UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ________________ FORM 10-Q |
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the third quarterly period ended September 30, 2022.30, 2017.
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from __________ to __________.
Commission file number 0-27408
SPAR GROUP, INC.
(Exact name of Registrant as specified in its charter)
| |
| |
| |
Delaware | 33-0684451 |
(State or other jurisdiction of |
|
| 48326 |
(Address of principal executive | (Zip Code) |
Registrant'sRegistrant's telephone number, including area code: (914) 332-4100(248) 364-7727
Indicate by check mark whether the registrantRegistrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12twelve months (or for such shorter period that the registrantRegistrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
☒days. Yes ☒ No ☐ No
Indicate by check mark whether the registrantRegistrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrantRegistrant was required to submit and post such files).
☒ Yes ☒ No ☐ No
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer,, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company"company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.). (Check one):
Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Non-Accelerated Filer | Smaller reporting |
| |
| Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrantRegistrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.Act ☐
Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) .Act.) Yes ☐ YesNo ☒ No
The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on March 31, 2022, based on the closing price of the Common Stock as reported by the Nasdaq Capital Market on such date, was approximately $14.2 million.
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading
| Name of each exchange on which registered |
Common | SGRP | Nasdaq |
| The number of shares of the Registrant's Common Stock |
Index
PART I: | FINANCIAL INFORMATION |
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| PART II: | OTHER INFORMATION | ||
Item 1 | |||
Item 1A |
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Item 2 | |||
Item 3 | |||
Item 4 | |||
Item 5 | |||
Item 6 | |||
SIGNATURES | |||
PART I: | FINANCIAL INFORMATION |
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|
Condensed Consolidated Financial Statements |
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Balance SheetsStatements of Income and Comprehensive Income (Loss)
(unaudited)
(In thousands, except share and per share data)
September 30, 2017 | December 31, | |||||||
| (Unaudited) | (revised) (1) | |||||||
Assets |
|
| ||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 7,662 | $ | 7,324 | ||||
Accounts receivable, net | 36,824 | 33,669 | ||||||
Prepaid expenses and other current assets | 1,629 | 1,299 | ||||||
Total current assets | 46,115 | 42,292 | ||||||
Property and equipment, net | 2,551 | 2,536 | ||||||
Goodwill | 1,841 | 1,847 | ||||||
Intangible assets, net | 1,900 | 2,340 | ||||||
Deferred income taxes | 4,468 | 4,694 | ||||||
Other assets | 1,683 | 1,142 | ||||||
Total assets | $ | 58,558 | $ | 54,851 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 7,783 | $ | 5,567 | ||||
Accrued expenses and other current liabilities | 13,598 | 9,766 | ||||||
Due to affiliates | 4,008 | 3,349 | ||||||
Customer incentives and deposits | 1,587 | 1,305 | ||||||
Lines of credit and short-term loans | 6,222 | 9,778 | ||||||
Total current liabilities | 33,198 | 29,765 | ||||||
Long-term debt and other liabilities | 33 | 4 | ||||||
Total liabilities | 33,231 | 29,769 | ||||||
Commitments and Contingencies – See Note 9 | ||||||||
Equity: | ||||||||
SPAR Group, Inc. equity | ||||||||
Preferred stock, $.01 par value: Authorized and available shares– 2,445,598 Issued and outstanding shares– None – September 30, 2017, and December 31, 2016 | – | – | ||||||
Common stock, $.01 par value: Authorized shares – 47,000,000 Issued shares – 20,680,717 – September 30, 2017, and December 31, 2016 | 207 | 207 | ||||||
Treasury stock, at cost 115,123 shares – September 30, 2017, and 37,877 shares – December 31, 2016 | (127 | ) | (51 | ) | ||||
Additional paid-in capital | 16,234 | 16,093 | ||||||
Accumulated other comprehensive loss | (2,060 | ) | (2,407 | ) | ||||
Retained earnings | 6,246 | 5,835 | ||||||
Total SPAR Group, Inc. equity | 20,500 | 19,677 | ||||||
Non-controlling interest | 4,827 | 5,405 | ||||||
Total equity | 25,327 | 25,082 | ||||||
Total liabilities and equity | $ | 58,558 | $ | 54,851 | ||||
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|
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Net revenues | $ | 69,832 | $ | 67,423 | $ | 196,626 | $ | 195,696 | ||||||||
Related party - cost of revenues | 2,535 | 2,109 | 7,201 | 5,952 | ||||||||||||
Cost of revenues | 54,457 | 52,704 | 151,806 | 152,869 | ||||||||||||
Gross profit | 12,840 | 12,610 | 37,619 | 36,875 | ||||||||||||
Selling, general and administrative expense | 10,614 | 9,426 | 29,952 | 28,020 | ||||||||||||
Depreciation and amortization | 506 | 509 | 1,524 | 1,573 | ||||||||||||
Operating income | 1,720 | 2,675 | 6,143 | 7,282 | ||||||||||||
Interest expense | 270 | 124 | 595 | 402 | ||||||||||||
Other income, net | (126 | ) | (137 | ) | (363 | ) | (208 | ) | ||||||||
Income before income tax expense | 1,576 | 2,688 | 5,911 | 7,088 | ||||||||||||
Income tax expense | 676 | 549 | 1,942 | 2,036 | ||||||||||||
Net income | 900 | 2,139 | 3,969 | 5,052 | ||||||||||||
Net income attributable to non-controlling interest | (932 | ) | (959 | ) | (2,180 | ) | (2,441 | ) | ||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | (32 | ) | $ | 1,180 | $ | 1,789 | $ | 2,611 | |||||||
Basic and diluted income (loss) per common share: | $ | (0.00 | ) | $ | 0.06 | $ | 0.08 | $ | 0.12 | |||||||
Weighted average common shares – basic | 22,227 | 21,295 | 21,873 | 21,248 | ||||||||||||
Weighted average common shares – diluted | 22,227 | 21,589 | 22,010 | 21,592 | ||||||||||||
Net income | $ | 900 | $ | 2,139 | $ | 3,969 | $ | 5,052 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | (1,085 | ) | (1,352 | ) | (5,021 | ) | (2,696 | ) | ||||||||
Comprehensive income (loss) | (185 | ) | 787 | (1,052 | ) | 2,356 | ||||||||||
Comprehensive loss (income) attributable to non-controlling interest | (303 | ) | (311 | ) | 1,696 | (423 | ) | |||||||||
Comprehensive income (loss) attributable to SPAR Group, Inc. | $ | (488 | ) | $ | 476 | $ | 644 | $ | 1,933 | |||||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Income and Comprehensive Balance SheetsIncome (Loss)
(unaudited)(unaudited)
(In thousands, except share and per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
(revised) (1) | (revised) (1) | |||||||||||||||
Net revenues | $ | 48,752 | $ | 33,438 | $ | 131,361 | $ | 89,781 | ||||||||
Cost of revenues | 39,960 | 26,162 | 105,563 | 69,309 | ||||||||||||
Gross profit | 8,792 | 7,276 | 25,798 | 20,472 | ||||||||||||
Selling, general and administrative expense | 7,477 | 6,360 | 21,988 | 17,637 | ||||||||||||
Depreciation and amortization | 487 | 486 | 1,526 | 1,459 | ||||||||||||
Operating income | 828 | 430 | 2,284 | 1,376 | ||||||||||||
Interest expense | 110 | 51 | 117 | 111 | ||||||||||||
Other (income), net | (78 | ) | (78 | ) | (275 | ) | (183 | ) | ||||||||
Income before income tax expense | 796 | 457 | 2,442 | 1,448 | ||||||||||||
Income tax expense (benefit) | 210 | (31 | ) | 907 | 200 | |||||||||||
Net income | 586 | 488 | 1,535 | 1,248 | ||||||||||||
Net income attributable to non-controlling interest | (340 | ) | (546 | ) | (1,189 | ) | (1,164 | ) | ||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 246 | $ | (58 | ) | $ | 346 | $ | 84 | |||||||
Basic and diluted income per common share: | $ | 0.01 | $ | – | $ | 0.02 | $ | – | ||||||||
Weighted average common shares – basic | 20,602 | 20,607 | 20,633 | 20,580 | ||||||||||||
Weighted average common shares – diluted | 21,320 | 20,607 | 21,331 | 21,299 | ||||||||||||
Net income | $ | 586 | $ | 488 | $ | 1,535 | $ | 1,248 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Foreign currency translation adjustments | (61 | ) | 206 | 681 | (495 | ) | ||||||||||
Comprehensive income | 525 | 694 | 2,216 | 753 | ||||||||||||
Comprehensive income attributable to non-controlling interest | (318 | ) | (651 | ) | (1,523 | ) | (807 | ) | ||||||||
Comprehensive income (loss) attributable to SPAR Group, Inc. | $ | 207 | $ | 43 | $ | 693 | $ | (54 | ) | |||||||
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See accompanying notes.
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
| ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash, cash equivalents and restricted cash | $ | 12,121 | $ | 13,473 | ||||
Accounts receivable, net | 66,499 | 54,171 | ||||||
Prepaid expenses and other current assets | 7,688 | 4,382 | ||||||
Total current assets | 86,308 | 72,026 | ||||||
Property and equipment, net | 2,970 | 2,929 | ||||||
Operating lease right-of-use assets | 1,192 | 1,781 | ||||||
Goodwill | 4,169 | 4,166 | ||||||
Intangible assets, net | 2,109 | 2,295 | ||||||
Deferred income taxes | 5,256 | 4,468 | ||||||
Other assets | 2,200 | 1,351 | ||||||
Total assets | $ | 104,204 | $ | 89,016 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 12,640 | $ | 8,943 | ||||
Accrued expenses and other current liabilities | 23,783 | 22,031 | ||||||
Due to affiliates | 2,979 | 3,270 | ||||||
Customer incentives and deposits | 2,761 | 3,901 | ||||||
Lines of credit and short-term loans | 18,905 | 11,042 | ||||||
Current portion of operating lease liabilities | 509 | 1,019 | ||||||
Total current liabilities | 61,577 | 50,206 | ||||||
Operating lease liabilities, less current portion | 683 | 762 | ||||||
Long-term debt and other liabilities | 2,084 | 700 | ||||||
Total liabilities | 64,344 | 51,668 | ||||||
Commitments and contingencies – See Note 8 | ||||||||
Equity: | ||||||||
SPAR Group, Inc. equity | ||||||||
Preferred stock, Series - A, $.01 par value: Authorized shares– 2,445,598 Issued and outstanding shares – None – Balance at September 30, 2022 and December 31, 2021 | - | - | ||||||
Preferred stock, Series - B. $.01 par value: Authorized shares– 2,000,000; Issued shares – 1,017,113 – Balance at September 30, 2022 and none at December 31, 2021 | 11 | - | ||||||
Common stock, $.01 par value: Authorized shares – 47,000,000; Issued shares – 22,681,599 – Balance at September 30, 2022, and 21,320,414 – December 31, 2021 | 227 | 213 | ||||||
Treasury stock, at cost 201,980 shares – Balance at September 30, 2022 and 54,329 shares – Balance at December 31, 2021 | (285 | ) | (104 | ) | ||||
Additional paid-in capital | 20,951 | 17,231 | ||||||
Accumulated other comprehensive loss | (6,174 | ) | (5,028 | ) | ||||
Retained earnings | 9,228 | 7,439 | ||||||
Total SPAR Group, Inc. equity | 23,958 | 19,751 | ||||||
Non-controlling interest | 15,902 | 17,597 | ||||||
Total equity | 39,860 | 37,348 | ||||||
Total liabilities and equity | $ | 104,204 | $ | 89,016 | ||||
SPAR Group, Inc. and Subsidiaries
Consolidated Statement of Equity
(unaudited)(revised) (1)
(In thousands)
Common Stock | Treasury Stock | Additional | Accumulated Other | Non- | ||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Paid-In | Comprehensive | Retained Earnings | Controlling Interest | Total | ||||||||||||||||||||||||||||
Balance at January 1, 2017 | 20,681 | $ | 207 | 38 | $ | (51 | ) | $ | 16,093 | $ | (2,407 | ) | $ | 5,835 | $ | 5,405 | $ | 25,082 | ||||||||||||||||||
Share-based compensation | – | – | – | – | 178 | – | – | – | 178 | |||||||||||||||||||||||||||
Purchase of treasury shares | – | – | 111 | (121 | ) | – | – | – | – | (121 | ) | |||||||||||||||||||||||||
Reissued treasury shares – RSU's | – | – | (12 | ) | 16 | (16 | ) | – | – | – | – | |||||||||||||||||||||||||
Exercise of stock options | – | – | (22 | ) | 29 | (21 | ) | – | – | – | 8 | |||||||||||||||||||||||||
Distributions to non-controlling investors | – | – | – | – | – | – | – | (2,101 | ) | (2,101 | ) | |||||||||||||||||||||||||
Adoption of ASU 2016-09 (Note 12) | – | – | – | – | – | – | 65 | – | 65 | |||||||||||||||||||||||||||
Other comprehensive income | – | – | – | – | – | 347 | – | 334 | 681 | |||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | 346 | 1,189 | 1,535 | |||||||||||||||||||||||||||
Balance at September 30, 2017 | 20,681 | $ | 207 | 115 | $ | (127 | ) | $ | 16,234 | $ | (2,060 | ) | $ | 6,246 | $ | 4,827 | $ | 25,327 | ||||||||||||||||||
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See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated StatementsStatement of Cash FlowsEquity
(unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2017 | 2016 | |||||||
Operating activities | ||||||||
Net income | $ | 1,535 | $ | 1,248 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 1,526 | 1,459 | ||||||
Bad debt expense, net of recoveries | 93 | 317 | ||||||
Share based compensation | 178 | 271 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (3,250 | ) | (4,643 | ) | ||||
Prepaid expenses and other assets | (583 | ) | (105 | ) | ||||
Accounts payable | 2,234 | 1,000 | ||||||
Accrued expenses, other current liabilities and customer incentives and deposits | 4,679 | 2,548 | ||||||
Net cash provided by operating activities | 6,412 | 2,095 | ||||||
Investing activities | ||||||||
Purchases of property and equipment and capitalized software | (1,046 | ) | (1,153 | ) | ||||
Purchases of Brazil subsidiary, net of cash | – | (306 | ) | |||||
Net cash used in investing activities | (1,046 | ) | (1,459 | ) | ||||
Financing activities | ||||||||
Net (payments) borrowing on lines of credit | (2,953 | ) | 2,015 | |||||
Proceeds from stock options exercised | 8 | 22 | ||||||
Proceeds from local investors in Brazil | – | 102 | ||||||
Payments on term debt | (543 | ) | (21 | ) | ||||
Payments on capital lease obligations | (15 | ) | – | |||||
Purchase of treasury shares | (121 | ) | (12 | ) | ||||
Distribution to non-controlling investors | (2,101 | ) | (286 | ) | ||||
Net cash (used in) provided by financing activities | (5,725 | ) | 1,820 | |||||
Effect of foreign exchange rate changes on cash | 697 | (672 | ) | |||||
Net change in cash and cash equivalents | 338 | 1,784 | ||||||
Cash and cash equivalents at beginning of year | 7,324 | 5,718 | ||||||
Cash and cash equivalents at end of period | $ | 7,662 | $ | 7,502 | ||||
Supplemental disclosure of cash flows information | ||||||||
Interest paid | $ | 216 | $ | 108 | ||||
Income taxes paid | $ | 247 | $ | 126 | ||||
Increase in deferred tax asset due to adoption of ASU 2016-09 (Note 12) | $ | 65 | $ | - | ||||
Common Stock | Series B Preferred Stock | Treasury Stock | Additional | Accumulated Other | Non- | |||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Loss | Retained Earnings | Controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||
Balance at January 1, 2022 | 21,320 | $ | 213 | - | $ | - | 54 | $ | (104 | ) | $ | 17,231 | $ | (5,028 | ) | $ | 7,439 | $ | 17,597 | $ | 37,348 | |||||||||||||||||||||||
Share-based compensation | - | - | - | - | - | - | 150 | - | - | - | 150 | |||||||||||||||||||||||||||||||||
Majority Shareholder Agreement | - | - | 2,000 | 20 | - | - | 3,248 | - | - | - | 3,268 | |||||||||||||||||||||||||||||||||
Conversion of preferred stock to common stock | 525 | 5 | (350 | ) | (3 | ) | - | - | - | - | - | - | 2 | |||||||||||||||||||||||||||||||
Other comprehensive (loss) | - | - | - | - | - | - | - | 1,602 | - | (1,976 | ) | (374 | ) | |||||||||||||||||||||||||||||||
Net income | - | - | - | - | - | - | - | - | 672 | 783 | 1,455 | |||||||||||||||||||||||||||||||||
Balance at March 31, 2022 | 21,845 | $ | 218 | 1,650 | $ | 17 | 54 | $ | (104 | ) | $ | 20,629 | $ | (3,426 | ) | $ | 8,111 | $ | 16,404 | $ | 41,849 | |||||||||||||||||||||||
Share-based compensation | - | - | - | - | - | - | 130 | - | - | - | 130 | |||||||||||||||||||||||||||||||||
Purchase of Treasury shares | (74 | ) | - | - | - | 74 | (89 | ) | 1 | - | - | - | (88 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | - | - | - | (2,237 | ) | - | (1,325 | ) | (3,562 | ) | ||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | - | - | - | - | - | 1,149 | 465 | 1,614 | |||||||||||||||||||||||||||||||||
Balance at June 30, 2022 | 21,771 | $ | 218 | 1,650 | $ | 17 | 128 | $ | (193 | ) | $ | 20,760 | $ | (5,663 | ) | $ | 9,260 | $ | 15,544 | $ | 39,943 | |||||||||||||||||||||||
Share-based compensation | – | – | – | – | – | – | 309 | – | – | – | 309 | |||||||||||||||||||||||||||||||||
Majority Shareholder agreement | 949 | 9 | (633) | (6 | ) | – | – | – | – | – | – | 3 | ||||||||||||||||||||||||||||||||
| Exercise of stock options | 38 | – | – | – | – | – | (118 | ) | – | – | – | (118 | ) | |||||||||||||||||||||||||||||||
Purchase of treasury shares | (74 | ) | – | – | – | 74 | (92 | ) | – | – | – | – | (92 | ) | ||||||||||||||||||||||||||||||
Other comprehensive income (loss) | – | – | – | – | – | – | – | (511 | ) | – | (574 | ) | (1,085 | ) | ||||||||||||||||||||||||||||||
| Retirement of Shares | (3) | – | – | – | – | – | – | – | – | – | – | |||||||||||||||||||||||||||||||||
Net income (loss) | – | – | – | – | – | – | – | – | (32 | ) | 932 | 900 | ||||||||||||||||||||||||||||||||
Balance at September 30, 2022 | 22,681 | $ | 227 | 1,017 | $ | 11 | 202 | $ | (285 | ) | $ | 20,951 | $ | (6,174 | ) | $ | 9,228 | $ | 15,902 | $ | 39,860 | |||||||||||||||||||||||
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statement of Equity
(unaudited continued)
(In thousands)
Common Stock | Series B Preferred Stock | Treasury Stock | Additional | Accumulated Other | Non- | |||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Paid-In Capital | Comprehensive Loss | Retained Earnings | Controlling Interest | Total Equity | ||||||||||||||||||||||||||||||||||||||||||
Balance at January 1, 2021 | 21,122 | $ | 211 | - | $ | - | 2 | $ | (2 | ) | $ | 16,645 | $ | (3,913 | ) | $ | 9,218 | $ | 16,463 | $ | 38,622 | |||||||||||||||||||||||||||||||
| - | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 131 | 1 | - | - | - | - | (66 | ) | - | - | - | (65 | ) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | - | - | 99 | - | - | - | 99 | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | - | - | - | (198 | ) | - | (1,637 | ) | (1,835 | ) | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | - | - | - | - | - | - | - | - | 917 | 864 | 1,781 | |||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | 21,253 | $ | 212 | - | $ | - | 2 | $ | (2 | ) | $ | 16,678 | $ | (4,111 | ) | $ | 10,135 | $ | 15,690 | $ | 38,602 | |||||||||||||||||||||||||||||||
Exercise of stock options | 16 | 1 | - | - | - | - | (4 | ) | - | - | - | (3 | ) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation | - | - | - | - | - | - | 183 | - | - | - | 183 | |||||||||||||||||||||||||||||||||||||||||
Other changes to non-controlling interest | - | - | - | - | - | - | - | - | - | 4 | 4 | |||||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | - | - | - | - | - | - | - | 223 | - | 268 | 491 | |||||||||||||||||||||||||||||||||||||||||
Net income (loss) | - | - | - | - | - | - | - | - | 514 | 618 | 1,132 | |||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | 21,269 | $ | 213 | - | $ | - | 2 | $ | (2 | ) | $ | 16,857 | $ | (3,888 | ) | $ | 10,649 | $ | 16,580 | $ | 40,409 | |||||||||||||||||||||||||||||||
Share-based compensation | – | – | – | – | – | – | 221 | – | – | – | 221 | |||||||||||||||||||||||||||||||||||||||||
Exercise of stock options | 51 | – | – | – | – | – | (53 | ) | – | – | – | (53 | ) | |||||||||||||||||||||||||||||||||||||||
Purchase of treasury shares | - | – | - | – | – | – | 52 | (102 | ) | – | – | – | – | (102 | ) | |||||||||||||||||||||||||||||||||||||
Distribution to non-controlling investors | - | – | - | – | – | – | – | – | – | – | – | (40 | ) | (40 | ) | |||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | – | – | – | – | – | – | – | (703 | ) | – | (649 | ) | (1,352 | ) | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | – | – | – | – | – | – | – | – | 1,180 | 959 | 2,139 | |||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | 21,320 | $ | 213 | - | $ | - | 54 | $ | (104 | ) | $ | 17,025 | $ | (4,591 | ) | $ | 11,829 | $ | 16,850 | $ | 41,222 | |||||||||||||||||||||||||||||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(unaudited)
(In thousands)
Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Operating activities | ||||||||
Net income | $ | 3,969 | $ | 5,052 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities | ||||||||
Depreciation and amortization | 1,524 | 1,573 | ||||||
Non-cash lease expense | 589 | 786 | ||||||
Bad debt expense, net of recoveries | 35 | 100 | ||||||
Share-based compensation | 585 | 503 | ||||||
Majority stockholders change in control agreement | (420 | ) | - | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (12,283 | ) | (12,341 | ) | ||||
Prepaid expenses and other assets | (4,164 | ) | (1,997 | ) | ||||
Accounts payable | 3,708 | 2,308 | ||||||
Operating lease liabilities | (589 | ) | (786 | ) | ||||
Accrued expenses, other current liabilities and customer incentives and deposits | 2,884 | 5,921 | ||||||
Net cash provided (used in) by operating activities | (4,162 | ) | 1,119 | |||||
Investing activities | ||||||||
Purchases of property and equipment and capitalized software | (1,237 | ) | (1,432 | ) | ||||
| Acquisition of Business, net of cash acquired | - | (1,000) | ||||||
Net cash used in investing activities | (1,237 | ) | (2,432 | ) | ||||
Financing activities | ||||||||
Borrowings under line of credit | 33,151 | 58,045 | ||||||
Repayments under line of credit | (23,904 | ) | (53,510 | ) | ||||
Payments from stock options exercised | - | (121 | ) | |||||
| Distribution to non-controlling investors | - | (40 | ) | |||||
Net cash provided by financing activities | 9,247 | 4,374 | ||||||
Effect of foreign exchange rate changes on cash | (5,200 | ) | (3,733 | ) | ||||
Net change in cash and cash equivalents | (1,352 | ) | (672 | ) | ||||
Cash, cash equivalents and restricted cash at beginning of period | 13,473 | 15,972 | ||||||
Cash, cash equivalents and restricted cash at end of period | $ | 12,121 | $ | 15,300 | ||||
Supplemental disclosure of cash flows information: | ||||||||
Interest paid | $ | 738 | $ | 493 | ||||
Income taxes paid | $ | 1,710 | $ | 1,822 | ||||
Non-cash Majority Stockholders Agreement Charges | $ | 3,270 | $ | - | ||||
See accompanying notes.
