly Report. Mr. Bartels' list also includes payments of $500,000 per year to Robert G. Brown for extended retirement and advisory fees, although the Company has never proposed, committed or agreed to them and on several occasions specifically rejected Mr. Brown's proposals in various forms for them.
Infotech Litigation and Settlement
On September 19, 2018, SGRP was served with a Summons and Complaint by SPAR InfoTech, Inc. ("Infotech"), an affiliate of SGRP that is owned principally by Robert G. Brown (one of the Majority Stockholders) as plaintiff commencing a case against SGRP (the "Infotech Action"). The Infotech Action sought payment from SGRP of approximately $190,000 for alleged lost tax benefits and other expenses that it claims to have incurred in connection with SGRP's acquisition of its Brazilian subsidiary and that were previously denied on multiple occasions by both management and SGRP's Audit Committee (whose approval was required because Infotech is a related party).
In 2016, SGRP acquired SPAR Brasil Serviços de Merchandising e Tecnologia S.A. ("SPAR BSMT"), its Brazilian subsidiary, with the assistance of Robert G. Brown (while he was still Chairman and an officer and director of SGRP) and his nephew, Peter W. Brown, who became an indirect 10% owner of SPAR BSMT, and later became a director of SGRP on May 3, 2018. Robert G. Brown used his private company, Infotech and undisclosed foreign companies to structure the acquisition for SGRP.
Robert G. Brown incurred his alleged expenses associated with the transaction through Infotech, including salary allocations for unauthorized personnel and claims for his "lost tax breaks". Robert G. Brown submitted his unauthorized and unsubstantiated "expenses" to SGRP, and SGRP's Audit Committee allowed approximately $50,000 of them (which was paid by the Company) and disallowed approximately $150,000 of them. His claim increased to over $190,000 in the Infotech Action. The Company vigorously denied owing any of those amounts.
SPAR Group, Inc. and Subsidiaries
In 2018, Infotech also threatened to sue the Company in Romania for approximately $900,000 for programming services allegedly owed to the Company's former Romanian subsidiary (sold at book value to Infotech in 2013) and not provided to Infotech (the "Romanian Claim"). Infotech gave a draft complaint to the Company in 2018. The Company also vigorously denied owing any of those obligations or amounts.
In order to avoid the expenses of protracted litigation, SGRP's Management and the Audit Committee agreed that it would be in the best interest of all stockholders to reach a reasonable settlement of both the Infotech Action and the Romanian Claim for installment payments in reasonable amounts and mutual releases of all other related claims. Management had offed $225,000 to settle both, but at the urging of the Board and assurances of several Board members that it would help them persuade Robert G. Brown to settle, management agreed to increase the settlement offer to a total of $275,000. After extensive negotiation between the Company and Infotech, Robert G. Brown accepted the $275,000 offer and the parties entered into the Confidential Settlement Agreement and Mutual Release on October 8, 2019 (the "Infotech Settlement Agreement"), which was approved and ordered by the Court on October 30, 2019, and the Infotech Action was discontinued (dismissed) with prejudice.
The Infotech Settlement Agreement requires the Company to make payments totaling $275,000 in four installments: (i) $75,000 following Court approval (which Payment has already been made); (ii) $75,000 within 30 days following discontinuance of the Infotech Action (which was discontinued on October 30, 2019); (iii) $75,000 within 60 days following discontinuance of the Infotech Action; and (iv) $50,000 within 90 days following discontinuance of the Infotech Action. The Company paid the first four installments and has made an appropriate accrual for the final installment as of December 31, 2019. In January 2020, the Company made the final payment to Infotech.
The Company believes that the robust and comprehensive mutual releases in the Infotech Settlement Agreementprovide valuable relief from potential future claims and litigation by Infotech respecting the Company's past involvement with Infotech in the Brazilian and Romanian transactions.
