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sgrp20230930_10q.htm
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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 first quarterly period ended September 30, 2023

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 ☒

 

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 stock, par value $0.01 per share

SGRP

The NASDAQ Stock Market LLC

 

As of November 7, 2023, the Registrant had 23,240,959 shares of common stock, par value $0.01 per share, outstanding.

 

 
Table of Contents
 

 

 

SPAR Group, Inc.

 

Index

 

PART I: FINANCIAL INFORMATION  
     

Item 1

Condensed Consolidated Financial Statements (Unaudited)

  
     
 

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2023 and 2022  (Unaudited)

2
     
 

Condensed Consolidated Balance Sheets as of September 30, 2023 and December 31, 2022 (Unaudited)

3

 

    
 

Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2023 and 2022 (Unaudited)

4
     
 

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2023 and 2022 (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

26
     

Item 4

Controls and Procedures

26
     
PART II: OTHER INFORMATION  
     

Item 1

Legal Proceedings

28
     

Item 1A

Risk Factors

 29
     

Item 2

Unregistered Sales of Equity Securities and Use of Proceeds

 29
     

Item 3

Defaults Upon Senior Securities

 29
     

Item 4

Mine Safety Disclosures

 29
     

Item 5

Other Information

 29
     

Item 6

Exhibits

 30
     

SIGNATURES

 31

 

1
Table of Contents

 

PART I:

FINANCIAL INFORMATION

 

Item 1.

 Condensed Consolidated Financial Statements (Unaudited)

 

 

 SPAR Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)

(Unaudited)

(In thousands, except per share amounts)

 

   

Three Months Ended

    

Nine Months Ended

  
   

September 30,

    

September 30,

  
   

2023

    

2022

    

2023

    

2022

  
                                 

Net revenues

   $ 67,333     $ 69,832     $ 197,649     $ 196,626  

Related party - cost of revenues

     1,628       2,535       4,807       7,201  

Cost of revenues

     52,332       54,457       152,235       151,806  

Gross profit

     13,373       12,840       40,607       37,619  

Selling, general and administrative expense

     11,284       10,614       32,345       29,952  

Depreciation and amortization

     548       506       1,574       1,524  

Operating income

     1,541       1,720       6,688       6,143  

Interest expense, net

     380       270       1,248       595  

Other income, net

     (164 )     (126 )     (347 )     (363 )

Income before income tax expense

     1,325       1,576       5,787       5,911  
                                 

Income tax expense

     227       676       1,806       1,942  

Net income

     1,098       900       3,981       3,969  

Net income attributable to non-controlling interest

     (839 )     (932 )     (2,217 )     (2,180 )

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

   $ 259     $ (32 )   $ 1,764     $ 1,789  

Basic income per common share attributable to SPAR Group, Inc.

   $ 0.01     $ (0.00 )   $ 0.08     $ 0.08  

Diluted income per common share attributable to SPAR Group, Inc.

   $ 0.01     $ (0.00 )   $ 0.08     $ 0.08  

Weighted-average common shares outstanding – basic

     23,237       22,227       23,201       21,873  

Weighted-average common shares outstanding – diluted

     23,376       22,227       23,350       22,010  
                                 

Net income

   $ 1,098     $ 900     $ 3,981     $ 3,969  

Other comprehensive income (loss)

                                

Foreign currency translation adjustments

     (497 )     (1,085 )     (359 )     (5,021 )

Comprehensive income (loss)

     601       (185 )     3,622       (1,052 )

Comprehensive (income) loss attributable to non-controlling interest

     (688 )     (303 )     (1,788 )     1,696  

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

   $ (87 )   $ (488 )   $ 1,834     $ 644  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

2
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SPAR Group, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

(In thousands, except share data) 

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 
         

Assets

        

Current assets:

        

Cash and cash equivalents

 $7,960  $9,345 

Accounts receivable, net

  65,650   63,714 

Prepaid expenses and other current assets

  6,163   7,861 

Total current assets

  79,773   80,920 

Property and equipment, net

  3,094   3,261 

Operating lease right-of-use assets

  2,023   969 

Goodwill

  1,712   1,708 

Intangible assets, net

  1,295   2,040 

Deferred income taxes, net

  3,859   3,766 

Other assets

  2,259   1,934 

Total assets

 $94,015  $94,598 

Liabilities and stockholders' equity

        

Current liabilities:

        