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. | Basis of Presentation |
Basis of Presentation and Consolidation
The unaudited, interimcondensed consolidated financial statements of SPAR Group, Inc., a Delaware corporation ("SGRP"), and its subsidiaries (together with SGRP, collectively, the "Company" or the "SPAR Group"), accompanying this Quarterly Report on Form 10-Q for the third quarter ended September 30, 2017 (this "Quarterly Report"), have been prepared in accordance with accounting principles generally accepted in the United States forof America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial informationreporting. All intercompany balances and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally acceptedtransactions have been eliminated in the United States for completeaccompanying condensed consolidated financial statements.
Unaudited Interim Consolidated Financial Information
The accompanying interim condensed consolidated balance sheet as of December 31, 2016, hasSeptember 30,2022 and the interim condensed consolidated statements of income, statements of comprehensive income (loss), and statements of equity for the three (3) and nine (9) months period ended September 30,2022 and 2021, statements of cash flows for the nine (9) months period ended September 30,2022 and 2021, and the related disclosures, are unaudited. In management’s opinion, the unaudited interim condensed consolidated financial statements have been compiled fromprepared on the Company'ssame basis as the audited consolidated balance sheet as of such date. In the opinion of management,financial statements and includes all normal and recurring adjustments considered necessary for athe fair presentation have been includedof the Company’s financial position as of September 30,2022, its results of operations for the three (3) and nine (9) months period ended September 30,2022 and 2021, and its cash flows for the nine (9) months period ended September 30,2022 and 2021 in theseaccordance with U.S. GAAP. The results for the nine (9) months period ended September 30,2022 are not necessarily indicative of the results to be expected for the full fiscal year or any other interim financial statements. However, these interimperiod.
These unaudited condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements and notes thereto for the Company as contained in the SGRP'sCompany's Annual Report on Form 10-K10-K for the year ended December 31, 2016, as filed with the Securities and Exchange Commission (the "SEC") on April 17, 2017 (the "2016 Annual Report"), and SGRP's Proxy Statement for its 2017 Annual Meeting of Stockholders 2021, as filed with the SEC on April 28, 2017 (the "2017 Proxy Statement"15, 2022, (the "Annual Report"). Particular attention should be given
2. | Business |
SPAR Group, Inc., a Delaware corporation (“SGRP”), and its subsidiaries (together with SGRP, “SPAR Group” or the “Company”, “We”, “Our”), is a global merchandising and brand marketing services company, providing a broad range of services to Items 1retailers, consumer goods manufacturers and 1Adistributors around the world. With more than 50 years of experience, a diverse network of merchandising specialists around the world working during the year, and long-term relationships with some of the 2016 Annual Report respectingworld’s leading businesses, we provide specialized capabilities across nine (9) countries and five (5) continents. Our unique combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates us from the competition.
The Company reports under three (3) segments: Americas, Asia-Pacific (“APAC”) and Europe, Middle East and Africa (“EMEA”). The Americas segment is comprised of the United States, Canada, Mexico, and Brazil, APAC is comprised of China, Japan, Australia, and India, and EMEA is comprised of South Africa.
Novel Coronavirus (Covid-19) Outbreak
The COVID-19 pandemic had an effect on the Company’s joint venture operation in China in the second quarter of 2022 The lock-down ended in June of 2022 and the business has been back in operation in most cases; however, there is still restriction in certain areas impacting the third quarter financial results. In March of 2022, China implemented zero tolerance COVID-19 policy and locked down Shanghai Province and surrounding districts, and as a result, operations of the Company's Business and Risk Factors, respectively, and the following parts of SGRP's 2017 Proxy Statement: (i) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, (ii) CORPORATE GOVERNANCE, (iii) EXECUTIVE COMPENSATION, DIRECTORS AND OTHER INFORMATION and (iv) EXECUTIVE COMPENSATION, EQUITY AWARDS AND OPTIONS. The Company's results of operationsjoint venture in China were impacted for the interim period are not necessarily indicative of its operating results for the entire year.
|
|
In connection with the preparationmost of the Company's consolidated financial statements for the three months ended March 31, 2017, the Company identified an errorsecond quarter and in the recognitionthird quarter. In the third quarter of accumulated other comprehensive loss both2022, the joint venture in the equity section of the consolidated balance sheet, consolidated statement of equity and the comprehensive loss portion of the consolidated statement of income and comprehensive loss. In accordance with Staff Accounting Bulletin ("SAB") No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, the Company evaluated the error and determined that the related impact was not material to the results of operations or financial position for any prior annual or interim period. The correction of this error required reclassification of $1.6 million between comprehensiveChina generated a net loss attributable to the CompanySPAR Group inc. of $73,000 and comprehensive loss attributable to non-controlling interest$348,000 for the yearthree and nine-months ended December 31, 2016. Accordingly, the Company corrected the consolidated balance sheetSeptember 30, 2022, respectively, as compared to net income of $25,000 and consolidated statement of income and comprehensive loss as of and$23,000 for the yearthree and nine-months ended December 31, 2016,September 30, 2021, respectively. The net loss generated by the joint venture was largely due to a decrease in revenues of $276,000 or 7% and will correct these errors$2.3 million or 22% as a result of the lockdown for all prior periods presented by revising the appropriate consolidated financial statements. Thethree and nine months ended September 30, 2022, respectively, as compared to three and nine months ended September 30, 2021, while expenses continued to be incurred for wages, office rent and administrative expenses. Management continues to actively monitor the situation and assess operational and cashflow impact to the consolidated balance sheet asdetermine course of September 30, 2016, and December 31, 2016, and the consolidated statements of income and comprehensive loss for the three and nine months ended September 30, 2016, and the year ended December 31, 2016, is as follows:actions.
Consolidated Balance Sheets (in thousands):
As of September 30, 2016 | As of December 31, 2016 | |||||||||||||||||||||||
As Reported | Adjusted | As Revised | As Reported | Adjusted | As Revised | |||||||||||||||||||
Accumulated other comprehensive loss | $ | (3,364 | ) | $ | 1,373 | $ | (1,991 | ) | $ | (3,995 | ) | $ | 1,588 | $ | (2,407 | ) | ||||||||
Total SPAR Group, Inc. equity | $ | 18,572 | $ | 1,373 | $ | 19,945 | $ | 18,089 | $ | 1,588 | $ | 19,677 | ||||||||||||
Non-controlling interest | $ | 6,574 | $ | (1,373 | ) | $ | 5,201 | $ | 6,993 | $ | (1,588 | ) | $ | 5,405 | ||||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
3. | Restricted Cash |
Consolidated StatementFifth Third CreditFacility
One of Incomethe Company’s consolidated subsidiaries, Resource Plus of North Florida, Inc. (“Resource Plus”), was a party to a revolving line of credit facility (the “Fifth Third Credit Facility”) with Fifth Third Bank for $3.5 million, with an expiration date of June 16,2022. The credit facility was terminated as of December 31, 2021.
Resource Plus closed the line of credit with Fifth Third Bank on March 11, 2022. Resource Plus has maintained a letter of credit with an existing $857,000 restricted cash balance with Fifth Third Bank in order to be in compliance with Resource Plus' workers compensation insurance policy.
The Company's total cash, cash equivalents and Comprehensive Lossrestricted cash, as presented in the consolidated statements of cash flow, is as follows (in thousands):
Three months ended September 30, 2016 | Nine months ended September 30, 2016 | |||||||||||||||||||||||
As Reported | Adjusted | As Revised | As Reported | Adjusted | As Revised | |||||||||||||||||||
Comprehensive income attributable to non-controlling interest | $ | (546 | ) | $ | (105 | ) | $ | (651 | ) | $ | (1,164 | ) | $ | 357 | $ | (807 | ) | |||||||
Comprehensive loss attributable to SPAR Group, Inc. | $ | 148 | $ | (105 | ) | $ | 43 | $ | (411 | ) | $ | 357 | $ | (54 | ) | |||||||||
| September 30, 2022 | December 31, 2021 | |||||||
| Cash, cash equivalents and restricted cash | $ | 11,264 | $ | 13,473 | ||||
| Restricted cash included in cash, cash equivalents and restricted cash | 857 | - | ||||||
| Total as presented in the consolidated statement of cash flows | $ | 12,121 | $ | 13,473 | ||||
Twelve months ended December 31, 2016 | ||||||||||||
As Reported | Adjusted | As Revised | ||||||||||
Comprehensive income attributable to non-controlling interest | $ | (1,583 | ) | $ | 572 | $ | (1,011 | ) | ||||
Comprehensive loss attributable to SPAR Group, Inc. | $ | (953 | ) | $ | 572 | $ | (381 | ) | ||||
|
|
The Company is a supplier of merchandising and other marketing services throughout the United States and internationally. The Company provides merchandising and other marketing services to manufacturers, distributors and retailers worldwide, primarily in mass merchandiser, office supply, grocery, drug, dollar, independent, convenience, toy, home improvement and electronics stores, as well as providing furniture and other product assembly services, audit services, in-store events, technology services and marketing research.
Merchandising services primarily consist of regularly scheduled, special project and other product services provided at the store level, and the Company may be engaged by either the retailer or the manufacturer. Those services may include restocking and adding new products, removing spoiled or outdated products, resetting categories in accordance with client or store schematics, confirming and replacing shelf tags, setting new sale or promotional product displays and advertising, replenishing kiosks, providing in-store event staffing and providing assembly services in stores, homes and offices. Other merchandising services include whole store or departmental product sets or resets, including new store openings, new product launches and in-store demonstrations, audit services, special seasonal or promotional merchandising, focused product support and product recalls. The Company also provides technology services and marketing research services.
As of September 30, 2017, the Company operates in 10 countries and divides its operations into two reportable segments: its Domestic Division, which has provided services in the United States of America since certain of its predecessors were formed in 1979, and its International Division, which began operations in May 2001 and provides similar merchandising, marketing, audit and in-store event staffing services in Australia, Brazil, Canada, China, India, Japan, Mexico, South Africa, and Turkey.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
| Earnings Per Share |
The following table sets forth the computations of basic and diluted netNet income (loss) per share (in thousands, except per share data):
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
Numerator: | ||||||||||||||||||||||||||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 246 | $ | (58 | ) | $ | 346 | $ | 84 | $ | (32 | ) | $ | 1,180 | $ | 1,789 | $ | 2,611 | ||||||||||||||
Denominator: | ||||||||||||||||||||||||||||||||
Weighted average shares used in basic net income per share calculation | 20,602 | 20,607 | 20,633 | 20,580 | ||||||||||||||||||||||||||||
Shares used in basic Net income (loss) per share calculation | 22,227 | 21,295 | 21,873 | 21,248 | ||||||||||||||||||||||||||||
Effect of diluted securities: | ||||||||||||||||||||||||||||||||
Stock options and unvested restricted shares | - | 294 | 137 | 344 | ||||||||||||||||||||||||||||
Shares used in diluted net income per share calculations | 22,227 | 21,589 | 22,010 | 21,592 | ||||||||||||||||||||||||||||
Weighted average shares used in diluted net income per share calculation | 21,320 | 20,607 | 21,331 | 21,299 | ||||||||||||||||||||||||||||
Basic and diluted net income per common share | $ | 0.01 | $ | – | $ | 0.02 | $ | – | ||||||||||||||||||||||||
Basic and diluted Net income (loss) per common share: | $ | 0.00 | $ | 0.06 | $ | 0.08 | $ | 0.12 | ||||||||||||||||||||||||
5. Credit FacilitiesFor the three-months ended September 30, 2022, the Company had 136,000 unvested restricted shares and stock options which were not included in the calculation because they would have an anti-dilutive effect.
Sterling Credit Facility:
SGRP and certain of its US and Canadian subsidiaries (namely SPAR Marketing Force, Inc., SPAR Assembly & Installation, Inc. (F/K/A SPAR National Assembly Services, Inc.), SPAR Group International, Inc., SPAR Trademarks, Inc., SPAR Acquisition, Inc., SPAR Canada, Inc.), and SPAR Canada Company ("SCC") (together with SGRP and SCC, each a "Borrower") are parties to a Revolving Loan and Security Agreement dated July 6, 2010, as amended in June 2011, July 2012, January 2013, July 2013, October 2013, June 2014, September 2015, December 2016, March 2017, April 2017, June 2017 and September 2017 (as amended, the "Sterling Loan Agreement"), with Sterling National Bank (the "Lender"), and their Secured Revolving Loan Note in the amended maximum principal amounts of $9.0 million (see below) to the Lender (as amended by all loan amendments, the "Sterling Note"), to document and govern their credit facility with the Lender (including such agreement and note, the "Sterling Credit Facility"). The Sterling Credit Facility currently is scheduled to expire and the Borrowers' loans thereunder will become due on January 15, 2018.
The Sterling Loan Agreement currently requires the Borrowers to pay interest on the loans thereunder equal to the Agent's floating Prime Rate (as defined in such agreement) plus one half of one percent (1/2%) per annum, and a fee on the maximum unused line thereunder equal to one-eighth of one percent (0.125%) per annum.
Revolving loans of up to $9.0 million are available to the Borrowers under the Sterling Credit Facility based upon the borrowing base formula defined in the Sterling Loan Agreement (principally 85% of "eligible" US and Canadian accounts receivable less certain reserves). The Sterling Credit Facility is secured by substantially all of the assets of the Borrowers (other than SGRP's non-Canadian foreign subsidiaries, certain designated domestic subsidiaries, and their respective equity and assets).
The amendment to the Sterling Loan Agreement dated as of December 22, 2016, among other things, increased the maximum principal amount of the Secured Revolving Loan Note to $9.0 million until January 31, 2017, and increased the interest rate to Prime plus one half of one percent. The amendment to the Sterling Loan Agreement dated as of March 3, 2017, among other things, extended the Secured Revolving Loan Note of $9.0 million until July 6, 2017, and the amendment dated as of April 13, 2017, among other things, provided for a waiver of the Company's default on its Fixed Charge Ratio ("FCR") for the year ended December 31, 2016, and provided for an adjustment to its FCR for 2017. The June 27, 2017, amendment to the Sterling Loan Agreement extended the termination date to September 6, 2017. The September 6, 2017, amendment to the Sterling Loan Agreement extended the termination date to January 15, 2018.
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
5. | Credit Facilities and Other Debt |
Domestic Credit Facilities
North Mill Capital Credit Facility
The Company, under SPAR Marketing Force (“SMF”) and SPAR Canada Company ("SCC"), has a secured revolving credit facility in the United States and Canada (the "NM Credit Facility") with North Mill Capital, LLC, d/b/a SLR Business Credit ("NM").
In order to obtain, document and govern the NM Credit Facility, SGRP and certain of its direct and indirect subsidiaries in the United States and Canada, entered into an 18-month individual Loan and Security Agreements with NM dated as of April 10, 2019.
On January 5, 2021, the Company and NM entered into an agreement as of January 4, 2021, and effective as of December 31, 2020 (the "First Modification Agreement"), to extend the NM Credit Facility from October 10, 2021 to April 10, 2022, and increased the amounts of the credit facilities to $14.5 (USD) million in the United States and decreased the facility to $1.5 (CDN) million in Canada; in addition the First Modification Agreement increased SMF's borrowing base availability for unbilled receivables to up to 70% from January 1, 2021 through June 30, 2021, and increased the unbilled cap for SMF to $4.5 million (USD) from $3.9 million (USD).
The NM Credit Facility, as amended by the First Modification Agreement continued to require the Company to pay interest on the loans equal to: (A) Prime Rate designated by Wells Fargo Bank; plus (B) one hundred twenty-five basis points (1.25%) or a minimum of 6.75%. In addition, the Company continues to pay a facility fee to NM of 1.5% for the first$10.5 million loan balance, or $157,500 per year over the term of the agreement, plus a $15,000 one-time fee for each incremental $1 million increase in loan balance up to $14.5 million. Additionally, for the First Modification Agreement, SPAR paid NM a fee of $7,500 and agreed to reimburse NM's legal and documentation fees.
On March 22, 2021, the Company and NM executed and delivered a Second Modification Agreement effective as of April 1, 2021 (the "Second Modification Agreement"), pursuant to which NM and the Company agreed to extend the NM Loan Agreements from April 10, 2022 to October 10, 2023, and increased the amounts of the credit facilities for SMF to $16.5 (USD) million in the USA while the SCC facility remained at $1.5 (CDN) million in Canada; in addition, the Second Modification Agreement increased SMF's borrowing base availability for unbilled receivables to up to 70% permanently, and increased the unbilled cap for SMF to $5.5 (USD) million from $4.5 (USD) million. The NM Loan Agreements as amended by the Second Modification Agreement will require the Company to pay interest on the loans equal to: (A) Prime Rate designated by Wells Fargo Bank; plus; (B) one hundred twenty-five basis points (1.25%) or a minimum of 5.25%. In addition, the Company continues to pay a facility fee to NM of 0.8% (decreased from 1.5%) for the first$10.5 million loan balance, or $84,000 per year, over the term of the agreement, plus a $15,000 one-time fee for each incremental $1 million increase in loan balance up to $16.5 million. Additionally, the early termination fee has decreased from 1.0% to 0.85% of the advance limit.
On July 1, 2022, the Company and NM executed and delivered a Fourth Modification Agreement effective as of June 30, 2022 (the "Fourth Modification Agreement"), pursuant to which NM and the Company agreed to extend the NM Loan Agreements from October 10, 2023 to October 10, 2024, and increased the amounts of the credit facilities for SMF to $17.5 (USD) million in the USA while the SCC facility remained at $1.5 (CDN) million in Canada; in addition, the Fourth Modification Agreement increased SMF's borrowing base availability for billed receivables to up to 90% from 85%, and unbilled receivables to up to 80% from 70% permanently, and increased the unbilled cap for SMF to $6.5 (USD) million from $5.5 (USD) million. The NM Loan Agreements as amended by the Fourth Modification Agreement will require the Company to establish a permanent $500,000 availability reserve against the US Advance Limit. The remaining terms and conditions remain the same as the Second Modification Agreement.
On September 30, 2022, the aggregate interest rate was 6.46% per annum, and the outstanding loan balance was $16.7 million and on December 31, 2021, the aggregate interest rate was 5.25% per annum, and the outstanding loan balance was $9.7 million. Outstanding amounts are classified as short-term debt.
The NM Credit Facility contains certain financial and other restrictive covenants and also limits certain expenditures by the Company, including maintaining a positive trailing EBITDA for each Borrower, limits on non-ordinary course payments and transactions, incurring or guarantying indebtedness, increases in executive, officer or director compensation, capital expenditures and other investments. The Company was in compliance with such covenants as of September 30, 2022.
Resource Plus – Seller Notes
Effective with the closing of the Resource Plus acquisition in January 2018, the Company entered into promissory notes with the sellers totaling $2.3 million. The notes are payable in annual installments at various amounts due on December 31st of each year starting with December 31, 2018 and continuing through December 31, 2023. As such these notes are classified as both short term and long term for the appropriate amounts. The annual interest rate is 1.85% and the total balance owed at September 30, 2022 was approximately $1.0 million.
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
The Sterling Loan Agreement requires the Borrowers to maintain certain financial covenants, including maintenance by the Borrowers of a minimum combined tangible net worth of $7.4 million and minimum consolidated tangible net worth of $10.0 million, with those figures increasing by at least 50% of combined and consolidated net profit each year, respectively. In addition, the Borrowers and the Company must not exceed a maximum combined indebtedness to tangible net worth ratio of 3.0 to 1.0, and the Borrowers must maintain a minimum fixed charge coverage ratio of 1.5 to 1.0. Also, capital expenditures for the Borrowers cannot exceed $2.0 million during any fiscal year, and, on a consolidated basis, the Company's year-end operations may not result in a loss or deficit, as determined in accordance with GAAP. The Company was in compliance with its financial covenants at September 30, 2017.
International Credit Facilities:Facilities
SPARFACTS Australia Pty. Ltd. has a secured line of credit facility with Oxford Funding Pty Ltd. National Australia Bank, effective October 31, 2017, for $1.2 million$800,000 (Australian) or approximately $940,000$517,000 USD (based upon the exchange rate at September 30, 2017)2022). The facility provides for borrowing based upon a formula, as defined in the applicable loan agreement (principally 80% of eligible accounts receivable less certain deductions). The agreement expired on October 31, 2012, but was extended from month to month at the Company’s request. A new credit facility was signed in July 2017outstanding balance with National Australia Bank Limited and went into effect on October 31, 2017. The outstanding balance with Oxford as of September 30, 2017 2022 was $334,000 USD.$174,000 (Australian) or $113,000 USD and was $164,000 (Australian) or $118,000 USD as of December 31, 2021is due on demand.
