UNITED STATES
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(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the third quarterly period endedSeptember 30, 2014. 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: 0-27824 SPAR Group, Inc. (Exact name of registrant as specified in its charter) Delaware 33-0684451 State of Incorporation IRS Employer Identification No. 333 Westchester Avenue, South Building, Suite 204, White Plains, New York 10604 (Address of principal executive offices, including zip code) Registrant's telephone number, including area code: (914) 332-4100 Indicate by check whether the registrant (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 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: ☒ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. (See the definitions of "large accelerated filer", "accelerated filer", "non-accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act). Large Accelerated Filer ☐ Accelerated Filer ☐ Non-Accelerated Filer ☐ Smaller Reporting (Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No On SPAR Group, Inc. Index PART I: FINANCIAL INFORMATION Item 1 Consolidated Financial Statements Consolidated Balance Sheets as of Consolidated Statements of Income Consolidated Statement of Equity for the Consolidated Statements of Cash Flows for the Notes to Consolidated Financial Statements Item 2 Management's Discussion and Analysis of Financial Condition, Results of Operations, Liquidity and Capital Resources Item 3 Quantitative and Qualitative Disclosures about Market Risk Item 4 Controls and Procedures PART II: OTHER INFORMATION Item 1 Legal Proceedings Item 1A Risk Factors Item 2 Unregistered Sales of Equity Securities and Use of Proceeds Item 3 Defaults upon Senior Securities Item 4 Mine Safety Disclosures Item 5 Other Information Item 6 Exhibits 26 SIGNATURES PART I: FINANCIAL INFORMATION Item 1. Consolidated Financial Statements SPAR Group, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share and per share data) June 30, 2014 December 31, Assets Current assets: Cash and cash equivalents Accounts receivable, net Deferred income taxes Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Deferred income taxes Other assets Total assets Liabilities and equity Current liabilities: Accounts payable Accrued expenses and other current liabilities Accrued expenses due to affiliates Customer deposits Lines of credit Total current liabilities Long-term debt and other liabilities Total liabilities Commitments and Contingencies – See Note 9 Equity: SPAR Group, Inc. equity Preferred stock, $.01 par value: Authorized and available shares– 2,445,598Issued and outstanding shares–None – June 30, 2014 andNone – December 31, 2013 – – Common stock, $.01 par value: Authorized shares – 47,000,000 Issued shares –20,680,717 – June 30, 2014 andDecember 31, 2013 Treasury stock, at cost69,002 shares – June 30, 2014 and181,931 shares – December 31, 2013 Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total SPAR Group, Inc. equity Non-controlling interest Total Equity Total liabilities and equity September 30, 2014 December 31, (Unaudited) (Note) Current assets: Cash and cash equivalents Accounts receivable, net Deferred income taxes Prepaid expenses and other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Deferred income taxes Other assets Total assets Liabilities and equity Current liabilities: Accounts payable Accrued expenses and other current liabilities Accrued expenses due to affiliates Customer deposits Lines of credit Total current liabilities Long-term debt and other liabilities Total liabilities Commitments and Contingencies – See Note 10 Equity: SPAR Group, Inc. equity Preferred stock, $.01 par value: Authorized and available shares– 2,445,598Issued and outstanding shares–None – September 30, 2014 andNone – December 31, 2013 Common stock, $.01 par value: Authorized shares – 47,000,000Issued shares –20,680,717 – September 30, 2014 andDecember 31, 2013 Treasury stock, at cost124,163 shares – September 30, 2014 and181,931 shares – December 31, 2013 Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total SPAR Group, Inc. equity Non-controlling interest Total Equity Total liabilities and equity Note: The Balance Sheet at December 31, 2013, is excerpted from the consolidated audited financial statements as of that date but does not include certain information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. See accompanying notes to the consolidated financial statements. SPAR Group, Inc. and Subsidiaries Consolidated StatementsofIncome (unaudited) (In thousands, except per share data) Three Months Ended Six Months Ended Three Months Ended Nine Months Ended 2014 2013 2014 2013 2014 2013 2014 2013 Net revenues Cost of revenues Gross profit Selling, general and administrative expense Depreciation and amortization Operating income Interest expense Other expense (income), net Other (income) expense, net Income before provision for income taxes Income tax expense Income tax expense (benefit) Income from continuing operations Income from discontinued operations – – Net income Net income attributable to non-controlling interest Net income (loss) attributable to SPAR Group, Inc. Net income attributable to SPAR Group, Inc. Basic income (loss) per common share: Basic income per common share: Continuing operations Discontinued operations Diluted income (loss) per common share: Diluted income per common share: Continuing operations Discontinued operations Weighted average common shares – basic Weighted average common shares – diluted Net income Other comprehensive income (loss): Other comprehensive (loss) income: Foreign currency translation adjustments Comprehensive income (loss) Comprehensive income Comprehensive income attributable to non-controlling interest Comprehensive income (loss) attributable to SPAR Group, Inc. Comprehensive (loss) income attributable to SPAR Group, Inc. See accompanying notes to the consolidated financial statements. SPAR Group, Inc. and Subsidiaries Consolidated Statement of Equity (unaudited) (In thousands) Paid-In Capital Comprehensive Loss Retained Earnings Controlling Interest Share-based compensation – – – – – – – Exercise of stock options – – – – – – – Other changes to non-controlling interest Purchase of treasury shares – – – – – – Re-issued treasury shares – – – – – – Other comprehensive loss – – – – – – – Net income – – – – – – Balance atJune 30, 2014 Balance atSeptember 30, 2014 See accompanying notes to the consolidated financial statements. SPAR Group, Inc. and Subsidiaries Consolidated Statements of Cash Flows (unaudited) (In thousands) Six Months Ended June 30, 2014 2013 Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Bad debt expense, net of recoveries Share based compensation Changes in operating assets and liabilities, net of business acquisitions and disposition: Accounts receivable Prepaid expenses and other assets Accounts payable Accrued expenses, other current liabilities and customer deposits Net cash provided by operating activities Investing activities Purchases of property and equipment and capitalized software Purchase of MFI Business – Purchase of India Preceptor subsidiary – Net cash used in investing activities Financing activities Net borrowing (payment) on lines of credit Proceeds from stock options exercised Payments on term debt Payments on capital lease obligations Purchase of treasury shares Payment of notes to seller – Net cash provided by (used in) financing activities Effect of foreign exchange rate changes on cash Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosure of cash flows information Interest paid Income taxes paid Nine Months Ended September 30, 2014 2013 Operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Bad debt expense, net of recoveries Share based compensation Changes in operating assets and liabilities, net of business acquisitions and disposition: Accounts receivable Prepaid expenses and other assets Accounts payable Accrued expenses, other current liabilities and customer deposits Net cash provided by operating activities Investing activities Purchases of property and equipment and capitalized software Partners' investment in subsidiaries Purchase of MFI Business Purchase of Unilink Net cash used in investing activities Financing activities Net borrowing (payment) on lines of credit Proceeds from stock options exercised Payments on term debt Payments on capital lease obligations Purchase of treasury shares Payment of notes to seller Net cash provided by (used in) financing activities Effect of foreign exchange rate changes on cash Net change in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of period Supplemental disclosure of cash flows information Interest paid Income taxes paid See accompanying notes to the consolidated financial statements. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 1. Basis of Presentation The unaudited, 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 quarter and 2. Business and Organization The Company is a supplier of merchandising and other marketing services throughout the United States and internationally. The Company also provides in-store event staffing, product sampling, audit services, furniture and other product assembly services, technology services and marketing research services. Assembly services are performed in stores, homes and offices while those other services are primarily performed in mass merchandiser, office supply, value, grocery, drug, independent, convenience, toy, home improvement and electronics stores. 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 "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, 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 The Company continues to focus on expanding its merchandising and marketing services business throughout the world. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 3. Earnings Per Share The following table sets forth the computations of basic and diluted net income (loss) per share (in thousands, except per share data): Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 2014 2013 2014 2013 Numerator: Net income (loss) attributable to SPAR Group, Inc. Net income attributable to SPAR Group, Inc. Denominator: Shares used in basic net income per share calculation Effect of diluted securities: Stock options Shares used in diluted net income per share calculations Basic net income (loss) per common share: Diluted net income (loss) per common share: Basic net income per common share: Diluted net income per common share: 4. Credit Facilities Sterling Credit Facility: SGRP and certain of its US and Canadian subsidiaries, namely SPAR Marketing Force, Inc., SPAR National Assembly Services, Inc., SPAR Group International, Inc., SPAR Trademarks, Inc., SPAR Acquisition, Inc., SPAR Canada, Inc., SPAR Canada Company ("SCC"), and SPAR Wings & Ink Company ("SWI") (together with SGRP, SCC and SWI, each a "Borrower"), are parties to a Revolving Loan and Security Agreement dated as of July 6, 2010, as amended in June 2011, July 2012, January 2013, July 2013, October 2013 and June 2014 (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 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) minus 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 The Sterling Loan Agreement contains certain financial and other restrictive covenants and also limits certain expenditures by the Borrowers, including, but not limited to, capital expenditures and other investments. At The amendment to the Sterling Loan Agreement dated as of July 1, 2013, among other things, extended the scheduled term of the Sterling Credit Facility to July 6, 2016 (with no early termination fee), and eliminated the requirement for a "closed lockbox" so that collections no longer automatically pay down the loans under the Sterling Loan Agreement. As of January 1, 2014, the lockbox account at Sterling National Bank was closed and as of that date, all remittances from customers are going directly into the Company's main bank account. Therefore, the Sterling Credit Facility is now classified as long term debt. As a result of the October 30, 2013, Amendment to the Sterling Loan Agreement, the Company's Canadian subsidiaries, SCC and SWI, were added as Borrowers, their receivables are now included in the Company's borrowing base and pledged to Sterling, and advances are available to those Canadian borrowers under the Sterling Credit Facility. SCC has retired its existing credit facility with the Royal Bank of Canada and replaced it by becoming a borrower under the Sterling Credit Facility. On June 19, 2014, the Sterling Loan Agreement was further amended to increase the maximum principal amount of the Secured Revolving Loan Note to $7.5 million (effective as of July 1, 2014), to substitute a new $7.5 million note from the Borrowers for the old notes, and to remove SPAR Wings & Ink Company ("SWI") as a borrower, as this entity was merged into SCC as of January 1, 2014. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) International Credit Facilities: SPARFACTS Australia Pty. Ltd., has a secured line of credit facility with Oxford Funding Pty Ltd. for $1.2 million (Australian) or approximately 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 approximately Summary of Company Credit and Other Debt Facilities (dollarsin thousands): June 30, 2014 Interest Rate1 December 31, 2013 Interest Rate2 September 30, 2014 Interest Rate1 December 31, 2013 Interest Rate2 Credit Facilities Loan Balance: United States Australia Other Debt Facility: Japan Term Loan June 30 2014 December 31, 2013 September 30 2014 December 31, 2013 Unused Availability: United States Australia (1) Based on interest rate at (2) Based on interest rate at December 31, 2013 Management believes that based upon the continuation of the Company'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 could have a material adverse effect on the Company's cash resources and its ongoing ability to fund operations. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) 5. Capital Lease Obligations As of Start Date: Original Cost Accumulated Amortization Net Book Value at June 30, 2014 Original Cost Accumulated Amortization Net Book Value at September 30, 2014 January, 2012 Annual future minimum lease payments required under the leases, together with the present value as of As of June 30, 2014 Less amount representing interest Present value of net minimum lease payments, included within accrued expenses and other current liabilities As of September 30, 2014 Present value of net minimum lease payments, included within accrued expenses and other current liabilities 6. Related-Party Transactions SGRP'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 and Employees Amended and Restated (as of) August 1, 2012 (the "Ethics Code"). 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 in SBS, SAS, SIT, NMA, NRS and others (as defined and described below) held by certain directors, officers or employees of SGRP or their family members. The Company's senior management is generally responsible for monitoring compliance with the Ethics Code and establishing and maintaining compliance systems, including 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's Audit Committee has the specific duty and responsibility to review and approve the overall fairness of all material related-party transactions. The Audit Committee receives every affiliate contract and amendment thereto for its review and approval (to the extent approval is given), and each contract is periodically (often annually) again reviewed, in accordance with the Audit Charter, the Ethics Code, the rules of the Nasdaq Stock Market, Inc. ("Nasdaq"), and other applicable law to ensure that the overall economic and other terms will be (or continue to be) no less favorable to the Company than would be the case in an arms-length contract with an unrelated provider of similar services (i.e., its overall fairness). The Audit Committee periodically reviews all of the related party relationships and transactions described below, and as of this Annual Report the parties are in compliance with those agreements. SPAR Business Services, Inc. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) SBS On October 20, 2014, SMF sent a proposal to SBS and SAS to continue purchasing services from them on and after December 1, 2014, on the revised terms set forth in that letter (the "Offer Letter"), a copy of which is attached as Exhibit 10.1 to SGRP's Current Report on Form 8-K as filed with the SEC on October 20, 2014. The Offer Letter reduces the Cost Plus Fee from 4% to 2% of the applicable costs, clarifies certain costs and otherwise proposes to continue to be bound by the provisions of the Existing Agreements. No response was requested or required from SBS and SAS under the Offer Letter (because of the offer's unilateral nature) other than the continued performance of services on the proposed revise terms. SAS and SBS have stated their intent to continue to provide their services under the Existing Agreements, but have advised the Company that they will not accept such proposed pricing changes and made counterproposals (which were not accepted by the Company). On November 10, 2014, the parties agreed to retain an independent third party to review and independently analyze the cost components and structure under the Existing Agreements to provide a common framework for their continued negotiations. The Company expects that SAS and SBS will continue to provide their services to the Company and that pricing and other disagreements will eventually be resolved and adjusted (if and to the extent applicable). No salary reimbursements for Mr. Brown or Mr. Bartels are included in such National Merchandising Services, LLC ("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"), 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 and the sole member and manager of National Retail Source, LLC (“NRS”). Ms. Andrea Burdekin, Mr. Burdekin's wife, is the sole stockholder and a director of NMA and a director of NMS. NRS and NMA are affiliates of the Company but are not consolidated with the Company. NMS commenced operations as of September 1, 2012. NRS is expected to provide substantially all of the domestic merchandising specialist field force used by NMS. Pursuant to the terms of the Master Field Services Agreement dated as of August 1, 2013 (the "NRS Services Agreement"), NMS will receive merchandising services from NRS through the use of approximately SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) In connection with the approval of those related party agreements with NMA in 2012, the Board approved, based (in part) on the recommendation and approval of its Governance Committee (which is comprised solely of independent directors), the restated Ethics Code. As a result, the newly approved NRS Field Services Agreement is, and the NMA Field Services Agreement and other previously approved affiliate contracts continue to be, Approved Activities under the Ethics Code. The Company continues to purchase services from SBS, SAS and NRS because it believes the value of services it receives from them are at least as favorable to the Company as it could obtain from non-affiliated providers of similar services. The Company believes it is the largest and most important customer of SBS, SAS and NRS (and from time to time may be their only customer), and accordingly the Company is 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 and NRS than the Company could reasonably expect to receive from an unrelated service provider who has significant other customers and business. The Company periodically evaluates these fees and rates charged by comparable national labor sourcing firms to serve as a comparison to the rates charged by SBS, SAS and NRS. Based on an analysis performed by management, the Company believes that its cost of revenue would have increased by at The following costs of affiliates were charged to the Company (in thousands): Three Months EndedJune 30, Six Months EndedJune 30, 2014 2013 2014 2013 Net cost of field merchandiser services (SBS) Total costs of field management services (SAS) Total costs of field merchandiser services (NMA and NRS) Total costs charged by affiliates Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2014 2013 2014 2013 Net cost of field merchandiser services (SBS) Total costs of field management services (SAS) Total costs of field merchandiser services (NMA and NRS) Total costs charged by affiliates Accrued expenses due to affiliates (in thousands): June 30, December 31, 2014 2013 Total accrued expenses due to affiliates September 30, December 31, 2014 2013 Total accrued expenses due to affiliates In July 1999, SPAR Marketing Force, Inc. (“SMF”), SBS and SIT entered into a perpetual software ownership agreement providing that each party independently owned an undivided share of and had 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 any of them at its own expense. In addition, SPAR Trademarks, Inc. ("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 trademarks and related rights of STM, a wholly owned subsidiary of SGRP. SBS and SAS provide services to the Company, as described above, and SIT no longer provides services to and does not compete with the Company. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) Effective August 1, 2013, the Company sold its equity interests and working capital investment in its Romanian subsidiary, SPAR Business Ideas Provider S.R.L. “BIP”), to a Company affiliate, SIT, for a total purchase price of $348,465. The Company received, at closing, $187,767 in cash and the balance is payable over 29 months with interest at 6% per annum, recorded as Other Assets on the 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, SBS and (through SBS under contracts with them) its field merchandising specialists and 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, SBS (and through SBS to its covered field merchandising specialists) and the Company based on the contractual arrangements of the parties. In the event of any material dispute in the business relationships between the Company and SBS, SAS, SIT or NRS it is possible that Mr. Brown, Mr. Bartels or Mr. Burdekin may have one or more conflicts of interest with respect to these relationships and such dispute could have a material adverse effect on the Company. 7. Preferred Stock SGRP's certificate of incorporation authorizes it to issue 3,000,000 shares of preferred stock with a par value of $0.01 per share (the "SGRP Preferred Stock"), which may have such preferences and priorities over the SGRP Common Stock and other rights, powers and privileges as the Company's Board of Directors may establish in its discretion from time to time. The Company has created and authorized the issuance of a maximum of 3,000,000 shares of Series A Preferred Stock pursuant to SGRP's Certificate of Designation of Series "A" Preferred Stock (the "SGRP Series A Preferred Stock"), which have dividend and liquidation preferences, have a cumulative dividend of 10% per year, are redeemable at the Company's option and are convertible at the holder's option (and without further consideration) on a one-to-one basis into SGRP Common Stock. The Company issued 554,402 of SGRP shares to affiliated retirement plans which were all converted into common shares in 2011 (including dividends earned thereon), leaving 2,445,598 shares of remaining authorized preferred 8. 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 and restricted share awards. As of SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) The Company recognized On March 13, 2014, a restricted stock Award for 4,000 SGRP shares was issued to an employee, 9. Recent Accounting Pronouncements and Developments In May 2014, the Financial Accounting Standards Board issued a comprehensive new standard which amends revenue recognition principles and provides a single set of criteria for revenue recognition among all industries. The new standard provides a five step framework whereby revenue is recognized when promised goods or services are transferred to a customer at an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also requires enhanced disclosure pertaining to revenue recognition in both the interim and annual periods. The standard is effective for interim and annual periods beginning after December 15, 2016 and allows for adoption using a full retrospective method, or a modified retrospective method. The Company is currently assessing the method of adoption and the expected impact the new standard has on our financial position and results of operations. 10. Commitments and Contingencies Legal Matters The Company is a party to or paying for various legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company's management, disposition of these other matters are not anticipated to have a material adverse effect on the Company 11. Segment Information The Company reports net revenue and operating income from continuing operations by reportable segment. Reportable segments are components of the Company for which separate financial information is available that is evaluated on a regular basis by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company provides similar merchandising and marketing services throughout the world, operating within two reportable segments, its Domestic Merchandising Services Division and its International Merchandising Services Division. The Company uses those divisions to improve its administration and operational and strategic focuses, and it tracks and reports certain financial information separately for each of those divisions. The Company measures the performance of its domestic and international divisions and subsidiaries using the same metrics. The primary measurement utilized by management is operating profits, historically the key indicator of long-term growth and profitability, as the Company is focused on reinvesting the operating profits of each of its international subsidiaries back into its local markets in an effort to improve market share and continued expansion efforts. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) Management evaluates performance based on profit or loss from operations, as follows (in thousands): Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 2014 2013 2014 2013 Revenue: United States International Total revenue Operating income (loss): United States ) International ) Total operating income Interest expense: United States International Total interest expense Other expense (income), net: Other (income) expense, net: United States – – ) International ) ) ) ) ) ) ) ) Total other expense (income), net ) ) ) ) Total other (income) expense, net ) ) ) ) Income (loss) before income tax expense: Income before provision for income taxes: United States ) International Total income before income tax expense Total income before provision for income taxes Income tax expense: Income tax expense (benefit): ) ) International ) Total income tax expense Total income tax expense (benefit) Net income (loss) from continuing operations: Net income from continuing operations: United States ) International Total net income from continuing operations Depreciation and amortization: United States International Total depreciation and amortization Capital expenditures: United States International Total capital expenditures Note: There were no inter-company sales for 2014 or 2013. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) June 30, December 31, September 30, December 31, 2014 2013 2014 2013 Assets: United States International Total assets Geographic Data (in thousands) Three Months EndedJune 30, Six Months EndedJune 30, Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2014 2013 2014 2013 2014 2013 2014 2013 International revenue: % of consolidated net revenue % of consolidated net revenue % of consolidated net revenue % of consolidated net revenue % of consolidated net revenue % of consolidated net revenue % of consolidated net revenue % of consolidated net revenue Mexico South Africa China India Canada Australia Japan Canada India Australia China Turkey Total international revenue June 30, December 31, September 30, December 31, 2014 2013 2014 2013 Long lived assets: United States International Total long lived assets On July 2014, the Company, through its subsidiary in Hong Kong, SPAR China Ltd., entered into an agreement to purchase certain business assets, fixed assets and merchandising teams of the following three companies in China: Shanghai Unilink Marketing Execution and Design Co. Ltd, Shanghai Gold Park Investment Management Co. Ltd, and Beijing Merchandising Sales and Marketing Co. Ltd (collectively Unilink). As consideration for the purchase, Unilink received cash and 20% ownership in SPAR Shanghai. As a result of this transaction, current ownership interest in SPAR Shanghai is SPAR 51%, Shanghai Wedone Marketing Consulting Co. Ltd 29% and Unilink 20%. The Company consolidated operations beginning August 1, 2014. 12. Discontinued Operations Effective August 31, 2013, the Company sold its equity interests and working capital investment in its Romanian subsidiary, SPAR Business Ideas Provider S.R.L. ("BIP"), to a Company affiliate, SPAR InfoTech, Inc. ("SIT"), for a total purchase price of $348,465. The Company received, at closing, $187,767 in cash and the balance is payable over 30 months with interest at 6% per annum. The purchase price was equal to the book value of the Company's interests in BIP, which management believes approximates fair value. The sale to SIT was approved by the Company's Audit Committee and Board of Directors. SPAR Group, Inc. and Subsidiaries Notes to Consolidated Financial Statements (unaudited) As a result of the sale, the Romanian operations were reported in the consolidated financial statements of the Company as a discontinued operation. The consolidated statements of cash flows do not separately report the cash flows of the discontinued operations. The components of the earnings from discontinued operations are presented below (in thousands): Three Months Ended June 30, Six Months Ended June 30, Three Months Ended September 30, Nine Months Ended September 30, 2014 2013 2014 2013 2014 2013 2014 2013 Net revenues Cost of revenues Gross profit Selling, general and administrative expenses Depreciation and amortization Operating income Other (income) expense, net Income before provision for income tax expense Income tax expense Income from discontinued operations 13. Purchase of Interests in Subsidiaries The following contains descriptions of the Company's additional purchase of interest in its China operating subsidiary during the nine month period ended September 30, 2014. In July 2014, the Company, through its subsidiary in Hong Kong, SPAR China Ltd., entered into an agreement to purchase certain business assets Of the total purchase price of $1.46 million, the Company’s investment in Unilink represented 51% or $749,660, of which, $374,830 was paid in cash and the remaining $374,830 was recorded as a contingent liability to be paid based on Unilink’s future earnings as fully described below. Our Local Investor in Shanghai invested the remaining 49% or a total of $720,262. The Company has agreed to pay an additional $187,415 each year, over the next two years or a total of $374,830, provided the Unilink business can contribute at least $475,000 in operating earnings over the same two year period. The Company is confident that the Unilink business will meet or exceed this minimum operating earnings target and therefore has recorded the additional future payment of $374,830 as a contingent liability at September 30, 2014. The Company has completed its preliminary valuation of the fair value and recorded the following intangible assets at September 30, 2014: Customer list The customer list is being amortized over ten years. The following table includes the amount of Unilink’s revenue and earnings included in the Company's consolidated income statement for the nine month period ended September 30, 2014 and a pro forma calculation of the amounts that would have been included in the Company's consolidated statement of income for the nine month periods ended September 30, 2014 and 2013 had the Unilink acquisition date been January 1, 2014 and 2013, instead of August 1, 2014 (in thousands): Revenue Net Income Actual Unilink from August 1 to September 30, 2014 Consolidated supplemental pro forma from July 1 to September 30, 2014 Consolidated