SBS Field Specialist Litigation
The Company's merchandising, audit, assembly and other services for its domestic clients primarily through independentare performed by field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), almost furnished by others and substantially all of whom are engagedwhose services were provided to the Company prior to August 2018 by SBS, the Company's affiliate, SBS is not a subsidiary or in any way under the control of SGRP, SBS is not consolidated in the Company's financial statements, SGRP did not manage, direct or control SBS, and provided as independent contractorsSGRP did not participate in or control the defense by SBS.SBS of any litigation against it. The Company terminated its relationship with SBS and received no services from SBS after July 27, 2018. For affiliation, termination, contractual details and payment amounts, see Note 65 to the Company's Consolidated Financial Statements – -Related Party Transactions – -Domestic Related Party Services, above.
The appropriateness of SBS'sSBS' treatment of its Field Specialists as independent contractors hashad been periodically subject to legal challenge (both currently and historically) by various states and others, SBS'sothers. SBS' expenses of defending those challenges and other proceedings have historically beengenerally were, through but not after the termination of the SBS services, reimbursed by the Company under SBS's Prior Agreement,after and SBS's expenses of defending those challenges and other proceedings were reimbursed byto the extent the Company during the three month periods ended September 30, 2017 and 2016 (in the amounts of $39,000 and $144,000, respectively), and the nine month periods ended September 30, 2017 and 2016 (in the amounts of $218,000 and $587,000, respectively), after determinationdetermined (on a case by case basis) that those defense expenses were costs of providing services to the Company. The Company has advised SBS that, since there is no currently effective comprehensive written services agreement with SBS, the Company will continue to review and decide each request by SBS for reimbursement of its legal defense expenses (including appeals) on a case-by-case basis in its discretion, including the relative costs and benefits to the Company. The Company has not agreed, and does not currently intend, to reimburse SBS for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceedingagainst or involving SBS, and the Company does not believe it has ever done so (other than in insignificant nuisance amounts). However, there can be no assurance that SBS will be able to satisfy any such judgment or similar amount resulting from any adverse legal determination, that SBS or someone else will not claim, or that SBS will be able to successfully defend any claim, that the Company is liable (through reimbursement, indemnification or otherwise) for any such judgment or similar amount imposed against SBS. Furthermore, there can be no assurance that SBS will succeed in defending any such legal challenge, the legal expenses of prolonged litigation and appeals could continue to be (and have from time to time been) significant, and prolonged litigation and appeals and any adverse determination in any such challenge could have a material adverse effect on SBS's ability to provide services needed by the Company and the Company's costs of doing business.
Current material and potentially material proceedingsThe Company settled its potential liability (as a current or former party) under two class action lawsuits against SBS, namely Clothier and in one instance, the Company are described below. These descriptions are based on an independent review by the Company and do not reflect the views ofHogan. SBS its management or its counsel.
SBS Clothier Litigation
Melissa Clothier was engaged by SBS (then known as SPAR Marketing Services, Inc.) and provided services pursuant to the terms of an "Independent Merchandiser Agreement" acknowledging her engagement as an independent contractor. On June 30, 2014, Ms. Clothier filed suit against SBS and the Company styled Case No. RG12 639317, in the Superior Court in Alameda County, California, in which Ms. Clothier asserted claims on behalf of herself and a putative class of similarly situated merchandisers in California who are or were classified as independent contractors at any time between July 16, 2008, and June 30, 2014. Ms. Clothier alleged that she and other class members were misclassified as independent contractors and that, as a result of this misclassification, the defendants improperly underpaid them in violation of various California minimum wage and overtime laws. The Company was subsequentlyseparately dismissed from the Hogan class action without prejudice. The court ordered that the case be heard in two phases. Phase one was limitedprior to the determination of whether members of the class were misclassified as independent contractors. After hearing evidence, receiving post-trial briefingsCompany's settlement. SBS settled with Clothier and considering the issues, the Court issued its Statement of Decision on September 9, 2016, finding that the class members had been misclassified as independent contractors rather than employees. The parties have now moved into phase two to determine damages (if any), which included discovery as to the measure of damagesRodgers in the case. Trial on phase two was scheduled for September 11, 2017,SBS Bankruptcy, but was postponed. The Court has scheduled a case management conference for December 19, 2017, to establish a new trial date for phase two. SBS has advised the Company that SBS will appeal the adverse phase one determination when permitted under the court's rules.