Accounts payable

 $10,533  $10,588 

Accrued expenses and other current liabilities

  16,674   20,261 

Due to affiliates

  2,999   2,964 

Customer incentives and deposits

  1,771   2,399 

Lines of credit and short-term loans

  19,323   17,980 

Current portion of operating lease liabilities

  946   363 

Total current liabilities

  52,246   54,555 

Operating lease liabilities, net of current portion

  1,077   606 

Long-term debt

  922   1,376 

Total liabilities

  54,245   56,537 

Commitments and contingencies – See Note 4

          

Stockholders' equity:

        
         

Series B convertible preferred stock, $0.01 par value per share: 2,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 2,000,000 shares issued as of September 30, 2023 and December 31, 2022; 650,000 shares and 854,753 shares outstanding as of September 30, 2023 and December 31, 2022, respectively

  7   9 

Common stock, $0.01 par value per share: 47,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 23,446,444 and 23,059,138 shares issued as of September 30, 2023 and December 31, 2022, respectively; 23,240,959 shares and 22,853,653 shares outstanding as of September 30, 2023 and December 31, 2022, respectively

  232   229 

Treasury stock, at cost, 205,485 shares and 205,485 shares as of September 30, 2023 and December 31, 2022, respectively

  (285)  (285)

Additional paid-in capital

  20,928   20,708 

Accumulated other comprehensive loss

  (4,871)  (4,941)

Retained earnings

  8,471   6,707 

Total stockholders' equity attributable to SPAR Group, Inc.

  

24,482

   22,427 

Non-controlling interest

  15,288   15,634 

Total stockholders’ equity

  39,770   38,061 

Total liabilities and stockholders’ equity

 $94,015  $94,598 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3
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SPAR Group, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(Unaudited) 

(In thousands)

 

   

Common Stock

    

Series B Convertible Preferred Stock

    

Treasury Stock

    

Additional

    

Accumulated Other

            

Non-

          
   

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Paid-In Capital

    

Comprehensive Loss

    

Retained Earnings

    

Controlling Interest

    

Total Stockholders’ Equity

  

Balance at December 31, 2022

     22,961     $ 229       855     $ 9       205     $ (285 )   $ 20,708     $ (4,941 )   $ 6,707     $ 15,634     $ 38,061  

Share-based compensation

     -       -       -       -       -       -       173       -       -       -       173  

Conversion of preferred stock to common stock

     307       4       (205 )     (2 )     -       -       3       -       -       -       5  

Dividend to NCI

     -       -       -       -       -       -       -       -       -       (334 )     (334 )

Other comprehensive income

     -       -       -       -       -       -       -       85       -       92       177  

Net income

     -       -       -       -       -       -       -       -       866       911       1,777  

Balance at March 31, 2023

     23,268     $ 233       650     $ 7       205     $ (285 )   $ 20,884     $ (4,856 )   $ 7,573     $ 16,303     $ 39,859  

Share-based compensation

     -       -       -       -       -       -       (39 )     -       -       -       (39 )

Dividend to NCI

     -       -       -       -       -       -       -       -       -       (850 )     (850 )

Other changes to noncontrolling interest

     -       -       -       -       -       -       -       -       -       (460 )     (460 )

Retirement of shares

     (35 )     (1 )     -       -       -       -       -       -       -       -       (1 )

Other comprehensive income (loss)

     -       -       -       -       -       -       -       331       -       (370 )     (39 )

Net income

     -       -       -       -       -       -       -       -       639       467       1,106  

Balance at June 30, 2023

     23,233     $ 232       650     $ 7       205     $ (285 )   $ 20,845     $ (4,525 )   $ 8,212     $ 15,090     $ 39,576  

Share-based compensation

     –       –       –       –       –       –       83       –       –       –       83  

Exercise of stock options

     8       0       –       –       –       –       –       –       –       –       0  

Distribution to NCI

     –       –       –       –       –       –       –       –       –       (490 )     (490 )

Other comprehensive income (loss)

     –       –       –       –       –       –       –       (346 )     –       (151 )     (497 )

Net income

     –       –       –       –       –       –       –       –       259       839       1,098  

Balance at September 30, 2023

     23,241     $ 232       650     $ 7       205     $ (285 )   $ 20,928     $ (4,871 )   $ 8,471     $ 15,288     $ 39,770  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4
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SPAR Group, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity (Continued)

(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 Stockholders’ Equity

  

Balance at December 31, 2021

     21,320     $ 213       -     $ -       54     $ (104 )   $ 17,231     $ (5,028 )   $ 7,439     $ 17,597     $ 37,348  