On March 7, 2011, the Japanese subsidiary, SPAR FM Japan, Inc., a wholly owned subsidiary,China has secured a term loan with MizuhoIndustrial and Commercial Bank in the amount of 20.0China, effective December 21, 2021, for 2.0 million Yen (Japanese),Chinese Yuan or approximately $178,000 USD. The loan is payable in monthly installments of 238,000 Yen or approximately $2,100 USD at an interest rate of 0.1% per annum with a maturity date of February 28, 2018. The outstanding balance at September 30, 2017, was approximately 1.2 million Yen or $11,000$281,000 USD (based upon the exchange rate at September 30, 2017), all2022). The loan expires on November 4, 2022. The outstanding balance with Industrial and Commercial Bank of whichChina as of September 30,2022 was 2.0 million Chinese Yuan or $281,000 USD and is now classified as short term.due on demand.
On November 29, 2016, SPAR Brazil establishedChina has secured a lineloan with People's Bank of credit with Itau BankChina for 1.51.0 million Brazilian RealChinese Yuan or approximately $475,000$141,000 USD (based upon the exchange rate at September 30, 2017)2022). The line of credit expires November 29, 2017, loan expired on June 7, 2022 and the current interest ratesubsequently was not renewed. There is 2.08% per month. Theno outstanding balance at September 30, 2017 was zero.on this loan.
On December 26, 2016, SPAR BrazilChina has secured a term loan with BradescoIndustrial Bank for 2.03.0 million Brazilian RealChinese Yuan or approximately $633,000$422,000 USD (based upon the exchange rate at September 30, 2017)2022). The term loan is payable in monthly installments of 184,000 Brazilian Real or approximately $58,000 USD at anexpires on December 18, 2022. The annual interest rate was 4.0% as of 17.3%September 30,2022. The outstanding balance with a maturity dateIndustrial Bank as of December 15, 2017. As of September 30, 2017, 497,000 Brazilian Real2022 was 3.0 million Chinese Yuan or $157,000$422,000 USD was outstanding (based upon the exchange rate at September 30, 2017).and is due on demand.
SPAR TodopromoSGRP Meridian has secured a line of credit facilityloan with BBVA Bancomer BankInvestec Bank Ltd, for 5.030.0 million Mexican PesosSouth African Rand or approximately $274,000$1.7 million USD (based upon the exchange rate at September 30, 2017)2022). The revolving line of credit was securedloan expires on March 15, 2016, and expires March 2018. The variable interest rate is TIIE (Interbank Interest Rate) +4%, which resulted in an annual interest rate of 11.4% at the end of September 2017.July 13, 2023. The outstanding balance at with Investec Bank Ltd as of September 30, 2017 2022 was zero.approximately $18.4 million South African Rand or $1.0 million USD.
The Company had scheduled future maturities of loans as of September 30, 2017, approximately as follows (dollars in thousands):
Interest Rate as of September 30, 2017 | 2017 | 2018 | ||||||||||
USA - Sterling National Bank | 4.8 | % | $ | – | 5,720 | |||||||
Japan - Mizuho Bank | 0.1 | % | 7 | $ | 4 | |||||||
Australia - Oxford Funding Pty Ltd. | 6.4 | % | 334 | – | ||||||||
Brazil – Bradesco Bank | 17.3 | % | 157 | – | ||||||||
Total | $ | 498 | $ | 5,724 | ||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
Summary of the Company’s lines of credit and short-term loans (in thousands):
Interest Rate | ||||||||||||||||||||||||||||
as of | ||||||||||||||||||||||||||||
September 30, 2022 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | ||||||||||||||||||||||
Australia - National Australia Bank | 8.31 | % | 102 | - | - | - | - | - | ||||||||||||||||||||
China- Construction Bank | 4.15 | % | 281 | - | - | - | - | - | ||||||||||||||||||||
China- Industrial Bank | 4.00 | % | 422 | - | - | - | - | - | ||||||||||||||||||||
South Africa - Investec Bank Ltd. | 9.75 | % | 1,023 |
|
| - | - | |||||||||||||||||||||
USA - North Mill Capital d/b/a SLR | 6.46 | % | 16,777 | - | - | - | - | - | ||||||||||||||||||||
USA - Resource Plus Seller Notes | 1.85 | % | 300 | - | - | - | - | |||||||||||||||||||||
Total | $ | 18,905 | $ | - | $ | - | $ | - | $ | - | $ | – | ||||||||||||||||
Summary of Unused Company Credit and Other Debt Facilities (in thousands):
September 30, 2017 | December 31, 2016 | September 30, | December 31, | |||||||||||||
Unused Availability: | ||||||||||||||||
United States | $ | 3,280 | $ | 500 | ||||||||||||
2022 | 2021 | |||||||||||||||
Unused Availability: | ||||||||||||||||
United States / Canada | $ | 1,815 | $ | 5,319 | ||||||||||||
Australia | 606 | 688 | 416 | 455 | ||||||||||||
South Africa | 643 | - | ||||||||||||||
China | - | 157 | ||||||||||||||
Mexico | 274 | 241 | 374 | 743 | ||||||||||||
Brazil | 475 | – | ||||||||||||||
Total Unused Availability | $ | 4,635 | $ | 1,429 | $ | 3,248 | $ | 6,674 | ||||||||
Management believes that based upon the continuation of the Company'sCompany's existing credit facilities, projected results of operations, vendor payment requirements and other financing available to the Company (including amounts due to affiliates), sources of cash availability should be manageable and sufficient to support ongoing operations over the next year. However, delays in collection of receivables due from any of the Company's major clients, or a significant reduction in business from such clients and possible litigation expenses could have a material adverse effect on the Company's cash resources and its ongoing ability to fund operations. See Note 9 - Commitments and Contingencies: Legal Mattersand Potential Adverse Effects of the SBS Litigation, below.
|
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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 13, 2015 (the "Ethics Code"). The Ethics Code is intended to promote and reward honest, ethical, respectful and professional conduct by each Covered Person (as defined in the Ethics Code in his or her position with the Company anywhere in the world, including (among other things) serving each customer, dealing with each vendor and treating each other with integrity and respect, and behaving honestly, ethically and professionally with each customer, each vendor, each other and the Company. Article II of the Ethics Code specifically prohibits various forms of self-dealing and collusion and Article V of the Ethics Code generally prohibits each "Covered Person" (including SGRP's officers and directors) from engaging in any business activity that conflicts with his or her duties to the Company, and directs each "Covered Person" to avoid any activity or interest that is inconsistent with the best interests of the SPAR Group, in each case except for any "Approved Activity" (as such terms are defined in the Ethics Code). Examples of violations include (among other things) having any ownership interest in, acting as a director or officer of or otherwise personally benefiting from business with any competitor, customer or vendor of the Company other than pursuant to any Approved Activity. Approved Activities include (among other things) any contract with an affiliated person (each an "Approved Affiliate Contract") or anything else disclosed to and approved by SGRP's Board of Directors (the "Board"), its Governance Committee or its Audit Committee, as the case may be, as well as the ownership, board, executive and other positions held in and services and other contributions to affiliates of SGRP and its subsidiaries by certain directors, officers or employees of SGRP, any of its subsidiaries or any of their respective family members. The Company's senior management is generally responsible for monitoring compliance with the Ethics Code and establishing and maintaining compliance systems, including those related to the oversight and approval of conflicting relationships and transactions, subject to the review and oversight of SGRP's Governance Committee as provided in clause IV.11 of the Governance Committee's Charter, and SGRP's Audit Committee as provided in clause I.2(l) of the Audit Committee's Charter. The Governance Committee and Audit Committee each consist solely of independent outside directors.
SGRP'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 affiliate contracts and amendments thereto for its review and approval (to the extent approval is given), and these contracts are periodically (often annually) again reviewed, in accordance with the Audit Committee Charter, the Ethics Code, the rules of the Nasdaq Stock Market, Inc. ("Nasdaq"), and other applicable law to ensure that the overall economic and other terms will be (or continue to be) no less favorable to the Company than would be the case in an arms-length contract with an unrelated provider of similar services (i.e., its overall fairness to the Company including pricing and the ability to provide services at comparable performance levels). The Audit Committee periodically reviews all related party relationships and transactions described below.
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
In addition, in order to (among other things) assist
6. | Related-Party Transactions |
Domestic Related Party Transactions
Change of Control, Voting and Restricted Stock Agreement
Approved by the Board and the Audit Committee in connection with an overall review of the Company's related party transactions and certain worker classification-related litigation matters, in April 2017 the Board formed a special subcommittee of the Audit Committee (the "Special Subcommittee") to (among other things) review the structure, documentation, fairness, conflicts, fidelity, appropriateness, and practices respecting each of the relationships and transactions discussed in this Note 6 (including those described in this Note under Domestic Related Party Services, below). The Special Subcommittee commenced that review in the first quarter of 2017 with the assistance of special auditors and counsel and is currently reviewing the preliminary results of such review, including the feedback received from its special auditors and counsel. The Company is currently unable to predict the remaining duration and final results of this reviewaccepted by the Special Subcommittee. See Note 9 toMajority Stockholders (defined below) on December 31, 2021, and signed and effective January 28, 2022, SGRP entered into the Company's Consolidated Financial Statements – CommitmentsChange of Control, Voting and Contingencies – Legal MattersRestricted Stock Agreement ("CIC Agreement"), below.
Domestic Related Party Services:
SPAR Business Services, Inc.by and among SGRP, Robert G. Brown, ("SBS"Mr. Brown"), William H. Bartels, ("Mr. Bartels"), SPAR Administrative Services, Inc., ("SAS"SAS"), and SPAR InfoTech,Business Services, Inc., ("SIT"SBS"), are affiliates of SGRP but are not under the control or part of the consolidated Company. Mr. Robert G. Brown, a Director, Chairman and a major stockholder of SGRP, and Mr. William H. Bartels, a Director, Vice Chairman and a major stockholder of SGRP, are the sole stockholders of SBS.collectively with Mr. Brown, is the sole stockholder of SIT. Mr. Brown is a director and officer of SBS and SIT. Mr. Bartels, is a directorSAS and officer of SAS. The stockholders of SAS were Mr. Bartels and parties related to Mr. Brown, each of whom is considered an affiliate ofSBS, the Company for related party purposes because of their family relationships with Mr. Brown.("Majority Stockholders") (the "Agreement").
The Company executes the services it provides to its domestic clients primarily through independent field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), substantially all of whom are provided by SBS, and administers those services through local and regional administrators, substantially all of whom are provided by SAS. The Company paid $19.6 million and $15.8 million during the nine months ended September 30, 2017 and 2016, respectively, to SBS for its provision as needed of approximately 6,400 of SBS's available Field Specialists in the U.S.A. (which amounted to approximately 75% and 78% of the Company's total domestic Field Specialist expense for the nine months ended September 30, 2017 and 2016, respectively). The Company paid $3.2 and $3.1 million for the nine months ended September 30, 2017 and 2016, respectively, to SAS for its provision of its 60 and 61 full-time regional, district and office administrators as of September 30, 2017 and 2016, respectively (which amounted to approximately 90% and 92% of the Company's total domestic field administrative service cost for the nine months ended September 30, 2017 and 2016, respectively). In addition to these field service and administration expenses, SAS also incurs other administrative expenses related to benefit and employment tax expenses of SAS and payroll processing, legal and other administrative expenses and SBS incurs expenses for processing vendor payments, legal defense and other administrative expenses (but those expenses are only reimbursed by SGRP to the extent approved by the Company as described below). The total cost recorded by the Company for the expenses of SBS and SAS in providing their services to the Company, including the "Cost Plus Fee" arrangement (as defined and discussed below) and other expenses paid directly by the Company on behalf of and invoiced to SBS and SAS, was $22.8 and $19.0 million, for the nine months ended September 30, 2017 and 2016, respectively.
Thefinancial terms of the AmendedCIC Agreement to the Majority Stockholders, totaling $4,477,585 and Restated Field Servicefully accrued in December 2021, consists of the following:
a. | The Corporation issued to the Majority Stockholders 2,000,000 restricted shares of Series B Preferred Stock which are convertible into SGRP Shares subject to the conversion ratio as set forth in the CIC Agreement of 1:1.5 basis, subject to adjustment for a forward or reverse share split, share dividend, or similar transactions. These shares will vest over time upon execution of the CIC Agreement through November 10, 2023 in five (5) phases, assuming the Majority Stockholders' ongoing compliance with the terms and conditions of the CIC Agreement. Series B Preferred Shares may only be transferred to affiliates and certain related parties of the Majority Stockholders if those affiliates and certain related parties execute a joinder to the CIC Agreement. The Series B Preferred Stock was valued at $3,690,000 in total, based on the SGRP stock price on December 31, 2021 of $1.23 per share for 3,000,000 SGRP shares. Upon execution of the agreement in January of 2022, 2,000,000 restricted shares of Series B Preferred Stock were issued to the Majority Stockholders based on the SGRP stock price on January 28, 2022 of $1.09 per share and recorded in paid-in capital at $3,270,000 as of March 31, 2022. The $420,000 difference between what was accrued for as of December 31, 2021 was recognized in selling, general and administrative expenses during the quarter ended March 31, 2022. Immediately after the issuance of the Series B restricted shares, 350,000 of Series B Preferred Stock was converted to 525,000 of common shares per terms of the agreement. On May 30, 2022, 700,000 shares of Series B Preferred Stock were vested and convertible to 1,050,000 of common shares per terms of agreement. The Company has issued 632,887 shares of Series B Preferred Stock and converted and issued 949,311 shares of the common shares; the remaining 67,113 shares of Series B Preferred Stock, convertible to 100,689 shares of common shares, are pending initiation of transactions from a Majority Stockholder. |
b. | The Corporation made a $250,000 cash payment to Mr. Brown and agreed to reimburse up to $35,000 of the legal expenses of the Majority Stockholders that were incurred after January 1, 2021 in connection with the negotiation and execution of the CIC Agreement. Both payments were made during the nine months ended September 30,2022. |
c. | The Corporation assumed financial responsibility for, and paid directly to Affinity Insurance Company, Ltd., $502,585 to settle SAS obligations and the related claim for the 2014-2015 plan year. The payment was made directly to Affinity Insurance Company, Ltd. during the nine months ended September 30, 2022. |
James R. Brown, Sr. Advisor Agreement with SBS dated as of
Effective January 1, 2004, as amended in 2011, and the Amended and Restated Field Management Agreement with SAS dated as of January 1, 2004 (each a "Prior Agreement"), defined reimbursable expenses and established a "Cost Plus Fee" arrangement where the Company paid SBS and SAS for their costs of providing those services plus a fixed percentage of such reimbursable expenses (the "Cost Plus Fee"). The parties have had negotiations respecting replacement agreements since the Prior Agreements expired on November 30, 2014. As further described below, a new Field Administration Agreement was26, 2022, SGRP entered into a consulting agreement with SAS in 2016.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
The Company and SBS have agreed in principle to a revised Cost Plus Fee arrangement equal to 2.96% of the Field Specialists and certain other approved reimbursable expenses incurred by SBS in performing services for the Company, subject to certain offsetting credits. This agreement in principle went into effect on and has applied since December 1, 2014.
No SBS compensation to any officer, director or other related party has been reimbursed or approved to date by the Company, and no such compensation reimbursements were made or approved under SBS's Prior Agreement. This is not a restriction on SBS since SBS is not controlled by the Company and may pay any compensation to any person that SBS desires out of its own funds. However, SBS has invoiced the Company monthly for certain such compensation payments from July of 2015 through December 2016, and again from July 2017 to September 30, 2017, but the Company has rejected those invoices as non-reimbursable expenses. Since SBS is a "Subchapter S" corporation, all income from SBS is allocated to its stockholders (see above).
The Company has determined that the rates charged by SBS for the services of its field merchandising, auditing, assembly and other field personnel (each a "Field Specialist") are favorable to the Company when compared to other possible non-affiliate providers. SBS has advised the Company that those favorable rates are dependent (at least in part) on SBS's ability to continue to use independent contractors as its Field Specialists, that such Field Specialists generally provide greater flexibility and performance quality at lower total costsMr. James R. Brown, Sr., following his retirement as a resultdirector of their business independence and initiative, and that it has an agreement with each Field Specialist clearly confirming his, her, or its statusSGRP on January 25, 2022, pursuant to which Mr. Brown will serve as an independent contractor.
The appropriateness of SBS's treatment of its Field Specialists as independent contractors has been periodically subjecta Board advisor to legal challenge (both currently and historically) by various states and others, SBS's expenses of defending those challenges and other proceedings have historically been reimbursed by the Company under SBS's Prior Agreement, and SBS's expenses of defending those challenges and other proceedings were reimbursed by the Company for the nine months ended September 30, 2017 and 2016 (in the amounts of $218,000 and $587,000, respectively), after determination (on a case by case basis) that those defense expenses were costs of providing services to the Company. The Company has advised SBS that, since there is no currently effective comprehensive written services agreement with SBS, the Company will continue to review and decide each request by SBS for reimbursement of its legal defense expenses (including appeals) on a case-by-case basis in its discretion, including the relative costs and benefits to the Company. The Company has not agreed, and does not currently intend, to reimburse SBS for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceeding against or involving SBS, and the Company does not believe it has ever done so (other than in insignificant nuisance amounts). However, there can be no assurance that SBS will be able to satisfy any such judgment or similar amount resulting from any adverse legal determination, that SBS or someone else will not claim, or that SBS will be able to successfully defend any claim, that the Company is liable (through reimbursement, indemnification or otherwise) for any such judgment or similar amount imposed against SBS. Furthermore, there can be no assurance that SBS will succeed in defending any such legal challenge, the legal expenses of prolonged litigation and appeals could continue to be (and haveSGRP from time to time been) significant,for a term of one (1) year (the "Brown Advisor Agreement"). As compensation for his services, Mr. Brown is entitled to receive compensation at a rate of $55,000 for the term of the Brown Advisor Agreement. Payments will be made in equal quarterly installments and prolonged litigationwill be pro-rated for partial quarters. The consultant fee paid to Mr. Brown was $13,750 for the three-months and appeals and any adverse determination in any such challenge could have$41,250 for the nine-months period ended September, 2022.
Panagiotis Lazaretos Consulting Agreement
Effective February 1, 2022, SGRP entered into a material adverse effectconsulting agreement with Thenablers, Ltd. (the "Lazaretos Consulting Agreement"). Thenablers, Ltd. is wholly owned by Mr. Panagiotis Lazaretos, a retired director of SGRP. Following Mr. Lazaretos' retirement as a director on SBS's abilityJanuary 25, 2022, Thenablers, Ltd. agreed to provide the consulting services neededof Mr. Lazaretos to SGRP regarding global sales and new markets' expansion. The Lazaretos Consulting Agreement cannot be terminated by the Companyconsent of either party for the firsttwelve (12) months, and automatically expires on January 31, 2024. Upon the Company's costsone-year anniversary of doing business. the effective date, the Lazaretos Consulting Agreement may be terminated by either party with 180 days’ notice in writing to the other party. As compensation for its services, Thenablers, Ltd. is entitled to receive: (i) base compensation at a rate of $10,000 per month for the term of the Consulting Agreement; (ii) incentive-based compensation; and (iii) the outstanding options granted to Mr. Panagiotis ("Panos") N. Lazaretos on February 4, 2021 will continue to be outstanding and vest according to their terms under the agreement. Consultant fee paid to Mr. Lazaretos was $30,000 for the three-months and $80,000 for the nine-months period ended September 30,2022.
Current material and potentially material proceedings against SBS and, in one instance, the Company are described in Note 9 to the Company's Consolidated Financial Statements – Commitments and ContingenciesAudit Committee Nasdaq Compliance – Legal Matters, below. These descriptions are based on an independent review by the Company and do not reflect the views of SBS, its management or its counsel.
Any prolonged continuation of or material increase in the legal defense costs of SBS (and thus the reimbursable expenses SBS may charge to and that may be paid by the Company to the extent reimbursement is approved by the Company in its discretion), the failure of SBS to satisfy any such judgment or similar amount resulting from any adverse legal determination against SBS, any claim by SBS, SAS, any other related party or any third party that the Company is somehow liable for any such judgment or similar amount imposed against SBS or SAS or any other related party, any judicial determination that the Company is somehow liable for any such judgment or similar amount imposed against SBS or SAS or any other related party (in whole or in part), any decrease in SBS's or SAS's performance (quality or otherwise), any inability by SBS or SAS to execute the services for the Company, or any increase in the Company's use of employees (rather than independent contractors) as its domestic Field Specialists, in each case in whole or in part, could have a material adverse effect on the Company or its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
On June 14, 2016, SAS and SPAR Marketing Force, Inc. ("SMF"July 7, 2022, Nasdaq notified SGRP that it did not comply with the audit committee requirements for continued listing on The Nasdaq Capital Market set forth in Listing Rule 5605(c)(2) entered into(the “Rule”). The Rule requires the audit committee to comprise of three independent directors. Subsequent to resignation of Mr. Panagiotis Lazaretos who was a member of SGRP’s audit committee, the Company was actively recruiting for a new Field Administration Agreement (the "SAS Agreement"). In order to provide continuity with SAS's Prior Agreement,independent director while the SAS Agreement is effective and governs the relationship of the parties as of December 1, 2014, and amends, restates and completely replaces SAS's Prior Agreement. The SAS Agreement more clearly defines reimbursable and excluded expenses and the budget and approval procedures and continues the indemnifications and releases provided by SAS's Prior Agreement (which indemnifications and releases were and are comparable to those applicable to SGRP's directors and executive officers under its By-Laws and applicable law). Specifically, the SAS Agreement reduced the Cost Plus Fee from 4% to 2% effective as of June 1, 2016.position remained vacant.
The Board nominated Mr. Peter Brown on July 31, 2022 to fill the vacant position.
