SPAR (SGRP) - 2021 Q2 - Quarterly Report

PART I: FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis of SPAR Group, Inc Item 1. Condensed Consolidated Financial Statements (Unaudited) This section presents SPAR Group, Inc.'s unaudited condensed consolidated financial statements for Q2 2021, including balance sheets, income statements, equity, cash flows, and explanatory notes Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and equity as of June 30, 2021, and December 31, 2020 Condensed Consolidated Balance Sheets (In thousands): | Metric | June 30, 2021 (Unaudited) | December 31, 2020 | | :-------------------------------- | :------------------------ | :------------------ | | Total current assets | $78,325 | $66,517 | | Total assets | $94,980 | $84,029 | | Total current liabilities | $52,417 | $42,905 | | Total liabilities | $54,571 | $45,407 | | Total equity | $40,409 | $38,622 | Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) This section presents the company's financial performance, including revenues, gross profit, operating income, and net income for the three and six months ended June 30, 2021 and 2020 Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (In thousands, except per share data): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net revenues | $67,176 | $50,944 | $128,273 | $112,292 | | Gross profit | $12,006 | $9,872 | $24,265 | $21,660 | | Operating income | $1,887 | $1,963 | $4,606 | $3,440 | | Net income | $1,132 | $1,305 | $2,913 | $2,227 | | Net income (loss) attributable to SPAR Group, Inc. | $514 | $(103) | $1,431 | $193 | | Basic and diluted income per common share | $0.02 | $0.00 | $0.07 | $0.01 | Condensed Consolidated Statement of Equity This section details changes in the company's equity, including common stock, additional paid-in capital, retained earnings, and non-controlling interest, from January 1 to June 30, 2021 Condensed Consolidated Statement of Equity (In thousands): | Metric | Balance at January 1, 2021 | Balance at June 30, 2021 | | :-------------------------------- | :------------------------- | :----------------------- | | Common Stock (Shares) | 21,122 | 21,269 | | Common Stock (Amount) | $211 | $213 | | Additional Paid-In Capital | $16,645 | $16,857 | | Retained Earnings | $9,218 | $10,649 | | Non-Controlling Interest | $16,463 | $16,580 | | Total Equity | $38,622 | $40,409 | - Total equity increased from $38,622 thousand at January 1, 2021, to $40,409 thousand at June 30, 2021, driven by net income and share-based compensation, partially offset by other comprehensive loss and stock option exercises[13] Condensed Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2021 and 2020 Condensed Consolidated Statements of Cash Flows (In thousands): | Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $1,009 | $8,772 | | Net cash used in investing activities | $(886) | $(786) | | Net cash provided by (used in) financing activities | $2,025 | $(792) | | Effect of foreign exchange rate changes on cash | $(1,419) | $(3,976) | | Net change in cash and cash equivalents | $729 | $3,218 | | Cash and cash equivalents at end of period | $16,701 | $13,676 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements, covering various accounting policies and financial items 1. Basis of Presentation This note describes the accounting principles and reporting standards used for the unaudited interim condensed consolidated financial statements - The unaudited interim condensed consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q instructions, and should be read in conjunction with the 2020 Annual Report on Form 10-K[21] 2. Business and Organization This note provides an overview of SPAR Group's global operations, business divisions, and the impact of external factors like the COVID-19 pandemic and regulatory changes - SPAR Group is a global merchandising and marketing services company with over 40 years of experience, 25,000+ specialists, and operations in 9 countries across 4 continents, focusing on 'last mile' retailing and manufacturer product merchandising[22][23][25] - The company operates under two divisions: Domestic (United States) and International (all operations and joint ventures outside the U.S.)