Share-based compensation expense

     -       -       -       -       -       -       150       -       -       -       150  

Issuance of Series B convertible preferred stock

     -       -       2,000       20       -       -       3,248       -       -       -       3,268  

Conversion of Series B convertible preferred stock to common stock

     525       5       (350 )     (3 )     -       -       -       -       -       -       2  

Other comprehensive income (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  

Stock repurchase program

     (74 )     -       -       -       74       (89 )     1       -       -       -       (88 )

Other comprehensive (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 )

Stock repurchase program

     (74 )     -       -       -       74       (92 )     -       -       -       -       (92 )

Retirement of shares

     (3 )     -       -       -       -       -       -       -       -       -       -  

Other comprehensive (loss)

     -       -       -       -       -       -       -       (511 )     -       (574 )     (1,085 )

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  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

5
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SPAR Group, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

(In thousands)

 

   

Nine Months Ended September 30,

  
   

2023

    

2022

  

Cash flows from operating activities:

                

Net income

   $ 3,981     $ 3,969  

Adjustments to reconcile net income to net cash provided by (used in) operating activities

                

Depreciation and amortization

     1,574    

1,524

  

Amortization of operating lease right-of-use assets

     433    

589

  

Bad debt expense, net of recoveries

     138    

35

  

Deferred income tax expense (benefit)

     (15 )   -  

Share-based compensation expense

     217    

585

  

Majority stockholders change in control agreement

     -    

(420

 )

Changes in operating assets and liabilities:

                

Accounts receivable

     (1,963 )  

(12,283

 )

Prepaid expenses and other current assets

     1,635    

(4,164

 )

Accounts payable

     409    

3,708

  

Operating lease liabilities

     (433 )  

(589

 )

Accrued expenses and other current liabilities

     (4,336 )  

2,884

  

Net cash provided by (used in) operating activities

     1,640    

(4,162

 )
                 

Cash flows from investing activities

                

Purchases of property and equipment

     (1,083 )  

(1,237

 )

Net cash used in investing activities

     (1,083 )  

(1,237

 )
                 

Cash flows from financing activities

                

Borrowings under line of credit

     80,151    

33,151

  

Repayments under line of credit

     (79,520 )  

(23,904

 )

Payments to acquire noncontrolling interests

     (473 )   -  

Distribution to noncontrolling interest

     (1,674 )   -  

Net cash provided by (used in) financing activities

     (1,516 )  

9,247

  
                 

Effect of foreign exchange rate changes on cash

     (426 )  

(5,200

 )

Net change in cash, cash equivalents and restricted cash

     (1,385 )  

(1,352

 )

Cash, cash equivalents at beginning of period

     9,345    

13,473

  

Cash, cash equivalents at end of period

   $ 7,960    

$12,121

  
                 

Supplemental disclosure of cash flows information:

                

Cash paid for interest

   $ 1,302    

$738

  

Cash paid for income taxes

   $ 1,945    

$1,710

  
                 

Supplemental disclosure of non-cash investing and financing activities:

                

Non-cash majority stockholders change in control agreement charges

   $ -    

$3,270

  

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

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SPAR Group, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(unaudited)

 

 

1.

Nature of the Business

 

SPAR Group, Inc. ("SGRP" or the "Corporation"), and its subsidiaries (and SGRP together with its subsidiaries may be referred to as "SPAR Group", the "Company", "SPAR", "We", or "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. 

 
 

2.

Summary of Significant Accounting Policies

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the notes thereto for the year ended December 31, 2022 included in the 2022 Annual Report on Form 10-K that was filled with the Securities and Exchange Commission on April 17, 2023.

 

The unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements. In the opinion of management, the included disclosures are adequate, and the accompanying unaudited condensed consolidated financial statements contain all adjustments which are necessary for a fair presentation of the Company’s consolidated financial position as of September 30, 2023, consolidated results of operations and comprehensive income for the three and nine months ended September 30, 2023 and 2022, and consolidated cash flows for the nine months ended September 30, 2023 and 2022. Such adjustments are of a normal and recurring nature. The consolidated results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the consolidated results of operations that may be expected for the year ending December 31, 2023.

 

Principles of Consolidation 

 

The Company consolidates its 100%-owned subsidiaries and all of the 51%-owned joint ventures in which the Company has a controlling financial interest. All significant intercompany transactions have been eliminated in the unaudited condensed consolidated financial statements. 

