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sgrp20220930_10q.htm
0001004989 SPAR GROUP, Inc. false --12-31 Q3 2022 0.01 0.01 2,445,598 2,445,598 0 0 0 0 0.01 0.01 2,000,000 2,000,000 1,017,133 0 0.01 0.01 47,000,000 47,000,000 22,681,599 21,320,414 201,980 54,329 285 633 3 1,000 2.1 5.9 0.01 325,000 325,000 325,000 325,000 0 1 Represent loans due from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). 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Table of Contents

 

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.

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 incorporation or organization)

(I.R.S. Employer Identification No.)

  

  

1910 Opdyke Court, Auburn Hills, Michigan

48326

(Address of principal executive offices)

(Zip Code)

 

Registrant's telephone number, including area code: (248) 364-7727

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ☒   No  ☐

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files)  Yes  ☒   No  ☐

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.). (Check one):

 

Large Accelerated Filer ☐    Accelerated Filer ☐ 
  
Non-Accelerated Filer  ☒ Smaller reporting company
  
Emerging Growth Company  

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes  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

Symbol(s)

Name of each exchange on which registered

Common

SGRP

Nasdaq

 

The number of shares of the Registrant's Common Stock outstanding as of November 4, 2022, was 22,717,456 shares.

 

 
 

 

SPAR Group, Inc.

 

Index

 

PART I: FINANCIAL INFORMATION  
     

Item 1

Consolidated Financial Statements (Unaudited)

 
     
 

Condensed Consolidated Statements of Income (Loss) and Comprehensive Income for the three (3) and nine (9) months ended September 30, 2022 and 2021(Unaudited)

2

     
 

Condensed Consolidated Balance Sheets as of September 30, 2022 , and December 31, 2021(Unaudited)

3

 

   
 

Condensed Consolidated Statement of Equity for the three (3) and nine (9) months ended September 30, 2022 and 2021(Unaudited)

4

     
 

Condensed Consolidated Statements of Cash Flows for the nine (9) months ended September 30, 2022 and 2021(Unaudited)

6

     

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

7

     

Item 2

Management's Discussion and Analysis of Financial Condition and Results of Operations

20

 

   

Item 3

Quantitative and Qualitative Disclosures about Market Risk

25

     

Item 4

Controls and Procedures

25

     
PART II: OTHER INFORMATION  
     

Item 1

Legal Proceedings

26

     

Item 1A

Risk Factors

27
     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

27
     

Item 3

Defaults Upon Senior Securities

27
     

Item 4

Mine Safety Disclosures

27
     

Item 5

Other Information

27
     

Item 6

Exhibits

28
     

SIGNATURES

29

 

 

 

PART I:

FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

 

 SPAR Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

(unaudited)

(In thousands, except share and per share data)

 

   

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 Balance Sheets

(unaudited)

(In thousands, except share and per share data) 

 

  

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 

 

See accompanying notes.

 

 

 

 

SPAR Group, Inc. and Subsidiaries

Condensed Consolidated Statement of Equity

(unaudited) 

(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, 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 condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. All intercompany balances and transactions have been eliminated in the accompanying condensed consolidated financial statements.

 

Unaudited Interim Consolidated Financial Information

 

The accompanying interim condensed consolidated balance sheet as of September 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 prepared on the same basis as the audited consolidated financial statements and includes all normal and recurring adjustments necessary for the fair presentation of 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 accordance 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 period.

 

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 Company's Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on April 15, 2022, (the "Annual Report").

 

 

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 retailers, consumer goods manufacturers and distributors 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 world’s leading businesses, we provide specialized capabilities across nine (9) countries and five (5) continents. Our unique combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates us from the competition. 

 

The Company 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 joint venture in China were impacted for most of the second quarter and in the third quarter. In the third quarter of 2022, the joint venture in China generated a net loss attributable to SPAR Group inc. of $73,000 and $348,000 for the three and nine-months ended September 30, 2022, respectively, as compared to net income of $25,000 and $23,000 for the three and nine-months ended 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 $2.3 million or 22% as a result of the lockdown for the three 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 determine course of actions.

 

7

 

SPAR Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) (continued)

 

 

3.

Restricted Cash

 

Fifth Third CreditFacility

 

One of the 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 restricted cash, as presented in the consolidated statements of cash flow, is as follows (in thousands):

 

    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  

 

 

4.

