UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-Q |
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the thirdfirst quarterly period ended September March 31, 2022.30, 2017.
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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| 48326 |
(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 ☒ No ☐ No
Indicate by check mark whether the registrantRegistrant 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 registrantRegistrant was required to submit and post such files).
☒ Yes ☒ No ☐ No
Indicate by check mark whether the registrantRegistrant 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 registrantRegistrant 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 registrantRegistrant 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 September 30, 2021, based on the closing price of the Common Stock as reported by the Nasdaq Capital Market on such date, was approximately $13.3 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 |
Index
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 SheetsStatements of Income and Comprehensive Income (Loss)
(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 | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Net revenues | $ | 58,994 | $ | 61,097 | ||||
Related party - cost of revenues | 2,145 | 1,864 | ||||||
Cost of revenues | 45,018 | 46,974 | ||||||
Gross profit | 11,831 | 12,259 | ||||||
Selling, general and administrative expense | 9,254 | 9,011 | ||||||
Depreciation and amortization | 510 | 530 | ||||||
Operating income | 2,067 | 2,718 | ||||||
Interest expense | 149 | 147 | ||||||
Other (income), net | (87 | ) | (75 | ) | ||||
Income before income tax expense | 2,005 | 2,646 | ||||||
Income tax expense | 551 | 865 | ||||||
Net income | 1,454 | 1,781 | ||||||
Net (income) attributable to non-controlling interest | (780 | ) | (864 | ) | ||||
Net income attributable to SPAR Group, Inc. | $ | 674 | $ | 917 | ||||
| Basic income per common share: | $ | 0.03 | $ | 0.04 | ||||
Diluted income per common share: | $ | 0.03 | $ | 0.04 | ||||
Weighted average common shares – basic | 21,583 | 21,188 | ||||||
Weighted average common shares – diluted | 21,729 | 21,581 | ||||||
Net income | $ | 1,454 | $ | 1,781 | ||||
Other comprehensive income (loss): | ||||||||
Foreign currency translation adjustments | $ | (374 | ) | (1,835 | ) | |||
Comprehensive income (loss) | 1,080 | (54 | ) | |||||
Comprehensive loss attributable to non-controlling interest | 1,196 | 773 | ||||||
Comprehensive income attributable to SPAR Group, Inc. | $ | 2,276 | $ | 719 | ||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Balance SheetsIncome (Loss)
(unaudited)
(In thousands, except share and 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.
March 31, | December 31, | |||||||
2022 | 2021 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash, cash equivalents and restricted cash | $ | 14,061 | $ | 13,473 | ||||
Accounts receivable, net | 59,997 | 54,171 | ||||||
Prepaid expenses and other current assets | 5,750 | 4,382 | ||||||
Total current assets | 79,808 | 72,026 | ||||||
Property and equipment, net | 3,005 | 2,929 | ||||||
Operating lease right-of-use assets | 1,539 | 1,781 | ||||||
Goodwill | 4,179 | 4,166 | ||||||
Intangible assets, net | 2,488 | 2,295 | ||||||
Deferred income taxes | 5,511 | 4,468 | ||||||
Other assets | 1,694 | 1,351 | ||||||
Total assets | $ | 98,224 | $ | 89,016 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 8,787 | $ | 8,943 | ||||
Accrued expenses and other current liabilities | 23,054 | 22,031 | ||||||
Due to affiliates | 3,333 | 3,270 | ||||||
Customer incentives and deposits | 3,132 | 3,901 | ||||||
Lines of credit and short-term loans | 15,831 | 11,042 | ||||||
Current portion of operating lease liabilities | 814 | 1,019 | ||||||
Total current liabilities | 54,951 | 50,206 | ||||||
Operating lease liabilities, less current portion | 725 | 762 | ||||||
Long-term debt and other liabilities | 700 | 700 | ||||||
Total liabilities | 56,376 | 51,668 | ||||||
Commitments and contingencies – See Note 9 | ||||||||
Equity: | ||||||||
SPAR Group, Inc. equity | ||||||||
| Preferred stock, Series - A, $.01 par value: authorized shares– 2,445,598; no shares issued and outstanding as of March 31, 2022 and December 31, 2021 | 0 | 0 | ||||||
Preferred stock, Series - B Convertible, $.01 par value; authorized shares– 2,000,000:1,650,000 and none issued and outstanding at March 31, 2022 and December 31, 2021 | 17 | 0 | ||||||
Common stock, $.01 par value: Authorized shares – 47,000,000 Issued shares – 21,845,414 – Balance at March 31, 2022, and 21,320,312 – December 31, 2021 | 218 | 213 | ||||||
Treasury stock, at cost 54,329 shares – Balance at March 31, 2022 and December 31, 2021 | (104 | ) | (104 | ) | ||||
Additional paid-in capital | 20,629 | 17,231 | ||||||
Accumulated other comprehensive loss | (3,426 | ) | (5,028 | ) | ||||
Retained earnings | 8,113 | 7,439 | ||||||
Total SPAR Group, Inc. equity | 25,447 | 19,751 | ||||||
Non-controlling interest | 16,401 | 17,597 | ||||||
Total equity | 41,848 | 37,348 | ||||||
Total liabilities and equity | $ | 98,224 | $ | 89,016 | ||||
SPAR Group, Inc. and Subsidiaries
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 | ||||||||||||||||||
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See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated StatementsStatement of Cash FlowsEquity
(unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Operating activities | ||||||||
Net income | $ | 1,535 | $ | 1,248 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 1,526 | 1,459 | ||||||
Bad debt expense, net of recoveries | 93 | 317 | ||||||
Share based compensation | 178 | 271 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,250 | ) | (4,643 | ) | ||||
Prepaid expenses and other assets | (583 | ) | (105 | ) | ||||
Accounts payable | 2,234 | 1,000 | ||||||
Accrued expenses, other current liabilities and customer incentives and deposits | 4,679 | 2,548 | ||||||
Net cash provided by operating activities | 6,412 | 2,095 | ||||||
Investing activities | ||||||||
Purchases of property and equipment and capitalized software | (1,046 | ) | (1,153 | ) | ||||
Purchases of Brazil subsidiary, net of cash | – | (306 | ) | |||||
Net cash used in investing activities | (1,046 | ) | (1,459 | ) | ||||
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 | ||||||
Payments on term debt | (543 | ) | (21 | ) | ||||
Payments on capital lease obligations | (15 | ) | – | |||||
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 | |||||
Effect of foreign exchange rate changes on cash | 697 | (672 | ) | |||||
Net change in cash and cash equivalents | 338 | 1,784 | ||||||
Cash and cash equivalents at beginning of year | 7,324 | 5,718 | ||||||
Cash and cash equivalents at end of period | $ | 7,662 | $ | 7,502 | ||||
Supplemental disclosure of cash flows information | ||||||||
Interest paid | $ | 216 | $ | 108 | ||||
Income taxes paid | $ | 247 | $ | 126 | ||||
Increase in deferred tax asset due to adoption of ASU 2016-09 (Note 12) | $ | 65 | $ | - | ||||
| Series B | ||||||||||||||||||||||||||||||||||||||||||||
Common Stock | Preferred Stock | Treasury Stock | Additional | Accumulated Other | Non- | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Loss | Retained Earnings | Controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||
Balance at January 1, 2022 | 21,320 | $ | 213 | 0 | $ | 0 | 54 | $ | (104 | ) | $ | 17,231 | $ | (5,028 | ) | $ | 7,439 | $ | 17,597 | $ | 37,348 | |||||||||||||||||||||||
Share-based compensation | - | - | - | - | - | - | 150 | - | 0 | 0 | 150 | |||||||||||||||||||||||||||||||||
| Majority stockholders change in control agreement | : | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of Preferred Stock | 0 | 0 | 2,000 | 20 | 0 | 0 | 3,248 | 0 | 0 | 0 | 3,268 | |||||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock | 525 | 5 | (350 | ) | (3 | ) | 0 | 0 | 0 | 0 | 0 | 0 | 2 | |||||||||||||||||||||||||||||||
Other comprehensive income (loss) | - | 0 | - | 0 | - | 0 | 0 | 1,602 | 0 | (1,976 | ) | (374 | ) | |||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 0 | 0 | 674 | 780 | 1,454 | |||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 21,845 | $ | 218 | 1,650 | $ | 17 | 54 | $ | (104 | ) | $ | 20,629 | $ | (3,426 | ) | $ | 8,113 | $ | 16,401 | $ | 41,848 | |||||||||||||||||||||||
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, 2021 | 21,122 | $ | 211 | 2 | $ | (2 | ) | $ | 16,645 | $ | (3,913 | ) | $ | 9,218 | $ | 16,463 | $ | 38,622 | ||||||||||||||||||
Exercise of stock options | 131 | 1 | - | - | (66 | ) | - | - | - | (65 | ) | |||||||||||||||||||||||||
Share-based compensation | - | - | - | - | 99 | - | - | - | 99 | |||||||||||||||||||||||||||
Other comprehensive (loss) | - | - | - | - | - | (198 | ) | - | (1,637 | ) | (1,835 | ) | ||||||||||||||||||||||||
Net income | - | - | - | - | - | - | 917 | 864 | 1,781 | |||||||||||||||||||||||||||
Balance at March 31, 2021 | 21,253 | $ | 212 | 2 | $ | (2 | ) | $ | 16,678 | $ | (4,111 | ) | $ | 10,135 | $ | 15,690 | $ | 38,602 | ||||||||||||||||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Three Months Ended March 31, | ||||||||
2022 | 2021 | |||||||
Operating activities | ||||||||
Net income | $ | 1,454 | $ | 1,781 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||
Depreciation and amortization | 510 | 530 | ||||||
Non-cash lease expense | 241 | 421 | ||||||
Bad debt expense, net of recoveries | 34 | 69 | ||||||
Share-based compensation | 150 | 99 | ||||||
| Majority stockholders change in control agreement | (420 | ) | 0 | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (5,780 | ) | (6,100 | ) | ||||
Prepaid expenses and other assets | (1,716 | ) | 857 | |||||
Accounts payable | (145 | ) | 1,384 | |||||
Operating lease liabilities | (242 | ) | (421 | ) | ||||
Accrued expenses, other current liabilities and customer incentives and deposits | 2,916 | 3,773 | ||||||
Net cash (used in) provided by operating activities | (2,998 | ) | 2,393 | |||||
Investing activities | ||||||||
Purchases of property and equipment and capitalized software | (478 | ) | (332 | ) | ||||
Net cash used in investing activities | (478 | ) | (332 | ) | ||||
Financing activities | ||||||||
Borrowings under line of credit | 19,271 | 15,715 | ||||||
Repayments under line of credit | (14,446 | ) | (12,069 | ) | ||||
Cash received (payments) from stock options exercised | 0 | (65 | ) | |||||
Net cash provided by financing activities | 4,825 | 3,581 | ||||||
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (761 | ) | (1,901 | ) | ||||
Net change in cash, cash equivalents and restricted cash | 588 | 3,741 | ||||||
Cash, cash equivalents and restricted cash at beginning of period | 13,473 | 15,972 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 14,061 | $ | 19,713 | ||||
Supplemental disclosure of cash flows information: | ||||||||
Interest paid | $ | 162 | $ | 159 | ||||
Income taxes paid | $ | 611 | $ | 550 | ||||
| Non-cash Majority Stockholders Agreement | $ | 3,270 | $ | 0 | ||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
1. | Basis of Presentation |
Basis of Presentation and Consolidation
The unaudited, interimcondensed consolidated financial statements of SPAR Group, Inc., a Delaware corporation ("SGRP"), and its subsidiaries (together with SGRP, collectively, the "Company" or the "SPAR Group"), accompanying this Quarterly Report on Form 10-Q for the third quarter ended September 30, 2017 (this "Quarterly Report"), have been prepared in accordance with accounting principles generally accepted in the United States forof America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial informationreporting. All intercompany balances 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 acceptedtransactions have been eliminated in the United States for completeaccompanying condensed consolidated financial statements.