On August 1, 2022, SGRP's received a notification letter from Nasdaq dated August 1, 2022, stating that SGRP was now in compliance with Nasdaq's Audit Committee has approvedrequirements under Nasdaq Listing Rule 5605(c)(2) (the "Rule") and that the SAS Agreement pursuant to its specific duty and responsibility to review and approve the overall fairness of all material related-party transactions, as more fully provided above in this Note 6 to the Company's Consolidated Financial Statements.matter is now closed
No SAS compensation to any officer, director or other related party (other than Mr. Peter W. Brown pursuant to previously approved budgets) has been reimbursed or approved to date by the Company, and no such compensation reimbursements were made or approved under SAS's Prior Agreement. This is not a restriction on SAS since SAS is not controlled by the Company and may pay any compensation to any person that SAS desires out of its own funds. Since SAS is a "Subchapter S" corporation, all income from SAS is allocated to its stockholders (see above). Peter W. Brown ("Peter Brown") is an employee of SAS, is the nephew of SGRP's Chairman, Mr. Robert G. Brown, an officer and employee of the Company's affiliate, SIT (which is owned by Mr. Robert G. Brown), and is a director of SPAR BSMT and owns EILLC (see InternationalOther Domestic Related Party ServicesTransactions, below). Peter Brown was an official observer at the meetings of SGRP's Board from 2014 through December 2016. Accordingly, Peter Brown is a related party in respect of the Company.
National Merchandising Services, LLC ("NMS"NMS"), is a consolidated domestic subsidiary of the Company and is owned jointly by SGRP through its indirect ownership of 51% of the NMS membership interests and by National Merchandising of America, Inc. ("NMA"NMA"), through its ownership of the other 49% of the NMS membership interests. Mr. Edward Burdekin is the Chief Executive Officer and President and a director of NMS and also is an executive officer and director of NMA. Ms. Andrea Burdekin, Mr. Burdekin'sBurdekin's wife, is the sole stockholder and also a director of both NMA and a director of NMS. NMA is an affiliate of the Company but is not under the control of or consolidated with the Company. Mr. Burdekin also owns 100% of National Store Retail Services ("NSRS"). Beginning in September 2018 and through June of 2021, NSRS provided substantially all of the domestic merchandising specialist field force used by NMS. For those services, NMS agrees to reimburse NSRS certain costs for providing those services plus a premium ranging from 4.0% to 10.0% of certain costs. Starting in July of 2021, the domestic merchandising specialist field force services provided by NSRS was transitioned to National Remodel & Setup Services, LLC ("NRSS") with the same financial arrangement. Mrs. Andrea Burdekin is the owner of NRSS. NMS also leases office space from Mr. Burdekin. The costs associated with labor and office lease were approximately $2.5 million for the three-months and $7.1 million for the nine-months period ended September 30, 2022, and $2.1M for the three-months and $5.9M for the nine-months period ended September 30, 2021.
International Related Party Services:
Resource Plus is owned jointly by SGRP Meridian (Pty), Ltd. ("Meridian") is a consolidated international subsidiarythrough its direct ownership of 51% of the CompanyResource Plus membership interests and is owned 51% by SGRP andMr. Richard Justus through his ownership of the other 49% byof the following individuals:Resource Plus membership interests. Mr. Brian Mason, Mr. Garry Bristow, and Mr. Adrian Wingfield. Mr. Mason is President andJustus has a director and Mr. Bristow is an officer and director of Meridian. Mr. Mason is also an officer and director and 50% shareholder of Merhold Property Trust ("MPT"). Mr. Mason and Mr. Bristow are both officers and directors and both own 50% of Merhold Cape Property Trust ("MCPT"). Mr. Mason, Mr. Bristow and Mr. Wingfield are all officers and own 46.7%, 20% and 33.3%, respectively of Merhold Holding Trust ("MHT"),ownership interest in RJ Holdings which provides services similar to those provided by MPT. MPT owns the buildingbuildings where MeridianResource Plus is headquartered and isoperates and are subleased to Meridian. MCPT provides a fleet ofResource Plus. The costs associated with these transactions were approximately 160 vehicles to Meridian under a 4 year lease program. These leases are provided to Meridian at local market rates included in the summary table below.
SPAR Todopromo is a consolidated international subsidiary of the Company and is owned 51% by SGRP and 49% by the following individuals: Mr. Juan F. Medina Domenzain, Juan Medina Staines, Julia Cesar Hernandez Vanegas, and Jorge Medina Staines. Mr. Juan F. Medina Domenzain is an officer and director of SPAR Todopromo and is also majority shareholder (90%) of CONAPAD ("CON"), which supplied administrative and operational consulting support to SPAR Todopromo $182,000 for the three-months and $545,000 for the nine month periods-months period ended September 30, 2017 2022, and 2016.
SPAR Group, Inc.$248,000 for the three-months and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
In August 2016, Mr. Juan F. Medina Domenzain ("JFMD"), partner in SPAR Todopromo, purchased$814,000 for the warehouse that was being leased by SPAR Todopromo. A new lease expiring December 31, 2017, was entered into with SPAR Todopromo with the same terms and cost as with the previous owner.nine-months period ended September 30, 2021.
On September 8, 2016, December 1, 2021, the Company (through oneCorporation entered into the Agreement for Marketing and Advertising Services (the "WB Agreement") with WB Marketing, Inc. (the "Agent", and together with the Corporation, the "Parties"). The Agent is an entity owned and controlled by Mrs. Jean Matacunas who is the wife of its subsidiaries, SPAR International Ltd.) acquired 100% ownership of SGRP Brasil Participações Ltda. ("SGRP Holdings"), a Brazilian limitada (which is a form of limited liability company), from its affiliate, SIT, at cost (including approved expenses). SGRP Holdings then completed the formationPresident and acquired a majorityChief Executive Officer, Michael R. Matacunas. Mrs. Matacunas owns 51 % of the stock of SPAR Brasil Serviços de Merchandising e Tecnologia S.A., a Brazilian corporation ("SPAR BSMT"). SGRP Holdings and SPAR BSMT are consolidated subsidiariesequity of the Company.Agent of record, Mr. Matacunas owns 49% of the equity of the Agent of record. The service fees paid to WB Marketing for the three-months and nine-months periods were $32,000 and $170,000 respectively.
International Related Party Services
The Corporation's principal Brazilian subsidiary, SPAR BSMT, is owned 51% by the Company, 39% by JK Consultoria Empresarial Ltda.-ME, a Brazilian limitada ("JKC"JKC"), and 10% by Earth Investments, LLC, a Nevada limited liability company ("EILLC").
EILLC. JKC is owned by Mr. Jonathan Dagues Martins, a Brazilian citizen and resident ("JDM"JDM") and his sister, Ms. Karla Dagues Martins, a Brazilian citizen and resident. JDM is the Chief Executive Officer and President of each SPAR Brazil companysubsidiary pursuant to a Management Agreement between JDM and SPAR BSMT dated September 13, 2016. JDM also is a director of SPAR BSMT. Accordingly,Accordingly, JKC and JDM are each a related party in respect ofrespecting the Company. EILLC is owned by Mr. Peter W. Brown, a director of SPAR BSMT and SGRP. In November 2020, SPAR BSMT hired Mr. Peter W. Brown as a consultant to provide Brazil acquisition strategy services to SPAR BSMT, with a one-time initiation fee of $30,000 Brazilian Real and a monthly fee of $15,000 Brazilian Real effective December 1, 2020. The consultant agreement was terminated effective July 31, 2022 upon appointment of Mr. Peter Brown whoas a member of SGRP’s Audit Committee. The consultant fee paid to Mr. Brown was approximately $6,300 USD for the three-months and $44,300 USD for the nine-months period ended for both September 30, 2022 and 2021, respectively.
SPARFACTS is a citizen and resident of the USA and a related party in respectconsolidated international joint venture of the Company (SeeDomestic Related Party Services, above). Accordingly, EILLC alsoand is owned 51% by SGRP and 49% by Ms. Lydna Chapman. Ms. Chapman is a related party in respectdirector of SPARFACTS. Her various companies provide office lease, accounting and consultant services to SPARFACTS. The costs associated with these activities were approximately $130,000 for the Company.
SPAR BSMT has contracted with Ms. Karla Dagues Martins, a Brazilian citizenthree-months and resident $301,000 nine-months period ended September 30, 2022 and JDM's sister to handle$40,000 for the labor litigation casesthree-months and $178,000 for SPAR BSMT and its subsidiaries. These legal services are being provided to them at local market rates by Ms. Martins's company, Karla Martins Sociedade de Advogados ("KMSA").
The NM Acquisition (as defined below in Note 11 to the Company's Consolidated Financial Statement - Purchase of Interest in Subsidiaries) and associated related party transactions were reviewed and approved by the Audit Committee of SGRP's Board of Directors.nine-months period ended September 30, 2021
The Company believes it is the largest and most important customer of SBS, SAS, NRS, MPT, MCPT, MHT, CON, JFMD and KMSA (and from time to time may be each entity's only customer), and accordingly the Company generally has been able to negotiate better terms, receives more personal and responsive service and is more likely to receive credits and other financial accommodations from SBS, SAS, NRS, MPT, MCPT, MHT, CON, JFMD and KMSA than the Company could reasonably expect to receive from an unrelated service provider who has significant other customers and business. SBS, SAS and other material affiliate contracts and arrangements are annually reviewed and considered for approval by SGRP's Audit Committee, subject to the ongoing negotiations with SBS as described above.
Summary of Related Party Services:
The following costs of affiliates were charged to the Company (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Services provided by affiliates: | ||||||||||||||||
Field merchandiser and other expenses (SBS) | $ | 6,788 | $ | 5,491 | $ | 19,593 | $ | 15,828 | ||||||||
Field administration and other expenses (SAS) | 1,044 | 1,011 | 3,178 | 3,138 | ||||||||||||
Office and vehicle rental expenses (MPT) | 30 | 8 | 46 | 32 | ||||||||||||
Vehicle rental expenses (MCPT) | 579 | 245 | 870 | 618 | ||||||||||||
Office and vehicle rental expenses (MHT) | 85 | 34 | 126 | 85 | ||||||||||||
Field merchandiser expenses (NDS Reklam) | – | 1 | – | 1 | ||||||||||||
Consulting and administrative services (CON) | 61 | 74 | 181 | 241 | ||||||||||||
Legal Services (KMSA) | 31 | – | 79 | – | ||||||||||||
Warehousing rental (JFMD) | 13 | 3 | 38 | 3 | ||||||||||||
Total services provided by affiliates | $ | 8,631 | $ | 6,867 | $ | 24,111 | $ | 19,946 | ||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
Due to affiliates consists of the following (in thousands): | September 30, | December 31, | ||||||
2017 | 2016 | |||||||
Loans from local investors:(1) | ||||||||
Australia | $ | 250 | $ | 231 | ||||
Mexico | 1,001 | 1,001 | ||||||
Brazil | 139 | 139 | ||||||
China | 720 | 761 | ||||||
South Africa | 15 | – | ||||||
NMS LLC | – | 348 | ||||||
Accrued Expenses due to affiliates: | ||||||||
SBS/SAS | 1,883 | 869 | ||||||
Total due to affiliates | $ | 4,008 | $ | 3,349 | ||||
Summary of Certain Related Party Transactions
Due to related parties consists of the following (in thousands): | September 30, | December 31, | ||||||
2022 | 2021 | |||||||
Loans from joint venture partners:(1) | ||||||||
Australia | $ | 571 | $ | 597 | ||||
Mexico | 623 | 623 | ||||||
China | 1,519 | 1,784 | ||||||
Resource Plus | 266 | 266 | ||||||
Total due to affiliates | $ | 2,979 | $ | 3,270 | ||||
(1) | Represent loans due from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms, are due on demand, and are classified as current liabilities in the Company's consolidated financial statements. |
(1) Represent loans fromSPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
Bartels' Retirement and Director Compensation
Mr. William H. Bartels retired as an employee of the local investors intoCompany as of January 1, 2020 but continues to serve as a member of SPAR's Board. Mr. Bartels is also one of the Company's subsidiaries (representing their proportionate sharefounders and a significant stockholder of working capital loans).SGRP. Effective January 18, 2020, SPAR's Governance Committee proposed and unanimously approved retirement benefits for the five-year period commencing January 1, 2020, and ending December 31, 2024 (the "Five-Year Period"), for Mr. Bartels. The loans have no payment termsaggregate value of benefits payable to Mr. Bartels is approximately $220,558 per year and are due on demanda total of $1,102,790 for the Five-Year Period. As of September 30,2022 $352,600 remains outstanding and as such have been classified asis included within accrued expenses and other current liabilities in the Company's consolidated financial statements.liabilities.
Other Related Party Transactions and Arrangements
In July 1999, SMF, SBS and SITSPAR InfoTech, Inc. ("Infotech") are related parties and affiliates of SGRP, but are not under the control or part of the consolidated Company. SBS is an affiliate because it is owned by SBS LLC, which in turn is beneficially owned by Robert G. Brown, Director, Chairman of the Board, and significant shareholder of SGRP. Infotech is an affiliate because it is owned principally by Robert G. Brown.
SBS and Infotech previously entered into a perpetual software ownership agreement providing that each party independently owned an undivided share of and hadhas the right to unilaterally license and exploit their "Business Manager" Internet job scheduling software (which had been jointly developed by such parties), and all related improvements, revisions, developments and documentation from time to time voluntarily made or procured by anycertain portions of them at its own expense. Business Manager and its otherthe Company's proprietary software and applications are used by the Company for (among other things) the scheduling, tracking, coordination, reporting and reporting of its merchandisingexpense software are co-owned with SBS and marketing servicesInfotech and are accessible via the Internet or other applicable telecommunication network by the authorized representatives ofeach entered into a non-exclusive royalty-free license from the Company and its clients through their respective computers and mobile devices. In addition, SPAR Trademarks, Inc., a wholly owned subsidiary of SGRP ("STM"), SBS and SIT entered into separate perpetual trademark licensing agreements whereby STM has granted non-exclusive royalty-free licenses to SIT and SBS (and through them to their commonly controlled subsidiaries and affiliates by sublicenses, including SAS) for their continued use of the name "SPAR" and certain other"SPAR" trademarks and related rights of STM. SBS and SAS provide services to the Company, as described above, SIT assisted in the Brazilian acquisition at a cost to the Company of $49,000, as described below, and SIT no longer provides services to and does not compete with the Company.United States.
Through arrangements with the Company, SBS, SAS and other companies owned by Mr. Brown or Mr. Bartels participate in various benefit plans, insurance policies and similar group purchases by the Company, for which the Company charges them their allocable shares of the costs of those group items and the actual costs of all items paid specifically for them. All such transactions between the Company and the above affiliates are paid and/or collected by the Company in the normal course of business.
In addition to the above, SAS purchases insurance coverage for worker compensation, casualty and property insurance risk for itself, for SBS for its Field Specialists that require such insurance coverage, and for the Company from Affinity Insurance, Ltd. ("Affinity"). SAS owns a minority (less than 1%) of the common stock in Affinity. The Affinity insurance premiums for such coverage are ultimately charged to SAS, which then charges the Company and SBS for their fair share of the insurance cost based on informal arrangements between the parties.
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
| Preferred Stock |
SGRP'sSGRP's certificate of incorporation authorizes it to issue 3,000,000 shares of preferred stock with a par value of $0.01 per share, (the "SGRP Preferred Stock"), which may have such preferences and priorities over the SGRP Common Stock and other rights, powers and privileges as the Company's Board of Directors may establish inat its discretion from time to time.discretion. The Company has created and authorized the issuance of a maximum of 3,000,000 shares of Series A Preferred Stock pursuant to SGRP's Certificate of Designation of Series "A" Preferred Stock (the "SGRP"SGRP Series A Preferred Stock"Stock"), which have dividend and liquidation preferences, have a cumulative dividend of 10% per year, are redeemable at the Company's option and are convertible at the holder's option (and without further consideration) on a one-to-oneone-to-one basis into SGRP Common Stock. The Company issued 554,402
On January 28, 2022, SGRP entered into the Change in Control, Voting and Restricted Stock Agreement ("CIC Agreement") with the Majority Stockholders. As part of SGRP sharesexecution of the CIC agreement, on January 25, 2022, the Corporation filed a Certificate of Elimination for its “Certificate of Designation of Series “A” Preferred Stock of SPAR Group, Inc.” (the “Certificate of Elimination”). Pursuant to affiliated retirement plans, which werethe Certificate of Elimination, the Series "A" Preferred Stock was cancelled and withdrawn. As a result, all converted into common shares in 2011 (including dividends earned thereon), leaving 2,445,5983,000,000 shares of remainingthe previously authorized preferred stock. At September 30, 2017, no shares of SGRP Series A"A" Preferred Stock were returned to the Corporation’s authorized “blank check” preferred stock. There were no shares of Series "A" Preferred Stock outstanding at the time of the cancellation.
Subsequent to filing the Certificate of Elimination, on January 25, 2022, the Corporation filed a “Certificate of Designation of Series “B” Preferred Stock of SPAR Group, Inc.” (the “Preferred Designation”) with the Secretary of State of Delaware, which designation had been approved by the Board on January 25, 2022. The Preferred Designation created a series of 2,000,000 shares of Preferred Stock designated as “Series "B" Preferred Stock” with a par value of $.01 per share (the “Preferred Stock”). The Preferred Shares do not carry any voting or dividend rights and are convertible into the Common Stock on a 1 for 1.5 basis. As of September 30,2022, 1,017,113 shares of Series "B" Preferred Stock remain outstanding. In May of 2022, although 700,000 shares were vested and convertible to Common Stock, only 632,887 shares were issued and outstanding.converted to common stock, pending initiation of transactions by a Majority Stockholders as further discussed in Note 6.
| Long-Lived Assets, including Goodwill and Intangible Assets |
The Company’s goodwill balance was $4.2 million as of September 30, 2022 and December 31, 2021. The Company is required to test goodwill for impairment annually or more frequently, whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit with goodwill below its carrying amount. The Company annually tests goodwill impairment during the fourth quarter.
The Company’s long-lived intangible assets balance was $2.1 million as of September 30, 2022 and $2.3 million as of September 30, 2021. The Company is only required to test intangible assets whenever events occur or circumstances change that would more likely than not reduce the fair value of the assets below its carrying value.
The Company acquired Resource Plus in 2018 as a joint venture partnership and currently owns 51% of the Resource Plus business. As of September 30, 2022, the Company has recorded $2.0 million of goodwill and $1.2 million of intangible assets relating to brand and technology. In early 2021, Resource Plus lost a significant customer, Lowes Live Nursery Business. Resource Plus revenue was $15.3 million in 2021 comparing to $28.0 million in 2020, and net loss attributable to SPAR in 2021 was $116,000 comparing to net income attributable to SPAR of $679,000 in 2020. During the second and third quarters of 2022, Resource Plus did not meet original forecast and reduced forecasts for the remainder of 2022.
As a result of these circumstances, the Company concluded it was more likely than not that the fair value of the reporting unit was less than it's carrying amount, and performed an interim quantitative assessment. The quantitative assessment was performed utilizing the income approach. The analysis required the comparison of the Company’s carrying value with its fair value, with an impairment recorded for any excess of carrying value over the fair value. The discounted cash flow method was used to determine the fair value of the reporting unit under the income approach. The results of the quantitative analysis performed indicated the fair value of the reporting unit exceeded the carrying value of the reporting unit as of September 30, 2022. As a result, the Company has determined goodwill impairment is not needed.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, and other market factors. Our current expectations also include certain assumptions that could be negatively impacted if we are unable to meet our cost expectations in relation to inflation. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, foreign currency exchange rates, inflation, or any factors that could be affected by COVID-19, change, or if management’s expectations or plans otherwise change, including updates to our long-term operating plans, then one or more of our reporting units might become impaired in the future
The Company also performed an interim quantitative assessment for the intangible assets. The Company evaluates the need to adjust the carrying value of the underlying assets if the sum of the expected cash flows is less than the carrying value. The Company’s projections of future cash flows, the level of actual cash flows, the methods of estimation used for determining fair values and salvage values can impact impairment. Based on the assessment, the Company concluded no impairment or write-down is required.
9. | Stock-Based Compensation and Other Plans |
SGRP has granted restricted stock and stock option awards to its eligible directors, officers and employees and certain employees of its affiliates respecting shares of Common Stock issued by SGRP ("SGRP Shares") pursuant to SGRP's 2008 Stock Compensation Plan (as amended, the "2008 Plan"), which was approved by SGRP's stockholders in May of 2008 and 2009. The 2008 Plan provides for the granting of restricted SGRP shares, stock options to purchase SGRP shares (either incentive or nonqualified), and restricted stock units, stock appreciation rights and other awards based on SGRP shares ("Awards") to SGRP Directors and the Company's specified executives, employees and consultants (which are employees of certain of its affiliates), although to date SGRP has not issued any permissible form of Award other than stock option, restricted share awards, and performance stock units. As of September 30, 2017, approximately 677,488 SGRP shares were available for Award grants under the amended 2008 Plan. In the third quarter, there were 733,000 options awarded; 550,000 to officers and 183,000 to certain employees of SPAR Group, Inc.
The Company recognized $37,000approximately $30,000 and $86,000$174,000 in stock-based compensation expense relating to stock option awards during the three (3) month periods ended September 30, 2017 2022 and 2016,2021, respectively. The tax benefit available from stock basedstock-based compensation expense related to stock option during both the three (3) months period ended September 30, 2017 2022 and 20162021 was approximately $14,000$8,000 and $33,000$43,000 respectively. The Company recognized $146,000approximately $166,000 and $220,000$457,000 in stock-based compensation expense relating to stock option Awardsawards during the nine (9) month periods ended September 30, 201730,2022 and 2016,2021, respectively. The tax benefit available to the Company, from stock basedstock-based compensation expense related to stock optionsoption during both the nine (9) months period ended September 30, 201730,2022 and 20162021 was approximately $55,000$42,000 and $84,000,$114,000 respectively. As of September 30, 2017,2022, total unrecognized stock-based compensation expense related to stock options was $505,000.$236,000.