 

Use of Estimates

 

The preparation of the unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the amounts disclosed for contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting year. Significant balances subject to such estimates and assumptions include carrying amounts of property and equipment and intangible assets, valuation allowances for receivables, carrying amounts for deferred tax assets and liabilities, and liabilities incurred from operations and customer incentives. Actual results could differ from those estimates.

 

Segment Reporting

 

Reportable segments are components of the Company for which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker ("CODM”) in deciding how to allocate resources and in assessing performance. The Company's CODM is the Chief Executive Officer.

 

The Company provides similar merchandising, marketing and business services throughout the world and has three reportable regional segments: (i) Americas, which is comprised of United States, Canada, Brazil and Mexico; (ii) Asia-Pacific ("APAC”), which is comprised of Japan, China, India and Australia; and (iii) Europe, Middle East and Africa ("EMEA”), which is comprised of South Africa. Certain corporate expenses have been allocated to segments based on each segment’s revenue as a percentage of total company revenue.

 

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Recently Adopted Accounting Pronouncements 

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU No. 2016-13”), which replaces the existing incurred loss impairment model with an expected credit loss model and requires a financial asset measured at amortized cost to be presented at the net amount expected to be collected. The guidance was effective for the Company beginning January 1, 2023, and interim periods therein. Early adoption is permitted. The Company adopted ASU No. 2016-13 on January 1, 2023 and the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements, results of operations or disclosures.

 

 

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3.

 Debt

 

North Mill Capital Credit Facility

 

The Company, through SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ULC ("SCC", and collectively with SMF, the “NM Borrowers”), has a secured revolving credit facility in the United States (the "US Revolving Credit Facility") and Canada (the "Canada Revolving Credit Facility", and collectively with the US Revolving Credit Facility, 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, SMF, SCC, SGRP and certain of SGRP's direct and indirect subsidiaries in the United States and Canada (including SMF and SCC as borrowers and SGRP as a guarantor, collectively, the "NM Loan Parties") entered into a Loan and Security Agreement with NM dated as of April 10, 2019, which, as amended from time to time (as amended, the "NM Loan Agreement"), governs the NM Credit Facility. Pursuant to the NM Loan Agreement, the NM Borrowers agreed to reimburse NM for legal and documentation fees incurred in connection with the NM Loan Agreement and such amendments.

 

On July 1, 2022, the NM Loan Parties and NM executed and delivered a Fourth Modification Agreement, effective as of June 30, 2022 (the "Fourth Modification Agreement"), pursuant to which the NM Loan Parties and NM agreed to extend the NM Credit Facility from October 10, 2023, to October 10, 2024, and increased the amount of the US Revolving Credit Facility to $17.5 million while the Canada Revolving Credit Facility remained at CDN$1.5 million. In addition, the Fourth Modification Agreement permanently increased SMF's borrowing base availability for billed receivables to up to 90% from 85%, and unbilled receivables to up to 80% from 70%, and increased the cap on unbilled accounts for SMF to $6.5 million from $5.5 million.

 

On August 9, 2022, the NM Loan Parties and NM executed and delivered a Fifth Modification Agreement, effective immediately (the "Fifth Modification Agreement"), pursuant to which the NM Loan Parties and NM agreed to temporarily increase the borrowing base availability under the NM Credit Facility, and the NM Borrowers agreed to pay certain additional fees.

 

On February 1, 2023, the NM Loan Parties and NM executed and delivered a Sixth Modification Agreement, effective immediately (the "Sixth Modification Agreement"), pursuant to which the NM Loan Parties and NM agreed to increase the amount of the US Revolving Credit Facility to $28.0 million and increase the Canada Revolving Credit Facility to CDN$2.0 million. In addition, the Sixth Modification Agreement increased the cap on unbilled accounts in the borrowing base for SMF to $7.0 million from $6.5 million.

 

 

The Restated US Note and Restated Canadian Note (together, the "NM Notes") and the NM Loan Agreement together require the NM Borrowers to pay interest on the loans thereunder equal to: (i) the Prime Rate designated from time to time by Wells Fargo Bank; plus (ii) one and nine-tenths percentage points (1.90%) or an aggregate minimum of 6.75% per annum. In addition, the NM Borrowers are paying a facility fee to NM in an amount equal to: (i) for the year commencing on October 10, 2022, approximately $0.1 million plus 0.80% of the amount of any advances other than under the US Revolving Credit Facility plus an additional facility fee of $15,000 for every incremental $1.0 million of loan balance in excess of $21.0 million, and (ii) for the year commencing on October 10, 2023, approximately $0.2 million plus 0.80% of the amount of any advances other than under the US Revolving Credit Facility plus an additional facility fee of $15,000 for every incremental $1.0 million of loan balance in excess of $21.0 million. For the Sixth Modification Agreement, the NM Borrowers paid NM a fee of approximately $28,000 for the US and $3,000 for Canada.