Unaudited Interim Consolidated Financial Information
The accompanying interim condensed consolidated balance sheet as of DecemberMarch 31, 2016, has2022 and the interim condensed consolidated statements of income, statements of comprehensive income (loss), and statements of equity for the three (3) months period ended March 31, 2022 and 2021, statements of cash flows for the three (3) months period ended March 31, 2022 and 2021, and the related disclosures, are unaudited. In management’s opinion, the unaudited interim condensed consolidated financial statements have been compiled fromprepared on the Company'ssame basis as the audited consolidated balance sheet as of such date. In the opinion of management,financial statements and includes all normal and recurring adjustments considered necessary for athe fair presentation have been includedof the Company’s financial position as of March 31, 2022, its results of operations for the three (3) months period ended March 31, 2022 and 2021, and its cash flows for the three (3) months period ended March 31,2022 and 2021 in theseaccordance with U.S. GAAP. The results for the three (3) months period ended March 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim financial statements. However, these interimperiod.
These unaudited condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto for the Company as contained in the SGRP'sCompany's Annual Report on Form 10-K10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the "SEC") on April 17, 2017 (the "2016 Annual Report"), and SGRP's Proxy Statement for its 2017 Annual Meeting of Stockholders 2021, as filed with the SEC on April 28, 2017 (the "2017 Proxy Statement"15, 2022, and the First Amendment to the Company's Annual Report on Form 10-K/A for the year ended December 31, 2021, as filed with the SEC on May 2, 2022 (as so amended, the "Annual Report"). Particular attention should be given to Items 1, Business and 1A, Risk Factors of the 2016Company’s Annual Report respectingon Form 10-K.
2. | Business |
SPAR Group, Inc., a Delaware corporation (“SGRP”), and its subsidiaries (together with SGRP, “SPAR Group” or the Company's Business“Company”, “We”, “Our”), is a leading global merchandising and Risk Factors, respectively,brand marketing services company, providing a broad range of services to retailers, consumer goods manufacturers and distributors around the world. With more than 50 years of experience, a network of approximately 25,000+ merchandising specialists around the world working during the year, more than 11 million hours in store per year, and long-term relationships with some of the world’s leading businesses, we provide specialized capabilities across nine (9) countries and five (5) continents. Our unique combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates us from the competition.
The Company historically operated under two (2) divisions: Domestic and International. The Domestic division was comprised of all operations within the United States, and the following partsInternational division was a consolidation of SGRP's 2017 Proxy Statement: (i) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, (ii) CORPORATE GOVERNANCE, (iii) EXECUTIVE COMPENSATION, DIRECTORS AND OTHER INFORMATIONall operations and (iv) EXECUTIVE COMPENSATION, EQUITY AWARDS AND OPTIONS. The Company's resultsjoint ventures outside of operations for the interim period are not necessarily indicative of its operating results forUnited States. To better align the entire year.
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In connectionbusiness structure with the preparationCompany’s global growth strategy and leveraging regional footprint, the Company effective January 1, 2022, operates under three (3) divisions: Americas, Asia-Pacific (“APAC”) and Europe, Middle East and Africa (“EMEA”). The Americas division is comprised of the Company's consolidated financial statements for the three months ended March 31, 2017, the Company identified an error in the recognitionUnited States, Canada, Mexico, and Brazil, APAC is comprised of accumulated other comprehensive loss both in the equity sectionChina, Japan, Australia, and India, and EMEA is comprised 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 material 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 appropriate 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:South Africa.
Consolidated Balance SheetsNovel Coronavirus (Covid-19) Outbreak (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 | ||||||||||
The COVID-19 pandemic has not had material unfavorable effects to the Company's financial results during the fiscal year of 2021 although the economic impact continues to evolve globally. In March of 2022, China implemented zero tolerance COVID-19 policy and locked down Shanghai Province and surrounding districts. The policy has since expanded to other cities with no firm expiration date; operations of the Company's joint venture in China was impacted as a result. The Company's joint venture in China comprises approximately 6% of the Company’s total revenue in 2021, and it appears that current year results will continue to not have a material impact to SPAR’s total consolidated financial results. Management continues to actively monitor the situation and assess operational and cashflow impact to determine course of actions.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
3. | Restricted Cash |
Consolidated StatementFifth Third CreditFacility
One of Incomethe Company’s consolidated subsidiaries, Resource Plus of North Florida, Inc. (“Resource Plus”), was a party to a revolving line of credit facility (the “Fifth Third Credit Facility”) from Fifth Third Bank for $3.5 million, with an expiration date of June 16,2022. The credit facility was terminated as of December 31, 2021.
Resource Plus closed the line of credit with Fifth Third Bank on March 11, 2022. Resource Plus has maintained a letter of credit with an existing $855,000 restricted cash balance with Fifth Third Bank to be in compliance with their insurance policy.
The Company's total cash, cash equivalents and Comprehensive Lossrestricted cash, as presented in the consolidated statements of cash flow, was as follows (in thousands)millions):
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 | ) | |||||||||
| March 31, 2022 | December 31, 2021 | |||
| Cash and cash equivalents | $ | 13,206 | $ | 13,473 |
| Restricted cash included in cash, cash equivalents and restricted cash | 855 | 0 | ||
| Total as presented in the consolidated statement of cash flows | $ | 14,061 | $ | 13,473 |
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 | ) | ||||
|
|
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 September 30, 2017, 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.
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 Ended | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Numerator: | ||||||||
Net income attributable to SPAR Group, Inc. | $ | 674 | $ | 917 | ||||
Denominator: | ||||||||
Shares used in basic net income per share calculation | 21,583 | 21,188 | ||||||
Effect of diluted securities: | ||||||||
Stock options and unvested restricted shares | 146 | 393 | ||||||
Shares used in diluted net income per share calculations | 21,729 | 21,581 | ||||||
| Basic net income per common share: | $ | 0.03 | $ | 0.04 | ||||
Diluted net income per common share: | $ | 0.03 | $ | 0.04 | ||||
5. Credit Facilities
Sterling Credit Facility:
SGRP and certain of its US 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 Credit Facility"). The Sterling Credit Facility currently is scheduled to expire and the Borrowers' loans thereunder will become due on January 15, 2018.
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).
The amendment to the Sterling Loan Agreement dated as of December 22, 2016, among other things, increased the maximum principal amount of the Secured Revolving Loan Note to $9.0 million until January 31, 2017, and increased 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, 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 Ratio ("FCR") 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)
5. | Credit Facilities and Other Debt |
Domestic Credit Facilities
North Mill Capital Credit Facility
The SterlingCompany, under SPAR Marketing Force (“SMF”) and SPAR Canada, has a secured revolving credit facility in the United States and Canada (the "NM Credit Facility") with North Mill Capital, LLC, d/b/a SLR Business Credit ("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, entered into a 18-month individual Loan and Security Agreements with NM dated as of April 10, 2019.
On January 5, 2021, the Company and NM entered into an agreement as of January 4, 2021, and effective as of December 31, 2020 (the "First Modification Agreement"), to extend the NM Credit Facility from October 10, 2021 to April 10, 2022, and increased the amounts of the credit facilities to $14.5 (USD) million in the United States and decreased the facility to $1.5 (CDN) million in Canada; in addition the First Modification Agreement requiresincreased SMF's borrowing base availability for unbilled receivables to up to 70% from January 1, 2021 through June 30, 2021, and increased the Borrowersunbilled cap for SMF to maintain certain financial covenants, including maintenance$4.5 million (USD) from $3.9 million (USD).
The NM Credit Facility, as amended by the Borrowers ofFirst Modification Agreement continued to require the Company to pay interest on the loans equal to: (A) Prime Rate designated by Wells 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 continues to pay a facility fee to NM of 1.5% for the first$10.5 million loan balance, or $157,500 per year over the term of the agreement, plus a $15,000 one-time fee for each incremental $1 million increase in loan balance up to $14.5 million. Additionally, for the First Modification Agreement, SPAR paid NM a fee of $7,500 and agreed to reimburse NM's legal and documentation fees.
On March 22, 2021, the Company and NM executed and delivered a Second Modification Agreement effective as of April 1, 2021 (the "Second Modification Agreement"), pursuant to which NM and the Company must not exceedagreed to extend the NM Loan Agreements from April 10, 2022 to October 10, 2023, and increased the amounts of the credit facilities for SMF to $16.5 (USD) million in the USA while the SCC facility remained at $1.5 (CDN) million in Canada; in addition, the Second Modification Agreement increased SMF's borrowing base availability for unbilled receivables to up to 70% permanently, and increased the unbilled cap for SMF to $5.5 (USD) million from $4.5 (USD) million. The NM Loan Agreements as amended by the Second Modification Agreement will require the Company to pay interest on the loans equal to: (A) Prime Rate designated by Wells Fargo Bank; plus; (B) one hundred twenty-five basis points (1.25%) or a maximum combined indebtednessminimum of 5.25%. In addition, the Company continues to tangible net worth ratiopay a facility fee to NM of 3.00.8% (decreased from 1.5%) for the first$10.5 million loan balance, or $84,000 per year, over the term of the agreement, plus a $15,000 one-time fee for each incremental $1 million increase in loan balance up to 1.0,$16.5 million. Additionally, the early termination fee has decreased from 1.0% to 0.85% of the advance limit.
On March 31, 2022, the aggregate interest rate was 5.25% per annum, and the Borrowers must maintainoutstanding loan balance was $12.5 million. Outstanding amounts are classified as short-term debt.
The NM Credit Facility contains certain financial and other restrictive covenants and also limits certain expenditures by the Company, including maintaining a minimum fixed charge coverage ratio of 1.5 to 1.0. Also,positive trailing EBITDA for each Borrower, limits on non-ordinary course payments and transactions, incurring or guarantying indebtedness, increases in executive, officer or director compensation, 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 financialsuch covenants at September 30, 2017.as of March 31, 2022.
International Credit Facilities:Resource Plus – Seller Notes
SPARFACTS Australia Pty. Ltd. has a secured lineEffective with the closing of credit facilitythe Resource Plus acquisition, the Company entered into promissory notes with Oxford Funding Pty Ltd. for $1.2 million (Australian) or approximately $940,000 USD (based upon the exchange rate at September 30, 2017).sellers totaling $2.3 million. 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 2017 with National Australia Bank Limited and went into effect on October 31, 2017. The outstanding balance with Oxford as of September 30, 2017 was $334,000 USD.