During the three (3) months period ended September 30, 2017 2022 and 2016,2021, the Company recognized approximately $11,000$109,000 and $9,000, respectively of stock based compensation expense related to restricted stock. The tax benefit available to the Company from stock based compensation expense related to restricted stock during both three months ended September 30, 2017 and 2016 was approximately $4,000. During the nine months ended September 30, 2017 and 2016, the Company recognized approximately $32,000 and $39,000,$29,000, respectively of stock-based compensation expense related to restricted stock. The tax benefit available to the Company from stock basedstock-based compensation expense related to restricted stock during the ninethree (3) months period ended September 30, 2017 2022 and 20162021 was approximately $12,000$5,000 and $15,000,$7,000, respectively. During the nine (9) months period ended September 30, 2022 and 2021, the Company recognized approximately $423,000 and $47,000, respectively of stock-based compensation expense related to restricted stock. The tax benefit available to the Company from stock-based compensation expense related to restricted stock during the nine (9) months period ended September 30, 2022 and 2021 was approximately $23,000 and $12,000, respectively. As of September 30, 2017, total2022, there was $396,000 unrecognized stock-based compensation expense related to unvested restricted stock Awards was $24,000.awards.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
| Commitments and Contingencies |
Legal Matters
The Company is a party to various legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company'sCompany's management, dispositionresolution of these matters are is not anticipated to have a material adverse effect on the Company or its estimated or desired affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition.
The Company executes the services it provides to its domestic clients primarily through independent field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), almost all of whom are engaged and provided as independent contractors by SBS. For contractual details and payment amounts, see Note 6 to the Company's Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services, above.
The appropriateness of SBS's treatment of its Field Specialists as independent contractors has been periodically subject to legal challenge (both currently and historically) by various states and others, SBS's expenses of defending those challenges and other proceedings have historically been reimbursed byAll prior litigations associated with the Company under SBS's Prior Agreement,through SPAR Business Services, Inc., a corporation ("SBS") and SBS's expensesits Independent Contractors have been settled and, in most cases, paid to plaintiffs in full. As of defending those challenges and other proceedings were reimbursed bySeptember 30,2022, a $325,000 accrual remained for the Company duringfinal payment of the three month periods ended SBS Clothier Litigation. The litigation was settled on September 30, 2017 and 2016 (in20, 2019 for $1.3 million payable in four (4) equal annual installments of $325,000, with the amounts of $39,000 and $144,000, respectively), and the nine month periods ended September 30, 2017 and 2016 (in the amounts of $218,000 and $587,000, respectively), after determination (on a case by case basis) that those defense expenses were costs of providing services to the Company. The Company has advised SBS that, since there is no currently effective comprehensive written services agreement with SBS, the Company will continue to review and decide each request by SBS for reimbursement of its legal defense expenses (including appeals) on a case-by-case basis in its discretion, including the relative costs and benefits to the Company. The Company has not agreed, and does not currently intend, to reimburse SBS for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceeding against or involving SBS, and the Company does not believe it has ever done so (other than in insignificant nuisance amounts). However, there can be no assurance that SBS will be able to satisfy any such judgment or similar amount resulting from any adverse legal determination, that SBS or someone else will not claim, or that SBS will be able to successfully defend any claim, that the Company is liable (through reimbursement, indemnification or otherwise) for any such judgment or similar amount imposed against SBS. Furthermore, there can be no assurance that SBS will succeed in defending any such legal challenge, the legal expenses of prolonged litigation and appeals could continuefinal payment to be (and have from time to time been) significant, and prolonged litigation and appeals and any adverse determinationpaid in any such challenge could have a material adverse effect on SBS's ability to provide services needed by the Company and the Company's costs of doing business.
Current material and potentially material proceedings against SBS and, in one instance, the Company are described below. These descriptions are based on an independent review by the Company and do not reflect the views of SBS, its management or its counsel.
SBS Clothier Litigation
Melissa Clothier was engaged by SBS (then known as SPAR Marketing Services, Inc.) and provided services pursuant to the terms of an "Independent Merchandiser Agreement" acknowledging her engagement as an independent contractor. On June 30, 2014, Ms. Clothier filed suit against SBS and the Company styled Case No. RG12 639317, in the Superior Court in Alameda County, California, in which Ms. Clothier asserted claims on behalf of herself and a putative class of similarly situated merchandisers in California who are or were classified as independent contractors at any time between July 16, 2008, and June 30, 2014. Ms. Clothier alleged that she and other class members were misclassified as independent contractors and that, as a result of this misclassification, the defendants improperly underpaid them in violation of various California minimum wage and overtime laws. The Company was subsequently dismissed from the action without prejudice. The court ordered that the case be heard in two phases. Phase one was limited to the determination of whether members of the class were misclassified as independent contractors. After hearing evidence, receiving post-trial briefings and considering the issues, the Court issued its Statement of Decision on September 9, 2016, finding that the class members had been misclassified as independent contractors rather than employees. The parties have now moved into phase two to determine damages (if any), which included discovery as to the measure of damages in the case. Trial on phase two was scheduled for September 11, 2017, but was postponed. The Court has scheduled a case management conference for December 19, 2017, to establish a new trial date for phase two. SBS has advised the Company that SBS could appeal the adverse phase one determination when permitted under the court's rules.2022.
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
SBS Rodgers Litigation
Maceo Rodgers was engaged by and provided services to SBS pursuant to the terms of his "Master Agreements" with SBS acknowledging his engagement as an independent contractor. On February 21, 2014, Rodgers filed suit against SBS, Robert G. Brown and William H. Bartels, styled Civil Action No. 3:14-CV-00055, in the U.S. District Court for the Southern District of Texas (Galveston Division). Plaintiff asserted claims on behalf of himself and an alleged class of similarly situated individuals who provided services to SBS as independent contractors at any time on or after July 15, 2012, claiming they all were misclassified as independent contractors and that, as a result of this misclassification, the Defendants improperly underpaid them in violation of the Fair Labor Standards Act's overtime and minimum wage provisions. Although the Court conditionally certified the class on December 8, 2015, only 61 individuals joined the action as opt-in plaintiffs, and all but 11 of them have potentially disqualifying arbitration provisions, residences outside the class's geographic area, or late opt-in filings, and were challenged by the Defendants in various motions, including a motion to decertify the class. The Court, however, did not rule on these motions and instead stayed the case on September 19, 2017 to allow the parties to mediate. On October 24, 2017, the Court granted the parties' joint motion to extend the stay order until January 31, 2018.
SBS and SGRP Hogan Litigation
Paradise Hogan was engaged by and provided services to SBS as an independent contractor pursuant to the terms of an "Independent Contractor Master Agreement" with SBS acknowledging his engagement as an independent contractor. On January 6, 2017, Hogan filed suit against SBS and SGRP (and part of the Company), styled Civil Action No. 1:17-cv-10024-LTS, in the U.S. District Court for District of Massachusetts. Hogan initially asserted claims on behalf of himself and an alleged nationwide class of similarly situated individuals who provided services to SBS and SGRP as independent contractors. Hogan alleged that he and other alleged class members were misclassified as independent contractors, and as a result of this purported misclassification, Hogan asserted claims on behalf of himself and the alleged Massachusetts class members under the Massachusetts Wage Act and Minimum Wage Law for failure to pay overtime and minimum wages, as well as state law claims for breach of contract, unjust enrichment, quantum meruit, and breach of the covenant of good faith and fair dealing. In addition, Hogan asserted claims on behalf of himself and the nationwide class for violation of the Fair Labor Standards Act's overtime and minimum wage provisions. On March 28, 2017, the Company moved to refer Hogan's claim to arbitration pursuant to his agreement, to dismiss or stay Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted. Plaintiff's counsel subsequently notified SGRP's attorney of their intent to amend their Complaint without prejudice. The Amended Complaint, which was filed on May 2, 2017, eliminated all of Plaintiff's claims except for a single claim against SGRP for failure to pay Hogan and a similarly situated class of Massachusetts independent contractors all wages under the Massachusetts Wage Act and a separate, but identical claim against SBS. The result of the amendment significantly narrowed the scope of the litigation and eliminated the original nationwide Fair Labor Standards Act claims. The Company was granted leave to refile their motion to compel arbitration to dismiss Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted. The Company's motion was filed on June 7, 2017, Plaintiff's opposition to the Company's motion was filed on June 21, 2017 and the Company thereafter filed a reply brief in support of its motion on June 30, 2017. The parties currently await a hearing date on the Company's motion.
Potential Adverse Effects of the SBS Litigation
Any prolonged continuation of or material increase in the legal defense costs of SBS (and thus the reimbursable expenses SBS may charge to and that may be paid by the Companyto the extent reimbursement is approved by the Company in its discretion), the failure of SBS to satisfy anysuchjudgment or similar amount, any claim by SBS, any other related party or any third party that the Company is somehow liable for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceeding imposed against or involving SBS or other related party, any judicial determination that the Company is somehow liable for any such judgment or similar amount imposedagainst SBS or other related party (in whole or in part), any decrease in SBS's performance (quality or otherwise), any inability by SBS to execute the services for the Company, or any increase in the Company's use of employees (rather than independent contractors) as its domestic Field Specialists, in each case in whole or in part, could have a material adverse effect on the Company or its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected. See Note 6 to the Company's Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services, above.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
11. Segment Information10. Segment Information
The Company reports net revenues from operating income by reportable segment. Reportable segments are components of the Company for which separate financial information is available that is evaluated on a regular basis by the chief operating decision makermanagement in deciding how to allocate resources and in assessing performance.
The Company provides similar merchandising, business technology and marketing services throughoutcontinues to evaluate the world, operating within two reportable segments,global growth strategy. To better align with its Domestic Division and its International Division. The Company uses those divisions to improve its administration and operational and strategic focuses, and it tracks and reports certain financial information separately for each of those divisions. The Company measures the performance of its Domestic and International Divisions and subsidiaries using the same metrics. The primary measurement utilized by management is operating profits, historically the key indicator of long-termglobal growth and profitability, as strategy, effective January 1, 2022, the Company began reporting in (3) regional segments as follows: Americas which is focusedcomprised of United States, Canada, Brazil and Mexico, Asia-Pacific (“APAC”) which is comprised of Japan, China, India and Australia, and Europe, Middle East and Africa (“EMEA”) which is comprised of South Africa. Certain corporate expenses have been assigned to segments based on reinvesting the operating profitseach segment’s revenue as a percent of each of its international subsidiaries back into its local markets in an effort to improve market share and continued expansion efforts.total company revenue.
The operations and performance metrics for each country remains unchanged; the accounting policies offor each ofcountry also remains the reportable segmentssame. Therefore the new segment reporting has no impact to the existing accounting policies and are the same as those described in the Summary of Significant Accounting Policies. Management evaluates performance as follows (in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue: | ||||||||||||||||
United States | $ | 15,062 | $ | 11,332 | $ | 40,069 | $ | 32,268 | ||||||||
International | 33,690 | 22,106 | 91,292 | 57,513 | ||||||||||||
Total revenue | $ | 48,752 | $ | 33,438 | $ | 131,361 | $ | 89,781 | ||||||||
Operating income (loss): | ||||||||||||||||
United States | $ | 343 | $ | (184 | ) | $ | 701 | $ | (120 | ) | ||||||
International | 485 | 614 | 1,583 | 1,496 | ||||||||||||
Total operating income | $ | 828 | $ | 430 | $ | 2,284 | $ | 1,376 | ||||||||
Interest expense (income): | ||||||||||||||||
United States | $ | 56 | $ | 36 | $ | 158 | $ | 88 | ||||||||
International | 54 | 15 | (41 | ) | 23 | |||||||||||
Total interest expense | $ | 110 | $ | 51 | $ | 117 | $ | 111 | ||||||||
Other (income), net: | ||||||||||||||||
United States | $ | – | $ | – | $ | – | $ | – | ||||||||
International | (78 | ) | (78 | ) | (275 | ) | (183 | ) | ||||||||
Total other (income), net | $ | (78 | ) | $ | (78 | ) | $ | (275 | ) | $ | (183 | ) | ||||
Income (loss) before income tax expense: | ||||||||||||||||
United States | $ | 287 | $ | (220 | ) | $ | 543 | $ | (208 | ) | ||||||
International | 509 | 677 | 1,899 | 1,656 | ||||||||||||
Total income before income tax expense | $ | 796 | $ | 457 | $ | 2,442 | $ | 1,448 | ||||||||
Income tax (benefit) expense: | ||||||||||||||||
United States | $ | 14 | $ | (306 | ) | $ | (71 | ) | $ | (394 | ) | |||||
International | 196 | 275 | 978 | 594 | ||||||||||||
Total income tax (benefit) expense | $ | 210 | $ | (31 | ) | $ | 907 | $ | 200 | |||||||
Net income: | ||||||||||||||||
United States | $ | 273 | $ | 86 | $ | 614 | $ | 186 | ||||||||
International | 313 | 402 | 921 | 1,062 | ||||||||||||
Total net income | $ | 586 | $ | 488 | $ | 1,535 | $ | 1,248 | ||||||||
Depreciation and amortization: | ||||||||||||||||
United States | $ | 339 | $ | 334 | $ | 1,018 | $ | 1,014 | ||||||||
International | 148 | 152 | 508 | 445 | ||||||||||||
Total depreciation and amortization | $ | 487 | $ | 486 | $ | 1,526 | $ | 1,459 | ||||||||
Capital expenditures: | ||||||||||||||||
United States | $ | 172 | $ | 291 | $ | 683 | $ | 798 | ||||||||
International | 183 | 151 | 363 | 376 | ||||||||||||
Total capital expenditures | $ | 355 | $ | 442 | $ | 1,046 | $ | 1,174 | ||||||||
|
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Revenue: | ||||||||||||||||
Americas | $ | 53,738 | $ | 49,849 | $ | 149,992 | $ | 146,213 | ||||||||
Asia - Pacific | 7,147 | 7,921 | 19,351 | 23,584 | ||||||||||||
EMEA | 8,947 | 9,653 | 27,283 | 25,899 | ||||||||||||
Total revenue | $ | 69,832 | $ | 67,423 | $ | 196,626 | $ | 195,696 | ||||||||
Operating income: | ||||||||||||||||
Americas | $ | 1,441 | $ | 2,206 | $ | 5,862 | $ | 6,203 | ||||||||
Asia - Pacific | (341 | ) | (177 | ) | (1,491 | ) | (300 | ) | ||||||||
EMEA | 620 | 646 | 1,772 | 1,379 | ||||||||||||
Total operating income | $ | 1,720 | $ | 2,675 | $ | 6,143 | $ | 7,282 | ||||||||
Interest expense (income): | ||||||||||||||||
Americas | $ | 203 | $ | 110 | $ | 399 | $ | 396 | ||||||||
Asia - Pacific | 6 | 1 | 24 | (14 | ) | |||||||||||
EMEA | 61 | 13 | 172 | 20 | ||||||||||||
Total interest expense | $ | 270 | $ | 124 | $ | 595 | $ | 402 | ||||||||
Other expense (income), net: | ||||||||||||||||
Americas | $ | (12 | ) | $ | (11 | ) | $ | (24 | ) | $ | 74 | |||||
Asia - Pacific | (50 | ) | 14 | (62 | ) | (66 | ) | |||||||||
EMEA | (64 | ) | (140 | ) | (277 | ) | (216 | ) | ||||||||
Total other expense (income), net | $ | (126 | ) | $ | (137 | ) | $ | (363 | ) | $ | (208 | ) | ||||
Income before income tax expense: | ||||||||||||||||
Americas | $ | 1,250 | $ | 2,107 | $ | 5,487 | $ | 5,733 | ||||||||
Asia - Pacific | (297 | ) | (192 | ) | (1,453 | ) | (220 | ) | ||||||||
EMEA | 623 | 773 | 1,877 | 1,575 | ||||||||||||
Total income before income tax expense | $ | 1,576 | $ | 2,688 | $ | 5,911 | $ | 7,088 | ||||||||
Income tax expense: | ||||||||||||||||
Americas | $ | 467 | $ | 392 | $ | 1,346 | $ | 1,728 | ||||||||
Asia - Pacific | (145 | ) | 13 | (104 | ) | 83 | ||||||||||
EMEA | 354 | 144 | 700 | 225 | ||||||||||||
Total income tax expense | $ | 676 | $ | 549 | $ | 1,942 | $ | 2,036 | ||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Assets: | ||||||||
United States | $ | 21,804 | $ | 22,189 | ||||
International | 36,754 | 32,662 | ||||||
Total assets | $ | 58,558 | $ | 54,851 | ||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
Net income: | ||||||||||||||||
Americas | $ | 783 | $ | 1,715 | $ | 4,141 | $ | 4,005 | ||||||||
Asia - Pacific | (152 | ) | (205 | ) | (1,349 | ) | (303 | ) | ||||||||
EMEA | 269 | 629 | 1,177 | 1,350 | ||||||||||||
Total net income | $ | 900 | $ | 2,139 | $ | 3,969 | $ | 5,052 | ||||||||
Net (income) loss attributable to non-controlling interest: | ||||||||||||||||
Americas | $ | (582 | ) | $ | (535 | ) | $ | (1,660 | ) | $ | (1,400 | ) | ||||
Asia - Pacific | (45 | ) | 106 | 476 | 160 | |||||||||||
EMEA | (305 | ) | (530 | ) | (996 | ) | (1,201 | ) | ||||||||
Total net (income) attributable to non-controlling interest | $ | (932 | ) | $ | (959 | ) | $ | (2,180 | ) | $ | (2,441 | ) | ||||
Net income (loss) attributable to SPAR Group, Inc.: | ||||||||||||||||
Americas | $ | 201 | $ | 1,180 | $ | 2,481 | $ | 2,605 | ||||||||
Asia - Pacific | (197 | ) | (99 | ) | (873 | ) | (143 | ) | ||||||||
EMEA | (36 | ) | 99 | 181 | 149 | |||||||||||
Total net income (loss) attributable to SPAR Group, Inc. | $ | (32 | ) | $ | 1,180 | $ | 1,789 | $ | 2,611 | |||||||
Depreciation and amortization: | ||||||||||||||||
Americas | $ | 482 | $ | 506 | $ | 1,456 | $ | 1,498 | ||||||||
Asia - Pacific | 15 | (9 | ) | 39 | 44 | |||||||||||
EMEA | 9 | 12 | 29 | 31 | ||||||||||||
Total depreciation and amortization | $ | 506 | $ | 509 | $ | 1,524 | $ | 1,573 | ||||||||
Capital expenditures: | ||||||||||||||||
Americas | $ | 433 | $ | 454 | $ | 1,214 | $ | 1,205 | ||||||||
Asia - Pacific | – | (18 | ) | 14 | 19 | |||||||||||
EMEA | 30 | 104 | 9 | 208 | ||||||||||||
Total capital expenditures | $ | 463 | $ | 540 | $ | 1,237 | $ | 1,432 | ||||||||
Geographic Data (in thousands)Note: There were no inter-company sales for the nine months ended September 30, 2022 or 2021.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||||||||||||||||||
International revenue: | % of consolidated net revenue | % of consolidated net revenue | % of consolidated net revenue | % of consolidated net revenue | ||||||||||||||||||||||||||||
Brazil | $ | 11,132 | 22.8 | % | $ | 1,850 | 5.5 | % | $ | 29,232 | 22.3 | % | $ | 1,850 | 2.1 | % | ||||||||||||||||
South Africa | 6,703 | 13.7 | 5,936 | 17.8 | 19,646 | 15.0 | 14,871 | 16.6 | ||||||||||||||||||||||||
Mexico | 6,115 | 12.5 | 5,495 | 16.4 | 16,177 | 12.3 | 15,600 | 17.4 | ||||||||||||||||||||||||
China | 2,868 | 5.9 | 3,029 | 9.1 | 7,396 | 5.6 | 8,646 | 9.6 | ||||||||||||||||||||||||
Japan | 2,426 | 5.0 | 1,799 | 5.4 | 5,970 | 4.5 | 5,157 | 5.7 | ||||||||||||||||||||||||
India | 1,947 | 4.0 | 1,523 | 4.6 | 5,397 | 4.1 | 4,203 | 4.7 | ||||||||||||||||||||||||
Canada | 1,499 | 3.1 | 1,453 | 4.3 | 4,544 | 3.5 | 4,582 | 5.1 | ||||||||||||||||||||||||
Australia | 935 | 1.9 | 945 | 2.8 | 2,741 | 2.1 | 2,359 | 2.6 | ||||||||||||||||||||||||
Turkey | 65 | 0.1 | 76 | 0.2 | 189 | 0.1 | 245 | 0.3 | ||||||||||||||||||||||||
Total international revenue | $ | 33,690 | 69.0 | % | $ | 22,106 | 66.1 | % | $ | 91,292 | 69.5 | % | $ | 57,513 | 64.1 | % | ||||||||||||||||
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Assets: | ||||||||
Americas | $ | 86,151 | $ | 64,960 | ||||
Asia - Pacific | 6,044 | 10,699 | ||||||
EMEA | 12,009 | 13,357 | ||||||
Total assets | $ | 104,204 | $ | 89,016 | ||||
September 30, | December 31, | |||||||
2017 | 2016 | |||||||
Long lived assets: | ||||||||
United States | $ | 8,061 | $ | 8,594 | ||||
International | 4,382 | 3,965 | ||||||
Total long lived assets | $ | 12,443 | $ | 12,559 | ||||
11. Purchase of Interests in Subsidiaries
In September 2016, after acquiring SGRP Brasil Participações Ltda. ("SGRP Holdings"), a Brazilian limitada (which is a form of limited liability company), and establishing SPAR Brasil Serviços de Merchandising e Tecnologia S.A., a Brazilian corporation ("SPAR BSMT"), in a series of related party transactions (See Note 6 to the Company's Consolidated Financial Statements - Related Party Transactions–International Related Party Services, above), SGRP Holdings and SPAR BSMT (the "Purchasers") entered into a Quota Purchase Agreement dated September 13, 2016 (the "NM QPA"), with Interservice Publicidade Sociedade Ltda., a Brazilian limitada, Momentum Promoções Ltda., a Brazilian limitada, and IPG Nederland B.V., a Netherlands company (collectively, the "Sellers"). The Sellers are subsidiaries of The Interpublic Group of Companies, Inc., a Delaware corporation ("Interpublic"), which is a global provider of advertising, media and other business services. The NM QPA provided for the acquisition by the Purchasers from the Sellers (the "NM Acquisition") of all of the equity shares (called "quotas") in New Momentum Ltda., a Brazilian limitada, and New Momentum Serviços Temporários Ltda., a Brazilian limitada (each a "NM Company" or collectively the "NM Companies"), two of Interpublic's "In Store" companies in Brazil. SPAR BSMT acquired 99% of the quotas issued by each NM Company and SGRP Holdings acquired 1% of the quotas issued by each NM Company pursuant to the NM QPA. The closing of the acquisition of the NM Companies was completed with the disbursement of the purchase price to the Sellers on September 19, 2016, effective as of close of business on September 13, 2016. The purchase price for the NM Companies was R$1,312,000 (approximately US$401,000). The Company has since changed the names of the NM Companies to SPAR Brasil Serviços LTDA. and SPAR Brasil Serviços Temporários LTDA.