 

As of September 30, 2023, the aggregate interest rate was 10.40% per annum and the aggregate outstanding loan balance was approximately $15.6 million, which is included within lines of credit and short-term loans in the unaudited condensed consolidated balance sheets. The aggregate outstanding loan balance is divided between the US Revolving Credit Facility and the Canada Revolving Credit Facility as follows: (i) the outstanding loan balance under the US Revolving Credit Facility was approximately $14.5 million; and (ii) the outstanding loan balance under the Canada Revolving Credit Facility was approximately $1.1 million.

 

The NM Credit Facility contains certain financial and other restrictive covenants and also limits certain expenditures by the NM Loan Parties, including maintaining a positive trailing EBITDA for each the NM Borrowers (i.e., SMF and SCC) and imposes limits on all of the NM Loan Parties (including SGRP) on non-ordinary course payments and transactions, incurring or guaranteeing indebtedness, increases in executive, officer or director compensation, capital expenditures and certain other investments. The NM Loan Parties were in compliance with such covenants as of September 30, 2023.

 

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The obligations of the NM Borrowers are secured by the receivables and other assets of the NM Borrowers and substantially all of the assets of the other NM Loan Parties, however, the obligations are not secured by any equity in, financial asset respecting or asset of any Excluded Subsidiary (as such term is defined in the NM Loan Agreement). Pursuant to the NM Loan Agreement, Excluded Subsidiary means each of the following direct or indirect subsidiaries of SGRP: (i) Resource Plus of North Florida, Inc. (“Resource Plus”), Mobex of North Florida, Inc., and Leasex, LLC, and their respective subsidiaries; (ii) NMS Retail Services ULC, which is an inactive Nova Scotia ULC; (iii) SPAR Group International, Inc.; (iv) SPAR FM Japan, Inc.; (v) SPAR International, Ltd.; (vi) each other subsidiary formed outside of the United States or Canada; and (vii) any other entity in which any such subsidiary is a partner, joint venture or other equity investor.

 

Resource Plus Seller Notes

 

Effective with the closing of the Company's acquisition of Resource Plus in 2018, the Company issued promissory notes to the sellers of $2.3 million. The promissory notes are payable at annual installments in various amounts on December 31 of each year, starting with December 31, 2018 and continuing through December 31, 2023.

 

International Credit Facilities

 

In October 2017, SPARFACTS Australia Pty. Ltd. secured a line of credit facility with National Australia Bank for AUD$0.8 million. 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) and was due on demand.

 

In December 2020, SPAR China secured a loan with Industrial Bank for 3.0 million Chinese Yuan. The loan will expire in December 2023 and is due on demand.

 

In December 2021, SPAR China secured a loan with Industrial and Commercial Bank of China for 2.0 million Chinese Yuan, which was paid in July 2023.

 

In March 2022, SGRP Meridian (Pty), Ltd. secured loans with Investec Bank Ltd, for 100.5 million South African Rand; of which 80.0 million South African Rand expires in July 2024 and 25.0 million South African Rand expires in July 2025.

 

Summary of the Company’s lines of credit and short-term loans (in thousands):

 

  

Interest Rate

  

Balance

  

Interest Rate

  

Balance

 
  

as of

  

as of

  

as of

  

as of

 
  September 30, 2023  September 30, 2023  December 31, 2022  December 31, 2022 

Australia - National Australia Bank

  12.10% $132   10.60% $156 

China- Industrial and Commercial Bank

  4.15%  -   4.15%  290 

China- Industrial Bank

  4.00%  411   4.00%  435 

South Africa - Investec Bank Ltd.

  11.75%  2,522   10.50%  1,700 

USA - North Mill Capital

  10.40%  15,558   5.25%  14,399 

USA - Resource Plus Seller Notes

  1.85%  700   1.85%  1,000 

Total

     $19,323      $17,980 

 

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Summary of the Company’s Long- term debt (dollars in thousands):

 

  

Interest Rate as of

  

Balance Outstanding

  

Interest Rate as of

  

Balance Outstanding

 
  

September 30, 2023

  

September 30, 2023

  

December 31, 2022

  

December 31, 2022

 

South Africa - Investec Bank Ltd.