On March 7, 2011, the Japanese subsidiary, SPAR FM Japan, Inc., a wholly owned subsidiary, secured a term loan with Mizuho Bank in the amount of 20.0 million Yen (Japanese), or approximately $178,000 USD. The loan isnotes are payable in monthlyannual installments at various amounts due on December 31stof 238,000 Yen or approximately $2,100 USD at an interest rate of 0.1% per annumeach year starting with a maturity date of February 28, 2018. The outstanding balance at September 30, 2017, was approximately 1.2 million Yen or $11,000 USD (based upon the exchange rate at September 30, 2017), all of which is nowDecember 31, 2018 and continuing through December 31, 2023. As such these notes are classified as both short term.
On November 29, 2016, SPAR Brazil established a line of credit with Itau Bankterm and long term for 1.5 million Brazilian Real or approximately $475,000 USD (based upon the exchange rate at September 30, 2017).appropriate amounts. The line of credit expires November 29, 2017, and the currentannual interest rate is 2.08% per month. The outstanding1.85% and the total balance owed at September 30, 2017 March 31, 2022 was zero.approximately $1.0 million.
On December 26, 2016, SPAR Brazil secured a term loan with Bradesco Bank for 2.0 million Brazilian Real or approximately $633,000 USD (based upon the exchange rate at September 30, 2017). The term loan is payable in monthly installments of 184,000 Brazilian Real or approximately $58,000 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 September 30, 2017).
SPAR Todopromo has secured a line
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 National Australia Bank, effective October 31, 2017, for $800,000 (Australian) or approximately $586,000 USD (based upon the exchange rate at March 31, 2022). The facility provides for borrowing based upon a formula, as defined in the applicable loan agreement (principally 80% of eligible accounts receivable less certain deductions). The outstanding balance with National Australia Bank as of March 31, 2022 was $164,000 (Australian) or $124,000 USD and is due on demand.
SPAR China has secured a loan with Industrial and Commercial Bank of China, effective December 21, 2021, for 2.0 million Chinese Yuan or approximately $315,000 USD (based upon the exchange rate at March 31, 2022). The loan expires on November 4, 2022. The annual interest rate was 4.15% as of March 31,2022. The outstanding balance with Industrial and Commercial Bank of China as of March 31, 2022 was 2.0 million Chinese Yuan or $315,000 USD and is due on demand.
SPAR China has secured a loan with People's Bank of China for 1.0 million Chinese Yuan or approximately $158,000 USD (based upon the exchange rate at March 31, 2022). The loan expires on June 7, 2022. The annual interest rate was 3.65% as of March 31, 2022. The outstanding balance with People's Bank of China as of March 31, 2022 was 1.0 million Chinese Yuan or $158,000 USD and is due on demand.
SPAR China has secured a loan with Industrial Bank for 3.0 million Chinese Yuan or approximately $473,000 USD (based upon the exchange rate at March 31, 2022). The loan expires on December 18, 2022. The annual interest rate was 6.0% as of March 31, 2022. The outstanding balance with Industrial Bank as of March 31, 2022 was 3.0 million Chinese Yuan or $473,000 USD and is due on demand.
SGRP Meridian has secured a loan with Investec Bank Ltd, for 30.0 million South African Rand or approximately $2.0 million USD (based upon the exchange rate at March 31, 2022). The loan expires on July 13, 2022. The annual interest rate was 7.75% as of March 31,2022. The outstanding balance with Investec Bank Ltd as of March 31, 2022 was approximately 30.0 million South African Rand or $2.0 million USD.
Interest Rate | ||||||||||||||||||||||||||||
as of | ||||||||||||||||||||||||||||
March 31, 2022 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||||||||||||
Australia - National Australia Bank | 6.56 | % | 124 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
China- Industrial & Commercial Bank | 4.15 | % | 315 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
China- People's Bank of China | 3.65 | % | 158 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
China- Industrial Bank | 6.00 | % | 473 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
South Africa - Investec Bank Ltd. | 7.75 | % | 2,002 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
USA - North Mill Capital | 5.25 | % | 12,459 | 0 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
USA - Resource Plus Seller Notes | 1.85 | % | 300 | 700 | 0 | 0 | 0 | 0 | ||||||||||||||||||||
Total | $ | 15,831 | $ | 700 | $ | 0 | $ | 0 | $ | 0 | $ | 0 | ||||||||||||||||
Summary of Unused Company Credit and Other Debt Facilities (in thousands):
September 30, 2017 | December 31, 2016 | March 31, | December 31, | |||||||||||||
Unused Availability: | ||||||||||||||||
United States | $ | 3,280 | $ | 500 | ||||||||||||
2022 | 2021 | |||||||||||||||
Unused Availability: | ||||||||||||||||
United States / Canada | $ | 2,540 | $ | 5,319 | ||||||||||||
Australia | 606 | 688 | 477 | 455 | ||||||||||||
China | 158 | 157 | ||||||||||||||
Mexico | 274 | 241 | 378 | 743 | ||||||||||||
Brazil | 475 | – | ||||||||||||||
Total Unused Availability | $ | 4,635 | $ | 1,429 | $ | 3,553 | $ | 6,674 | ||||||||
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'sSPAR'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, 2015 (the "Ethics Code"). The March 15, 2018 (the "Ethics Code is intended to promote and reward honest, ethical, respectful and professional conduct by each Covered Person (as defined in the Ethics Code 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 and collusion and Article V of the Ethics Code generally prohibits each "Covered Person" (including SGRP's officers and directors) from 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 Affiliate Contract") or anything else disclosed to and approved by SGRP's Board of Directors (the "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.
SGRP'sSPAR's Audit Committee has the specific duty and responsibility to review and approve the overall fairness to the Company and terms of all material related-party transactions.transactions and payments. 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,reviews, in accordance with the Audit Committee Charter, the Ethics Code, the rules of the Nasdaq Stock Market, Inc. ("Nasdaq"),rules 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.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)transactions.
In addition, in order to (among other things) assistDomestic Related Party Transactions
Change of Control, Voting and Restricted Stock Agreement
Approved by the majority of 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 reviewaccepted by the Special Subcommittee. See Note 9 toMajority Stockholders on December 31, 2021, and signed and effective January 28, 2022, SGRP entered into the Company's Consolidated Financial Statements – CommitmentsChange of Control, Voting and Contingencies – Legal MattersRestricted Stock Agreement ("CIC Agreement"), below.
Domestic Related Party Services:
SPAR Business Services, Inc.by and among SGRP, Robert G. Brown, ("SBS"Mr. Brown"), William H. Bartels, ("Mr. Bartels"), SPAR Administrative Services, Inc., a corporation ("SAS"SAS"), and SPAR InfoTech,Business Services, Inc., a corporation ("SIT"SBS"), are affiliates of SGRP but are not under the control or part of the consolidated Company.and collectively with 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 ofSAS, the Company for related party purposes because of their family relationships with Mr. Brown.("Majority Stockholders") (the "Agreement").
The Company executes the services it provides to its domestic clients primarily through independent field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), substantially all of whom are provided by SBS, and administers those services through local and regional administrators, substantially all of whom are provided by SAS. The Company paid $19.6 million and $15.8 million during the nine months ended September 30, 2017 and 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" arrangement (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.
Thefinancial terms of the AmendedCIC Agreement to the Majority Stockholders, totaling $4,477,585 and Restated Field Servicefully accrued in December 2021, consists of the following:
a. | The Corporation issued to the Majority Stockholders 2,000,000 restricted shares of Series B Preferred Stock which are convertible into SGRP Shares subject to the conversion ratio as set forth in the CIC Agreement of 1:1.5 basis, subject to adjustment for a forward or reverse share split, share dividend, or similar transactions. These shares will vest over time upon execution of the CIC Agreement through November 10, 2023 in five (5) phases, assuming the Majority Stockholders' ongoing compliance with the terms and conditions of the CIC Agreement. Series B Preferred Shares may only be transferred to affiliates and certain related parties of the Majority Stockholders if those affiliates and certain related parties execute a joinder to the CIC Agreement. The Series B Preferred Stock was valued at $3,690,000 in total, based on the SGRP stock price on December 31, 2021 of $1.23 per share for 3,000,000 SGRP shares. Upon execution of the agreement in January of 2022, 2,000,000 restricted shares of Series B Preferred Stock were issued to the Majority Stockholders based on the SGRP stock price on January 28, 2022 of $1.09 per share and recorded in paid-in capital at $3,270,000 as of March 31, 2022. The $420,000 difference between what was accrued for as of December 31, 2021 was adjusted in selling, general and administrative expenses during the quarter ended March 31, 2022. Immediately after the issuance of the Series B restricted shares, 350,000 of Series B Preferred Stock was converted to 525,000 of common shares per terms of the agreement. |
b. | The Corporation made a $250,000 cash payment to Mr. Brown and agreed to reimburse up to $35,000 of the legal expenses of the Majority Stockholders that were incurred after January 1, 2021 in connection with the negotiation and execution of the CIC Agreement. Both payments have been made in Q1 of 2022. |
c. | The Corporation assumed financial responsibility for, and will pay directly to Affinity Insurance Company, Ltd., $502,585 to settle SAS obligations and the related claim for the 2014-2015 plan year. The payment has been made directly to Affinity Insurance Company, Ltd. in Q1 of 2022. |
James R. Brown, Sr. Advisor Agreement with SBS dated as of
Effective 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 was26, 2022, SGRP entered into a consulting agreement 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 of 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 costsMr. James R. Brown, Sr., following his retirement as a resultdirector of their business independence and initiative, and that it has an agreement with each Field Specialist clearly confirming his, her, or its statusSGRP on January 25, 2022, pursuant to which Mr. Brown will serve as an independent contractor.
The appropriateness of SBS's treatment of its Field Specialists as independent contractors has been periodically subjecta Board advisor 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 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 haveSGRP from time to time been) significant,for a term of one (1) year (the "Brown Advisor Agreement"). As compensation for his services, Mr. Brown is entitled to receive compensation at a rate of $55,000 for the term of the Brown Advisor Agreement. Payments will be made in equal quarterly installments 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. will be pro-rated for partial quarters.
Current material and potentially material proceedings against SBS and, in one instance, the Company are described in Note 9 to the Company's Consolidated Financial Statements – Commitments and ContingenciesPanagiotis Lazaretos Consulting Agreement – 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.