supplemental pro forma from July 1 to September 30, 2013 Consolidated supplemental pro forma from January 1 to September 30, 2014 Consolidated supplemental pro forma from January 1 to September 30, 2013 SPAR Group, Inc. and Subsidiaries Item 2. Management's Discussion and Analysis of Financial Condition, Results of Operations, Liquidity and Capital Resources Forward-Looking Statements There are "forward-looking statements" contained in this Quarterly Report on Form 10-Q for the You should carefully consider all forward-looking statements, risk factors and the other risks, cautions and information noted in this Quarterly Report, the Annual Report, the Proxy Statement and the Company'sotherSEC Reports that could cause the Company's actual assets, business, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, Although the Company believes that its plans, intentions, expectations and estimates reflected or implied in such forward-looking statements are reasonable, the Company cannot assure you that such plans, intentions, expectations or estimates will be achieved in whole or in part, that the Company has identified all potential risks, or that the Company can successfully avoid or mitigate such risks in whole or in part. You should carefully review the risk factors describedin the Annual Report (See Item 1A – Risk Factors) and any other risks, cautions orsimilar information made, contained or incorporated by reference in You should not place undue reliance on the Company's forward-looking statements and similar information because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond its control. The Company's forward-looking statements, risk factors and other risks, cautions and information (whether contained in this Quarterly Report, the Annual Report, the Proxy Statement or any other applicable SEC Report) are based on the informationthen available to the Company and speak only as of the date specifically referenced, or if no date is referenced, then as of December 31, 2013, in the case of the Annual Report or the Proxy Statement or the last day of the period covered bythis Quarterly Report, SPAR Group, Inc. and Subsidiaries The Company does not intend or promise, and the Company expressly disclaims any obligation, to publicly update or revise any forward-looking statements, risk factors or other risks, cautions or information (in whole or in part), whether as a result of new information, risks or uncertainties, future events or recognition or otherwise, except as and to the extent required by applicable law. GENERAL SPAR Group, Inc. ("SGRP"), and its subsidiaries (together with SGRP, the "SPAR Group" or the "Company"), is a diversified international merchandising and marketing services company and provides a broad array of services worldwide to help companies improve their sales, operating efficiency and profits at retail locations. The Company provides its merchandising and other marketing services to manufacturers, distributors and retailers worldwide, primarily in mass merchandiser, office supply, value, grocery, drug, independent, convenience, toy, home improvement and electronics stores. The Company also provides furniture and other product assembly services in stores, homes and offices. The Company has supplied these services in the United States since certain of its predecessors were formed in 1979 and internationally since the Company acquired its first international subsidiary in Japan in May of 2001. The Company currently does business in 9 countries that encompass approximately 50% of the total world population through its operations in the United States, Canada, Japan, South Africa, India, China, Australia, Mexico 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, 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 Industry According to industry estimates over two billion dollars are spent annually in the United States alone on retail merchandising and marketing services. The merchandising and marketing services industry includes manufacturers, retailers, food brokers, and professional service merchandising companies. 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. These services primarily involve placing orders, shelf maintenance, display placement, reconfiguring products on store shelves and replenishing product inventory. 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. Initially, 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 the manufacturers and the retailers discovered that using their own sales representatives and employees for this purpose was expensive and inefficient. 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 more effectively provide these services to retailers, manufacturers and other businesses around the world. SPAR Group, Inc. and Subsidiaries Another significant trend impacting the merchandising and marketing services business is the tendency of consumers 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 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 five years. Both retailers and manufacturers are seeking third parties to help them meet the increased demand for these labor-intensive services. In addition, the consolidation of many retailers has 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 cases, stores are completely remodeled and re-merchandised after a consolidation. 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 internet, hand-held computer, tablet and smart phone based technology and business model worldwide. The Company's Domestic and International Geographic Segments: The Company provides similar merchandising and marketing services throughout the world, operating within two reportable segments, its domestic and international divisions (as described above). 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 their respective net revenues and operating income for each of the three and 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 Date Established SGRP Percentage Ownership Principal Office Location United States of America 1979 100% White Plains, New York, United States of America6 1979 100% White Plains, New York, United States of America6 Japan May 2001 100% Tokyo, Japan May 2001 100% Tokyo, Japan Canada June 2003 100% Toronto, Canada June 2003 100% Toronto, Canada South Africa April 2004 51%1 Durban, South Africa April 2004 51%1 Durban, South Africa India April 2004 51%2 New Delhi, India April 2004 51%2 New Delhi, India Australia April 2006 51% Melbourne, Australia April 2006 51% Melbourne, Australia Romania July 2009 100%3 Bucharest, Romania July 2009 100%3 Bucharest, Romania China March 2010 51%4 Shanghai, China March 2010 51%4 Shanghai, China Mexico August 2011 51% Mexico City, Mexico August 2011 51% Mexico City, Mexico Turkey November 2011 51%5 Istanbul, Turkey November 2011 51%5 Istanbul, Turkey SPAR Group, Inc. and Subsidiariesfor the second quarterly period endedJune TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934for the transition period from __________ to __________. Company☒Company ☒August 8,November 6, 2014, there were 20,580,68420,556,554 shares of Common Stock outstanding. JuneSeptember 30, 2014 and December 31, 201321 (Loss) and Comprehensive Income (Loss) for the three and sixnine months ended JuneSeptember 30, 2014 and 201332 sixnine months ended JuneSeptember 30, 201443 sixnine months ended JuneSeptember 30, 2014 and 201354 65 1716 2423 2524 2625 2625 2625 2625 2625 2625 2827
i FINANCIAL INFORMATIONConsolidated Financial Statements
2013 (Unaudited) (Note) $ 4,699 $ 2,814 24,476 21,734 432 456 437 642 30,044 25,646 2,131 2,032 1,800 1,800 2,003 2,259 1,900 1,900 970 641 $ 38,848 $ 34,278 $ 3,934 $ 4,267 7,092 5,854 1,049 560 766 673 558 696 13,399 12,050 5,889 3,672 19,288 15,722 207 207 (130 ) (356 ) 15,488 15,339 (986 ) (1,031 ) 1,862 1,654 16,441 15,813 3,119 2,743 19,560 18,556 $ 38,848 $ 34,278
2013 Assets $ 5,622 $ 2,814 21,844 21,734 410 456 509 642 28,385 25,646 2,238 2,032 1,800 1,800 3,339 2,259 1,900 1,900 493 641 $ 38,155 $ 34,278 $ 3,695 $ 4,267 8,149 5,854 729 560 490 673 503 696 13,566 12,050 4,120 3,672 17,686 15,722 - - 207 207 (188 ) (356 ) 15,589 15,339 (1,409 ) (1,031 ) 2,244 1,654 16,443 15,813 4,026 2,743 20,469 18,556 $ 38,155 $ 34,278 (Loss) and Comprehensive Income (Loss)
June 30,
June 30,
September 30,
September 30, $ 30,924 $ 27,410 $ 58,960 $ 52,399 $ 31,009 $ 27,753 $ 89,969 $ 80,152 23,225 20,843 45,030 40,025 23,703 21,228 68,733 61,252 7,699 6,567 13,930 12,374 7,306 6,525 21,236 18,900 6,271 5,953 12,193 11,155 6,329 5,747 18,522 16,900 418 408 830 710 430 388 1,260 1,097 1,010 206 907 509 547 390 1,454 903 41 20 84 51 44 28 128 80 (68 ) (56 ) (113 ) (69 ) (89 ) (5 ) (202 ) (73 ) 1,037 242 936 527 592 367 1,528 896 233 224 352 338 21 (139 ) 373 200 804 18 584 189 571 506 1,155 696 41 82 - 17 - 98 804 59 584 271 571 523 1,155 794 227 189 376 358 (188 ) (192 ) (565 ) (550 ) $ 577 $ (130 ) $ 208 $ (87 ) $ 383 $ 331 $ 590 $ 244 $ 0.03 $ (0.01 ) $ 0.01 $ - $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ - $ - $ - $ - $ - $ - $ - $ - $ 0.03 $ (0.01 ) $ 0.01 $ - $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ - $ - $ - $ - $ - $ - $ - $ - 20,613 20,481 20,585 20,473 20,584 20,503 20,585 20,483 21,709 21,716 21,762 21,661 21,525 21,781 21,687 21,708 $ 804 $ 59 $ 584 $ 271 $ 571 $ 523 $ 1,155 $ 794 92 (363 ) 45 (561 ) (423 ) 56 (378 ) (505 ) 896 (304 ) 629 (290 ) 148 579 777 289 227 189 376 358 (188 ) (192 ) (565 ) (550 ) $ 669 $ (493 ) $ 253 $ (648 ) $ (40 ) $ 387 $ 212 $ (261 ) Common Stock TreasuryStock Additional Accumulated Other Non- Common Stock TreasuryStock Additional Accumulated Other Non- Shares Amount Shares Amount Total
Equity Shares Amount Shares Amount Paid-In
Capital Comprehensive
Loss RetainedEarnings Controlling Interest Total