SPAR Group, Inc. and Subsidiaries
SBS Rodgers Litigation
Maceo Rodgers was engaged by and provided services to SBS pursuant to the terms of his "Master Agreements" with SBS acknowledging his engagement as an independent contractor. On February 21, 2014, Rodgers filed suit against SBS, Robert G. Brown and William H. Bartels styled Civil Action No. 3:14-CV-00055,were not released from Clothier, any related case or Rodgers (see above). The Company has never been a party to the Rodgers case. See Note 8 to the Company's Consolidated Financial Statements in the U.S. District Court for the Southern District of Texas (Galveston Division). Plaintiff asserted claims on behalf of himselfQ2 2019 Quarterly Report - Commitments and an alleged class of similarly situated individuals who provided services to Contingencies -- SBS as independent contractors at any time on or after July 15, 2012, claiming they all were misclassified as independent contractors Clothier Litigation and that, as a result of this misclassification, the Defendants improperly underpaid them in violation of the Fair Labor Standards Act's overtime and minimum wage provisions. Although the Court conditionally certified the class on December 8, 2015, only 61 individuals joined the action as opt-in plaintiffs, and all but 11 of them have potentially disqualifying arbitration provisions, residences outside the class's geographic area, or late opt-in filings, and were challenged by the Defendants in various motions, including a motion to decertify the class. The Court, however, did not rule on these motions and instead stayed the case on September 19, 2017, to allow the parties to mediate. On October 24, 2017, the Court granted the parties' joint motion to extend the stay order until January 31, 2018.
SBS and SGRP Hogan Litigation, and
Paradise Hogan was engaged by and provided services to SBS as an independent contractor pursuant to the terms of an "Independent Contractor Master Agreement" with SBS acknowledging his engagement as an independent contractor. On January 6, 2017, Hogan filed suit against SBS and SGRP and part of the Company), styled Civil Action No. 1:17-cv-10024-LTS, in the U.S. District Court for District of Massachusetts. Hogan initially asserted claims on behalf of himself and an alleged nationwide class of similarly situated individuals who provided services to SBS and SGRP as independent contractors. Hogan alleged that he and other alleged class members were misclassified as independent contractors, and as a result of this purported misclassification, Hogan asserted claims on behalf of himself and the alleged Massachusetts class members under the Massachusetts Wage Act and Minimum Wage Law for failure to pay overtime and minimum wages, as well as state law claims for breach of contract, unjust enrichment, quantum meruit, and breach of the covenant of good faith and fair dealing. In addition, Hogan asserted claims on behalf of himself and the nationwide class for violation of the Fair Labor Standards Act's overtime and minimum wage provisions. On March 28, 2017, the Company moved to refer Hogan's claim to arbitration pursuant to his agreement, to dismiss or stay Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted. Plaintiff's counsel subsequently notified SGRP's attorney of their intent to amend their Complaint without prejudice. The Amended Complaint, which was filed on May 2, 2017, eliminated all of Plaintiff's claims except for a single claim against SGRP for failure to pay Hogan and a similarly situated class of Massachusetts independent contractors all wages under the Massachusetts Wage Act and a separate, but identical claim against SBS. The result of the amendment significantly narrowed the scope of the litigation and eliminated the original nationwide Fair Labor Standards Act claims. The Company was granted leave to refile their motion to compel arbitration to dismiss Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted. The Company's motion was filed on June 7, 2017, Plaintiff's opposition Note 8 to the Company's motion was filed on June 21, 2017,Consolidated Financial Statements in the Commitments and Contingencies --Legal Proceedings -- SBS Rodgers Litigation in the Company thereafter filed a reply brief in support of its motion on June 30, 2017. The parties currently await a hearing date on the Company's motion.
Potential Adverse Effects of the SBS LitigationQ3 2018 Quarterly Report.