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 paid 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 by 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 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.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
On June 14, 2016, SAS and SPAR Marketing Force, Inc. ("SMF")Effective February 1, 2022, SGRP entered into a new Field Administration Agreementconsulting agreement with Thenablers, Ltd. (the "SAS Agreement""Lazaretos Consulting Agreement"). In order to provide continuity with SAS's Prior Agreement, the SAS Agreement Thenablers, Ltd. 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) has been reimbursed or approved to date by the Company, and no such compensation reimbursements were made or approved under SAS's Prior Agreement. This is not a restriction on SAS since SAS is not controlled by the Company and may pay any compensation to any person that SAS desires out 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, is the nephew of SGRP's Chairman, Mr. Robert G. Brown, an officer and employee of the Company's affiliate, SIT (which iswholly owned by Mr. Robert G. Brown), and isPanagiotis Lazaretos, a retired director of SGRP. Following Mr. Lazaretos' retirement as a director on January 25, 2022, Thenablers, Ltd. agreed to provide the consulting services of SPAR BSMTMr. Lazaretos to SGRP regarding global sales and owns EILLC (see new markets' expansion. The Lazaretos Consulting Agreement cannot be terminated by the consent of either party for the firsttwelve (12) months, and automatically expires on January 31, 2024. Upon the one-year anniversary of the effective date, the Lazaretos Consulting Agreement may be terminated by either party with 180 days’ notice in writing to the other party. As compensation for its services, Thenablers, Ltd. is entitled to receive: (i) base compensation at a rate of $10,000 per month for the term of the Consulting Agreement; (ii) incentive-based compensation; and (iii) the outstanding options granted to Mr. Panagiotis ("Panos") N. Lazaretos on February 4, 2021 will continue to be outstanding and vest according to their terms under the agreement.
InternationalOther Domestic Related Party ServicesTransactions, below). Peter Brown was an official observer at the meetings of SGRP's Board from 2014 through December 2016. Accordingly, Peter Brown is a related party in respect of the Company.
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 also a director of both 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 through June of 2021, NSRS provided substantially all of the domestic merchandising specialist field force used by NMS. For those services, NMS agrees to reimburse NSRS certain costs for providing those services plus a premium ranging from 4.0% to 10.0% of certain costs. Starting in July of 2021, the domestic merchandising specialist field force services provided by NSRS was transitioned to National Remodel & Setup Services, LLC ("NRSS") with the same financial arrangement. Mrs. Andrea Burdekin is the owner of NRSS. NMS also leases office space from Mr. Burdekin's Personal property. The costs associated with this transaction were approximately $2.1M and $1.8M as of March 31, 2022 and 2021, respectively.
Resource Plus of North Florida, Inc. ("Resource Plus"), is a consolidated domestic subsidiary of the Company and is owned jointly by SGRP through its indirect ownership of 51% of the Resource Plus membership interests and by Mr. Richard Justus through his ownership of the other 49% of the Resource Plus membership interests. Mr. Justus has a 50% ownership interest in RJ Holdings which owns the buildings where Resource Plus is headquartered and operates. Both buildings are subleased to Resource Plus. The costs associated with these transactions were approximately $180,000 and $290,000 for the three-month periods ended March 31, 2022 and 2021, respectively.
International Related Party Services:Services
SGRP Meridian (Pty), Ltd. ("Meridian"Meridian") is a consolidated international subsidiaryjoint venture 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, Mr. Garry Bristow, andLindicom Empowerment Holdings Proprietary Limited. Until December 31, 2021, Meridian owned 51% of CMR (Pty), Ltd. (“CMR”) where Mr. Adrian Wingfield. Mr. Mason is PresidentWingfield owned 49% and was also a director and Mr. Bristow is an officer and directorDirector of CMR Meridian. Mr. Mason is also an officer and director and 50% shareholder 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 ofMeridian leases office space from Merhold Holding Trust ("MHT"MHT"), which provides services similar to those provided by MPT. MPT owns where Mr. Wingfield is one of the building where beneficial owners. Effective January 1, 2022 Meridian is headquarteredacquired the remaining CMR shares from Mr. Wingfield and is subleased to Meridian. MCPT providesterminated his CMR directorship as a fleet of approximately 160 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.result.
SPAR Todopromo is a consolidated internationalThe Corporation's principal Brazilian 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"), which supplied administrative and operational consulting support to SPAR Todopromo for the three and nine month periods ended September 30, 2017 and 2016.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
In August 2016, Mr. Juan F. Medina Domenzain ("JFMD"), partner in SPAR Todopromo, purchased the warehouse that was being leased by SPAR Todopromo. A new lease expiring December 31, 2017, was entered into with SPAR Todopromo with the same terms and cost as with the previous owner.
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 companysubsidiary 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, whoa director of SPAR BSMT and SGRP.
SPARFACTS is a citizen and resident of the USA and a related party in respectconsolidated international joint venture of the Company (SeeDomestic Related Party Services, above). Accordingly, EILLC alsoand is owned 51% by SGRP and 49% by Ms. Lydna Chapman. Ms. Chapman is a related party in respectdirector of SPARFACTS. Her various companies provide office lease, accounting and consultant services to SPARFACTS. The costs associated with these activities were approximately $91,000 and $76,000 for the Company.three-month periods ended March 31, 2022 and 2021, respectively.
SPAR BSMT has contracted with Ms. Karla Dagues Martins, a Brazilian citizen and resident and JDM's sister 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's company, Karla Martins Sociedade de Advogados ("KMSA").
The NM Acquisition (as defined below in Note 11 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.
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.
Summary of Related Party Services:
The following costs of affiliates were charged to the Company (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
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 | ||||||||||||
Vehicle rental expenses (MCPT) | 579 | 245 | 870 | 618 | ||||||||||||
Office and vehicle rental expenses (MHT) | 85 | 34 | 126 | 85 | ||||||||||||
Field merchandiser expenses (NDS Reklam) | – | 1 | – | 1 | ||||||||||||
Consulting and administrative services (CON) | 61 | 74 | 181 | 241 | ||||||||||||
Legal Services (KMSA) | 31 | – | 79 | – | ||||||||||||
Warehousing rental (JFMD) | 13 | 3 | 38 | 3 | ||||||||||||
Total services provided by affiliates | $ | 8,631 | $ | 6,867 | $ | 24,111 | $ | 19,946 | ||||||||
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 | ||||
Summary of Certain Related Party Transactions
Due to affiliates consists of the following (in thousands): | March 31, | December 31, | ||||||
2022 | 2021 | |||||||
Loans from local investors: (1) | ||||||||
Australia | $ | 656 | $ | 597 | ||||
Mexico | 623 | 623 | ||||||
China | 1,788 | 1,784 | ||||||
Resource Plus | 266 | 266 | ||||||
Total due to affiliates | $ | 3,333 | $ | 3,270 | ||||
(1) | Represent loans due from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms, are due on demand, and are classified as current liabilities in the Company's consolidated financial statements. |
(1) Represent loans fromSPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Bartels' Retirement and Director Compensation
Mr. William H. Bartels retired as an employee of the local investors intoCompany as of January 1, 2020 but continues to serve as a member of SPAR's Board, a position he has held since July 8, 1999. Mr. Bartels is also one of the Company's subsidiaries (representing their proportionate sharefounders and a significant stockholder of working capital loans).SGRP. Effective January 18, 2020, SPAR's Governance Committee proposed and unanimously approved retirement benefits for the five-year period commencing January 1, 2020, and ending December 31, 2024 (the "Five-Year Period"), for Mr. Bartels. The loans have no payment termsaggregate value of benefits payable to Mr. Bartels is approximately $220,558 per year and are due on demanda total of $1,102,790 for the Five-Year Period. As of March 31, 2022 $355,918 remains outstanding and as such have been classified asis included within accrued expenses and other current liabilities in the Company's consolidated financial statements.liabilities.
Other Related Party Transactions and Arrangements
SPAR Business Services, Inc. ("SBS") and SPAR InfoTech, Inc. ("Infotech") 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, Director, Chairman of the Board, and significant shareholder of SGRP. Infotech is an affiliate because it is owned principally by Robert G. Brown.
In July 1999 SMF, SBS and SITInfotech 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 are co-owned with SBS and marketing servicesInfotech and are accessible via the Internet or other applicable telecommunication network by the authorized representatives ofeach entered into a non-exclusive royalty-free license from the Company and its clients through their respective computers and mobile devices. In addition, SPAR Trademarks, Inc., a wholly owned subsidiary of SGRP ("STM"), SBS and SIT entered into separate perpetual trademark licensing agreements whereby STM has granted non-exclusive royalty-free licenses 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"SPAR" trademarks and related rights of STM. SBS and SAS provide services to the Company, as described above, SIT assisted in the Brazilian acquisition at a cost to the Company of $49,000, as described below, and SIT no longer provides services to and does not compete with the Company.United States.
Through arrangements with the Company, SBS, SAS 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 inat its discretion from time to time.discretion. 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-one1-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.SGRP Series "A" Preferred Stock. At September 30, 2017, March 31, 2022, no shares of SGRP Series A"A" Preferred Stock were issued and outstanding.
On January 28, 2022, SGRP entered into the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement") with the Majority Stockholders. As part of execution of the CIC agreement, on January 25, 2022, the Corporation filed a Certificate of Elimination for its “Certificate of Designation of Series “A” Preferred Stock of SPAR Group, Inc.” (the “Certificate of Elimination”). Pursuant to the Certificate of Elimination, the Series "A" Preferred Stock was cancelled and withdrawn. As a result, all 3,000,000 shares of the previously authorized Series "A" Preferred Stock were returned to the Corporation’s authorized “blank check” preferred stock. There were no shares of Series "A" Preferred Stock outstanding at the time of the cancellation.
Subsequent to filing the Certificate of Elimination, on January 25, 2022, the Corporation filed a “Certificate of Designation of Series “B” Preferred Stock of SPAR Group, Inc.” (the “Preferred Designation”) with the Secretary of State of Delaware, which designation had been approved by the Board on January 25, 2022. The Preferred Designation created a series of 2,000,000 shares of Preferred Stock designated as “Series "B" Preferred Stock” with a par value of $.01 per share (the “Preferred Stock”). The Preferred Shares do not carry any voting or dividend rights and are convertible into the Common Stock on a 1 for 1.5 basis. As of March 31, 2022, 1,650,000 shares of Series "B" Preferred Stock remain 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 employees of its affiliates respecting shares of Common Stock issued by SGRP ("SGRP Shares") pursuant to SGRP's 2008 Stock Compensation Plan (as amended, the "2008 Plan"), 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), and restricted stock units, stock appreciation rights and other awards based on SGRP 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 grants under the amended 2008 Plan. In the third quarter, there were 733,000 options awarded; 550,000 to officers and 183,000 to certain employees of SPAR Group, Inc.
The Company recognized $37,000approximately $110,000 and $86,000$96,000 in stock-based compensation expense relating to stock option awards during the three month-month periods ended September 30, 2017 March 31, 2022 and 2016,2021, respectively. The tax benefit available from stock basedstock-based compensation expense related to stock option during both the three (3) months period ended September 30, 2017 March 31, 2022 and 20162021 was approximately $14,000$27,000 and $33,000 respectively. The Company recognized $146,000 and $220,000 in stock-based compensation expense relating to stock option Awards during the nine month periods ended September 30, 2017 and 2016, respectively. The tax benefit, available to the Company, from stock based compensation expense related to stock options during the nine months ended September 30, 2017 and 2016 was approximately $55,000 and $84,000,$24,000 respectively. As of September 30, 2017,March 31, 2022, total unrecognized stock-based compensation expense related to stock options was $505,000.$228,000.