Momentum Promoções Ltda., one of the Sellers, also agreed to provide certain transition services and continued use of certain existing office space to SPAR BSMT and each of the NM Companies (collectively, "SPAR Brazil"), pursuant to a Transition Services Agreement dated September 13, 2016 (the "Transition Agreement"), and a Sublease Agreement dated September 13, 2016 (the "Sublease"), respectively. The Sublease has an initial term of 12 months and requires monthly rent and back office support payments of R$205,417 (approximately $65,000 USD). After December 31, 2016, the Transition Agreement relating to Accounting Service, terminated on April 30, 2017, and for IT service, terminated on September 13, 2017.
September 30, | December 31, | |||||||
2022 | 2021 | |||||||
Long lived assets: | ||||||||
Americas | $ | 4,524 | $ | 3,968 | ||||
Asia - Pacific | 1,609 | 1,798 | ||||||
EMEA | 229 | 295 | ||||||
Total long lived assets | $ | 6,362 | $ | 6,061 | ||||
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
The Company has completed its preliminary calculation of the fair value and related allocation of assets between goodwill and other. The amounts listed below reflect the results of our preliminary assessment and may be updated should additional information become available related to this acquisition. A summary of assets acquired, goodwill and liabilities assumed and net of purchase price are as follows
Geographic Data (in thousands):
Cash | $ | 484 | ||
Net Working Capital, net of cash | (155 | ) | ||
Fixed Assets | 22 | |||
Intangible Assets | 336 | |||
Goodwill | 133 | |||
Assumed Liabilities | (419 | ) | ||
Net Fair Value of Assets Acquired | $ | 401 |
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
consolidated | consolidated | consolidated | consolidated | |||||||||||||||||||||||||||||
Country revenue: | net revenue | net revenue | net revenue | net revenue | ||||||||||||||||||||||||||||
United States | $ | 32,475 | 46.5 | % | $ | 28,696 | 42.6 | % | $ | 87,406 | 44.5 | % | $ | 79,624 | 40.7 | % | ||||||||||||||||
Brazil | 16,904 | 24.2 | 14,913 | 22.1 | 49,504 | 25.2 | 40,809 | 20.9 | ||||||||||||||||||||||||
South Africa | 8,947 | 12.8 | 9,653 | 14.3 | 27,283 | 13.9 | 25,899 | 13.2 | ||||||||||||||||||||||||
Mexico | 2,375 | 3.4 | 4,307 | 6.4 | 7,132 | 3.6 | 19,929 | 10.2 | ||||||||||||||||||||||||
China | 3,460 | 5.0 | 3,735 | 5.5 | 7,930 | 4.0 | 10,193 | 5.2 | ||||||||||||||||||||||||
Japan | 1,725 | 2.5 | 2,348 | 3.5 | 5,536 | 2.8 | 7,336 | 3.7 | ||||||||||||||||||||||||
Canada | 2,707 | 3.9 | 1,650 | 2.4 | 5,949 | 3.0 | 4,886 | 2.5 | ||||||||||||||||||||||||
India | 831 | 1.1 | 1,933 | 2.9 | 4,765 | 2.4 | 6,199 | 3.2 | ||||||||||||||||||||||||
Australia | 408 | 0.6 | 188 | 0.3 | 1,121 | 0.6 | 821 | 0.4 | ||||||||||||||||||||||||
Total revenue | $ | 69,832 | 100.0 | % | $ | 67,423 | 100.0 | % | $ | 196,626 | 100.0 | % | $ | 195,696 | 100.0 | % | ||||||||||||||||
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
12. | Recent Accounting Pronouncements |
The following table contains unaudited pro forma revenue and net income for SPAR Group, Inc. assuming SPAR Brasil closed on January 1, 2016 (in thousands):
Revenue | Net (Loss) | |||||||
Consolidated supplemental pro forma for the nine month period ended September 30, 2016 | $ | 113,783 | $ | (194 | ) | |||
The pro forma inCompany reviews new accounting pronouncements as they are issued or proposed by the table above includes adjustments for, amortization of intangible assets and acquisition costs to reflect results that are more representative of the results of the transactions as if the SPAR Brasil acquisition closed on January 1, 2016. This pro forma information utilizes certain estimates, is presented for illustrative purposes only and may not be indicative of the results of operation that would have actually occurred. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, such as anticipated cost savings from operating synergies.Financial Accounting Standards Board (“FASB”).
12. Summary of Significant Accounting PoliciesNot Yet Adopted
New Accounting Pronouncements
ASU 2017-09, Scope of Modification Accounting, clarifies Topic 718, Compensation – Stock Compensation, such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met: (1) the fair value of the modified award is the same as the fair value of the original award immediately before the modification. The ASU indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification. The ASU is effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact the adoption of ASU 2017-09 will have on its consolidated financial statements.
In January 2017, the FASB issued Accounting Standard Update 2017-04 (ASU 2017-04), Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment. With ASU 2017-04, an entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity will compare the fair value of a reporting unit with its carrying amount and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of ASU 2017-04 will have on its consolidated financial statements.
In January 2017, June 2016, the FASB issued ASU 2017-01, ClarifyingNo.2016-13, “Financial Instruments (Topic 326) Credit Losses”. Topic 326 changes the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 is required to be applied prospectively for reporting periods beginning after December 31, 2017. The impact on the Company's consolidated financial statements will depend on the facts and circumstances of any specific future transactions.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited) (continued)
ASU 2016-17, Interests Held through Related Parties That Are under Common Control, amends the variable interest entity (VIE) guidance within Topic 810, Consolidation. It does not change the two required characteristics for a single decision maker to be the primary beneficiary ("power" and "economics"), but it revises one aspect of the related analysis. The amendments change how a single decision maker of a VIE treats indirect variable interests held through related parties that are under common control when determining whether it is the primary beneficiary of that VIE. The ASU requires consideration of such indirect interests on a proportionate basis, instead of being the equivalent of direct interests in their entirety, thereby making consolidation less likely. ASU 2016-17 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. For all other entities, ASU 2016-17 is effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. Early adoption is permitted. However, if an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of that fiscal year. Entities that have not yet adopted ASU 2015-02 are required to adopt ASU 2016-17 at the same time they adopt ASU 2015-02 and should apply the same transition method elected for ASU 2015-02. Entities that have already adopted ASU 2015-02 are required to apply ASU 2016-17 retrospectively to all relevant prior periods beginning with the fiscal year in which ASU 2015-02 initially was applied.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows ("ASU 2016-15"), which reduces diversity in practice in how certain transactions are classified in the statement of cash flows. The new standard is effective for reporting periods after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13 amending how entities will measure credit lossesimpairment model for most financial assets and certain other instrumentsinstruments. Under the new standard, entities holding financial assets and net investment in leases that are not measured accounted for at fair value through net income. The guidance requiresincome are to be presented at the application of a currentnet amount expected credit loss model, which is a new impairment model based on expected losses. Under this model, an entity recognizes anto be collected. An allowance for expected credit losses basedwill be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on historical experience, current conditions and forecasted information rather than the current methodology of delaying recognition of credit losses until it is probable a loss has been incurred. This ASUfinancial asset. Topic 326 is effective for interim and annual reporting periodsas of January 1, 2020, although in November 2019, the FASB delayed the effective date until fiscal years beginning after December 15, 2019 with early adoption permitted 2022 for annualSEC filers eligible to be smaller reporting periods beginning after December 15, 2018.companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company is currently evaluatingqualifies as a smaller reporting company under the impact of the new guidance on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation (Topic 718) ("ASU 2016-09"). The guidance changes how companies account for certain aspects of equity-based payments to employees. Entities will be required to recognize income tax effects of awards in the income statement when the awards vest or are settled. The guidance also allows an employer to repurchase more of an employee's shares than it can under current guidance for tax withholding purposes providing for withholding at the employee's maximum rate as opposed to the minimum rate without triggering liability accounting and to make a policy election to account for forfeitures as they occur. The updated guidance is effective for annual periods beginning after December 15, 2016. Effective January 1, 2017, the Company adopted the accounting guidance contained within ASU 2016-09.
In February 2016, the FASB issued ASU 2016-02 amending the existing accounting standards for lease accounting and requiring lessees to recognize lease assets and lease liabilities for all leases with lease terms of more than 12 months, including those classified as operating leases. Both the asset and liability will initially be measured at the present value of the future minimum lease payments, with the asset being subject to adjustments such as initial direct costs. Consistent with current U.S. Generally Accepted Accounting Principles ("GAAP"), the presentation of expenses and cash flows will depend primarily on the classification of the lease as either a finance or an operating lease. The new standard also requires additional quantitative and qualitative disclosures regarding the amount, timing and uncertainty of cash flows arising from leases in order to provide additional information about the nature of an organization's leasing activities. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and requires modified retrospective application.SEC’s definition. Early adoption is permitted. The Company is currently evaluating the impact of the new guidanceTopic 326 on ourits consolidated financialbalance sheets, statements of income (loss), statements of cash flows and related disclosures. As our operations are conducted in leased facilities, this ASU may require us to disclose additional information about our leasing activities. The Company plans to evaluate the impact of the new guidance on its consolidated financial statements and related disclosures.
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
In November 2015, the FASB issued ASU 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes, simplifying the balance sheet classification of deferred taxes by requiring all deferred taxes, along with any related valuation allowance, to be presented as noncurrent. This ASU is effective for the Company beginning in the first quarter of 2017, which the Company has applied retroactively. Upon the adoption of the guidance, the Company has reclassified $471,000 from current assets to non-current assets, and reduced both non-current and current liabilities by $2,389,000.
In May 2014, the FASB issued new revenue recognition guidance under ASU 2014-09 that will supersede the existing revenue recognition guidance under U.S. GAAP. The new standard, along with amendments in 2015 and 2016, focuses on creating a single source of revenue guidance for revenue arising from contracts with customers. The objective of the new standard is for companies to recognize revenue when it transfers the promised goods or services to its customers at an amount that represents what the company expects to be entitled to in exchange for those goods or services. Additionally, the new standard requires enhanced disclosures about the nature, amount, timing, and uncertainty of revenue and cash flows arising from customer contracts, including revenue recognition policies to identify performance obligations, assets recognized from costs incurred to obtain and fulfill a contract, and significant judgments in measurement and recognition. The standard, as amended, will be effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period.
13. | Leases |
The Company alongis a lessee under certain operating leases for office space and equipment.
Many of SPAR's equipment leases are short-term or cancellable with its third-party advisor, is currently performing an analysis thatnotice. SPAR’s office space leases have remaining lease terms between one and eleven (11) years, many of which include one (1) or more options to extend the new standard will have on its revenueterm for both the domesticperiods thereafter. The extension options and international segments. This analysis includes evaluating which, if any, practical expedients the Company will elect upon adoption. Based on analysis to date, we currently believe our revenue recognition under the new standard will termination options may be mostly consistent with the current standard, with performance obligations being satisfied over time as our customers simultaneously receive and consume the benefits of our performance obligations. We expect that the disclosuresexercised at SPAR’s sole discretion. SPAR does not consider in the notesmeasurement of ROU assets and lease liabilities an option to our consolidated financial statements relatedextend or terminate a lease if SPAR is not reasonably certain to revenue recognition will be significantly expanded underexercise the new standard, specifically regarding quantitative and qualitative information about performance obligations.
The Company expects to adopt the standard using the modified retrospective approach, under which the cumulative effectoption. As of the initial applicationend of the new standard will be recognized as an adjustmentthis reporting period, SPAR has not included any options to the opening balanceextend or terminate in its measurement of retained earnings in the first quarter of 2018. As we are still in the process of evaluating ASU 2014-09 along with the subsequent amendments our initial assessment may change as we continue to refine our systems, processes, controls and assumptions.
13. Capital Lease Obligations
The Company has an outstanding capitalROU assets or lease obligation with an interest rate of 5.8%. The related capital lease assets balances are detailed below (in thousands):liabilities.
Start Date: | Original Cost | Accumulated Amortization | Net Book Value at September 30, 2017 | |||||||||
January 2017 | $ | 76 | $ | 19 | $ | 57 | ||||||
SPAR Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited) (continued)
Annual future minimum
The components of SPAR's lease payments required underexpenses for the leases, together withthree (3) and nine (9) months ended September 30,2022 and 2021, which are included in the present value as of September 30, 2017,condensed consolidated income statement, are as follows (in thousands):
Year Ending |
| |||
2017 | $ | 7 | ||
2018 | 28 | |||
2019 | 28 | |||
Total | 63 | |||
Less amount representing interest | 4 | |||
Present value of net minimum lease payments included in accrued expenses and other current liabilities, and long term debt | $ | 59 | ||
Three Months Ended | Nine Months Ended | |||||||||||||||||
September 30, | September 30, | |||||||||||||||||
Lease Costs | Classification | 2022 | 2021 | 2022 | 2021 | |||||||||||||
Operating lease cost | Selling, General and Administrative Expense | $ | 103 | $ | 255 | $ | 358 | $ | 690 | |||||||||
Short-term lease cost | Selling, General and Administrative Expense | 137 | 121 | 399 | 629 | |||||||||||||
Variable costs | Selling, General and Administrative Expense | 21 | 40 | 74 | 132 | |||||||||||||
Total lease cost | $ | 261 | $ | 416 | $ | 831 | $ | 1,451 | ||||||||||
Supplemental cash flow information related to SPAR’s leases for the three (3) and nine (9) months ended September 30,2022 and 2021 is as follows (in thousands):
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Cash paid for amounts included in the measurement of lease liabilities | $ | 245 | $ | 256 | $ | 775 | $ | 691 | ||||||||
Assets obtained in exchange for new operating lease liabilities | ||||||||||||||||
Operating lease | $ | - | $ | 2 | $ | - | $ | 2 | ||||||||
At September 30, 2022, SPAR had the following maturities of lease liabilities related to office space and equipment, all of which are under non-cancellable operating leases (in thousands):
Period Ending December 31, | Amount | |||
2022 | $ | 230 | ||
2023 | 418 | |||
2024 | 282 | |||
2025 | 426 | |||
2026 | 79 | |||
Thereafter | 104 | |||
Total Lease Payments | 1,539 | |||
Less: imputed interest | 347 | |||
Total | $ | 1,192 | ||
SPAR Group, Inc. and Subsidiaries
Management's Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This Quarterly Report on Form 10-Q (this " (this "Quarterly Report"Quarterly Report") contains "forward-looking statements" within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, made by, or respecting, SPAR Group, Inc. ("SGRP"SGRP") and its subsidiaries (together with SGRP, “SPAR”, the "SPAR Group""SPAR Group" or the "Company""Company"), and this Quarterly.There also are forward-looking statements contained in: (a) SGRP's Annual Report has beenon Form 10-Kfor its fiscal year ended December 31, 2021, as filed by SGRP with the Securities and Exchange Commission (the "SEC"). There also are "forward-looking statements" contained in SGRP"'SECs") on April 15, 2022, and SGRP's First Amendment to Annual Report on Form 10-K10-K/A for its fiscalthe year ended December 31, 2016 (as filed, the "Annual Report"),2021, as filed with the SEC on April 17, 2017, in SGRPMay 2, 2022 (as so amended, the "'Annual Reports");(b) SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders held on May 18, 2017 (the "Proxy Statement"),July 12, 2022 which SGRPfiled with the SEC on April 28, 2017, and SGRPJune 13,2022(the "'Proxy Statements "); and (c) SGRP'sQuarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and statements as and when filed with the SEC (including this Quarterly Report, the Annual Report and the Proxy Statement, each a "SEC Report""SEC Report"). "Forward-looking statements" are defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act""Exchange Act"), and other applicable federal and state securities laws, rules and regulations, as amended (together with the Securities Act and Exchange Act, the "Securities Laws""Securities Laws").
AllReaders can identify forward-looking statements (other than thoseby the fact that are purely historical) are forward-looking statements. they do not relate strictly to historical or current facts.Words such as "may," "will," "expect," "intend", "believe", "estimate","intend," "believe," "estimate," "anticipate," "continue," "plan," "project," or the negative of these terms or other similar expressions also identify forward-looking statements. Forward-looking statements made by the Company in this Quarterly Report or the Annual Report may include (without limitation) statements regarding: risks, uncertainties, cautions, circumstances and other factors ("Risks"Risks");the potential continuing negative effects of the COVID-19 pandemic on the Company's business; the Company's potential non-compliance with applicable Nasdaq director independence; bid price or other rules;the Company's cash flow or financial condition; and plans, intentions, expectations, guidance or other information respecting the pursuit or achievement of the Company's fiveCompany's corporate objectives (growth, customer value, employee development, greater productivity & efficiency, and increased earnings per share), building upon the Company's strong foundation, leveraging compatible global opportunities, growing the Company's client base and contracts, continuing to strengthen its balance sheet, growing revenues and improving profitability through organic growth, new business development and strategic acquisitions, and continuing to control costs.objectives. The Company'sCompany's forward-looking statements also include (without limitation) those made in thethis Annual Report in "Business","Business," "Risk Factors",Factors," "Legal Proceedings", "Management'sProceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations", "Directors,Operations,""Directors, Executive Officers and Corporate Governance",Governance," "Executive Compensation",Compensation," "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters",Matters," and "Certain Relationships and Related Transactions, and Director Independence".Independence."
You should carefully review and consider the Company'sCompany's forward-looking statements (including all risk factors and other cautions and uncertainties) and other information made, contained or noted in or incorporated by reference into this Quarterly Report, the Annual Report, the Proxy Statement, the First Special Meeting Proxy/Information Statement and the First Special Meeting Report and the other applicable SEC Reports, but you should not place undue reliance on any of them. The results, actions, levels of activity,performance, achievements or condition of the Company (including its affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, performance, prospects, sales, strategies, taxation or other achievement, results, risks, trends or condition) and other events and circumstances planned, intended, anticipated, estimated or otherwise expected by the Company (collectively, "Expectations""Expectations"), and our forward-looking statements (including all Risks) and other information reflect the Company's Company's currentviews about future events and circumstances. Although the Company believes those Expectations and views are reasonable, the results, actions, levels of activity, performance, achievements or condition of the Company or other events and circumstances may differ materially from our Expectations and views, and they cannot be assured or guarantiedguaranteed by the Company, since they are subject to Risks and other assumptions, changes in circumstances and unpredictable events (many of which are beyond the Company'sCompany's control).In addition, new Risks arise from time to time, and it is impossible for the Company to predict these matters or how they may arise or affect the Company. Accordingly, the Company cannot assure you that its Expectations will be achieved in whole or in part, that it has identified all potential Risks, or that it can successfully avoid or mitigate such Risks in whole or in part, any of which could be significant and materially adverse to the Company and the value of your investment in the Company'sCompany's Common Stock.
These forward-looking statements reflect the Company's Expectations, views, Risks and assumptions only as of the date of this Quarterly Report, and the Company does not intend, assume any obligation, or promise to publicly update or revise any forward-looking statements (including any Risks or Expectations) or other information (in whole or in part), whether as a result of new information, new or worsening Risks or uncertainties, changed circumstances, future events, recognition, or otherwise.
SPAR Group, Inc. and Subsidiaries
GENERAL
GENERAL
SPAR Group, Inc., a Delaware corporation (“SGRP”), and its subsidiaries (together with SGRP, “SPAR Group” or the “Company”), is a leading global merchandising and brand marketing services company, providing a broad range of sales enhancing services to retailers across most classes of trade and consumer goods manufacturers and distributors around the world. The Company’s goal is to be the most creative, energizing and effective global services company that drives sales, margins and operating efficiency for our clients.
As of September 30, 2022, the Company operated in nine (9) countries including the United States, Canada, Mexico, Brazil, South Africa, Australia, China, Japan and India. Across all of these countries, the Company successfully executes programs through its multi-lingual logistics, reporting and communication technology, which provides clients value through real-time insight on store / product conditions.
With more than 50 years of experience and a diverse network of merchandising specialists’ around the world, the Company continues to grow its relationships with some of the world’s leading businesses. The combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates the Company from the competition.
The CompanyCompany’s focus is a diversified international merchandising, business technology and marketing services company and provides a broad array of services worldwideservices. The team works closely with clients to help companies improvedetermine their key objectives to execute globally, focusing on enhancing their sales operating efficiency and profits atprofit. At retail, locations. The Company provides itsthe Company’s merchandising brand marketing specialists perform a wide range of programs to maximize product sell-through to consumers. Some of these programs include launching new products, installing displays, assembling product fixtures, and other marketing services to manufacturers, distributorsensuring shelves are fully stocked and retailers worldwide, primarily in mass merchandise, office supply, value, grocery, drug, independent, convenience, toy, home improvement and electronics stores.reordering when they are not. The Company also provides furnitureassists with sales and other product assembly services in stores, homescustomer service. As retailers adapt to changes and offices. The Company has supplied these servicesnew opportunities, our team engages in the United States since certaintotal renovations and updating of its predecessors were formedstores, as well as preparing new locations for grand openings. The Company’s distribution associates work in 1979retail and internationally sinceconsumer goods distribution centers to prepare the Company acquired its first international subsidiary in Japan in May of 2001. The Company currently does business in 10 countries that encompass approximately 50% of the total world population through its operations in the United States, Australia, Brazil, Canada, China, India, Japan, Mexico, South Africa,centers to open, testing systems, putting away, picking products and Turkey.
Merchandising services primarily consist of regularly scheduled, special project and other product services provided at store level, and the Company may be engaged by either the retailer or the manufacturer. Those services may include restocking and adding new products, removing spoiled or outdated products, resetting categories "on the shelf" in accordance with client or store schematics, confirming and replacing shelf tags, setting new sale or promotional product displays and advertising, replenishing kiosks, demonstrating or promoting a product, providing on-site audit and in-store eventpeak 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 Industryfor our clients.