Earnings Per Share

 

The following table sets forth the computations of basic and diluted Net income (loss) per share (in thousands, except per share data):

 

  

Three Months Ended

  

Nine Months Ended

 
  

September 30,

  

September 30,

 
  

2022

  

2021

  

2022

  

2021

 

Numerator:

                

Net income (loss) attributable to SPAR Group, Inc.

 $(32) $1,180  $1,789  $2,611 
                 

Denominator:

                

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 
                 

Basic and diluted Net income (loss) per common share:

 $0.00  $0.06  $0.08  $0.12 

 

For 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.

 

 

8

 

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 o 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.

 

9

 

SPAR Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) (continued)

 

International Credit Facilities

 

SPARFACTS Australia Pty. Ltd. has a secured line of credit facility with National Australia Bank, effective October 31, 2017, for $800,000 (Australian) or approximately $517,000 USD (based upon the exchange rate at September 30, 2022). The facility provides for borrowing based upon a formula, as defined in the applicable loan agreement (principally 80% of eligible accounts receivable less certain deductions). The outstanding balance with National Australia Bank as of  September 30, 2022 was $174,000 (Australian) or $113,000 USD and was $164,000 (Australian) or $118,000 USD as of  December 31, 2021is due on demand.

 

SPAR China has secured a loan with Industrial and Commercial Bank of China, effective December 21, 2021, for 2.0 million Chinese Yuan or approximately $281,000 USD (based upon the exchange rate at September 30, 2022). The loan expires on November 4, 2022. The outstanding balance with Industrial and Commercial Bank of China as of  September 30, 2022 was 2.0 million Chinese Yuan or $281,000 USD and is due on demand.

 

SPAR China has secured a loan with People's Bank of China for 1.0 million Chinese Yuan or approximately $141,000 USD (based upon the exchange rate at September 30, 2022). The loan expired on June 7, 2022 and subsequently was not renewed. There is no outstanding balance on this loan.

 

SPAR China has secured a loan with Industrial Bank for 3.0 million Chinese Yuan or approximately $422,000 USD (based upon the exchange rate at September 30, 2022). The loan expires on December 18, 2022. The annual interest rate was 4.0% as of  September 30, 2022. The outstanding balance with Industrial Bank as of  September 30, 2022 was 3.0 million Chinese Yuan or $422,000 USD and is due on demand.

 

SGRP Meridian has secured a loan with Investec Bank Ltd, for 30.0 million South African Rand or approximately $1.7 million USD (based upon the exchange rate at September 30, 2022). The loan expires on July 13, 2023. The outstanding balance with Investec Bank Ltd as of  September 30, 2022 was approximately $18.4 million South African Rand or $1.0 million USD.

 

 

 

Summary of the Companys 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,

  

December 31,

 
  

2022

  

2021

 

Unused Availability:

        

United States / Canada

 $1,815  $5,319 

Australia

  416   455 

South Africa

  643   - 

China

  -   157 

Mexico

  374   743 

Total Unused Availability

 $3,248  $6,674 

 

Management believes that based upon the continuation of the Company's existing credit facilities, projected results of operations, vendor payment requirements and other financing available to the Company (including amounts due to affiliates), sources of cash availability should be manageable and sufficient to support ongoing operations over the next year. However, delays in collection of receivables due from any of the Company's major clients, or a significant reduction in business from such clients could have a material adverse effect on the Company's cash resources and its ongoing ability to fund operations.

 

10

 

SPAR Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) (continued)

 

 

6.

Related-Party Transactions

 

Domestic Related Party Transactions

 

Change of Control, Voting and Restricted Stock Agreement

 

Approved by the Board and the Audit Committee and accepted by the Majority Stockholders (defined below) on December 31, 2021, and signed and effective January 28, 2022, SGRP entered into the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement"), by and among SGRP, Robert G. Brown, ("Mr. Brown"), William H. Bartels, ("Mr. Bartels"), SPAR Administrative Services, Inc., ("SAS"), and SPAR Business Services, Inc., ("SBS"), and collectively with Mr. Brown, Mr. Bartels, SAS and SBS, the ("Majority Stockholders") (the "Agreement").

 

The financial terms of the CIC Agreement to the Majority Stockholders, totaling $4,477,585 and fully 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

 

Effective January 26, 2022, SGRP entered into a consulting agreement with Mr. James R. Brown, Sr., following his retirement as a director of SGRP on January 25, 2022, pursuant to which Mr. Brown will serve as a Board advisor to SGRP from time to time 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 will be pro-rated for partial quarters. The consultant fee paid to Mr. Brown was $13,750 for the three-months and $41,250 for the nine-months period ended September, 2022.