During the three (3) months period ended September 30, 2017 March 31, 2022 and 2016,2021, the Company recognized approximately $11,000$40,000 and $9,000, 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,$5,000, respectively of stock-based compensation expense related to restricted stock. The tax benefit available to the Company from stock basedstock-based compensation expense related to restricted stock during the ninethree (3) months period ended September 30, 2017 March 31, 2022 and 20162021 was approximately $12,000$10,000 and $15,000,$1,000, respectively. As of September 30, 2017, totalMarch 31, 2022, there was $116,000 unrecognized stock-based compensation expense related to unvested restricted stock Awards was $24,000.awards.
2021 Plan
On June 4, 2021, the Board and the Board's Compensation Committee (the "Compensation Committee") approved the revised proposed 2021 Stock Compensation Plan of SPAR Group, Inc. (the "2021 Plan") for submission, approval and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)ratification by the Company's stockholders at their Annual Meeting on August 12, 2021. At that meeting, the 2021 Plan was ratified and approved by the Company's stockholders and became effective immediately on August 12, 2021 (the "2021 Plan Effective Date"), through May 31, 2022 (the "2021 Plan Period"). The 2021 Plan terminates on May 31, 2022 (or earlier upon the stockholder approval of the 2022 Plan).
The 2021 Plan provides for the issuance of Awards for NQSOs and RSUs (as defined below) respecting shares of SGRP's Common Stock ("SGRP Shares") covering up to a total of 400,000 SGRP Shares ("Maximum Award") under the 2021 Plan ("New Awards") to, in or otherwise respecting SGRP Shares ("New Award Shares") so long as the New Award Shares covered by each proposed New Award or group of New Awards in the aggregate (NQSOs plus RSUs) do not at the time of the proposed issuance exceed the Maximum Award and the RSU component does not exceed 150,000 New Award Shares.
Option Awards under the 2021 Plan expire on the fifth anniversary of grant or sooner as provided in the 2021 Plan, whether or not vested. Once vested under the 2021 Plan, RSU Awards do not expire. Under the 2021 Plan: (i) each stock option Award must vest over a four-year period following the date of grant in four (4) equal amounts annually starting on the first anniversary of the grant date; (ii) any RSU Award granted to an employee shall vest over a three-year period following the date of grant annually in three (3) equal amounts starting on the first anniversary of the RSU grant date; and (iii) any RSU Award granted to a Director shall vest over a one-year period following the date of grant in four (4) equal amounts quarterly with one (1) installment vesting at the end of each three-month period following the date of the RSU grant date. As of March 31,2021, 58,011 RSU Awards had been granted under the 2021 Plan (all of which remained outstanding).
2020 Plan
The Board authorized and approved the revised proposed 2020 stock compensation plan of SGRP (the "2020 Plan"), which was submitted to and approved by SGRP's stockholders at the Special Meeting of SGRP's stockholders on January 19, 2021 (the "2020 Plan Effective Date"). The 2020 Plan became effective immediately upon such approval.
The 2020 Plan: (a) has a four-month term from the 2020 Plan Effective Date (as defined below) through May 1, 2021 (the "2020 Plan Period"); and (b) provides for the issuance of "non-qualified" option awards to purchase shares of SGRP's Common Stock ("SGRP Shares") aggregating: (i) 550,000 SGRP Shares; plus (ii) 50,000 SGRP Shares for each of up to the firstthree (3) additional new Directors during the period December 1, 2020, to April 30, 2021 (for a possible total of 700,000 SGRP Shares) available for future Awards during the 2020 Plan Period as outlined below (the "20-21 Maximum") under 2020 Plan. Since one (1) new director joined the Board on the 2020 Plan Effective Date, 600,000 SGRP Shares were available for Awards on the 2020 Plan Effective Date.
The 2020 Plan required the Company to issue as of the plan effective date new awards for options to purchase: (i) an aggregate of 125,000 SGRP Shares to 19 employees (other than the Named Executive Officers) in individual amounts designated by the Board; (ii) 10,000 SGRP Shares to each of Panagiotis N. Lazaretos, Igor Novgorodtsev, Robert G. Brown and Arthur H. Baer (each a director at that time); and (iii) 50,000 SGRP Shares to each member of the Board of Directors on the Effective Date of the Plan. Those options were granted by the Board on February 4, 2021. The 2020 Plan was terminated on May 1, 2021, and no further options were granted under it.
2018 and 2008 Plan
As of March 31, 2022, there were awards representing 600,000 shares of SGRP's Common Stock that had been granted under the 2018 Plan (160,000 of which remain outstanding), and awards representing 691,162 shares of SGRP's Common Stock outstanding under the 2008 Plan. After May 31, 2019, the 2018 Plan ended, and no further grants can be made under the 2018 Plan respecting such shares of SGRP's Common Stock.
Inducement Stock Award Summary
Nasdaq Rules permit the grant of options, RSUs and other stock-based awards outside of stockholder approved plans to induce executives to accept employment with the Corporation. Such inducement awards require Board approval, but do not require stockholder approval.
On August 2, 2021, as an inducement to Ron Lutz to become the Corporation's Chief Global Commercial Officer, the Corporation granted to Mr. Lutz RSU Awards issued and effective on that date having a fair market value of $50,000 (i.e., respecting 26,882 SGRP Shares at $1.86 per share) as of that date and vesting in one (1) year.
On August 2,2021, as an inducement to William Linnane to become the Corporation's Chief Strategy and Growth Officer, the Corporation granted to Mr. Linnane RSU Awards issued and effective on that date having a fair market value of $50,000 (i.e., respecting 26,882 SGRP Shares at $1.86 per share) as of that date and vesting in one (1) year.
On February 22, 2021, as an inducement to Michael R. Matacunas to become the Corporation's Chief Executive Officer and a Director, the Company granted to Mr. Matacunas Awards consisting of: (a) nonqualified option Awards to acquire 630,000 SGRP shares at $1.90 per share; and (b) RSU Awards issued and effective: (i) on that date having a fair market value of $50,000 (i.e., respecting 26,315 SGRP Shares at $1.90 per share) as of that date and vesting in one (1) year; and (ii) on May 15, 2022, and on May 15 of each following year through 2031, provided that Mr. Matacunas is then still employed as the CEO of the Company on such date, RSUs having a Fair Market Value of $100,000 on each such date, which shall be automatically issued and effective and shall be recorded by the Corporation on its books and records on each such date. Each of his RSU Awards vests one (1) year after issuance. His Option Award vested on February 22, 2022.
On August 31, 2020, as an inducement to Fay DeVriese to become the Corporation's Chief Financial Officer and a Director, the Corporation granted to Ms. DeVriese an Award consisting of nonqualified options to acquire 200,000 SGRP shares at $0.85 per share, vesting twenty-five percent (25%) of the total number of shares of Common Stock on August 31, 2021, and the balance shall vest and become exercisable in a series of three successive equal annual installments upon Ms. DeVriese’s completion of each additional year of employment over the three-year period following August 31,2021, fully vesting on August 31, 2024.
| 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 are is 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.
The Company executes the services it provides to its domestic clients primarily through independent field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), almost all of whom are engaged and provided as independent contractors by SBS. For 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's treatment of its Field Specialists 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 byAll prior litigations associated with the Company under SBS's Prior Agreement,through SPAR Business Services, Inc., a corporation ("SBS") and SBS's expensesits Independent Contractors have been settled and, in most cases, paid to plaintiffs in full. As of defending those challenges and other proceedings were reimbursed byMarch 31,2022, a $325,000 accrual remained for the Company duringfinal payment of the three month periods ended SBS Clothier Litigation. The litigation was settled on September 30, 2017 and 2016 (in20, 2019 for $1.3 million payable in four (4) equal annual installments of $325,000, with 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 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 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 continuefinal payment to be (and have from time to time been) significant, and prolonged litigation and appeals and any adverse determinationpaid 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 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" 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 subsequently dismissed from the action without prejudice. 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 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 damages in the case. Trial on phase two was scheduled for 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 advised the Company that SBS could appeal the adverse phase one determination when permitted under the court's rules.2022.
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 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 to 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.
Potential Adverse Effects of the SBS Litigation
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 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, above.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
10. Segment Information10. 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 makermanagement in deciding how to allocate resources and in assessing performance.
The Company provides similar merchandising,, business technology and marketing services throughout the world, operatingworld. The Company historically operated within two2 (2) reportable segments, its Domestic Divisiondivision was comprised of the business in the United States, and its International Division.international division was comprised of all countries outside United States. The Company usesused those divisions to improve its administration and operational and strategic focuses, and it trackstracked and reportsreported certain financial information separately for each of those divisions. The Company measuresmeasured the performance of its Domestic and International Divisionsdivisions 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 Company continues to evaluate the global growth strategy. To better leverage the regional footprint to align with global growth strategy, effective January 1, 2022, the Company has realigned its segment from two (2) divisions to 3 (3) regional segments which has been recast below: Americas which is comprised of United States, Canada, Brazil and Mexico, Asia-Pacific (“APAC”) which is comprised of Japan, China, India and Australia, and Europe, Middle East and Africa (“EMEA”) which is comprised of South Africa. Certain corporate expenses have been assigned to segments based on each segment’s revenue as a percent of total company revenue.
The operations and performance metrics for each country remains unchanged; the accounting policies for each country also remains the same. Therefore the change of each ofsegment reporting has no impact to the reportable segmentsexisting accounting policies and 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 | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Revenue: | ||||||||
Americas | $ | 42,978 | $ | 45,114 | ||||
APAC | 6,818 | 8,262 | ||||||
EMEA | 9,198 | 7,721 | ||||||
Total revenue | $ | 58,994 | $ | 61,097 | ||||
Operating income: | ||||||||
Americas | $ | 1,780 | $ | 2,328 | ||||
APAC | (441 | ) | 23 | |||||
EMEA | 728 | 367 | ||||||
Total operating income | $ | 2,067 | $ | 2,718 | ||||
Interest expense (income): | ||||||||
Americas | $ | 101 | $ | 134 | ||||
APAC | (1 | ) | 7 | |||||
EMEA | 49 | 6 | ||||||
Total interest expense | $ | 149 | $ | 147 | ||||
Other expense (income), net: | ||||||||
Americas | $ | (7 | ) | $ | 14 | |||
APAC | (16 | ) | (47 | ) | ||||
EMEA | (64 | ) | (42 | ) | ||||
Total other expense (income), net | $ | (87 | ) | $ | (75 | ) | ||
Income before income tax expense: | ||||||||
Americas | $ | 1,686 | $ | 2,180 | ||||
APAC | (424 | ) | 63 | |||||
EMEA | 743 | 403 | ||||||
Total income before income tax expense | $ | 2,005 | $ | 2,646 | ||||
Income tax expense: | ||||||||
Americas | $ | 370 | $ | 791 | ||||
APAC | (6 | ) | 49 | |||||
EMEA | 187 | 25 | ||||||
Total income tax expense | $ | 551 | $ | 865 | ||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Assets: | ||||||||
United States | $ | 21,804 | $ | 22,189 | ||||
International | 36,754 | 32,662 | ||||||
Total assets | $ | 58,558 | $ | 54,851 | ||||
Net income: | ||||||||
Americas | $ | 1,316 | $ | 1,389 | ||||
APAC | (418 | ) | 14 | |||||
EMEA | 556 | 378 | ||||||
Total net income | $ | 1,454 | $ | 1,781 | ||||
Net (income) loss attributable to non-controlling interest: | ||||||||
Americas | $ | (548 | ) | $ | (515 | ) | ||
APAC | 153 | (4 | ) | |||||
EMEA | (385 | ) | (345 | ) | ||||
Total net (income) attributable to non-controlling interest | $ | (780 | ) | $ | (864 | ) | ||
Net income (loss) attributable to SPAR Group, Inc.: | ||||||||
Americas | $ | 768 | $ | 874 | ||||
APAC | (265 | ) | 10 | |||||
EMEA | 171 | 33 | ||||||
Total net income (loss) attributable to SPAR Group, Inc. | $ | 674 | $ | 917 | ||||
Depreciation and amortization: | ||||||||
Americas | $ | 485 | $ | 502 | ||||
APAC | 14 | 18 | ||||||
EMEA | 11 | 10 | ||||||
Total depreciation and amortization | $ | 510 | $ | 530 | ||||
Capital expenditures: | ||||||||
Americas | $ | 466 | $ | 294 | ||||
APAC | 5 | 36 | ||||||
EMEA | 7 | 2 | ||||||
Total capital expenditures | $ | 478 | $ | 332 |
Note: There were 0 inter-company sales for the three (3) months period ended March 31, 2022 or 2021.