The merchandisingCompany’s business is led and marketing services industry includes manufacturers, retailers, brokers, distributorsoperated globally from its global headquarters in Auburn Hills, Michigan, with local leadership and professional service merchandising companies. Merchandising services primarily involve placing orders, shelf maintenance, display placement, reconfiguring products on store shelves and replenishing product inventory. Additional marketing services include but are not limited to new store sets and remodels, audits, sales assist, installation and assembly, product demos/sampling, promotion and various others. The Company believes that merchandising and marketing services add value to retailers, manufacturers and other businesses and enhance sales by making a product more visible and more available to consumers.offices in each country.
Historically, retailers staffed their stores as needed to provide these services to ensure that manufacturers' inventory levels, the advantageous display of new items on shelves, and the maintenance of shelf schematics and product placement were properly merchandised. However, retailers in an effort to improve their margins, have decreased their own store personnel and increased their reliance on manufacturers to perform such services. At one time, manufacturers attempted to satisfy the need for merchandising and marketing services in retail stores by utilizing their own sales representatives. Additionally, retailers also used their own employees to merchandise their stores to satisfy their own merchandising needs. However, both manufacturers and retailers discovered that using their own sales representatives and employees for this purpose was expensive and inefficient. In addition, the changing retail environment, driven by the rise of digital and mobile technology, is fostering even more challenges to the labor model of retailers and manufacturers. These challenges include increased consumer demand for more interaction and engagement with retail sales associates, stores remodels to accommodate more technology, installation and continual maintenance of in-store digital and mobile technology, in-store pick-up and fulfillment of online orders and increased inventory management to reduce out-of-stocks from omnichannel shopping.
Most manufacturers and retailers have been, and SPAR Group believes they will continue, outsourcing their merchandising and marketing service needs to third parties capable of operating at a lower cost by (among other things) serving multiple manufacturers simultaneously. The Company also believes that it is well positioned, as a domestic and international merchandising and marketing services company, to provide these services to retailers, manufacturers and other businesses around the world more effectively and efficiently than other available alternatives.
SPAR Group, Inc. and Subsidiaries
Another significant trend impacting the merchandising and marketing services business is the continued preference of consumers to shop in stores and their tendency to make product purchase decisions once inside the store. Accordingly, merchandising and marketing services and in-store product promotions have proliferated and diversified. Retailers are continually re-merchandising and re-modeling entire departments and stores in an effort to respond to new product developments and changes in consumer preferences. We estimate that these activities have increased in frequency over the last few years. Both retailers and manufacturers are seeking third party merchandisers to help them meet the increased demand for these labor-intensive services.
In addition, the consolidation of many retailers and changing store formats have created opportunities for third party merchandisers when an acquired retailer's stores are converted to the look and format of the acquiring retailer. In many of those cases, stores are completely remodeled and re-merchandised to implement the new store formats.
SPAR Group believes the current trend in business toward globalization fits well with its expansion model. As companies expand into foreign markets they will need assistance in merchandising or marketing their products. As evidenced in the United States, retailer and manufacturer sponsored merchandising and marketing programs are both expensive and inefficient. The Company also believes that the difficulties encountered by these programs are only exacerbated by the logistics of operating in foreign markets. This environment has created an opportunity for the Company to exploit its global Internet and data network based technology (through computers or mobile devices) and its business model worldwide.
The Company's Domestic and International Geographic Segments:
The Company provides similar merchandising, business technology and marketing services throughout the world, operating within two reportable segments, its Domestic and International Divisions. The Company tracks and reports certain financial information separately for these two segments using the same metrics. The primary measurement utilized by management is operating profit level, historically the key indicator of long-term growth and profitability, as the Company is focused on reinvesting the operating profits of each of its international subsidiaries back into local markets in an effort to improve its market share and continued expansion efforts. Certain financial information regarding each of the Company's two segments, which includes, among other items, their respective net revenues, operating income and net income for each of the three and nine month periods ended September 30, 2017 and 2016, and their respective assets as of September 30, 2017, and December 31, 2016, is provided above in Note 10 to the Company's Condensed Consolidated Financial Statements – Segment Information.
The Company's international business in each territory outside the United States is conducted through a foreign subsidiary incorporated in its primary territory. The primary territory establishment date (which may include predecessors), the percentage of the Company's equity ownership, and the principal office location for its US (domestic) subsidiaries and each of its foreign (international) subsidiaries is as follows:
Primary Territory | Date Established | SGRP Percentage Ownership |
Principal Office Location | |||
United States of America | 1979 | 100% | White Plains, New York, United States of America | |||
Japan | May 2001 | 100% | Tokyo, Japan | |||
Canada | June 2003 | 100% | Vaughan, Canada | |||
South Africa | April 2004 | 51% | Durban, South Africa | |||
India | April 2004 | 51% | New Delhi, India | |||
Australia | April 2006 | 51% | Melbourne, Australia | |||
China | March 2010 | 51% | Shanghai, China | |||
Mexico | August 2011 | 51% | Mexico City, Mexico | |||
Turkey | November 2011 | 51% | Istanbul, Turkey | |||
Brazil1 | September 2016 | 51% | Sao Paolo, Brazil |
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SPAR Group, Inc. and Subsidiaries
Critical Accounting Policies
Other than the adoption of accounting pronouncements as described above, there have been no significant changes to the Company's accounting policies since it filed its audited consolidated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2016, with the SEC on April 17, 2017.
Results of Operations
ThreeFor the three (3) months period ended September 30,, 2017, 2022, compared to the three (3) months period ended September 30, 202130, 2016
The following table sets forth selected financial data and data as a percentage of net revenues for the periods indicated (in thousands, except percent data).
Three Months Ended September 30, | Three Months Ended September 30, | |||||||||||||||||||||||||||||||
2017 | 2016 | 2022 | 2021 | |||||||||||||||||||||||||||||
| $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||
Net revenues | $ | 48,752 | 100.0 | % | $ | 33,438 | 100.0 | % | $ | 69,832 | 100.0 | % | $ | 67,423 | 100.0 | % | ||||||||||||||||
Cost of revenues | 39,960 | 82.0 | 26,162 | 78.2 | 56,992 | 81.6 | 54,813 | 81.3 | ||||||||||||||||||||||||
Gross profit | 8,792 | 18.0 | 7,276 | 21.8 | 12,840 | 18.4 | 12,610 | 18.7 | ||||||||||||||||||||||||
Selling, general & administrative expense | 7,477 | 15.3 | 6,360 | 19.0 | 10,614 | 15.2 | 9,426 | 14.0 | ||||||||||||||||||||||||
Depreciation & amortization | 487 | 1.0 | 486 | 1.5 | 506 | 0.7 | 509 | 0.8 | ||||||||||||||||||||||||
Operating income | 828 | 1.7 | 430 | 1.3 | 1,720 | 2.5 | 2,675 | 3.9 | ||||||||||||||||||||||||
Interest expense, net | 110 | 0.2 | 51 | 0.2 | 270 | 0.4 | 124 | 0.2 | ||||||||||||||||||||||||
Other (income), net | (78 | ) | (0.2 | ) | (78 | ) | (0.2 | ) | ||||||||||||||||||||||||
Other expense (income), net | (126 | ) | (0.2 | ) | (137 | ) | (0.2 | ) | ||||||||||||||||||||||||
Income before income taxes | 796 | 1.7 | 457 | 1.3 | 1,576 | 2.3 | 2,688 | 3.9 | ||||||||||||||||||||||||
Income tax expense (benefit) | 210 | 0.4 | (31 | ) | (0.1 | ) | ||||||||||||||||||||||||||
Income tax expense | 676 | 1.0 | 549 | 0.8 | ||||||||||||||||||||||||||||
Net income | 586 | 1.3 | 488 | 1.4 | 900 | 1.3 | 2,139 | 3.1 | ||||||||||||||||||||||||
Net income attributable to non-controlling interest | (340 | ) | (0.7 | ) | (546 | ) | (1.6 | ) | (932 | ) | (1.3 | ) | (959 | ) | (1.4 | ) | ||||||||||||||||
Net income (loss) attributable to SPAR Group, Inc. | $ | 246 | 0.6 | % | $ | (58 | ) | (0.2 | )% | $ | (32 | ) | (0.0 | )% | $ | 1,180 | 1.7 | % | ||||||||||||||
Net Revenues
Net revenues for the three (3) months period ended September 30, 2017,2022 were $48.8$69.8 million, compared to $33.4$67.4 million for the three (3) months period ended September 30, 2016,2021, an increase of $15.3$2.4 million or 45.8%3.6%. The increase in net revenue is primarily attributable to In the acquisition of our Brazil subsidiary, which contributed $9.3 million. In addition, the remainder of ourthird quarter many international segment increased $2.3 million,countries, particularly Japan and our domestic segment increased $3.7 million.South Africa, suffered from significant foreign exchange impact.
DomesticAmericas net revenues totaled $15.1$53.7 million inand $49.8 million for the three (3) months period ended September 30, 2017, compared to $11.3 million for the same period in 2016, an2022 and 2021, respectively. An increase of 32.9%. The increase$3.9 million or 7.8% was primarily due to an increaseorganic growth for US ($3.8 million or 13.2%) and Brazil business ($2.0 million or 13.3%), partially offset by decrease in project work compared to last year.Mexico driven by change of labor regulation (-$1.9 million or -44.8%).
InternationalAPAC net revenues totaled $33.7$7.1 million and $8.0 million for the three (3) months period ended September 30, 2017, compared to $22.1 million for the same period in 2016, an increase2022 and 2021, respectively. A decrease of $11.6$0.8 million or 52.4%. The increase in net revenues9.8% was primarily due to the continuing effects of COVID-19 in China (-$0.3 million or -7.4%) and foreign exchange impact for Japan (-$0.6 million or -26.8%), partially offset by increase of $0.2 million or 117.2% for Australia driven by recovery from COVID-19.
EMEA net revenues totaled $8.9 million and $9.7 million for the three (3) months period ended September 2016 acquisition30, 2022 and 2021, respectively. A decrease of our Brazilian operation, which added $9.3$0.7 million an increase inor 7.3% is driven by foreign exchange impact as South Africa of $0.8 million, and an increase in Japan of $0.6 million.suffered from double-digit foreign exchange delta.
Cost of Revenues
The Company's cost of revenues consists of its on-site labor and field administrationadministration fees, travel and other direct labor-relatedlabor related expenses and was 82.0%81.6% of its net revenues for the three (3) months period ended September 30, 2017,2022, and 78.2%81.3% of its net revenues for the three (3) months period ended September 30, 2016.2021.
DomesticAmericas cost of revenues was 76.5%82.8% of net revenues for both of the three (3) months period ended September 30, 2017,2022 and 73.5%2021. The Company continues to drive gross profit improvement initiatives to go above and beyond neutralizing inflation, labor costs pressure and rising travel costs.
APAC cost of revenues was 78.8% of net revenues and 72.8% of net revenues for the three (3) months period ended September 30, 2016. The2022 and 2021, respectively. An increase of 5.9% was primarily due to continuing effect of COVID-19 in China and costs to restart and normalize the business.
EMEA cost of revenues as a percentagewas 76.6% of net revenues of 3.0 percentage points was due primarily to continued price pressure and an unfavorable mix of project work compared to the same period last year. For the three months ended September 30, 2017 and 2016, approximately 68% and 76%, respectively, of the Company's domestic cost of revenues resulted from in-store merchandiser specialist, on-site assembly technician and field administration services, purchased from certain of the Company's affiliates, SBS, and SAS, respectively. (See Note 6 to the Condensed Consolidated Financial Statements - Related-Party Transactions.)
SPAR Group, Inc. and Subsidiaries
Internationally, the cost of revenues increased to 84.4%80.3% of net revenues for the three (3) months period ended September 30, 2017, compared to 80.7%2022 and 2021, respectively. A decrease of net revenues for the three months ended September 30, 2016. The cost of revenue increase of 3.7 percentage points 3.7% was primarily due to a mixexecution of higher costgross margin improvement initiatives and improvement for Bordax business in Brazil, China and Mexico.post acquisition.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of the Company include its corporate overhead, project management, information technology, executive compensation, human resources, legal and accounting expenses. Selling, general and administrative expenses werewere approximately $7.5$10.6 million and $6.4$9.4 million for the three (3) months period ended September 30, 20172022 and 2016,2021, respectively. The year-over-year increase was the result of (1) our planned investments in business development and marketing to drive the future business, an increase in non-capital technology spending to enable our insights and analytics business, improvements in operations as the company enters the next phase of its growth, and (2) one-time costs related to our announced strategic alternatives initiative and an increase in Non-Executive Director Board cash compensation.
DomesticAmericas selling, general and administrative expenses totaled $2.9$7.3 million and $5.8 million for both the three month periods(3) months period ended September 30, 20172022 and 2016,2021, respectively.
InternationalAPAC selling, general and administrative expenses totaled $4.6$1.8 million and $2.3 million for the three (3) months period ended September 30, 2017, compared2022 and 2021, respectively. The decrease is driven by cost reduction effort to $3.5minimize negative impact due to COVID-19.
EMEA selling, general and administrative expenses totaled $1.4 million and $1.2 million for the samethree (3) months period in 2016. The increase of approximately $1.1 million was primarily attributable to the Brazil acquisition.ended September 30, 2022 and 2021, respectively.
Depreciation and Amortization
Depreciation and amortization charges totaled $487,000$506,000 and $509,000 for the three (3) months period ended September 30, 2017,2022 and $486,000 for the same period in 2016.2021, respectively.
Interest Expense
The Company's net interest expense was $110,000$270,000 and $124,000 for the three (3) months period ended September 30, 2017, compared to $51,0002022 and 2021, respectively. The increase in driven by higher leverage of working capital credit facility for the three months ended September 30, 2016. The change is due primarily to increased domestic average borrowing and interest rate and lower interest income due to distribution of cash in the form of a dividend from South Africa. investments purpose.
Other Income
Other income totaled $78,000was $126,000 and $137,000 for both the three month periods(3) months period ended September, 30, 20172022 and 2016,2021, respectively.
Income Taxes
Income tax expense was $210,000$676,000 and $549,000 for the three months(3) months period ended September 30, 2017, compared2022 and 2021, respectively.
Non-controlling Interest
Net income related to a net tax benefit of $31,000the Company’s non-controlling interest was $932,000 and $959,000 for the three (3) months period ended September 30, 2016.2022 and 2021, respectively. The change is due primarilydecrease was attributed to improved domestic performance compared to prior year.
Non-controlling Interest
Net operating profitsless profit from the non-controlling interest, from the Company's 51% owned subsidiaries, resulted in a reduction of net income attributable to SPAR Group, Inc. of $340,000Mexico and $546,000 for the three months ended September 30, 2017China partially offset by Brazil and 2016, respectively.South Africa.
Net Income
The Company reported net income of $246,000Net loss attributable to SPAR was $32,000 for the three (3) months period ended September 30, 2017,2022, or $0.01$0.00 per diluted share, compared to a net loss of $58,000,$1.2 million, or $0.00$0.06 per diluted share, for the corresponding period last year. The change is due primarily to increased domestic and international sales.
SPAR Group, Inc. and Subsidiaries
NineFor the nine (9) months period ended September 30, 2017,2022, compared to the nine (9) months period ended September 30, 20162021
The following table sets forth selected financial data and data as a percentage of net revenues for the periods indicated (in thousands, except percent data).
Nine Months Ended September 30, | ||||||||||||||||
2017 | 2016 | |||||||||||||||
| $ | % | $ | % | |||||||||||||
Net revenues | $ | 131,361 | 100.0 | % | $ | 89,781 | 100.0 | % | ||||||||
Cost of revenues | 105,563 | 80.4 | 69,309 | 77.2 | ||||||||||||
Gross profit | 25,798 | 19.6 | 20,472 | 22.8 | ||||||||||||
Selling, general & administrative expense | 21,988 | 16.7 | 17,637 | 19.7 | ||||||||||||
Depreciation & amortization | 1,526 | 1.2 | 1,459 | 1.6 | ||||||||||||
Operating income | 2,284 | 1.7 | 1,376 | 1.5 | ||||||||||||
Interest expense, net | 117 | 0.1 | 111 | 0.1 | ||||||||||||
Other (income), net | (275 | ) | (0.2 | ) | (183 | ) | (0.2 | ) | ||||||||
Income before income taxes | 2,442 | 1.8 | 1,448 | 1.6 | ||||||||||||
Income tax expense | 907 | 0.7 | 200 | 0.2 | ||||||||||||
Net income | 1,535 | 1.1 | 1,248 | 1.4 | ||||||||||||
Net income attributable to non-controlling interest | (1,189 | ) | (0.9 | ) | (1,164 | ) | (1.3 | ) | ||||||||
Net income attributable to SPAR Group, Inc. | $ | 346 | 0.2 | % | $ | 84 | 0.1 | % | ||||||||
Nine Months Ended September 30, | ||||||||||||||||
2022 | 2021 | |||||||||||||||
$ | % | $ | % | |||||||||||||
Net revenues | $ | 196,626 | 100.0 | % | $ | 195,696 | 100.0 | % | ||||||||
Cost of revenues | 159,007 | 80.9 | 158,821 | 81.2 | ||||||||||||
Gross profit | 37,619 | 19.1 | 36,875 | 18.8 | ||||||||||||
Selling, general & administrative expense | 29,952 | 15.2 | 28,020 | 14.3 | ||||||||||||
Depreciation & amortization | 1,524 | 0.8 | 1,573 | 0.8 | ||||||||||||
Operating income | 6,143 | 3.1 | 7,282 | 3.7 | ||||||||||||
Interest expense, net | 595 | 0.3 | 402 | 0.2 | ||||||||||||
Other income, net | (363 | ) | (0.2 | ) | (208 | ) | (0.1 | ) | ||||||||
Income before income taxes | 5,911 | 3.0 | 7,088 | 3.6 | ||||||||||||
Income tax expense | 1,942 | 1.0 | 2,036 | 1.0 | ||||||||||||
Net income | 3,969 | 2.0 | 5,052 | 2.6 | ||||||||||||
Net income attributable to non-controlling interest | (2,180 | ) | (1.1 | ) | (2,441 | ) | (1.2 | ) | ||||||||
Net income attributable to SPAR Group, Inc. | $ | 1,789 | 0.9 | % | $ | 2,611 | 1.4 | % | ||||||||
Net Revenues
Net revenues for the nine (9) months period ended September 30, 2017,2022 were $131.3$196.6 million, compared to $89.8$195.7 million for the nine (9) months period ended September 30, 2016,2021, an increase of $41.5 million$900,000 or 46.3%0.1%. The increase in net revenue attributable to our international segment was $33.8 million, primarily from our Brazil, India and South Africa operations. Our domestic segment contributed an increase of $7.8 million compared to last year.
DomesticAmericas net revenuesrevenues totaled $40.1$150.0 million inand $146.2 million for the nine (9) months period ended September 30, 2017, compared to $32.3 million for the same period in 2016, an2022 and 2021, respectively. An increase of 24.2%. The increase$3.84million or 2.6% was primarily due to an increaserevenue growth for domestic business and Brazil, partially offset by decrease in project work comparedMexico. The decrease in revenue for Mexico was driven by changes in Mexican labor laws that became effective in July 2021, and led to last year.a reduction of our client base that started in the second half of 2021.
InternationalAPAC net revenuesrevenues totaled $91.3$19.4 million and $23.6 million for the nine (9) months period ended September 30, 2017, compared to $57.5 million for the same period in 2016, an increase2022 and 2021, respectively. A decrease of $33.8$4.2 million or 58.7%. The increase in net revenues17.9% was primarily due to the September 2016 acquisitioncontinuing effects of our Brazilian operation, which contributedCOVID-19 in China and Japan.
EMEA net revenues totaled $27.3 million and an$25.9 million for the nine (9) months period ended September 30, 2022 and 2021, respectively. An increase of $1.4 million or 5.3% is due to organic growth and the acquisition of Bordax in South Africa in July of 2021, partially offset by $4.8 million.foreign exchange impact.
Cost of Revenues
The Company's cost of revenues consists of its on-site labor and field administration fees, travel and other direct labor-relatedlabor related expenses and was 80.4%80.9% of its net revenues for the nine (9) months period ended September 30, 2017,2022, and 77.2%81.2% of its net revenues for the nine (9) months period ended September 30, 2016.2021.
DomesticAmericas cost of revenues was 73.6%81.7% of net revenues and 82.5% of net revenues for the nine (9) months period ended September 30, 2017, and 71.5%2022 and 2021, respectively. A decrease of 0.8% was primarily due to execution of gross margin improvement initiatives for the domestic business.
APAC cost of revenues was 77.0% of net revenues and 72.4% of net revenues for the nine (9) months period ended September 30, 2016. The2022 and 2021, respectively. An increase of 4.6% was primarily due to continuing effect of COVID-19 and restarting costs to normalize business in China.
EMEA cost of revenues as a percentagewas 79.0% of net revenues and 81.6% of 2.1 percentage points was due primarily to continued price pressure and an unfavorable mix of project work compared to the same period last year. Fornet revenues for the nine (9) months period ended September 30, 20172022 and 2016, approximately 77% and 80%, respectively,2021, respectively. A decrease of the Company's domestic cost of revenues resulted from in-store merchandiser specialist, on-site assembly technician and field administration services, purchased from certain of the Company's affiliates, SBS and SAS, respectively. (See Note 62.5% was primarily due to the Condensed Consolidated Financial Statements - Related-Party Transactions.)South Africa's margin improvement initiatives.
SPAR Group, Inc. and Subsidiaries
Internationally, the cost of revenues increased to 83.3% of net revenues for the nine months ended September 30, 2017, compared to 80.4% of net revenues for the nine months ended September 30, 2016. The cost of revenue increase of 2.9 percentage points was primarily due to a mix of higher cost margin business in Brazil and Mexico.
Selling, General and Administrative Expenses
Selling, general and administrative expenses of the Company include its corporate overhead, project management, information technology, executive compensation, human resources, legal and accounting expenses. Selling, general and administrative expenses werewere approximately $22.0$29.9 million and $17.6$28.0 million for the nine (9) months period ended September 30, 20172022 and 2016,2021, respectively. The year-over-year increase was the result of additional expenditures needed for continued investment in the growth of the business.