  11.75

%

 $922   10.50

%

 $1,376 

Total

     $922     $1,376 

 

Summary of Unused Company Credit and Other Debt Facilities (in thousands):

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Unused Availability:

        

United States / Canada

 $1,863  $4,601 

Australia

  383  

390

 

South Africa

  2,107  454 

Mexico

  -  

1

 

Total Unused Availability

 $4,353  

$5,446

 

 

 

 

 

4.

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. ("SBS") and its independent contractors have been settled as per CIC Agreement (note 8).  

 

 

 
 

5.

Common Stock

 

As of September 30, 2023, the Company’s certificate of incorporation authorized the Company to issue 47,000,000 shares of common stock, par value $0.01 per share.

 

The voting, dividend and liquidation rights of the holders of the Company’s common stock are subject to and qualified by the rights, powers and preferences of the holders of the Company’s Series B convertible preferred stock. Each share of the Company’s common stock is entitled to one vote on all matters submitted to a vote of the Company’s stockholders. Holders of the Company’s common stock are entitled to receive dividends as may be declared by the Company’s board of directors (the "Board"), if any, subject to the preferential dividend rights of the Company’s Series B convertible preferred stock. No cash dividends had been declared or paid during the periods presented.

 

In May 2022, the Board authorized the Company to repurchase up to 500,000 shares of the Company’s common stock pursuant to the 2022 Stock Repurchase Program (the "2022 Stock Repurchase Program"), which ended May 2023.  During the three and nine months ended September 30, 2023, there were no shares of common stock repurchased under the 2022 Stock Repurchase Program.

 

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6.

Preferred Stock

 

The Company’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 Company’s common stock and other rights, powers and privileges as the Board may establish in its discretion.

 

In January 2022, the Company 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 created a series of 2,000,000 shares of convertible preferred stock designated as “Series B” convertible preferred stock, par value of $0.01 per share. In January 2022, 2,000,000 shares of Series B convertible preferred stock were issued to the majority stockholders and related parties pursuant to the Change of Control, Voting and Restricted Stock Agreement. See Note 8.

 

Shares of Series B convertible preferred stock do not carry any voting or dividend rights and upon vesting, are convertible into the Company’s common stock at a ratio of 1-to-1.5.  See Note 8. The holders of the Series B convertible preferred stock have a liquidation preference over the Company’s common stock and vote together for matters pertaining only to the Series B convertible preferred stock where only the holders of the Series B convertible preferred stock are entitled to vote. The holders of outstanding Series B Preferred Stock do not have the right to vote for directors or other matters submitted to the holders of the Company’s common stock.

 

During the nine months ended September 30, 2023, 204,753 shares of Series B convertible preferred stockconverted to 307,130 shares of the Company’s common stock.  As of September 30, 2023, 650,000 shares of Series B convertible preferred stock were outstanding, which upon vesting, will convert to 975,000 shares of the Company’s common stock. 

 

Following the remaining Series B convertible preferred stock shares converting to common stock and when there are no more shares of Series B convertible preferred stock outstanding, the Company may change or cancel the authorized Series B convertible preferred stock, and to the extent it reduces such authorization without issuance, the Company can create other series of preferred stock with potentially different dividends, preferences and other terms.

 
 

7.

Share-Based Compensation

 

Stock Options

 

For the three months ended September 30, 2023 and 2022, the Company recognized share-based compensation expense related to stock options of approximately $15,000 and $30,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized share-based compensation expense related to stock options of approximately $45,000 and $166,000, respectively.

 

Restricted Stock Units

 

For the three months ended September 30, 2023 and 2022, the Company recognized share-based compensation expense related to restricted stock units of approximately $68,000 and $109,000, respectively. For the nine months ended September 30, 2023 and 2022, the Company recognized share-based compensation expense related to restricted stock units of approximately $172,000 and $423,000, respectively.

 

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8.

Related Party Transactions

 

Domestic Related Party Transactions

 

Mr. Robert G. Brown and Mr. William H. Bartels are directors and significant stockholders of SGRP, and thus each is a related party and affiliate of SGRP.  Mr. Robert G. Brown was the Chairman of the Board of Directors of SGRP (the "Board"), but ceased to be eligible to hold that position when the 2022 By-Laws became effective on January 25, 2022. SPAR Business Services, Inc. ("SBS") (See note 4) and SPAR Administrative Services, Inc. ("SAS"), are related parties and affiliates of SGRP, but are not under the control or part of the Company. SBS is a related party and affiliate of SGRP because it is owned by SBS LLC, which in turn is beneficially owned by Mr. Robert G. Brown. SAS is a related party and affiliate of SGRP because it is owned principally by Mr. William H. Bartels and entities owned by affiliates of Mr. Robert G. Brown.