March 31, | December 31, | |||||||
2022 | 2021 | |||||||
Assets: | ||||||||
Americas | $ | 74,070 | $ | 65,689 | ||||
APAC | 8,110 | 10,023 | ||||||
EMEA | 16,044 | 13,304 | ||||||
Total assets | $ | 98,224 | $ | 89,016 | ||||
March 31, | December 31, | |||||||
2022 | 2021 | |||||||
Long lived assets: | ||||||||
Americas | $ | 6,311 | $ | 7,517 | ||||
APAC | (1,648 | ) | (1,818 | ) | ||||
EMEA | 283 | 362 | ||||||
Total long lived assets | $ | 4,946 | $ | 6,061 | ||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Geographic Data (in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | Three Months Ended March 31, | ||||||||||||||||||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2022 | 2021 | |||||||||||||||||||||||||||||||||||||||||||
International revenue: | % of consolidated net revenue | % of consolidated net revenue | % of consolidated net revenue | % of consolidated net revenue | ||||||||||||||||||||||||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||||||||||||||||||||||||||
consolidated | consolidated | |||||||||||||||||||||||||||||||||||||||||||||||
Revenue by country: | net revenue | net revenue | ||||||||||||||||||||||||||||||||||||||||||||||
| United States | $ | 23,353 | 39.7 | % | $ | 23,676 | 38.8 | % | ||||||||||||||||||||||||||||||||||||||||
Brazil | $ | 11,132 | 22.8 | % | $ | 1,850 | 5.5 | % | $ | 29,232 | 22.3 | % | $ | 1,850 | 2.1 | % | 15,568 | 26.4 | 12,300 | 20.1 | ||||||||||||||||||||||||||||
South Africa | 6,703 | 13.7 | 5,936 | 17.8 | 19,646 | 15.0 | 14,871 | 16.6 | 9,198 | 15.6 | 7,722 | 12.6 | ||||||||||||||||||||||||||||||||||||
Mexico | 6,115 | 12.5 | 5,495 | 16.4 | 16,177 | 12.3 | 15,600 | 17.4 | 2,410 | 4.1 | 7,259 | 11.9 | ||||||||||||||||||||||||||||||||||||
China | 2,868 | 5.9 | 3,029 | 9.1 | 7,396 | 5.6 | 8,646 | 9.6 | 2,860 | 4.8 | 3,263 | 5.3 | ||||||||||||||||||||||||||||||||||||
Japan | 2,426 | 5.0 | 1,799 | 5.4 | 5,970 | 4.5 | 5,157 | 5.7 | 2,023 | 3.4 | 2,450 | 4.0 | ||||||||||||||||||||||||||||||||||||
Canada | 1,647 | 2.8 | 1,878 | 3.1 | ||||||||||||||||||||||||||||||||||||||||||||
India | 1,947 | 4.0 | 1,523 | 4.6 | 5,397 | 4.1 | 4,203 | 4.7 | 1,616 | 2.7 | 2,226 | 3.6 | ||||||||||||||||||||||||||||||||||||
Canada | 1,499 | 3.1 | 1,453 | 4.3 | 4,544 | 3.5 | 4,582 | 5.1 | ||||||||||||||||||||||||||||||||||||||||
Australia | 935 | 1.9 | 945 | 2.8 | 2,741 | 2.1 | 2,359 | 2.6 | 319 | 0.5 | 323 | 0.6 | ||||||||||||||||||||||||||||||||||||
Turkey | 65 | 0.1 | 76 | 0.2 | 189 | 0.1 | 245 | 0.3 | ||||||||||||||||||||||||||||||||||||||||
Total international revenue | $ | 33,690 | 69.0 | % | $ | 22,106 | 66.1 | % | $ | 91,292 | 69.5 | % | $ | 57,513 | 64.1 | % | ||||||||||||||||||||||||||||||||
Total revenue | $ | 58,994 | 100 | % | $ | 61,097 | 100 | % | ||||||||||||||||||||||||||||||||||||||||
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 | ||||
11. | Recent Accounting Pronouncements |
The Company reviews new accounting pronouncements as they are issued or proposed by the Financial Accounting Standards Board (“FASB”).
11. Purchase of Interests in SubsidiariesNot Yet Adopted
In SeptemberJune 2016, after acquiring SGRP Brasil Participações Ltda. ("SGRP Holdings"the FASB issued ASU No.2016-13, “Financial Instruments (Topic 326), Credit Losses”. Topic 326 changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be 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 of related party transactions (See Note 6 to the Company's Consolidated Financial Statements - Related Party Transactions–International Related Party Services, above), SGRP Holdings and SPAR BSMT (the "Purchasers") entered into a Quota Purchase Agreement dated September 13, 2016 (the "NM QPA"), with Interservice Publicidade Sociedade Ltda., a Brazilian limitada, Momentum Promoções Ltda., a Brazilian limitada, and IPG Nederland B.V., a Netherlands company (collectively, 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 Purchasersvaluation account that will be deducted from the Sellers (the "NM Acquisition") of allamortized cost basis of the equity shares (called "quotas") in New Momentum Ltda., a Brazilian limitada, and New Momentum Serviços Temporários Ltda., a Brazilian limitada (each a "NM Company" or collectivelyfinancial asset to present the "NM Companies"), two of Interpublic's "In Store" companies in Brazil. SPAR BSMT acquired 99% ofnet carrying value at the quotas issued by each NM Company and SGRP Holdings acquired 1% ofamount expected to be collected on 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,financial asset. Topic 326 is effective as of close of business on September 13, 2016. The purchase price January 1, 2020, although in November 2019, the FASB delayed the effective date until fiscal years beginning after December 15, 2022 for SEC filers eligible to be smaller reporting companies under the NM Companies was R$1,312,000 (approximately US$401,000).SEC’s definition, as well as private companies and not-for-profit entities. The Company has since changedqualifies as a smaller reporting company under the namesSEC’s definition. Early adoption is permitted. The Company is currently evaluating the impact of the NM Companies to SPAR Brasil Serviços LTDA.Topic 326 on its consolidated balance sheets, statements of income (loss), statements of cash flows and SPAR Brasil Serviços Temporários LTDA.related disclosures.
Momentum Promoções Ltda., one
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
12. | Leases |
The Company has completed its preliminary calculationis a lessee under certain operating leases for office space and equipment.
ASC 842 requires lessees to recognize leases on the balance 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 fair value and related allocationcontract, whether the contract is or contains a lease based on whether the contract provides SPAR the right to control the use of assets between goodwill and other. The amounts listed below reflecta physically distinct asset or substantially all of the resultscapacity 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):an asset.
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 |
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 (11) years, many of which include one (1) 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 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)
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 characteristicsmeasures its lease liability 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 reflectedeach leased asset 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 2016-13 amending how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance requires the application of a current expected credit loss model, which is a new impairment model based on expected losses. Under this model, an entity recognizes an allowance for expected credit losses based 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 ASU is effective for interim and annual reporting periods beginning after December 15, 2019 with early adoption permitted for annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements 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 will initially be measured at the present value of the future minimum lease payments, withas defined in ASC 842, allocated to the asset being subjectlease component, discounted using an incremental borrowing rate specific to adjustments such as initial direct costs. Consistent with current U.S. Generally Accepted Accounting Principles ("GAAP"), the presentation of expenses and cash flows will depend primarilyunderlying asset. SPAR's ROU assets are equal to the lease liability. SPAR estimates its incremental borrowing rate based on the classification ofinterest rate SPAR would incur to borrow an amount equal to the lease as eitherpayments on 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 leasescollateralized basis over a similar term in order to provide additional information about the nature of an organization's leasing activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application. Early adoption is permitted. The Company is currently evaluating the impact of the new guidance on our consolidated financial statements and related disclosures. As our operations are conducted in leased facilities, this ASU may require us to disclose additional information about our leasing activities. The Company plans to evaluate the impact of the new guidance on its consolidated financial statements and related disclosures.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, simplifying the balance sheet classification of deferred taxes by requiring all deferred taxes, along with any related valuation allowance, to be presented as noncurrent. This ASU is effective for the Company beginning in the first quarter of 2017, which the Company has applied retroactively. Upon the adoption of the guidance, the Company has reclassified $471,000 from current assets 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 at an amount that represents what the company expects to be entitled to 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, along with its third-party advisor, is currently performing an analysis thatcomponents of SPAR's lease expenses for the new standard will have on its revenue for both the domestic three (3) months period ended March 31, 2022 and international segments. This analysis includes evaluating2021, 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 consistent with the current standard, with performance obligations being satisfied over time as our customers simultaneously receive and consume the benefits of our performance obligations. We expect that the disclosuresare included in the notes to ourcondensed consolidated financial statements related to revenue recognition will be significantly expanded under the new standard, specifically regarding quantitative and qualitative information about performance obligations.
The Company expects to adopt the standard using the modified retrospective approach, under which the cumulative effect of the initial application of the new standard will be recognized as an adjustment 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, controls and assumptions.