 

Panagiotis Lazaretos Consulting Agreement

 

Effective February 1, 2022, SGRP entered into a consulting 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 January 25, 2022, Thenablers, Ltd. agreed to provide the consulting services of Mr. Lazaretos to SGRP regarding global sales and new markets' expansion. The Lazaretos Consulting Agreement cannot be terminated by the consent of either party for the first twelve (12) months, and automatically expires on January 31, 2024. Upon the one-year anniversary of the effective date, the Lazaretos Consulting Agreement may be terminated by either party with 180 days’ notice in writing to the other party. As compensation for its services, Thenablers, Ltd. is entitled to receive: (i) base compensation at a rate of $10,000 per month for the term of the Consulting Agreement; (ii) incentive-based compensation; and (iii) the outstanding options granted to Mr. Panagiotis ("Panos") N. Lazaretos on February 4, 2021 will continue to be outstanding and vest according to their terms under the agreement. 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.

 

Audit Committee Nasdaq Compliance

 

On 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) (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 independent director while the position remained vacant.

 

The Board nominated Mr. Peter Brown on July 31, 2022 to fill the vacant position.

 

On August 1, 2022, SGRP received a notification letter from Nasdaq dated August 1, 2022, stating that SGRP was now in compliance with Nasdaq's Audit Committee requirements under Nasdaq Listing Rule 5605(c)(2) (the "Rule") and that the matter is now closed

 

Other Domestic Related Party Transactions 

 

National Merchandising Services, LLC ("NMS"), is a consolidated domestic subsidiary of the Company and is owned jointly by SGRP through its indirect ownership of 51% of the NMS membership interests and by National Merchandising of America, Inc. ("NMA"), through its ownership of the other 49% of the NMS membership interests. Mr. Edward Burdekin is the Chief Executive Officer and President and a director of NMS and also is an executive officer and director of NMA. Ms. Andrea Burdekin, Mr. Burdekin's wife, is the sole stockholder and also a director of both NMA and 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.

 

Resource Plus is owned jointly by SGRP through its direct ownership of 51% of the Resource Plus membership interests and by Mr. Richard Justus through his ownership of the other 49% of the Resource Plus membership interests. Mr. Justus has a 50% ownership interest in RJ Holdings which owns the buildings where Resource Plus is headquartered and operates and are subleased to Resource Plus. The costs associated with these transactions were approximately $182,000 for the three-months and $545,000 for the nine-months period ended September 30, 2022, and $248,000 for the three-months and $814,000 for the nine-months period ended  September 30, 2021.

 

On December 1, 2021, the Corporation 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 President and Chief Executive Officer, Michael R. Matacunas. Mrs. Matacunas owns 51 % of the equity of the 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"), and 10% by EILLC. JKC is owned by Mr. Jonathan Dagues Martins, a Brazilian citizen and resident ("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 subsidiary pursuant to a Management Agreement between JDM and SPAR BSMT dated September 13, 2016. JDM also is a director of SPAR BSMT. Accordingly, JKC and JDM are each a related party respecting 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 as 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 consolidated international joint venture of the Company and is owned 51% by SGRP and 49% by Ms. Lydna Chapman. Ms. Chapman is a director 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 three-months and $301,000 nine-months period ended September 30, 2022 and $40,000 for the three-months and $178,000 for the nine-months period ended September 30, 2021

 

11

 

SPAR Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) (continued)

 

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.

 

12

 

SPAR 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 Company as of January 1, 2020 but continues to serve as a member of SPAR's Board. Mr. Bartels is also one of the founders and a significant stockholder of 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 aggregate value of benefits payable to Mr. Bartels is approximately $220,558 per year and a total of $1,102,790 for the Five-Year Period. As of September 30, 2022 $352,600 remains outstanding and is included within accrued expenses and other current liabilities.

 

Other Related Party Transactions and Arrangements

 

SBS and SPAR InfoTech, Inc. ("Infotech") are related parties and affiliates of SGRP, but are not under the control or part of the consolidated Company. SBS is an affiliate because it is owned by SBS LLC, which in turn is beneficially owned by Robert G. Brown, Director, Chairman of the Board, and significant shareholder of SGRP. Infotech is an affiliate because it is owned principally by Robert G. Brown.