DomesticAmericas selling, general and administrative expenses totaled $8.9$20.1 million and $8.3$17.9 million for the nine month periods(9) months period ended September 30, 20172022 and 2016,2021, respectively. The increase in selling, general and administrative expense was directly related to increased spending on accounting and legal services.
InternationalAPAC selling, general and administrative expenses totaled $13.1$5.9 million and $6.8 million for the nine (9) months period ended September 30, 2017, compared2022 and 2021, respectively. The decrease is driven by cost reduction effort to $9.3minimize negative impact due to COVID-19.
EMEA selling, general and administrative expenses totaled $3.9 million and $3.4 million for the samenine (9) months period in 2016. The increase of approximately $3.8 million was primarily attributable to the Brazil acquisition.ended September 30, 2022 and 2021, respectively.
Depreciation and Amortization
Depreciation and amortization charges totaled $1.5 million and $1.6 million for both the nine (9) months period ended September 30, 2017,2022 and 2016.2021, respectively.
Interest Expense
The Company's net interest expense was $117,000$595,000 and $402,000 for the nine (9) months period ended September 30, 2017, compared to net interest expense of $111,000 for the nine months ended September 30, 2016.2022 and 2021, respectively.
Other - Income
Other Income
Other income totaled $275,000 was $363,000 and $183,000$208,000 for the nine (9) months period ended September 30, 20172022 and 2016, respectively, with the increase primarily in South Africa.2021, respectively.
Income Taxes
Income tax expense was $907,000$1.9 million and $2.0 million for the nine (9) months period ended September 30, 2017, compared2022 and September 30, 2021., respectively.
Non-controlling Interest
Net income related to $200,000the Company’s non-controlling interest was $2.2 million for the nine (9) months period ended September 30, 2016. The change is due primarily to improved domestic performance compared to prior year.
Non-controlling Interest
Net operating profits2022 from the non-controlling interest, from the Company's 51% owned subsidiaries, resulted in a reduction of net income attributable to SPAR Group, Inc. of $1.2$2.4 million for both the nine (9) months period ended September 30, 20172021. The decrease was attributed to less profit from Mexico and 2016.China partially offset by Brazil and South Africa.
Net Income
The Company reported a netNet income of $346,000attributable to SPAR was $1.8 million for the nine (9) months period ended September 30, 2017,30, 2022, or $0.02$0.08 per diluted share, compared to $84,000,$2.6 million, or $0.00$0.12 per diluted share, for the corresponding period last year.
Critical Accounting Estimates
Our significant accounting policies are described in Note 2, Significant Accounting Policies, to the consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2021.
We prepare our condensed consolidated financial statements in conformity with U.S. GAAP. The preparation of these financial statements requires the use of estimates, judgments, and assumptions. Our critical accounting estimates and assumptions related to goodwill and intangible assets are described below. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in our Annual Report on Form 10-K for the year ended December 31, 2021 for a discussion of our other critical accounting estimates and assumptions.
Goodwill and Intangible Assets
The Company is required to test goodwill for impairment annually or more frequently, whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit with goodwill below its carrying amount. The Company annually tests goodwill impairment during the fourth quarter. See Note 8, Long-lived Assets, Including Goodwill and Intangible Assets, for additional information.
The Company’s long-lived intangible assets balance was $2.1 million as of September 30, 2022 and $2.3 million as of September 30, 2021. The Company is only required to test intangible assets whenever events occur or circumstances change that would more likely than not reduce the fair value of the assets below its carrying value.
The Company acquired Resource Plus in 2018 as a joint venture partnership and currently owns 51% of the Resource Plus business. As of September 30, 2022, the Company has recorded $2.0 million of goodwill and $1.2 million of intangible assets relating to brand and technology. In early 2021, Resource Plus lost a significant customer, Lowes Live Nursery Business. Resource Plus revenue was $15.3 million in 2021 comparing to $28.0 million in 2020, and net loss attributable to SPAR in 2021 was $116,000 comparing to net income attributable to SPAR of $679,000 in 2020. During the second and third quarters of 2022, Resource Plus did not meet original forecast and reduced forecasts for the remainder of 2022.
As a result of these circumstances, the Company concluded it was more likely than not that the fair value of the reporting unit was less than its carrying amount, and performed an interim quantitative assessment. The quantitative assessment was performed utilizing the income approach. The analysis required the comparison of the Company’s carrying value with its fair value, with an impairment recorded for any excess of carrying value over the fair value. The discounted cash flow method was used to determine the fair value of the reporting unit under the income approach. The results of the quantitative analysis performed indicated the fair value of the reporting unit exceeded the carrying value of the reporting unit as of September 30, 2022 by 2.3%, which is not a substantial amount. As a result, the Company has determined goodwill impairment is not needed.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires us to make assumptions and estimates regarding our future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, and other market factors. Our current expectations also include certain assumptions that could be negatively impacted if we are unable to meet our cost expectations in relation to inflation. If current expectations of future growth rates and margins are not met, if market factors outside of our control, such as discount rates, income tax rates, foreign currency exchange rates, inflation, or any factors that could be affected by COVID-19, change, or if management’s expectations or plans otherwise change, including updates to our long-term operating plans, then one or more of our reporting units might become impaired in the future.
The Company also performed an interim quantitative assessment for the intangible assets. The Company evaluates the need to adjust the carrying value of the underlying assets if the sum of the expected cash flows is less than the carrying value. The Company’s projections of future cash flows, the level of actual cash flows, the methods of estimation used for determining fair values and salvage values can impact impairment. Based on the assessment, the Company concluded no impairment or write-down is required.
Liquidity and Capital Resources
InFor the nine months ended September 30, 2017, the Company had a2022, net income before non-controllingnon-controlling interest of $1.5was $4.0 million.
SPAR Group, Inc. and Subsidiaries
Net cash provided byused in operating activities was $6.4 million and $2.1$4.2 million for the nine (9) months period ended September 30, 2017 and 2016, respectively. The2022, compared to net cash provided by operating activities of $1.1 million for the nine (9) months period ended September 30, 2021. The net cash used in operating activities during the nine (9) months period ended September 30, 2017,2022, was primarily due to cash-impacting earnings and an increase in withholding tax assets from Brazil, and decrease in accrued expenses,liabilities due to payments made under the Majority Stockholders CIC Agreement. Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and the other current liabilities, customer incentivesrisks detailed in the section titled "Risk Factors" included elsewhere in our Annual Report. However, the Company believes that existing cash, cash equivalents, short-term investment balances, funds available under our debt agreement, and depositscash generated from operations, will be sufficient to meet our working capital and accounts payable, partially offset by an increase in accounts receivable, prepaid expenses and other current assets.capital expenditure requirements for at least the next twelve (12) months.
Net cash used in investing activities was $1.0$1.2 million for the nine months ended September 30, 2017,2022, compared to $1.5$2.4 million for the nine months ended September 30, 2016.2021. The net cash used in investing activities during the nine months ended September 30, 2017, 2022, was due tofor fixed asset additions, primarily capitalized software.
SPAR Group, Inc. and Subsidiaries
Net cash used inprovided by financing activities for the nine months ended September 30, 2017,2022, was approximately $5.7$9.3 million compared to $1.8$4.4 million provided by financing activities for the ninenine months ended September 30, 2016.2021. Net cash used inprovided by financing activities during the nine months ended September 30, 2017,2022, was primarily due to net paymentshigher draws on lines of credit, and a distribution to non-controlling local investors in South Africa.credit.
The aboveabove activity and the impact of foreign exchange rate changes resulted in an increasea decrease in cash, and cash equivalents and restricted cash for the nine months ended September 30, 20172022, of approximately $338,000.$12.1 million. All international countries except for Brazil are facing inflation challenge with direct negative impact of foreign exchange rates.
At September 30, 2017, theThe Company had net working capital of $12.9 million,$24.7 million and $21.8 million as compared to net working capital of $12.5 million atSeptember 30, 2022, and December 31, 2016.2021, respectively. The Company's current ratio was 1.4 at bothas of September 30, 2017,2022, and 1.4 as of December 31, 2016, respectively.2021.
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.item.
Controls and Procedures |
Management's Evaluation of Disclosure Controls and Procedures
Item 4. Controls and Procedures
Restatement of Previously Issued Financial Statements
An evaluation was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2017. The evaluation of our disclosure controls and procedures by ourCompany's Chief Executive Officer and Chief Financial Officer included a reviewhave each reviewed and evaluated the effectiveness of the restatement describedCompany's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the filingend of the period covered by this Form 10-Q, where we restated our consolidated balance sheet, consolidated statements of operationsreport, as required by Exchange Act Rules 13a-15(b) and comprehensive income and consolidated statements of equity.Rule 15d-15(b). Based on thisthat evaluation, ourthe Chief Executive Officer and Chief Financial Officer have each concluded that ourthe Company's current disclosure controls and procedures were notare effective as of September 30, 2017, atto ensure that the reasonable assurance level, to enable us to record, process, summarize and report information required to be disclosed by usthe Company in reports that we fileit files, or submitsubmits under the Exchange Act were recorded, processed, summarized and reported within the time periodsperiod specified in the SECCommission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or forms duesubmits under the Exchange Act is accumulated and communicated to the material weakness described below.issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Material WeaknessChanges in Internal Control overControls Over Financial Reporting
A material weakness is defined as a deficiency or combination of deficienciesThere have been no changes in the Company's internal controlcontrols over financial reporting such that there is a reasonable possibilityoccurred during the Company's third quarter of its 2022 fiscal year that a material misstatement of annualmaterially affected, or interim consolidated financial statements will not be prevented or detected on a timely basis. In connection withare reasonably likely to materially affect, the evaluation of our disclosureCompany's internal controls and procedures as of September 30, 2017, we identified a material weakness in our internal control over financial reporting associated with the recognition of accumulated other comprehensive loss both in the equity section of the consolidated balance sheet and the comprehensive loss portion of the consolidated statement of income and comprehensive loss.reporting.
The Company did not design and maintain effective control over the assessment of the presentation of foreign currency translation adjustments when preparing the consolidated financial statements. While this is considered a material weakness in internal control over financial reporting, the Company determined that the related impact was not material to the results of operations or financial position for any prior annual or interim period as described above in Note 2 of the Company's prior period financial statements for the year ended December 31, 2016.
SPAR Group, Inc. and Subsidiaries
Changes in Internal Control over Financial Reporting
Other than the material weakness as set forth above during the quarter ended September 30, 2017, there have been no changes in our internal controls over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during the quarter ended September 30, 2017, identified in connection with our evaluation that has materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management's Remediation Initiatives
We have taken, and continue to take, the actions described below to remediate the identified material weakness. As we continue to evaluate and work to improve our internal controls over financial reporting, our senior management may determine to take additional measures to address control deficiencies or modify the remediation efforts, or in appropriate circumstances not to complete certain of the remediation measures described in this section. While the Audit Committee and senior management are closely monitoring the implementation, until the remediation efforts discussed in this section, including any additional remediation efforts that our senior management identifies as necessary, are completed, tested, and determined effective, the material weakness described above will continue to exist.
To address this material weakness, our management has implemented new procedures and internal controls surrounding the reporting of its majority owned international subsidiaries to ensure comprehensive income (loss) and non-controlling interest are properly adjusted to account for the impact of foreign currency translation.
SPAR Group, Inc. and Subsidiaries
PART II: OTHER INFORMATION
Legal Proceedings |
The Company is a party to various legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company'sCompany's management, dispositionresolution of these matters areis not anticipated to have a material adverse effect on the Company or its estimated or desired affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition.
The Company executes the services it provides to its domestic clients primarily through independent field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), almost allFor further discussion of whom are engaged and provided as independent contractors by SBS. For contractual details and payment amounts,certain legal proceedings, see Note 6 “Related-Party Transactions” and Note 9 “Commitments and Contingencies” of the Notes to the Company'sthe’ Condensed Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services, above.
The appropriatenessincluded in Part I, Item 1 of SBS's treatmentthis Quarterly Report on Form 10-Q, which is incorporated herein by reference, and Note 6 “Commitments and Contingencies” of its Field Specialists as independent contractors has been periodically subject to legal challenge (both currently and historically) by various states and others, SBS's expenses of defending those challenges and other proceedings have historically been reimbursed by the Company under SBS's Prior Agreement, and SBS's expenses of defending those challenges and other proceedings were reimbursed by the Company during the three month periods ended September 30, 2017 and 2016 (in the amounts of $39,000 and $144,000, respectively), and the nine month periods ended September 30, 2017 and 2016 (in the amounts of $218,000 and $587,000, respectively), after determination (on a case by case basis) that those defense expenses were costs of providing servicesNotes to the Company. The Company has advised SBS that, since there is no currently effective comprehensive written services agreement with SBS, the Company will continue to review and decide each request by SBS for reimbursement of its legal defense expenses (including appeals)’Condensed Consolidated Financial Statements included in Part IV, Item 15 on a case-by-case basis in its discretion, including the relative costs and benefits to the Company. The Company has not agreed, and does not currently intend, to reimburse SBS for any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceedingagainst or involving SBS, and the Company does not believe it has ever done so (other than in insignificant nuisance amounts). However, there can be no assurance that SBS will be able to satisfy any such judgment or similar amount resulting from any adverse legal determination, that SBS or someone else will not claim, or that SBS will be able to successfully defend any claim, that the Company is liable (through reimbursement, indemnification or otherwise) for any such judgment or similar amount imposed against SBS. Furthermore, there can be no assurance that SBS will succeed in defending any such legal challenge, the legal expenses of prolonged litigation and appeals could continue to be (and have from time to time been) significant, and prolonged litigation and appeals and any adverse determination in any such challenge could have a material adverse effect on SBS's ability to provide services needed by the Company and the Company's costs of doing business.
Current material and potentially material proceedings against SBS and, in one instance, the Company are described below. These descriptions are based on an independent review by the Company and do not reflect the views of SBS, its management or its counsel.
SBS Clothier Litigation
Melissa Clothier was engaged by SBS (then known as SPAR Marketing Services, Inc.) and provided services pursuant to the terms of an "Independent Merchandiser Agreement" acknowledging her engagement as an independent contractor. On June 30, 2014, Ms. Clothier filed suit against SBS and the Company styled Case No. RG12 639317, in the Superior Court in Alameda County, California, in which Ms. Clothier asserted claims on behalf of herself and a putative class of similarly situated merchandisers in California who are or were classified as independent contractors at any time between July 16, 2008, and June 30, 2014. Ms. Clothier alleged that she and other class members were misclassified as independent contractors and that, as a result of this misclassification, the defendants improperly underpaid them in violation of various California minimum wage and overtime laws. The Company was subsequently dismissed from the action without prejudice. The court ordered that the case be heard in two phases. Phase one was limited to the determination of whether members of the class were misclassified as independent contractors. After hearing evidence, receiving post-trial briefings and considering the issues, the Court issued its Statement of Decision on September 9, 2016, finding that the class members had been misclassified as independent contractors rather than employees. The parties have now moved into phase two to determine damages (if any), which included discovery as to the measure of damages in the case. Trial on phase two was scheduled for September 11, 2017, but was postponed. The Court has scheduled a case management conference for December 19, 2017, to establish a new trial date for phase two. SBS has advised the Company that SBS will appeal the adverse phase one determination when permitted under the court's rules.Annual Report From 10-K.
SPAR Group, Inc. and Subsidiaries
Risk FactorsSBS Rodgers LitigationMaceo Rodgers was engaged by and provided services to SBS pursuant to the terms of his "Master Agreements" with SBS acknowledging his engagement as an independent contractor. On February 21, 2014, Rodgers filed suit against SBS, Robert G. Brown and William H. Bartels, styled Civil Action No. 3:14-CV-00055, in the U.S. District Court for the Southern District of Texas (Galveston Division). Plaintiff asserted claims on behalf of himself and an alleged class of similarly situated individuals who provided services to SBS as independent contractors at any time on or after July 15, 2012, claiming they all were misclassified as independent contractors and that, as a result of this misclassification, the Defendants improperly underpaid them in violation of the Fair Labor Standards Act's overtime and minimum wage provisions. Although the Court conditionally certified the class on December 8, 2015, only 61 individuals joined the action as opt-in plaintiffs, and all but 11 of them have potentially disqualifying arbitration provisions, residences outside the class's geographic area, or late opt-in filings, and were challenged by the Defendants in various motions, including a motion to decertify the class. The Court, however, did not rule on these motions and instead stayed the case on September 19, 2017, to allow the parties to mediate. On October 24, 2017, the Court granted the parties' joint motion to extend the stay order until January 31, 2018.SBS and SGRP Hogan Litigation Paradise Hogan was engaged by and provided services to SBS as an independent contractor pursuant to the terms of an "Independent Contractor Master Agreement" with SBS acknowledging his engagement as an independent contractor. On January 6, 2017, Hogan filed suit against SBS and SGRP and part of the Company), styled Civil Action No. 1:17-cv-10024-LTS, in the U.S. District Court for District of Massachusetts. Hogan initially asserted claims on behalf of himself and an alleged nationwide class of similarly situated individuals who provided services to SBS and SGRP as independent contractors. Hogan alleged that he and other alleged class members were misclassified as independent contractors, and as a result of this purported misclassification, Hogan asserted claims on behalf of himself and the alleged Massachusetts class members under the Massachusetts Wage Act and Minimum Wage Law for failure to pay overtime and minimum wages, as well as state law claims for breach of contract, unjust enrichment, quantum meruit, and breach of the covenant of good faith and fair dealing. In addition, Hogan asserted claims on behalf of himself and the nationwide class for violation of the Fair Labor Standards Act's overtime and minimum wage provisions. On March 28, 2017, the Company moved to refer Hogan's claim to arbitration pursuant to his agreement, to dismiss or stay Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted. Plaintiff's counsel subsequently notified SGRP's attorney of their intent to amend their Complaint without prejudice. The Amended Complaint, which was filed on May 2, 2017, eliminated all of Plaintiff's claims except for a single claim against SGRP for failure to pay Hogan and a similarly situated class of Massachusetts independent contractors all wages under the Massachusetts Wage Act and a separate, but identical claim against SBS. The result of the amendment significantly narrowed the scope of the litigation and eliminated the original nationwide Fair Labor Standards Act claims. The Company was granted leave to refile their motion to compel arbitration to dismiss Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted. The Company's motion was filed on June 7, 2017, Plaintiff's opposition to the Company's motion was filed on June 21, 2017, and the Company thereafter filed a reply brief in support of its motion on June 30, 2017. The parties currently await a hearing date on the Company's motion. Potential Adverse Effects of the SBS LitigationAny prolonged continuation of or material increase in the legal defense costs of SBS (and thus the reimbursable expenses SBS may charge to and that may be paid by the Companyto the extent reimbursement is approved by the Company in its discretion), the failure of SBS to satisfy any judgment or similar amount (including any damages, settlement, or related tax, penalty, or interest) in any legal challenge or other proceeding imposed against or involving SBS, any claim by SBS, any other related party or any third party that the Company is somehow liable for any such judgment or similar amount imposed against SBS or other related party, any judicial determination that the Company is somehow liable for any such judgment or similar amount imposed against SBS or other related party (in whole or in part), any decrease in SBS's performance (quality or otherwise), any inability by SBS to execute the services for the Company, or any increase in the Company's use of employees (rather than independent contractors) as its domestic Field Specialists, in each case in whole or in part, could have a material adverse effect on the Company or its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected. See Note 6 to the Company's Consolidated Financial Statements – Related Party Transactions – Domestic Related Party Services, above.SPAR Group, Inc. and Subsidiaries
Item 1A. Risk Factors
Existing Risk Factors
Various risk factors applicable to the Company and its businesses are described in Item 1A under the caption "Risk Factors" in the 2016 Annual Report, which risk factorsRisk Factors are incorporated by reference into this Quarterly Report.
There have been no material changes in the Company's risk factors since the 2016 Annual Report other than as disclosed below.Report. You should review and give attention to all of those Risk Factors.
We have identified a material weakness in our internal control over financial reporting. If we fail to remediate this material weakness, our ability to produce accurate and timely financial statements could be impaired, which could adversely affect investor views of us and the value of our common stock.
As a public company, we are required to comply with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, regarding internal control over financial reporting. In connection with our evaluation of compliance, we identified a material weakness in our internal control over financial reporting as of March 31, 2017. A "material weakness" is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. During the first quarter of 2017, we have identified a material weakness in our internal control over financial reporting associated with the recognition of accumulated other comprehensive loss both in the equity section of the consolidated balance sheet and the comprehensive loss portion of the consolidated statement of income and comprehensive loss. Specifically, the Company previously attributed 100% of the foreign currency translation adjustment recorded in annual comprehensive loss to the Company compared to allocating a proportionate amount to the non-controlling interest portion on both the consolidated balance sheet and the consolidated statement of income and comprehensive loss. To address this material weakness, our management has implemented new procedures and internal controls surrounding the reporting of its majority owned international subsidiaries to insure comprehensive income (loss) and non-controlling interest are properly adjusted to account for the impact of foreign currency translation. However, these steps will take time to fully integrate and confirm, and until the remediation steps are fully implemented and tested, the material weakness will continue to exist.
If we fail to remediate the identified material weakness or identify further material weaknesses, we may not be able to accurately report our financial results, prevent fraud, or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price. In addition, our failure to timely file our periodic reports could eventually result in the delisting of our common stock from the New York Stock Exchange, regulatory sanctions from the SEC, and/or the breach of covenants in our credit facilities or of any preferred equity or debt securities we may issue in the future, any of which could have a material adverse impact on our operations and your investment in our common stock.
Unregistered Sales of Equity Securities and Use of ProceedsItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.applicable.
Defaults upon Senior SecuritiesItem 3. Defaults upon Senior Securities
Not applicable.
Mine Safety Disclosures |
Not applicable.
Other Information |
Not applicable.
SPAR Group, Inc. and Subsidiaries
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
Not applicable.
ExhibitsItem 6. Exhibits
31.1 | |||
31.2 | |||
32.1 | |||
32.2 |
101.INS | Inline XBRL Instance Document - the instance document does not appear in the interactive Inline XBRL document. | |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | Inline XBRL Taxonomy Extension | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
SPAR Group, Inc. and Subsidiaries
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 14, | SPAR Group, Inc., Registrant |
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