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,income statement, 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 | ||
Three Months Ended | ||||||||||
March 31, | ||||||||||
Lease Costs | Classification | 2022 | 2021 | |||||||
Operating lease cost | Selling, General and Administrative Expense | $ | 141 | $ | 217 | |||||
Short-term lease cost | Selling, General and Administrative Expense | 124 | $ | 302 | ||||||
Variable costs | Selling, General and Administrative Expense | 29 | $ | 50 | ||||||
Total lease cost | $ | 294 | $ | 569 | ||||||
Supplemental cash flow information related to SPAR’s leases for three (3) months period ended March 31, 2022 and 2021 is as follows (in thousands):
Three Months Ended | ||||||||
March 31, | ||||||||
2022 | 2021 | |||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 272 | $ | 520 | ||||
Assets obtained in exchange for new operating lease liabilities | ||||||||
Operating lease | $ | 0 | $ | 0 | ||||
At March 31, 2022, 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 December 31, | Amount | |||
2022 | $ | 748 | ||
2023 | 384 | |||
2024 | 247 | |||
2025 | 392 | |||
2026 | 45 | |||
Thereafter | 96 | |||
Total Lease Payments | $ | 1,912 | ||
Less: imputed interest | 373 | |||
Total | $ | 1,539 | ||
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 " (this "Quarterly Report"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"SGRP") and its subsidiaries (together with SGRP, “SPAR”, the "SPAR Group""SPAR Group" or the "Company""Company"), and this Quarterly.There also are forward-looking statements contained in: (a) SGRP's Annual Report has beenon Form 10-Kfor its fiscal year ended December 31, 2021, as filed by SGRP with the Securities and Exchange Commission (the "SEC"). There also are "forward-looking statements" contained in SGRP"'SECs") on April 15, 2022, and SGRP's First Amendment to Annual Report on Form 10-K10-K/A for its fiscalthe year ended December 31, 2016 (as filed, the "Annual Report"),2021, as filed with the SEC on April 17, 2017, in SGRPMay 2, 2022 (as so amended, the "'Annual Reports");(b) SGRP's amended definitive Proxy Statement respecting its Annual Meeting of Stockholders held on May 18, 2017 (the "Proxy Statement"),August 12, 2021 which SGRPfiled with the SEC on April 28, 2017, and SGRPJuly 20,2021(the "'Proxy Statements "); and (c) SGRP'sQuarterly 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, each a "SEC Report""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""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""Securities Laws").
AllReaders can identify forward-looking statements (other than thoseby the fact that are purely historical) are forward-looking statements. they do not relate strictly to historical or current facts.Words such as "may," "will," "expect," "intend", "believe", "estimate","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"Risks");the potential continuing negative effects of the COVID-19 pandemic on the Company's business; the Company's potential non-compliance with applicable Nasdaq director independence; bid price or other rules;the Company's cash flow or financial condition; and plans, intentions, expectations, guidance or other information respecting the pursuit or achievement of the Company's fiveCompany's corporate objectives (growth, customer value, employee development, greater productivity & efficiency, and increased earnings per share), building upon the Company's strong foundation, leveraging compatible global opportunities, growing the Company'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.objectives. The Company'sCompany's forward-looking statements also include (without limitation) those made in thethis Annual Report in "Business","Business," "Risk Factors",Factors," "Legal Proceedings", "Management'sProceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Directors,Operations,""Directors, Executive Officers and Corporate Governance",Governance," "Executive Compensation",Compensation," "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters",Matters," and "Certain Relationships and Related Transactions, and Director Independence".Independence."
You should carefully review and consider the Company'sCompany'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""Expectations"), and our forward-looking statements (including all Risks) and other information reflect the Company's Company's currentviews 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'sCompany'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'sCompany'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
GENERAL
SPAR Group, Inc., a Delaware corporation (“SGRP”), and its subsidiaries (together with SGRP, “SPAR Group” or the “Company”), is a leading global merchandising and brand marketing services company, providing a broad range of sales enhancing services to retailers across most classes of trade and consumer goods manufacturers and distributors around the world. The Company’s goal is to be the most creative, energizing and effective global services company that drives sales, margins and operating efficiency for our clients.
As of March 31, 2022, the Company operated in nine (9) countries including the United States, Canada, Mexico, Brazil, South Africa, Australia, China, Japan and India. Across all of these countries, the Company successfully execute programs through its multi-lingual logistics, reporting and communication technology, which provides clients value through real-time insight on store / product conditions.
With more than 50 years of experience, an average of 25,000 merchandising specialists’ network around the world working more than 11 million hours in store per year, the Company continues to grow its long-term relationships with some of the world’s leading businesses. The combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates the Company from the competition.
The Company’s focus is services. The team works closely with clients to determine their key objectives to execute globally, focusing on enhancing their sales and profit. At retail, the Company’s merchandising brand marketing specialists perform a wide range of programs to maximize product sell-through to consumers. Some of these programs include launching new products, installing displays, assembling product fixtures, and ensuring shelves are fully stocked and reordering when they are not. The Company also assists with sales and customer service. As retailers adapt to changes and new opportunities, our team engages in the total renovations and updating of stores, as well as preparing new locations for grand openings. The Company’s distribution associates work in retail and consumer goods distribution centers to prepare the centers to open, testing systems, putting away, picking products and providing peak staffing services for our clients.
The Company is a diversified international merchandising, business technology historically operated under two (2) divisions: Domestic and marketing services company and provides a broad arrayInternational. The Domestic division was comprised 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 inall operations within the United States, since certainand the International division was a consolidation of its predecessors were formed in 1979all operations and internationally sincejoint ventures outside of the United States. To better align the business structure with the Company’s global growth strategy and leveraging regional footprint, the Company acquired its first international subsidiary in Japan in Mayeffective January 1, 2022 operates under three (3) divisions: Americas, APAC and EMEA. The Americas division is comprised 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, Canada, Mexico, and Brazil, APAC is comprised of China, Japan, Australia, Brazil, Canada, China,and India, Japan, Mexico,and EMEA is comprised of 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 Overview of the Merchandising and Marketing Services IndustryAfrica.
The merchandisingCompany’s business is led and marketing services industry includes manufacturers, retailers, brokers, distributorsoperated globally from its global headquarters in Auburn Hills, Michigan, with local leadership 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.offices in each country.
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 format 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 opportunity 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 each of the Company's two segments, which includes, among other items, their respective net revenues, operating income and net income for each of the three and nine month periods ended September 30, 2017 and 2016, and their respective assets as of September 30, 2017, and December 31, 2016, is provided above in Note 10 to the Company's Condensed Consolidated Financial Statements – Segment Information.
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 of 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:
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
ThreeFor the three (3) months period ended September 30, 2017,March 31, 2022, compared to three (3) months period ended March 31, 2021September 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 March 31, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2022 | 2021 | |||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
Net revenues | $ | 48,752 | 100.0 | % | $ | 33,438 | 100.0 | % | $ | 58,994 | 100.0 | % | $ | 61,097 | 100.0 | % | ||||||||||||||||
Cost of revenues | 39,960 | 82.0 | 26,162 | 78.2 | 47,163 | 79.9 | 48,838 | 79.9 | ||||||||||||||||||||||||
Gross profit | 8,792 | 18.0 | 7,276 | 21.8 | 11,831 | 20.1 | 12,259 | 20.1 | ||||||||||||||||||||||||
Selling, general & administrative expense | 7,477 | 15.3 | 6,360 | 19.0 | 9,254 | 15.7 | 9,011 | 14.7 | ||||||||||||||||||||||||
Depreciation & amortization | 487 | 1.0 | 486 | 1.5 | 510 | 0.9 | 530 | 0.9 | ||||||||||||||||||||||||
Operating income | 828 | 1.7 | 430 | 1.3 | 2,067 | 3.5 | 2,718 | 4.5 | ||||||||||||||||||||||||
Interest expense, net | 110 | 0.2 | 51 | 0.2 | 149 | 0.3 | 147 | 0.2 | ||||||||||||||||||||||||
Other (income), net | (78 | ) | (0.2 | ) | (78 | ) | (0.2 | ) | ||||||||||||||||||||||||
Other expense (income), net | (87 | ) | (0.1 | ) | (75 | ) | (0.1 | ) | ||||||||||||||||||||||||
Income before income taxes | 796 | 1.7 | 457 | 1.3 | 2,005 | 3.3 | 2,646 | 4.4 | ||||||||||||||||||||||||
Income tax expense (benefit) | 210 | 0.4 | (31 | ) | (0.1 | ) | ||||||||||||||||||||||||||
Income tax expense | 551 | 0.9 | 865 | 1.4 | ||||||||||||||||||||||||||||
Net income | 586 | 1.3 | 488 | 1.4 | 1,454 | 2.4 | 1,781 | 3.0 | ||||||||||||||||||||||||
Net income attributable to non-controlling interest | (340 | ) | (0.7 | ) | (546 | ) | (1.6 | ) | (780 | ) | (1.3 | ) | (864 | ) | (1.4 | ) | ||||||||||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 246 | 0.6 | % | $ | (58 | ) | (0.2 | )% | $ | 674 | 1.1 | % | $ | 917 | 1.6 | % | |||||||||||||||
Net Revenues
Net revenues for the three (3) months period ended September 30, 2017,March 31, 2022 were $48.8$59.0 million, compared to $33.4$61.1 million for the three (3) months period ended September 30, 2016, an increaseMarch 31, 2021, a decrease of $15.3$2.1 million or 45.8%3.4%. 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.
DomesticAmericas net revenues totaled $15.1$42.9 million in the three months ended September 30, 2017, compared to $11.3and $45.1 million for the samethree (3) months period in 2016, an increaseended March 31, 2022 and 2021, respectively. A decrease of 32.9%. The increase$2.2 million or 4.9% was primarily due to an increasechanges in project work comparedMexican labor laws that became effective in 2021, and led to last year.a reduction of our client base that started in the second half of 2021.
InternationalAPAC net revenues totaled $33.7$6.8 million and $8.3 million for the three (3) months period ended September 30, 2017, compared to $22.1 million for the same period in 2016, an increaseMarch 31, 2022 and 2021, respectively. A decrease of $11.6$1.5 million or 52.4%. The increase in net revenues18.1% was primarily due to the September 2016continuing effects of COVID-19 in China and Japan.
EMEA net revenues totaled $9.2 million and $7.7 million for the three (3) months period ended March 31, 2022 and 2021, respectively. An increase of $1.5 million or 19.5% is due to the acquisition of our Brazilian operation, which added $9.3 million, an increaseBordax in South Africa in July of $0.8 million, and an increase in Japan of $0.6 million.2021.
Cost of Revenues
The Company's cost of revenues consists of its on-site labor and field administrationadministration fees, travel and other direct labor-relatedlabor related expenses and was 82.0%79.9% of its net revenues for the three (3) months period ended September 30, 2017,March 31, 2022, and 78.2%79.9% of its net revenues for the three (3) months period ended September 30, 2016.March 31, 2021.
DomesticAmericas cost of revenues was 76.5%81.1% of net revenues for the three months ended September 30, 2017, and 73.5%80.9% of net revenues for the three (3) months period ended September 30, 2016. TheMarch 31, 2022 and 2021, respectively. An increase inof 0.2% was primarily due to unfavorable margin mix for Resource Plus and Brazil, partially offset by NMS price increase and Mexico's favorable margin mix.