Any prolonged continuation of or material increase in the legal defense costs ofclaim made and proven by Robert G. Brown, William H. Bartels, SBS, (and thus the reimbursable expenses SBS may charge to and that may be paid by the Companyto the extent reimbursement is approved by the Company in its discretion), the failure of SBS to satisfy any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceeding imposed against or involving SBS, any claim by SBS,SAS, any other related party or any third party that the Company is somehow liable (through indemnification or otherwise) for any such judgment or similar amount imposed against Mr. Brown, Mr. Bartels, SBS or SAS or any other related party, any judicial determination that the Company is somehow liable for any such judgment or similar amount imposed against SBS or other related party (in whole or in part), any decrease in SBS's performance (quality or otherwise), any inability by SBS to execute the services for the Company, or any increase in the Company's use of employees (rather than independent contractors) as its domestic Field Specialists, in each case in whole or in part, could have a material adverse effect on the Company or its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected. See Note 68 to the Company's Consolidated Financial Statements –in the Q2 2019 Quarterly Report - Related Party TransactionsCommitments and Contingencies – Domestic Related Party Services, above..
SPAR Group, Inc. and Subsidiaries
Risk Factors |
Existing Risk Factors
Various risk factors applicable to the Company and its businesses are described in Item 1A under the caption "Risk Factors" in the 2016 Annual Report, which risk factorsRisk Factors are incorporated by reference into this Quarterly Report. There have been no material changes in the Company's risk factors since the 2016 Annual Report other than as disclosed below.Report. You should review and give attention to all of those Risk Factors, including (without limitation) Dependence Upon and Cost of Services Provided by Affiliates and Use of Independent Contractors,Potential Conflicts in Services Provided by Affiliates,Risks Related to the Company's Significant Stockholders: Potential Voting Control and Conflicts, and Risks of a Nasdaq Delisting and Penny Stock Trading.
We have identified a material weakness in our internal control over financial reporting. If we fail to remediate this material weakness, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect investor views of us and the value of our common stock.
As a public company, we are required to comply with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, regarding internal control over financial reporting. In connection with our evaluation of compliance, we identified a material weakness in our internal control over financial reporting as of March 31, 2017. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the first quarter of 2017, we have identified a material weakness in our internal control over financial reporting associated with the recognition of accumulated other comprehensive loss both in the equity section of the consolidated balance sheet and the comprehensive loss portion of the consolidated statement of income and comprehensive loss. Specifically, the Company previously attributed 100% of the foreign currency translation adjustment recorded in annual comprehensive loss to the Company compared to allocating a proportionate amount to the non-controlling interest portion on both the consolidated balance sheet and the consolidated statement of income and comprehensive loss. To address this material weakness, our management has implemented new procedures and internal controls surrounding the reporting of its majority owned international subsidiaries to insure comprehensive income (loss) and non-controlling interest are properly adjusted to account for the impact of foreign currency translation. However, these steps will take time to fully integrate and confirm, and until the remediation steps are fully implemented and tested, the material weakness will continue to exist.
If we fail to remediate the identified material weakness or identify further material weaknesses, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price. In addition, our failure to timely file our periodic reports could eventually result in the delisting of our common stock from the New York Stock Exchange, regulatory sanctions from the SEC, and/or the breach of covenants in our credit facilities or of any preferred equity or debt securities we may issue in the future, any of which could have a material adverse impact on our operations and your investment in our common stock.
Unregistered Sales of Equity Securities and Use of ProceedsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.applicable.
Defaults upon Senior SecuritiesItem 3. Defaults upon Senior Securities
Not applicable.
SPAR Group, Inc. and Subsidiaries
Mine Safety DisclosuresItem 4. Mine Safety Disclosures
Not applicable.
Other InformationItem 5. Other Information
Not applicable.
SPAR Group, Inc. and Subsidiaries
ExhibitsItem 6. Exhibits
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101.INS | XBRL Instance | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation | |
101.DEF | XBRL Taxonomy Extension Definition | |
101.LAB | XBRL Taxonomy Extension Labels | |
101.PRE | XBRL Taxonomy Extension Presentation |
SPAR Group, Inc. and Subsidiaries
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | SPAR Group, Inc., Registrant |
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| By: /s/ Clint Morrow |
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