Equity Balance at January 1, 2014 20,681 $ 207 182 $ (356) $ 15,339 $ (1,031) $ 1,654 $ 2,743 $ 18,556 20,681 $ 207 182 $ (356 ) $ 15,339 $ (1,031 ) $ 1,654 $ 2,743 $ 18,556 375 375 - - - - 534 - - - 534 21 21 - - - - 53 - - - 53 Change in non-controlling interest related to business acquisition - - - - - - - 720 720 - - - - - - - (2 ) (2 ) 13 (21 ) (21 ) - - 114 (169 ) - - - - (169 ) (126 ) 247 (247 ) - - (172 ) 337 (337 ) - - - - 45 45 - - - - - (378 ) - - (378 ) 208 376 584 - - - - - - 590 565 1,155 20,681 $ 207 69 $ (130 ) $ 15,488 $ (986 ) $ 1,862 $ 3,119 $ 19,560 20,681 $ 207 124 $ (188 ) $ 15,589 $ (1,409 ) $ 2,244 $ 4,026 $ 20,469 $ 584 $ 271 830 711 59 28 375 256 (2,795 ) 1,641 (100 ) (70 ) (333 ) 829 1,932 689 552 4,355 (674 ) (731 ) (1,300 ) (21 ) (674 ) (2,052 ) 2,043 (118 ) 21 20 (14 ) (14 ) (65 ) (116 ) (21 ) (85 ) (200 ) 1,964 (513 ) 43 (531 ) 1,885 1,259 2,814 1,792 $ 4,699 $ 3,051 $ 67 $ 68 $ 210 $ 175 $ 1,155 $ 794 1,260 1,100 162 48 534 438 (384 ) 2,299 (47 ) (512 ) (572 ) (153 ) 2,394 812 4,502 4,826 (1,084 ) (1,039 ) - 20 - (1,300 ) Purchase of India Preceptor subsidiary - (21 ) (375 ) - (1,459 ) (2,340 ) 241 (177 ) 53 95 (19 ) (22 ) (87 ) (154 ) (169 ) (232 ) - (200 ) 19 (690 ) (254 ) (477 ) 2,808 1,319 2,814 1,792 $ 5,622 $ 3,111 $ 103 $ 98 $ 324 $ 224 Supplemental disclosure ofnon-cash activities Liability related to acquisition of Unilink subsidiary $ 375 $ - Increase in non-controlling interest attributable to acquisition of Unilink subsidiary $ 720 $ - six-monthnine-month period ended JuneSeptember 30, 2014 (this "Quarterly Report"), have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all normal and recurring adjustments considered necessary for a fair presentation have been included in these interim financial statements. However, these interim financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto for the Company as contained in the SGRP's Annual Report on Form 10-K for the year ended December 31, 2013, as filed with the Securities and Exchange Commission (the "SEC") on March 31, 2014 (the "2013 Annual Report"), and SGRP's Proxy Statement for its 2014 Annual Meeting of Stockholders as filed with the SEC on April 24, 2014 (the "2014 Proxy Statement"). Particular attention should be given to Items 1 and 1A of the 2013 Annual Report respecting the Company's Business and Risk Factors, respectively, and the following parts of SGRP's 2014 Proxy Statement: (i)SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, (ii) CORPORATE GOVERNANCE, (iii) EXECUTIVE OFFICERS, COMPENSATION, DIRECTORS AND OTHER INFORMATION and (iv)EXECUTIVE COMPENSATION, EQUITY AWARDS AND OPTIONS. The Company's results of operations for the interim periods are not necessarily indicative of its operating results for the entire year.JuneSeptember 30, 2014, the Company operates in 9 countries and divides its operations into two reportable segments: its Domestic Merchandising Services Division, which provides those services in the United States of America since certain of its predecessors were formed in 1979; and its International Merchandising Services Division, which began operations in May 2001 and provides similar merchandising, marketing and in-store event staffing services in Japan, Canada, South Africa, India, China, Australia, Mexico and Turkey. (continued) $ 577 $ (130 ) $ 208 $ (87 ) $ 383 $ 331 $ 590 $ 244 20,613 20,481 20,585 20,473 20,584 20,503 20,585 20,483 1,096 1,235 1,177 1,188 941 1,278 1,102 1,225 21,709 21,716 21,762 21,661 21,525 21,781 21,687 21,708 $ 0.03 $ (0.01 ) $ 0.01 $ – $ 0.03 $ (0.01 ) $ 0.01 $ – $ 0.02 $ 0.02 $ 0.03 $ 0.01 $ 0.02 $ 0.02 $ 0.03 $ 0.01 $6.5$7.5 million (see below) to Sterling National Bank (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 July 6, 2016.2016 (with no early termination fee). $6.5$7.5 million ($7.5 million after July 1, 2014 - see below) 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).JuneSeptember 30, 2014, the Company was in compliance with such covenants.SPAR Group, Inc. and SubsidiariesNotes to Consolidated Financial Statements(unaudited) (continued)$1.1$1.0 million (based upon the exchange rate at JuneSeptember 30, 2014). 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 technically expired on October 31, 2012, but is being extended from month to month at the Company's request. SPARFACTS is in the process of renegotiating new financing.$198,000.$182,000. The loan is payable in monthly installments of $2,400$2,200 at an interest rate of 0.1% per annum with a maturity date of February 28, 2018. The outstanding balance at JuneSeptember 30, 2014, was approximately $104,000$89,000 (based upon the exchange rate at JuneSeptember 30, 2014). $ 5,799 2.8 % $ 3,615 2.8 % $ 4,054 2.8% $ 3,615 2.8% 558 7.1 % 696 7.0 % 503 7.1% 696 7.0% $ 6,357 $ 4,311 $ 4,557 $ 4,311 $ 104 0.1 % $ 113 0.1 % $ 89 0.1% $ 113 0.1% $ 701 $ 2,885 $ 3,446 $ 2,885 575 368 544 368 $ 1,276 $ 3,253 $ 3,990 $ 3,253 JuneSeptember 30, 2014 (continued)JuneSeptember 30, 2014, the Company has two outstanding capital lease obligations with an interest rate of 4.5%. The related capital lease assets balances are detailed below (in thousands): $ 253 $ 211 $ 42 $ 253 $ 231 $ 22 JuneSeptember 30, 2014, are as follows (in thousands):
Amount $ 43 (1 ) $ 42
Amount $ 22 Less amount representing interest - $ 22 SPAR Group, Inc. and SubsidiariesNotes to Consolidated Financial Statements(unaudited) (continued)(“SBS”("SBS"), SPAR Administrative Services, Inc. (“SAS”("SAS") and SPAR InfoTech, Inc. (“SIT”("SIT") are affiliates of SGRP but are not part of the consolidated Company. Mr. Robert G. Brown, a Director, the Chairman and a major stockholder of SGRP, and Mr. William H. Bartels, a Director and the Vice Chairman of the Company and a major stockholder of SGRP, are the sole stockholders of SBS and SAS. 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. and SAS provided approximately 88%80% and 99%77% of the domestic merchandising specialist field force used by the Company (other than NMS,(as a percentage of the total cost for such field force, including field force provided by NRS, as defined below) for the six monthsnine month periods ended JuneSeptember 30, 2014 and 2013, respectively, and SAS provided approximately 92%93% and 94%97% of the direct domestic field managementadministration used by the Company (as a percentage of the total cost for such field administrators) at a total cost for the services of SBS and SAS of approximately $13.4$20 million and $11.3$18 million for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. Pursuant to the terms of the Amended and Restated Field Service Agreement dated as of January 1, 2004, as amended in 2011, the Company received merchandising services from SBS through the use of approximately 6,3007,400 field merchandising specialists during the sixnine months ended JuneSeptember 30, 2014. Pursuant to the terms of the Amended and Restated Field Management Agreement dated as of January 1, 2004, the Company received administrative services from SAS through the use of 6653 full-time national, regional and district administrators during the sixnine months ended JuneSeptember 30, 2014. For those services, the Company has agreedcontracted in the Existing Agreements to reimbursepay SBS and SAS on a "Cost Plus Fee" arrangement, which provides that the Company is to pay SBS and SAS for certaintheir costs of providing those services and to pay SBS and SAS each a fee equal toplus 4% of these costs.such costs (the "Cost Plus Fee"). Those costs include field expenses of SBS excluding(excluding workers compensation expense,expense), all payroll and employment tax expenses of SAS and all legal and other administrative expenses paid by either of them. Those fees for services renderedThe net total Cost Plus Fee earned by SAS and SBS werefor services rendered was approximately $514,000$770,000 and $436,000$693,000 for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. TheIn order to obtain and continue its favorable fee arrangement with SBS and SAS, the Company also providesarranged to provide certain administrative services directly to SBS and SAS without charge, forincluding certain human resource and legal and other services, which theservices. The Company believes this arrangement also is more efficient if paid directly, and would otherwise have been subject to cost plus reimbursement.effective. The value of these services was approximately $329,000$502,000 and $229,000$455,000 for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. Those service agreements with SBS and SAS were scheduled to automatically renew on December 31, 2013, but in order to prevent such automatic renewal and permit renegotiation after the end of 2013, the Company has givengave SBS and SAS the required notice of non-renewal under those agreements and from time to time has entered into temporary extension agreements with them to temporarily extend those agreementsthe Existing Agreements to August 31, 2014, and is in the process of extending them through November 30, 2014. The parties have had extensive negotiations for over a year to try to resolve their pricing and related differences.feesreimbursable costs or reimbursable costs.Cost Plus Fee. However, since SBS and SAS are "Subchapter S" corporations and are owned by Messrs. Brown and Bartels, all income from SBS and SAS is allocated to them.850974 field merchandising specialists. Prior to that date, NMS received such merchandising services from NMA pursuant to the terms of the substantially similar Field Services Agreement dated as of July 31, 2012, as amended (the “NMA Services Agreement”). For those services, the Company has agreed to reimburse NRS (and NMA before it) for its total costs of providing those services and to pay NRS (and NMA before it) a fee equal to 2% of its total costs.costs (the "Plus 2% Fee"). Those costs include all field and workers compensation insurance expenses of NRS (and NMA before it) but exclude certain legal and other administrative expenses. Accordingly, no salary reimbursement for Mr. Burdekin or Ms. Burdekin are included in such feesreimbursable costs or reimbursable costs.Plus 2% Fee. (continued)NMS commenced operations as of September 1, 2012. NRS (and before that NMA) provided all of the domestic merchandising specialist field force used by NMS and 9% and 8% of all of the domestic merchandising specialist field force used by the Company (as a percentage of the total cost for such field force, including the field force provided by SBS) for the sixnine months ended JuneSeptember 30, 2014. Those fees2014 and 2013, respectively. The total Plus 2% Fee earned by NRS for services rendered by NRS (and NMA before it) werewas approximately $27,000$38,000 and $22,000$30,000 for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively.least $438,000approximately $594,000 and $329,000$550,000 for the sixnine months ended June 30,September 31, 2014 and 2013, respectively, if the Company would have instead used an unaffiliated entity to provide comparable services. All affiliate contracts are reviewed and approved by SGRP's Audit Committee, as described above. $ 5,593 $ 4,776 $ 11,053 $ 8,887 $ 1,127 $ 1,460 $ 2,305 $ 2,440 $ 857 $ 564 $ 1,359 $ 1,105 $ 7,577 $ 6,800 $ 14,717 $ 12,432 $ 5,605 $ 5,417 $ 16,658 $ 14,304 $ 1,056 $ 1,266 $ 3,361 $ 3,706 $ 546 $ 447 $ 1,905 $ 1,553 $ 7,207 $ 7,130 $ 21,924 $ 19,563 $ 1,049 $ 560 Accrued expenses due to affiliates (in thousands): $ 729 $ 560 (continued)JuneSeptember 30, 2014 and December 31, 2013 consolidated balance sheets. The purchase price was equal to the book value of the Company’s interests in BIP. The sale to SIT was approved by the Company’s Audit Committee and Board of Directors.stock available for issuance.stock. At JuneSeptember 30, 2014, no shares of SGRP Series A Preferred Stock were issued or outstanding.JuneSeptember 30, 2014, approximately 1.3 million SGRP shares were available for Award grants under the amended 2008 