 

SBS and Infotech previously entered into a perpetual software ownership agreement providing that each party independently owned an undivided share of and has the right to unilaterally license and exploit certain portions of the Company's proprietary scheduling, tracking, coordination, reporting and expense software are co-owned with SBS and Infotech and each entered into a non-exclusive royalty-free license from the Company to use certain "SPAR" trademarks in the United States. 

 

 

13

 

SPAR Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) (continued)

 

 

 

 

 

 

7.

Preferred Stock

 

SGRP's certificate of incorporation authorizes it to issue 3,000,000 shares of preferred stock with a par value of $0.01 per share, 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 at its 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 Series A Preferred Stock"), which have dividend and liquidation preferences, have a cumulative dividend of 10% per year, are redeemable at the Company's option and are convertible at the holder's option (and without further consideration) on a one-to-one basis into SGRP Common Stock. 

 

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 execution of the CIC agreement, on January 25, 2022, the Corporation filed a Certificate of Elimination for its “Certificate of Designation of Series “A” Preferred Stock of SPAR Group, Inc.” (the “Certificate of Elimination”). Pursuant to the Certificate of Elimination, the Series "A" Preferred Stock was cancelled and withdrawn. As a result, all 3,000,000 shares of the previously authorized Series "A" Preferred Stock were returned to the Corporation’s authorized “blank check” preferred stock. There were no shares of Series "A" Preferred Stock outstanding at the time of the cancellation.

 

Subsequent to filing the Certificate of Elimination, on January 25, 2022, the Corporation filed a “Certificate of Designation of Series “B” Preferred Stock of SPAR Group, Inc.” (the “Preferred Designation”) with the Secretary of State of Delaware, which designation had been approved by the Board on January 25, 2022. The Preferred Designation created a series of 2,000,000 shares of Preferred Stock designated as “Series "B" Preferred Stock” with a par value of $.01 per share (the “Preferred Stock”). The Preferred Shares do not carry any voting or dividend rights and are convertible into the Common Stock on a 1 for 1.5 basis. As of 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 converted to common stock, pending initiation of transactions by a Majority Stockholders as further discussed in Note 6.

 

 

8.

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

 

The Company recognized approximately $30,000 and $174,000 in stock-based compensation expense relating to stock option awards during the three (3) month periods ended September 30, 2022 and 2021, respectively. The tax benefit available from stock-based compensation expense related to stock option during both the three (3) months period ended September 30, 2022 and 2021 was approximately $8,000 and $43,000 respectively. The Company recognized approximately $166,000 and $457,000 in stock-based compensation expense relating to stock option awards during the nine (9) month periods ended September 30,2022 and 2021, respectively. The tax benefit available from stock-based compensation expense related to stock option during both the nine (9) months period ended September 30,2022 and 2021 was approximately $42,000 and $114,000 respectively. As of September 30, 2022, total unrecognized stock-based compensation expense related to stock options was $236,000

 

During the three (3) months period ended September 30, 2022 and 2021, the Company recognized approximately $109,000 and $29,000, respectively of stock-based compensation expense related to restricted stock. The tax benefit available to the Company from stock-based compensation expense related to restricted stock during the three (3) months period ended September 30, 2022 and 2021 was approximately $5,000 and $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, 2022, there was $396,000 unrecognized stock-based compensation expense related to unvested restricted stock awards.

 

 

10.

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's management, resolution of these matters 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.

 

All prior litigations associated with the Company through SPAR Business Services, Inc., a corporation ("SBS") and its Independent Contractors have been settled and, in most cases, paid to plaintiffs in full. As of  September 30, 2022, a $325,000 accrual remained for the final payment of the SBS Clothier Litigation. The litigation was settled on September 20, 2019 for $1.3 million payable in four (4) equal annual installments of $325,000, with the final payment to be paid in December 2022.

 

14

 

SPAR Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited) (continued)

 

 

11.

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 management in deciding how to allocate resources and in assessing performance.

 

The Company continues to evaluate the global growth strategy. To better align with its global growth strategy, effective January 1, 2022, the Company began reporting in (3) regional segments as follows: Americas which is comprised of United States, Canada, Brazil and Mexico, Asia-Pacific (“APAC”) which is comprised of Japan, China, India and Australia, and Europe, Middle East and Africa (“EMEA”) which is comprised of South Africa. Certain corporate expenses have been assigned to segments based on each segment’s revenue as a percent of total company revenue.

 

The operations and performance metrics for each country remains unchanged; the accounting policies for each country also remains the same. Therefore the 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

  

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