 

Change of Control, Voting and Restricted Stock Agreement

 

The Change of Control, Voting and Restricted Stock Agreement (the "CIC Agreement") became effective on January 28, 2022, when signed by the Company and Robert G. Brown, ("Mr. Brown"), William H. Bartels, ("Mr. Bartels"), SPAR Administrative Services, Inc., a corporation ("SAS"), and collectively with Mr. Brown, Mr. Bartels and SAS, the ("Majority Stockholders"). Mr. Bartels and Mr. Brown are Directors of the Corporation. Mr. Brown was the Chairman of the Board of Directors of SGRP (the "Board"), but ceased holding that position when the 2022 By-Laws (as defined below) became effective on January 25, 2022.

 

The execution of the CIC Agreement was conditional upon making the changes to and restatement of the Corporation's 2022 By-Laws, which were approved by the Board and became effective on January 25, 2022 (the "2022 By-Laws").

 

The financial terms of the CIC Agreement to the Majority Stockholders, totaled $4,477,585, consisting of the following:

 

 

1.

The Corporation issued to the Majority Stockholders 2,000,000 restricted shares of Series B Preferred Stock, which are convertible into 3,000,000 SGRP Shares pursuant to the 1:1.5 conversion ratio set forth in the Preferred Designation and the CIC Agreement, 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 in 5 phases through November 10, 2023, 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 shares was valued at $3,690,000 in total, based on the SGRP stock price on December 31, 2021 of $1.23 per share for the 3,000,000 conversion SGRP shares.

 

 

2.

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.

 

 

3. 

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.

 

Pursuant to the CIC Agreement, all actions, claims and demands between the Majority Stockholders and the Company were resolved; and the Majority Stockholders and their affiliates during the five-year term of the CIC Agreement have agreed to give up their rights to do any of the following; (i) act or attempt to act by written consent; (ii) submit or attempt to submit any stockholder proposals in advance of any annual or special stockholders meeting of the Corporation; (iii) call or attempt to call any special meetings of the Corporation's stockholders; (iv) continue or commence or attempt to continue or commence any legal claims against the Company; (v) change or attempt to change the size of the Board; (vi) appoint or remove or attempt to appoint or remove any director or officer of the Corporation, except as expressly permitted with in the CIC Agreement; (vii) amend or attempt to amend the Corporation's Certificate of Incorporation or 2022 By-Laws; and (viii) enter or attempt to enter into any agreement, arrangement or understanding with any other person in an effort to take any of those actions.

 

The Corporation's amended and restated 2022 By-Laws were adopted to increase the independence of the Board by making the following changes (among others): (i) the Board size was fixed at 7 and must consist of at least three (3) Super Independent Directors (as defined below) plus the CEO at all times; (ii) the Chairman, Vice Chairman and all Committee Chairpersons must qualify as Super Independent Directors ; and (iii) to establish a quorum, any Board meeting must have 70% of the Directors including the majority of Super Independent Directors.  If there are less than three (3) Super Independent Directors, then the least tenured non-Super Independent Director, other than the CEO, may not vote on Board matters, which helps to ensure that the Board remains under independent governance.  As defined in the 2022 By-Laws "Super Independent Director" means a member of the Board who: (1) qualifies as an independent director under applicable laws and regulations; (2) is affirmatively determined to be an independent director by the Governance Committee of the Board; (3) excludes the Majority Stockholders, Spar Administrative Services, Inc. and Spar Business Services, Inc. and any of their respective Relatives, Family Members, or Affiliates; and (4) excludes any Person that is or was a present or past employee or advisor of any company with which any of the Majority Stockholders has been involved and any Person that is, or was in the past, related or affiliated in any way to any of the Majority Stockholders, including, without limitation, any Affiliates of Innovative Global Technologies, LLC or SP/R, Inc. Defined Benefit Pension Trust.

 

In January 2022, for the CIC Agreement and 2022 By-Law to go into effect, two (2) of the Board members at the time, James R. Brown, Sr. and Panagiotis Lazaretos, who are affiliated with the Majority Stockholders, retired from the Board and assumed other advisory roles with the Company under separate agreements (see below). 