Plan. (continued)$246,000approximately $399,000 and $211,000$366,000 in stock-based compensation expense relating to stock option Awards during the sixnine month periods ended JuneSeptember 30, 2014 and 2013, respectively. The recognized tax benefit on stock based compensation expense related to stock options during the sixnine months ended JuneSeptember 30, 2014 and 2013 was approximately $93,000$151,000 and $80,000,$139,000, respectively. As of JuneSeptember 30, 2014, total unrecognized stock-based compensation expense related to stock options was $1.2$1.1 million.and on May 15, 2014, 16,000 shares of Restricted Stockrestricted stock were issued to the Directors of the Company and on August 7, 2014, 83,400 shares of restricted stock were issued to select employees in lieu of stock options pursuant to the 2008 Plan. The estimated stock compensation expense for thesethose Awards is $37,487,$155,988, which will be recognized ratably over the four year vesting period. In February 2014, the remaining outstanding restricted stock Awards of Mr. Gary R. Raymond, former Chief Executive Officer of the Company, fully vested on his retirement at an expense to the Company of $127,594. During the sixnine months ended JuneSeptember 30, 2014 and 2013, the Company recognized approximately $129,000$135,000 and $29,000,$139,000, respectively, of stock-based compensation expense related to restricted stock. The recognized tax benefit on stock based compensation expense related to restricted stock during the sixnine months ended JuneSeptember 30, 2014 and 2013 was approximately $49,000$51,300 and $11,000,$15,500, respectively. As of JuneSeptember 30, 2014, total unrecognized stock-based compensation expense related to unvested restricted stock Awards was $36,000.$149,000. onor its planned, intended, expected, estimated or desired assets, business, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, performance, prospects, sales, strategies, taxation or other achievement, resultsresult or condition. (continued) $ 12,641 $ 11,374 $ 23,599 $ 21,062 $ 11,666 $ 11,327 $ 35,265 $ 32,390 18,283 16,036 35,361 31,337 19,343 16,426 54,704 47,762 $ 30,924 $ 27,410 $ 58,960 $ 52,399 $ 31,009 $ 27,753 $ 89,969 $ 80,152 $ 561 $ (23 $ 297 $ 281 $ 557 $ 99 $ 852 $ 383 449 229 610 228 (10 291 602 520 $ 1,010 $ 206 $ 907 $ 509 $ 547 $ 390 $ 1,454 $ 903 $ 20 $ 14 $ 39 $ 24 $ 22 $ 15 $ 62 $ 40 21 6 45 27 22 13 66 40 $ 41 $ 20 $ 84 $ 51 $ 44 $ 28 $ 128 $ 80 $ 1 $ (26 $ – $ – $ – $ (25 ) (68 (56 (114 (43 (89 (5 (202 (48 $ (68 $ (56 $ (113 $ (69 $ (89 $ (5 $ (202 $ (73 $ 541 $ (37 $ 257 $ 283 $ 535 $ 84 $ 790 $ 368 496 279 679 244 57 283 738 528 $ 1,037 $ 242 $ 936 $ 527 $ 592 $ 367 $ 1,528 $ 896 United States $ – $ 64 $ – $ 130 $ 93 $ (141 $ 93 $ (9 233 160 352 208 (72 2 280 209 $ 233 $ 224 $ 352 $ 338 $ 21 $ (139 ) $ 373 $ 200 $ 541 $ (101 $ 257 $ 153 $ 442 $ 225 $ 697 $ 377 263 119 327 36 129 281 458 319 $ 804 $ 18 $ 584 $ 189 $ 571 $ 506 $ 1,155 $ 696 $ 323 $ 315 $ 643 $ 553 $ 321 $ 307 $ 964 $ 858 95 93 187 157 109 81 296 239 $ 418 $ 408 $ 830 $ 710 $ 430 $ 388 $ 1,260 $ 1,097 $ 216 $ 330 $ 513 $ 631 $ 252 $ 224 $ 765 $ 855 100 64 161 100 158 88 319 184 $ 316 $ 394 $ 674 $ 731 $ 410 $ 312 $ 1,084 $ 1,039 (continued) $ 19,260 $ 17,651 $ 17,186 $ 17,651 19,588 16,627 20,969 16,627 $ 38,848 $ 34,278 $ 38,155 $ 34,278 $ 4,859 15.7 % $ 3,750 13.7 % $ 9,198 15.6 % $ 7,275 13.9 % $ 4,983 16.1 % $ 4,002 14.4 % $ 14,181 15.8 % $ 11,277 14.1 % 4,099 13.3 3,950 14.4 7,970 13.5 7,936 15.1 4,388 14.2 3,873 14.0 12,358 13.7 11,809 14.7 3,046 9.8 1,911 6.9 5,791 6.4 4,956 6.2 1,850 6.0 1,203 4.3 5,112 5.7 3,318 4.1 1,643 5.3 1,545 5.6 4,858 5.4 4,389 5.5 1,366 4.4 1,283 4.6 4,441 4.9 5,046 6.3 2,657 8.6 1,303 4.8 4,752 8.1 2,601 5.0 1,338 4.3 2,079 7.5 6,090 6.8 4,680 5.8 1,977 6.4 1,520 5.5 3,215 5.5 2,844 5.4 1,644 5.3 1,461 5.3 3,262 5.5 2,116 4.0 1,621 5.2 1,839 6.7 3,075 5.2 3,763 7.2 829 2.7 1,375 5.0 2,745 4.7 3,045 5.8 597 1.9 838 3.1 1,144 1.9 1,757 3.4 729 2.4 530 1.9 1,873 2.1 2,287 2.9 $ 18,283 59.1 % $ 16,036 58.5 % $ 35,361 60.0 % $ 31,337 59.8 % $ 19,343 62.5 % $ 16,426 59.2 % $ 54,704 60.8 % $ 47,762 59.6 % $ 6,248 $ 6,222 $ 6,213 $ 6,222 2,556 2,410 3,557 2,410 $ 8,804 $ 8,632 $ 9,770 $ 8,632 SPAR Group, Inc. and SubsidiariesNotes to Consolidated Financial Statements(unaudited) (continued) $ – $ 1,286 $ – $ 2,474 $ - $ 952 $ - $ 3,426 – 1,040 – 2,003 - 733 - 2,736 – 246 – 471 - 219 - 690 – 182 – 352 - 208 - 562 – 1 – 1 - - - 1 – 63 – 118 - 11 - 127 – (4 ) (4 ) - (6 ) - (11 ) – 67 122 - 17 138 – 26 40 - - - 40 $ – $ 41 $ $ 82 $ - $ 17 $ - $ 98 13. Subsequent EventsChina fixed assets and merchandising teams of the following three companies in China: Shanghai Unilink Marketing Execution and Design Co. Ltd, Shanghai Gold Park Investment Management Co. Ltd, and Beijing Merchandising Sales and Marketing Co. Ltd (collectively Unilink). As consideration for the purchase, Unilink will receive cash and 20% ownership in SPAR Shanghai. At closing, SPAR will have 51%, Shanghai Wedone Marketing Consulting Co. Ltd will have 29% and Unilink will have 20% of the SPAR Shanghai ownership interests. The Company began consolidating those operations onbeginning August 1, 2014.$ 1,469,922 $ 1,614 $ 43 $ 31,847 $ 405 $ 30,086 $ 454 $ 95,549 $ 798 $ 86,084 $ 620 sixnine months endedJuneSeptember 30, 2014 (this "Quarterly Report"), of SPAR Group, Inc. ("SGRP", and together with its subsidiaries, the "SPAR Group" or the "Company"),; in SGRP's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (as filed, the "Annual Report"), as filed with the Securities and Exchange Commission (the "SEC") on March 31, 2014; in SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders on May 15, 2014 (as filed, the "Proxy Statement"), which SGRP filed with the SEC on April24, 2014; andinthe Company's other filings under applicable law with the SEC (including this Quarterly Report, the Annual Report and the Proxy Statement, each a "SEC Report"). "Forward-looking statements" are defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other applicable federal and state securities laws, rules and regulations, as amended (together with the Securities Act and Exchange Act, collectively, "Securities Laws"). The Company's forward-looking statements include, in particular and without limitation, this "Management's Discussion and Analysis of Financial Condition, Results of Operations, Liquidity and Capital Resources"containedin this Quarterly Report, and "Business"the statements made in"Business", "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Annual Report. You can identify forward-looking statements in such information by the Company's use of terms such as "may", "will", "expect", "intend", "believe", "estimate", "anticipate", "continue" or similar words or variations or negatives of those words.performance,prospects, sales, strategies, taxation or other achievement, results, risks, trends or condition to differ materially from those anticipated by the Company and described in the information in the Company's forward-lookingand otherstatements, whether express or implied, asthey the Company's anticipations are based upon the Company's plans, intentions, expectations and estimates and (althoughit the Company believes them to be reasonable)andinvolve known and unknown risks, uncertainties and otherunpredictablefactors(many of which are beyond the Company's control)that could cause them to fail to occur or be realized or to be materially and adversely different from those the Companyplanned, intended, expected or estimated. anticipated. this this Quarterly Report, theAnnual Report oranyother applicable SEC Report. All forward-looking and other statements or information attributable to the Company or persons acting on its behalf are expressly subject to and qualified by all such risk factors and other risks, cautions and information. or any other applicable SEC Report. New risks and uncertainties 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. Over time, the Company's actual assets, business, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations,performance,prospects, sales, strategies, taxation or other achievements, results, risks, trends or condition will likely differ from those expressed or implied by the Company's forward-looking statements and other information, and such difference could be significant and materially adverse to the Company and the value of your investment in the Company's Common Stock.sixnine months ended JuneSeptember 30, 2014 and 2013, and their respective assets as of JuneSeptember 30, 2014 and 2013, is provided in Note 1011 to the Company's Consolidated Financial Statements –SegmentInformation.
1 | In September 2012, the Company, through its subsidiary in South Africa (SGRP Meridian), entered into a joint venture agreement to expand its operations in South Africa. SGRP Meridian owns a 51% ownership interest in the new company; CMR Meridian (Pty) Ltd. ("CMR-Meridian"). |
2 | In June 2011, the Company sold 49% of its interest in its Indian subsidiary to KROGNOS Integrated Marketing Services Private Limited. In March 2013, the company purchased a 51% interest in a new subsidiary in India, Preceptor Marketing Services Private Limited, which began operations in March 2013. |
3 | In August 2013, the Company sold its 51% ownership in Romania in its active Romania subsidiary to SPAR InfoTech, Inc. (see Note 6 to the Consolidated Financial Statements –Related-Party Transactions). The Company continues to have one Romanian subsidiary that is 100% owned and is inactive. |
4 | Currently the Company owns two subsidiaries in China. One subsidiary is 100% owned and is inactive, and the second subsidiary, acquired in March 2010 and operational in August 2010, is 51% owned. In July 2011, the Company, through its active subsidiary in China (SPAR Shanghai), entered into a joint venture agreement to expand its operations in China. SPAR Shanghai has a 75.5% ownership interest in the new company; SPAR DSI Human Resource Company. |
5 | In August 2011, the Company sold its 51% ownership in its original subsidiary in Turkey to its original Local Investor, and in November 2011 the Company started a new 51% owned subsidiary to compete in this important market. |
6 | In September 2012, the Company established a new subsidiary, National Merchandising Services, LLC, ("NMS") 51% owned by the Company, with its principal office in Georgia. In March 2013, the Company purchased general merchandising service and certain in-store audit service businesses from Market Force Information, Inc. (“MFI”). |
CRITICAL ACCOUNTING POLICIESCritical Accounting Policies
There were no material changes during the sixnine months ended JuneSeptember 30, 2014, to the Company's critical accounting policies as reported in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the SEC on March 31, 2014.