APAC cost of revenues as a percentagewas 73.7% of net revenues and 73.0% of 3.0 percentage points was due primarily to continued price pressure and an unfavorable mix of project work compared to the same period last year. Fornet revenues for the three (3) months period ended September 30, 2017March 31, 2022 and 2016, approximately 68%2021, respectively. An increase of 0.7% was primarily due to Japan’s unfavorable margin mix and 76%, respectively,termination of COVID-19 government funding for Australia at the Company's domesticend of Q1 of 2021.
EMEA cost of revenues resulted from in-store merchandiser specialist, on-site assembly technicianwas 78.9% of net revenues and field administration services, purchased from certain81.9% of net revenues for the Company's affiliates, SBS,three (3) months period ended March 31, 2022 and SAS,2021, respectively. (See Note 6A decrease of 3.0% was primarily due to the Condensed Consolidated Financial Statements - Related-Party Transactions.)South Africa's margin improvement initiatives.
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$9.3 million and $6.4$9.0 million for the three (3) months period ended September 30, 2017March 31, 2022 and 2016,2021, respectively. The year-over-year increase was the result of additional expenditures needed to normalize post-pandemic operations vs. same period prior year, as well continued investment in the growth of the business. The increase in expenses was partially offset by a one-time favorable adjustment for the Majority Stockholders CIC Agreement in the amount of $420,000.
DomesticAmericas selling, general and administrative expenses totaled $2.9$5.7 million and $5.8 million for both the three month periods(3) months period ended September 30, 2017March 31, 2022 and 2016,2021, respectively. A decrease of $100,000 was primarily due to cost saving initiatives implemented by Resource Plus.
InternationalAPAC selling, general and administrative expenses totaled $4.6$2.3 million and $2.2 million for the three (3) months period ended September 30, 2017, compared to $3.5March 31, 2022 and 2021, respectively.
EMEA selling, general and administrative expenses totaled $1.3 million and $1.0 million for the samethree (3) months period in 2016.ended March 31, 2022 and 2021, respectively. The increase of approximately $1.1 million$300,000 was primarily attributabledue to the Brazil acquisition.South Africa newly acquired Bordax business in July of 2021.
Depreciation and Amortization
Depreciation and amortization charges totaled $487,000$510,000 and $530,000 for the three (3) months period ended September 30, 2017,March 31, 2022 and $486,000 for the same period in 2016.
Interest Expense
The Company's net interest expense was $110,000 for the three months ended September 30, 2017, compared to $51,000 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 cash in the form of a dividend from South Africa.
Other Income
Other income totaled $78,000 for both the three month periods ended September 30, 2017 and 2016,2021, 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 for the three months ended September 30, 2016. The change is due primarily to improved domestic performance compared to prior year.
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 $340,000 and $546,000 for the three months ended September 30, 2017 and 2016, respectively.
Net Income
The Company reported net income of $246,000 for the three months ended September 30, 2017, or $0.01 per diluted share, compared to a net loss of $58,000, or $0.00 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
Ninemonths ended September 30, 2017, compared to ninemonths ended September 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 | % | ||||||||
Net Revenues
Net revenues for the nine months ended September 30, 2017, were $131.3 million, compared to $89.8 million for the nine months ended September 30, 2016, an increase of $41.5 million or 46.3%. 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 revenues totaled $40.1 million in the nine months ended September 30, 2017, compared to $32.3 million for the same period in 2016, an increase of 24.2%. The increase was primarily due to an increase in project work compared to last year.
International net revenues totaled $91.3 million for the nine months ended September 30, 2017, compared to $57.5 million for the same period in 2016, an increase of $33.8 million or 58.7%. The increase in net revenues was primarily due to the September 2016 acquisition of our Brazilian operation, which contributed $27.3 million, and an increase in South Africa by $4.8 million.
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% of its net revenues for the nine months ended September 30, 2017, and 77.2% of its net revenues for the nine months ended September 30, 2016.
Domestic cost of revenues was 73.6% of net revenues for the nine months ended September 30, 2017, and 71.5% of net revenues for the nine months ended September 30, 2016. The increase in cost of revenues as a percentage of net revenues of 2.1 percentage points was due primarily to continued price pressure and an unfavorable mix of project work compared to the same period last year. For the nine months ended September 30, 2017 and 2016, approximately 77% and 80%, 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 were approximately $22.0 million and $17.6 million for the nine months ended September 30, 2017 and 2016, respectively.
Domestic selling, general and administrative expenses totaled $8.9 million and $8.3 million for the nine month periods ended September 30, 2017 and 2016, respectively. The increase in selling, general and administrative expense was directly related to increased spending on accounting and legal services.
International selling, general and administrative expenses totaled $13.1 million for the nine months ended September 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.
Depreciation and Amortization
Depreciation and amortization charges totaled $1.5 million for both the nine months ended September 30, 2017, and 2016.
Interest Expense
The Company's net interest expense was $117,000$149,000 and $147,000 for the ninethree (3) months period ended September 30, 2017, compared to net interest expense of $111,000 for the nine months ended September 30, 2016.March 31, 2022 and 2021, respectively.
Other Income(Income)
Other income totaled $275,000was $87,000 and $183,000$75,000 for the ninethree (3) months period ended September 30, 2017March 31, 2022 and 2016, respectively, with the increase primarily in South Africa.2021, respectively.
Income Taxes
Income tax expense was $907,000$551,000 and $865,000 for the ninethree (3) months period ended September 30, 2017, compared to $200,000 for the nine months ended September 30, 2016. The change is due primarily to improved domestic performance compared to prior year.March 31, 2022 and 2021., respectively.
Non-controlling Interest
Net operating profits fromincome related to the Company’s non-controlling interest decreased to $780,000 for the three (3) months period ended March 31, 2022 from the Company's 51% owned subsidiaries, resulted in a reduction of net income attributable to SPAR Group, Inc. of $1.2 million$864,000 for both the ninethree (3) months period ended September 30, 2017 and 2016.March 31, 2021.
Net Income
The Company reported a netNet income of $346,000attributable to SPAR was $674,000 for the ninethree (3) months period ended September 30, 2017,March 31, 2022, or $0.02$0.03 per diluted share, compared to $84,000,$917,000 million, or $0.00$0.04 per diluted share, for the corresponding period last year.
Liquidity and Capital Resources
InFor the ninethree (3) months period ended September 30, 2017, the Company had aMarch 31, 2022, net income before non-controllingnon-controlling interest was $1.4 million.
Net cash used in operating activities was $3.0 million for the three (3) months period ended March 31, 2022, compared to net cash provided by operating activities of $1.5 million.$2.4 million for the three (3) months period ended March 31, 2021. The net cash used in operating activities during the three (3) months period ended March 31, 2022, was primarily due to an increase in accounts receivable from Brazil and South Africa which have longer payment terms, increase in prepaid expenses, and payments made under the Majority Stockholders CIC Agreement. 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, the Company believes that 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 (12) months.
Net cash used in investing activities was $478,000 for the three (3) months period ended March 31, 2022, compared to $332,000 for the three (3) months period ended March 31, 2021. The net cash used in investing activities during the three (3) months period ended March 31, 2022, was for 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 ninethree (3) months period ended September 30, 2016.March 31, 2022, was $4.8 million compared to $3.6 million for the three (3) months period ended March 31, 2021. Net cash used inprovided by financing activities during the ninethree (3) months period ended September 30, 2017,March 31, 2022, was primarily due to net draws/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 increasea decrease in cash, and cash equivalents and restricted cash for the ninethree (3) months period ended September 30, 2017March 31, 2022, of approximately $338,000.$761,000.
At September 30, 2017, theThe Company had net working capital of $12.9 million,$24.9 million and $23.6 million as compared to net working capital of $12.5 million atMarch 31, 2022, and December 31, 2016.2021, respectively. The Company's current ratio was 1.4 at both September 30, 2017,1.5 as of March 31, 2022, and 1.6 as of December 31, 2016, respectively.2021.
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 |
Management's Evaluation of Disclosure Controls and Procedures
Item 4. Controls and Procedures
Restatement of Previously Issued Financial Statements
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017. The evaluation of our disclosure controls and procedures by ourCompany's Chief Executive Officer and Chief Financial Officer included a reviewhave each reviewed and evaluated the effectiveness of the restatement describedCompany's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the filingend of the period covered by this Form 10-Q, where we restated our consolidated balance sheet, consolidated statements of operationsreport, as required by Exchange Act Rules 13a-15(b) and comprehensive income and consolidated statements of equity.Rule 15d-15(b). Based on thisthat evaluation, ourthe Chief Executive Officer and Chief Financial Officer have each concluded that ourthe Company's current disclosure controls and procedures were notare effective as of September 30, 2017, atto ensure that 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 Weakness inManagement's Report on Internal Control overOver Financial Reporting
A material weaknessThe Company's management is defined as a deficiency or combination of deficiencies inresponsible for establishing and maintaining adequate internal control over financial reporting for the registrant, as such that thereterm is a reasonable possibility that a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis. In connection with the evaluation of our disclosure controlsdefined in Exchange Act Rules 13a-15(f) and procedures as of September 30, 2017, we identified a material weakness in our15d-15(f). Management has designed such internal control over financial reporting associatedby the Company to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with the recognition of accumulated other comprehensive loss bothgenerally accepted accounting principles in the equity sectionUnited States of America.
The Company's management has evaluated the effectiveness 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 inCompany's internal control over financial reporting using the Company determined that"Internal Control – Integrated Framework (2013)" created by the related impact was not material to the resultsCommittee of operations or financial position for any prior annual or interim period as described above in Note 2Sponsoring Organizations of the Treadway Commission ("COSO") framework. Based on this evaluation, management has concluded that internal controls over financial reporting was effective as of March 31, 2022.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company's prior periodinternal controls over financial statements forreporting that occurred during the Company's first quarter of its 2022 fiscal year ended December 31, 2016.that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial 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.
The Company executes the services it provides to its domestic clients primarily through independent field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), almost allFor further discussion of whom are engaged and provided as independent contractors by SBS. For contractual details and payment amounts,certain legal proceedings, see Note 6 “Related-Party Transactions” and Note 9 “Commitments and Contingencies” of the Notes to the Company'sthe’ Condensed Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services, above.
The appropriatenessincluded in Part I, Item 1 of SBS's treatmentthis Quarterly Report on Form 10-Q, which is incorporated herein by reference, and Note 6 “Commitments and Contingencies” of its Field Specialists 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 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 determination (on a case by case basis) that those defense expenses were costs of providing servicesNotes 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)’Condensed Consolidated Financial Statements included in Part IV, Item 15 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 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" 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 subsequently dismissed from the action without prejudice. 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 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 damages in the case. Trial on phase two was scheduled for 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 advised the Company that SBS will appeal the adverse phase one determination when permitted under the court's rules.Annual Report From 10-K.
SPAR Group, Inc. and Subsidiaries
Risk FactorsSBS Rodgers LitigationMaceo 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 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 to 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. Potential Adverse Effects of the SBS LitigationAny 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 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, 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 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, 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, above.SPAR Group, Inc. and Subsidiaries
Item 1A. 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.
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.
Mine Safety Disclosures |
Not applicable.
Other Information |
Not applicable.
SPAR Group, Inc. and Subsidiaries
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
ExhibitsItem 6. Exhibits
101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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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