 

Panagiotis Lazaretos Consulting Agreement

 

On January 27, 2022, the Corporation entered into a consulting agreement with Thenablers, Ltd. effective February 1, 2022 (the " Lazaretos Consulting Agreement"). Thenablers, Ltd. is wholly owned by Mr.Panagiotis Lazaretos, a retired director of the corporation. Following Mr. Lazaretos' retirement as a director on January 25, 2022, Thenablers, Ltd. agreed to provide the consulting services of Mr. Lazaretos to the Corporation 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. 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 as calculated in Exhibit A of the Lazaretos Consulting Agreement; and (iii) the outstanding options granted to Mr. Panagiotis ("Panos") N. Lazaretos on February 4, 2022 will continue to be outstanding and vest according to their terms under the agreement. As permitted by that agreement, on February 2, 2023, the Corporation gave notice that it was terminating that agreement effective July 31, 2023. 

 

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 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 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 these activities for the three months ended September 30, 2023 and 2022 were approximately $1.5 million and $2.5 million, respectively. The costs associated with these activities for the nine months ended September 30, 2023 and 2022 were approximately $4.2 million and $7.1 million, respectively.

 

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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 activities for the three months ended September 30, 2023 and 2022 were approximately $0.1 million and $0.2 million, respectively. The costs associated with these activities for the nine months ended September 30, 2023 and 2022 were approximately $0.4 million and $0.5 million, respectively.

 

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 Company, 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. Costs associated with these activities for the nine-months ended September 30, 2023 and 2022 were approximately $0.1 million and $0.1 million, respectively.

 

International Related Party Services

 

The Company's principal Brazilian subsidiary, SPAR BSMT, is owned 51% by the Company. Mr. Jonathan Dagues Martins, ("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, JDM is a related party of the Company. EILLC is owned by Mr. Peter W. Brown, a director of SPAR BSMT and the Corporation.

 

SPARFACTS is a consolidated international subsidiary of the Company and is owned 51% by SGRP. Ms. Lynda Chapman is a director of SPARFACTS. Her various companies provide office lease, accounting and consultant services to SPARFACTS.

 

Summary of Certain Related Party Transactions

 

Due to related parties consists of the following as of the periods presented (in thousands):

 

  

September 30,

  

December 31,

 
  

2023

  

2022

 

Loans from joint venture partners(1):

        

China

 $1,500  $1,382 

Mexico

  623   623 

Australia

  610   693 

Resource Plus

  266   266 

Total due to affiliates

 $2,999  $2,964 

 

(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 unaudited condensed consolidated balance sheets.

 

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 $0.2 million per year and a total of $1.1 million for the Five-Year Period.

 

As of September 30, 2023, there are approximately $0.2 million of benefits payable, which are included in accrued expenses and other current liabilities in the unaudited condensed consolidated balance sheets.

 

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9.

Segment Information

 

Select statement of operations activity of the Company’s reportable segments for the periods presented were (in thousands):

 

   

Three Months Ended

    

Nine Months Ended

  
   

September 30,

    

September 30,

  
   

2023

    

2022

    

2023

    

2022

  

Net revenues:

                                

Americas

   $ 53,796     $ 53,738     $ 154,457     $ 149,992  

APAC

     5,674       7,147       17,432       19,351  

EMEA

     7,863       8,947       25,760       27,283  

Total net revenues

   $ 67,333     $ 69,832     $ 197,649     $ 196,626  
                                 

Operating income (loss):

                                

Americas

   $ 1,328     $ 1,441     $ 5,894     $ 5,862  

APAC

     (218 )     (341 )     (510 )     (1,491 )

EMEA

     431       620       1,304       1,772  

Total operating income

   $ 1,541     $ 1,720     $ 6,688     $ 6,143  
                                 

Interest expense, net:

                                

Americas

   $ 264     $ 203     $ 895     $ 399  

APAC

     31       6       47       24  

EMEA

     85       61       306       172  

Total interest expense, net

   $ 380     $ 270     $ 1,248     $ 595  
                                 

Other (income) expense, net:

                                

Americas

   $ 5     $ (12 )   $ 22     $ (24 )

APAC

     (59 )     (50 )     (69 )     (62 )

EMEA

     (110 )     (64 )     (300 )     (277 )

Total other (income) expense, net

   $ (164 )   $ (126 )   $ (347 )   $ (363 )
                                 

Income (loss) before income tax expense:

                                

Americas

   $ 1,059     $ 1,250     $ 4,977     $ 5,487  

APAC

     (190 )     (297 )     (488 )     (1,453 )

EMEA

     456