RESULTS OF OPERATIONSResults of Operations
Three months endedJuneSeptember 30, 2014, compared to three months ended JuneSeptember 30, 2013
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 EndedJune 30, | Three Months EndedSeptember 30, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
Net revenue | $ | 30,924 | 100.0 | % | $ | 27,410 | 100.0 | % | $ | 31,009 | 100.0 | % | $ | 27,753 | 100.0 | % | ||||||||||||||||
Cost of revenue | 23,225 | 75.1 | 20,843 | 76.0 | 23,703 | 76.4 | 21,228 | 76.5 | ||||||||||||||||||||||||
Gross profit | 7,699 | 24.9 | 6,567 | 24.0 | ||||||||||||||||||||||||||||
Selling, general & administrative expense | 6,271 | 20.3 | 5,953 | 21.7 | 6,329 | 20.4 | 5,747 | 20.7 | ||||||||||||||||||||||||
Depreciation & amortization | 418 | 1.4 | 408 | 1.5 | 430 | 1.4 | 388 | 1.4 | ||||||||||||||||||||||||
Operating income | 1,010 | 3.2 | 206 | 0.8 | ||||||||||||||||||||||||||||
Interest expense | 41 | 0.1 | 20 | 0.1 | ||||||||||||||||||||||||||||
Other expense (income), net | (68 | ) | (0.2 | ) | (56 | ) | (0.2 | ) | ||||||||||||||||||||||||
Interest expense, net | 44 | 0.1 | 28 | 0.1 | ||||||||||||||||||||||||||||
Other (income) expense, net | (89 | ) | (0.3 | ) | (5 | ) | - | |||||||||||||||||||||||||
Income before income taxes | 1,037 | 3.3 | 242 | 0.9 | 592 | 2.0 | 367 | 1.3 | ||||||||||||||||||||||||
Income tax expense | 233 | 0.8 | 224 | 0.8 | ||||||||||||||||||||||||||||
Income tax expense (benefit) | 21 | 0.1 | (139 | ) | (0.5 | ) | ||||||||||||||||||||||||||
Income from continuing operations | 804 | 2.5 | 18 | 0.1 | 571 | 1.9 | 506 | 1.8 | ||||||||||||||||||||||||
Income from discontinued operations | – | – | 41 | 0.1 | - | - | 17 | 0.1 | ||||||||||||||||||||||||
Net income | 571 | 1.9 | 523 | 1.9 | ||||||||||||||||||||||||||||
Net income attributable to non-controlling interest | 227 | 0.7 | 189 | 0.7 | (188 | ) | 0.6 | (192 | ) | (0.7 | ) | |||||||||||||||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 577 | 1.8 | % | $ | (130 | ) | (0.5 | )% | |||||||||||||||||||||||
Net income attributable to SPAR Group, Inc. | $ | 383 | 1.3 | % | $ | 331 | 1.2 | % | ||||||||||||||||||||||||
Net Revenue
Net revenue for the three months ended JuneSeptember 30, 2014, was $30.9$31.0 million, compared to $27.4$27.8 million for the three months ended JuneSeptember 30, 2013, an increase of $3.5$3.2 million or 12.8%12%.
SPAR Group, Inc. and Subsidiaries
Domestic net revenue totaled $12.6$11.7 million in the three months ended JuneSeptember 30, 2014, compared to $11.4$11.3 million for the same period in 2013. Domestic net revenue increased by approximately $1.2 million$400,000 or 11.1%3%. The increase was primarily due to incremental revenue from project work compared to the same period last year.
International net revenue totaled $18.3$19.3 million for the three months ended JuneSeptember 30, 2014, compared to $16.0$16.4 million for the same period in 2013, an increase of $2.3$2.9 million or 14.4%18%. The increase in net revenue was primarily due to increased revenue in China, Mexico, JapanSouth Africa and Canada,India, partially offset by lower revenue in China, Australia and Turkey.Japan.
Cost of Revenue
The Company's cost of revenue consists of on-site labor and field administration fees, travel and other direct labor-related expenses and was 75.1%76.4% of net revenue for the three months ended JuneSeptember 30, 2014, and 76.0%76.5% of net revenue for the three months ended JuneSeptember 30, 2013.
Domestic cost of revenue was 68.6%67.6% of net revenues for the three months ended September 30, 2014, and 69.6% of net revenue for the three months ended June 30, 2014, and 70.0% of net revenue for the three months ended JuneSeptember 30, 2013. The decrease in cost of revenue as a percentage of net revenue of 1.42.0 percentage points was due primarily to a more favorable mix of higher margin project work compared to last year. For the three months ended JuneSeptember 30, 2014 and 2013, approximately 78%84% and 84%85%, respectively, of the Company's domestic cost of revenue resulted from in-store merchandiser specialist, on-site assembly technician and field administration services purchased from certain of the Company's affiliates, SPAR Business Services, Inc. ("SBS"), and SPAR Administrative Services, Inc. ("SAS"), respectively, and approximately 10%7% and 7%5% of the Company's domestic cost of revenues for the three months ended JuneSeptember 30, 2014 and 2013, respectively, resulted from in-store merchandiser specialist services purchased from certain of the Company's other affiliates, National Retail Source, LLC ("NRS"), and prior to August 1, 2013, National Merchandising of America, Inc. ("NMA") (See Note 6 to the Consolidated Financial Statements -Related-Party Transactions).
Internationally, the cost of revenue as(as a percentpercentage of revenue decreasedrevenue) slightly increased to 79.6%81.7% of net revenues for the three months ended September 30, 2014, compared to 81.3% of net revenue for the three months ended June 30, 2014, compared to 80.4% of net revenue for the three months ended JuneSeptember 30, 2013. The decrease in cost of revenue percentage increase of 0.8 percentage points0.4% was primarily due to margin improvementlower margins in China South Africa, Canada and Australia partially offset by higher cost business in India and Turkey.Canada.
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 $6.3 million and $6.0$5.7 million for the three months ended JuneSeptember 30, 2014 and 2013, respectively.
Domestic selling, general and administrative expenses totaled $3.1$2.9 and $3.0 million for both three month periods ended JuneSeptember 30, 2014, and 2013.
International selling, general and administrative expenses totaled $3.2$3.4 million for the three months ended JuneSeptember 30, 2014, compared to $2.9$2.7 million for the same period in 2013. The increase of approximately $300,000$700,000 was primarily attributable to increases in Mexico, China and JapanSouth Africa in support of the revenue growth for the period.
Depreciation and Amortization
Depreciation and amortization charges totaled $418,000$430,000 for the three months ended JuneSeptember 30, 2014, and $408,000$388,000 for the same period in 2013.
Interest Expense
The Company's net interest expense was $41,000$44,000 and $20,000$28,000 for the three months ended JuneSeptember 30, 2014 and 2013, respectively. The increase in interest expense was due primarily to increased borrowing in the United States and Canada.
SPAR Group, Inc. and Subsidiaries
Other Income(Income) Expense, Net
Other income totaled $68,000$89,000 and $56,000$5,000 for the three months ended JuneSeptember 30, 2014 and 2013, respectively. The increase was primarily related to various activity in Mexico.
Income Taxes
The income tax provision totaled $233,000$21,000 for the three months ended JuneSeptember 30, 2014, and $224,000compared to a benefit of $139,000 for the three months ended JuneSeptember 30, 2013.
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 $227,000$188,000 and $189,000$192,000 for the three months ended JuneSeptember 30, 2014 and September 30, 2013, respectively.
Net Income (Loss)
The Company reported net income of $577,000$383,000 for the three months ended JuneSeptember 30, 2014, or $0.03$0.02 per diluted share, compared to a net loss of $130,000,$331,000, or $(0.01)$0.02 per diluted share, for the corresponding period last year.
SixNinemonths ended JuneSeptember 30, 2014, compared to sixnine months ended JuneSeptember 30, 2013
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).
SixMonths EndedJune 30, | NineMonths EndedSeptember 30, | |||||||||||||||||||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
Net revenue | $ | 58,960 | 100.0 | % | $ | 52,399 | 100.0 | % | $ | 89,969 | 100.0 | % | $ | 80,152 | 100.0 | % | ||||||||||||||||
Cost of revenue | 45,030 | 76.4 | 40,025 | 76.4 | 68,733 | 76.4 | 61,252 | 76.4 | ||||||||||||||||||||||||
Gross profit | 13,930 | 23.6 | 12,374 | 23.6 | ||||||||||||||||||||||||||||
Selling, general & administrative expense | 12,193 | 20.7 | 11,155 | 21.3 | 18,522 | 20.6 | 16,900 | 21.1 | ||||||||||||||||||||||||
Depreciation & amortization | 830 | 1.4 | 710 | 1.4 | 1,260 | 1.4 | 1,097 | 1.4 | ||||||||||||||||||||||||
Operating income | 907 | 1.5 | 509 | 0.9 | ||||||||||||||||||||||||||||
Interest expense | 84 | 0.1 | 51 | 0.1 | ||||||||||||||||||||||||||||
Other expense (income), net | (113 | ) | (0.2 | ) | (69 | ) | (0.1 | ) | ||||||||||||||||||||||||
Interest expense, net | 128 | 0.1 | 80 | - | ||||||||||||||||||||||||||||
Other (income) expense, net | (202 | ) | (0.2 | ) | (73 | ) | (0.1 | ) | ||||||||||||||||||||||||
Income before income taxes | 936 | 1.6 | 527 | 0.9 | 1,528 | 1.7 | 896 | 1.2 | ||||||||||||||||||||||||
Income tax expense | 352 | 0.6 | 338 | 0.6 | 373 | 0.4 | 200 | 0.3 | ||||||||||||||||||||||||
Income from continuing operations | 584 | 1.0 | 189 | 0.3 | 1,155 | 1.3 | 696 | 0.9 | ||||||||||||||||||||||||
Income from discontinued operations | – | – | 82 | 0.2 | - | - | 98 | 0.1 | ||||||||||||||||||||||||
Net income | 1,155 | 1.3 | 794 | 1.0 | ||||||||||||||||||||||||||||
Net income attributable to non-controlling interest | 376 | 0.6 | 358 | 0.7 | (565 | ) | (0.6 | ) | (550 | ) | (0.7 | ) | ||||||||||||||||||||
Net income attributable to SPAR Group, Inc. | $ | 208 | 0.4 | % | $ | (87 | ) | (0.2 | )% | $ | 590 | 0.7 | % | $ | 244 | 0.3 | % | |||||||||||||||
Net Revenue
Net revenue for the sixnine months ended JuneSeptember 30, 2014, was $59.0$90.0 million, compared to $52.4$80.2 million for the sixnine months ended JuneSeptember 30, 2013, an increase of $6.6$9.8 million or 12.5%12%.
Domestic net revenue totaled $23.6$35.3 million in the sixnine months ended JuneSeptember 30, 2014, compared to $21.1$32.4 million for the same period in 2013. Domestic net revenue increase of approximately $2.5$2.9 million or 12.0%9% was due primarily to incremental project work compared to the same period in 2013.
SPAR Group, Inc. and Subsidiaries
International net revenue totaled $35.4$54.7 million for the sixnine months ended JuneSeptember 30, 2014, compared to $31.3$47.8 million for the same period in 2013, an increase of $4.1$6.9 million or 12.8%15%. The increase in net revenue was primarily due to incremental revenue from the integration of the acquisitions in India and increased revenue in Mexico, Japan, China, South Africa and Canada, partially offset by lower revenue in China, Australia and Turkey.
Cost of Revenue
The Company's cost of revenue consists of on-site labor and field administration fees, travel and other direct labor-related expenses and was 76.4% of its net revenue for both the sixnine month periods ended JuneSeptember 30, 2014, and 2013.
Domestic cost of revenue was 70.3%69.4% of net revenue for the sixnine months ended JuneSeptember 30, 2014, and 69.3%69.4% of net revenue for the sixnine months ended JuneSeptember 30, 2013. The increase in cost of revenue as a percentage of net revenue of 1.0 percentage points was due primarily to an unfavorable mix of higher cost project work compared to last year. For the sixnine months ended JuneSeptember 30, 2014 and 2013, approximately 81%82% and 85%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, SPAR Business Services, Inc. ("SBS"), and SPAR Administrative Services, Inc. ("SAS"), respectively, and approximately 8% and 9%6% of the Company's domestic cost of revenues for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively, resulted from in-store merchandiser specialist services purchased from certain of the Company's other affiliates, National Retail Source, LLC ("NRS"), and prior to August 1, 2013, National Merchandising of America, Inc. ("NMA") (See Note 6 to the Consolidated Financial Statements -Related-Party Transactions).
Internationally, the cost of revenue decreased to 80.4%80.9% of net revenue for the sixnine months ended JuneSeptember 30, 2014, compared to 81.1%81.2% of net revenue for the sixnine months ended JuneSeptember 30, 2013. The decrease in the cost of revenue percentage decrease of 0.7 percentage points0.3% was primarily due to lower cost margin improvementsbusiness in Mexico, South Africa, China and Japan partially offset by higher cost margin business in India and Turkey.
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 $12.2$18.5 million and $11.2$16.9 million for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively.
Domestic selling, general and administrative expenses totaled $6.1$9.0 million for sixnine months ended JuneSeptember 30, 2014, compared to $5.6$8.7 million for the sixnine months ended JuneSeptember 30, 2013. The increase of $500,000$300,000 was primarily due to the Market Force Information (“MFI”) and employee stock compensation expense related to the acceleration of the Restricted Stock Unit awards for the former/retired CEO.CEO, and increased accounting fees.
International selling, general and administrative expenses totaled $6.1$9.5 million for the sixnine months ended JuneSeptember 30, 2014, compared to $5.6$8.2 million for the same period in 2013. The increase of approximately $500,000$1.3 million was primarily attributable to increases in Mexico, China, Japan and JapanSouth Africa in support of the revenue growth for the period, partially offset by a decrease in Australia.period.
Depreciation and Amortization
Depreciation and amortization charges totaled $830,000$1.3 million for the sixnine months ended JuneSeptember 30, 2014, and $710,000$1.1 million for the same period in 2013. The increase of $120,000$200,000 is primarily attributable to amortization related to intangible assets recordedan increase in valuing recent acquisitions of MFI and CMR.capitalized software.
Interest Expense
The Company's net interest expense was $84,000$128,000 and $51,000$80,000 for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. The increase in interest expense was due primarily to increased borrowing in the United States and Canada.
SPAR Group, Inc. and Subsidiaries
Other Income(Income) Expense, Net
Other income totaled $113,000$202,000 and $69,000$73,000 for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively.
Income Taxes
The income tax provision totaled $352,000$373,000 for the sixnine months ended JuneSeptember 30, 2014 and $338,000$200,000 for the sixnine months ended JuneSeptember 30, 2013.
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 $376,000$565,000 and $358,000$550,000 for the sixnine months ended JuneSeptember 30, 2014 and JuneSeptember 30, 2013, respectively.
Net Income (Loss)
The Company reported net income of $208,000$590,000 for the sixnine months ended JuneSeptember 30, 2014, or $0.01$0.03 per diluted share, compared to a net loss of $87,000,$244,000, or $0.00$0.01 per diluted share, for the corresponding period last year.
Liquidity and Capital Resources
In the sixnine months ended JuneSeptember 30, 2014, the Company had a net income before non-controlling interest of $584,000.$1.2 million. .
Net cash provided by operating activities was $552,000approximately $4.5 million and $4.4$4.8 million for the sixnine months ended JuneSeptember 30, 2014 and 2013, respectively. The net cash provided by operating activities was primarily due to net income and an increase in accrued expenses, partially offset by an increase in accounts receivable.receivable and a decrease in accounts payable.
Net cash used in investing activities for the sixnine months ended JuneSeptember 30, 2014, and JuneSeptember 30, 2013, was approximately $674,000$1.5 million and $2.1$2.3 million, respectively. The net cash used in investing activities in 2014 was due to fixed asset additions. The main difference in cash used in investing activities year-over-year is the $1.3 million investment to acquire the MFI business in 2013.
Net cash provided by financing activities for the sixnine months ended JuneSeptember 30, 2014, was approximately $2.0 million,$19,000, compared to $513,000$690,000 used in 2013. Net cash provided by financing activities was primarily from increased borrowing on lines of credit.credit partially offset by the purchase of treasury shares.
The above activity resulted in an increase in cash and cash equivalents for the sixnine months ended JuneSeptember 30, 2014 of $1.9$2.8 million.
At JuneSeptember 30, 2014, the Company had net working capital of $16.6$14.8 million, as compared to net working capital of $13.6 million at December 31, 2013. The Company's current ratio was 2.2 and 2.1 at Juneboth September 30, 2014 and December 31, 2013, respectively.2013.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's accounting policies for financial instruments and disclosures relating to financial instruments require that the Company's consolidated balance sheets include the following financial instruments: cash and cash equivalents, accounts receivable, accounts payable and lines of credit. The Company carries current assets and liabilities at their stated or face amounts in its consolidated financial statements, as the Company believes those amounts approximate the fair value for these items because of the relatively short period of time between origination of the asset or liability and their expected realization or payment. The Company monitors the risks associated with asset and liability positions, as well as interest rates. The Company's investment policy objectives require the preservation and safety of the principal, and the maximization of the return on investment based upon its safety and liquidity objectives.
SPAR Group, Inc. and Subsidiaries
The Company is exposed to market risk related to the variable interest rate on its lines of credit, both in its United States subsidiaries (i.e., the Domestic Merchandising Services Division) and in its International (non-U.S.) subsidiaries (i.e., the International Merchandising Services Division). At JuneSeptember 30, 2014, the Company's outstanding lines of credit and other debt totaled approximately $6.5$4.6 million, as noted in the table below (in thousands):
Location | Variable Interest Rate(1) | US Dollars(2) | Variable Interest Rate(1) | US Dollars(2) | ||||||||||||
United States | 2.8% | $ | 5,799 | 2.8% | $ | 4,054 | ||||||||||
International | 0.1%-7.1% | 662 | 0.1%-7.1% | 592 | ||||||||||||
| $ | 6,461 | $ | 4,646 | |||||||||||||
(1) | Based on interest rate at |
(2) | Based on exchange rate at |
The Company has foreign currency exposure associated with its international subsidiaries. In both 2014 and 2013, these exposures are primarily concentrated in the South African Rand, the Canadian Dollar, the Mexican Peso, the Australian Dollar and the Japanese Yen.
Item 4. Controls and Procedures
Management's Report on Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the registrant, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management has designed such internal control over financial reporting by the Company to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
The Company's management has evaluated the effectiveness of the Company's internal control over financial reporting using the "Internal Control – Integrated Framework (1992)" created by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") framework. Based on this evaluation, management has concluded that internal controls over financial reporting were effective as of JuneSeptember 30, 2014.
Management's Evaluation of Disclosure Controls and Procedures
The Company's chief executive officer and chief financial officer have each reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this report, as required by Exchange Act Rules 13a-15(b) and Rule 15d-15(b). Based on that evaluation, the chief executive officer and chief financial officer have each concluded that the Company's current disclosure controls and procedures are effective to insure that the information required to be disclosed by the Company in reports it files, or submits under the Exchange Act were recorded, processed, summarized and reported within the time period specified in the Commission'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 submits under the Exchange Act is accumulated and communicated to the 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.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's secondthird quarter of its 2014 fiscal year that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
SPAR Group, Inc. and Subsidiaries
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various legal actions and administrative proceedings arising in the normal course of business. See Note 910 to Consolidated Financial Statements –Commitments and Contingencies.
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 SGRP's Annual Report on Form 10-K for the fiscal year ended December 31, 2013, as filed with the Securities and Exchange Commission (the "SEC") on March 31, 2014 (the "2013 Annual Report"), which risk factors are incorporated by reference into this Quarterly Report. There have been no material changes in the Company's risk factors since those reports.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 2(a): Not applicable
Item 2(b): Not applicable
Item 2(c): Not applicable
Item 3. Defaults upon Senior Securities
Item 3(a): Defaults under Indebtedness: None.
Item 3(b): Defaults under Preferred Stock: None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
SPAR Group, Inc. and Subsidiaries
Item 6. Exhibits
31.1 | Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
31.2 | Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
32.1 | Certification of the CEO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
32.2 | Certification of the CFO pursuant to 18 U.S.C. Section 1350 adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, as filed herewith. |
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101.INS* | XBRL Instance | ||
101.SCH* | XBRL Taxonomy Extension Schema | ||
101.CAL* | XBRL Taxonomy Extension Calculation |
SPAR Group, Inc. and Subsidiaries
101.DEF* | XBRL Taxonomy Extension Definition | |
101.LAB* | XBRL Taxonomy Extension Labels | |
101.PRE* | XBRL Taxonomy Extension Presentation | |
* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SPAR Group, Inc. and Subsidiaries
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: | SPAR Group, Inc., Registrant | ||
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| By: | /s/ James R. Segreto | |
| James R. Segreto | ||
| Chief Financial Officer, Treasurer, | |||
| Secretary and duly authorized signatory | |||
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