[26] - The COVID-19 pandemic has not had material unfavorable effects on financial results through June 30, 2021, but the company has experienced increased labor costs and wage pressures, and future impacts remain uncertain[30] - The CARES Act allowed the company to defer $1.3 million in employer-paid social security taxes, with repayment expected by December 2022[31] - An amendment to Mexican Labor Law effective June 30, 2021, prohibiting outsourcing unless services are specialized, could materially adversely affect SPAR Todopromo's revenues[32] 3. Earnings Per Share This note details the calculation of basic and diluted earnings per common share for the three and six months ended June 30, 2021 and 2020 Earnings Per Share (In thousands, except per share data): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) attributable to SPAR Group, Inc. | $514 | $(103) | $1,431 | $193 | | Shares used in basic net income per share calculation | 21,262 | 21,108 | 21,225 | 21,107 | | Shares used in diluted net income per share calculations | 21,617 | 21,125 | 21,600 | 21,157 | | Basic and diluted net income per common share | $0.02 | $0.00 | $0.07 | $0.01 | 4. Credit Facilities and Other Debt This note outlines the company's credit agreements, outstanding debt balances, interest rates, and compliance with covenants, including available credit facilities - The company extended its North Mill Capital Credit Facility to October 10, 2023, increasing the US facility to $16.5 million and improving borrowing base availability and interest rates[43] - As of June 30, 2021, the North Mill Capital Credit Facility had an outstanding balance of $10.0 million at an interest rate of 5.25%[44] - Resource Plus was not in compliance with its Fifth Third Credit Facility's debt service charge coverage ratio covenant as of June 30, 2021, but obtained a waiver[49] Summary of Unused Company Credit and Other Debt Facilities (in thousands): | Metric | June 30, 2021 | December 31, 2020 | | :------------------------ | :-------------- | :---------------- | | Unused Availability: United States / Canada | $8,487 | $10,238 | | Unused Availability: Australia | $566 | $262 | | Unused Availability: Mexico | $399 | $463 | | Total Unused Availability | $9,452 | $10,963 | 5. Related-Party Transactions This note discloses transactions and balances with affiliated entities and individuals, including services provided, loans, and compensation arrangements - All three independent directors of SGRP's Audit Committee resigned on June 9, 2021, leading to Nasdaq non-compliance[64][65] The company submitted a plan to Nasdaq to appoint three new independent directors by October 15, 2021, which was accepted[66] - The company is owed $901,000 from SAS (an affiliate) for security deposit and premium advances, which SAS has acknowledged but refused to repay, leading to pending legal action[76][79][81] Summary of Certain Related Party Transactions (Costs charged to the Company, in thousands): | Service Provider | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | National Store Retail Services (NSRS) | $1,959 | $1,050 | $3,799 | $2,392 | | Office lease expenses (Mr. Burdekin) | $6 | $6 | $12 | $12 | | Office lease expenses (RJ Holdings) | $214 | $177 | $442 | $350 | | Office and vehicle lease expenses (MPT) | $18 | $11 | $35 | $27 | | Vehicle rental expenses (MCPT) | $12 | $281 | $24 | $580 | | Office and vehicle rental expenses (MHT) | $30 | $58 | $59 | $131 | | Consulting and administrative services (CON) | $- | $11 | $- | $23 | | Legal services (KMSA) | $16 | $34 | $30 | $57 | | Warehousing rental (JFMD) | $12 | $12 | $24 | $25 | | Consulting and administrative fees (SPARFACTS) | $62 | $41 | $138 | $72 | | Total services provided by affiliates | $2,329 | $1,681 | $4,563 | $3,669 | Due to affiliates (in thousands): | Category | June 30, 2021 | December 31, 2020 | | :------------------------------------ | :-------------- | :---------------- | | Loans from local investors: Australia | $483 | $586 | | Loans from local investors: Mexico | $623 | $623 | | Loans from local investors: Brazil | $139 | $139 | | Loans from local investors: China | $1,762 | $1,746 | | Loans from local investors: South Africa | $364 | $415 | | Loans from local investors: Resource Plus | $266 | $266 | | Total due to affiliates | $3,637 | $3,775 | - William H. Bartels, a director and significant stockholder, retired as an employee but continues to receive $220,558 annually in retirement compensation, director fees, and medical benefits for a five-year period[99][100][102] 6. Preferred Stock This note details the company's authorized and outstanding preferred stock, specifically Series A Preferred Stock - SGRP is authorized to issue 3,000,000 shares of preferred stock, with 2,445,598 shares of Series A Preferred Stock remaining authorized[113] As of June 30, 2021, no shares of SGRP Series A Preferred Stock were issued and outstanding[113] 7. Stock-Based Compensation and Other Plans This note describes the company's stock-based compensation plans, including stock option and restricted stock awards, and associated expenses Stock-Based Compensation Expense (In thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock option awards expense | $183 | $70 | $282 | $95 | | Restricted stock expense | $12 | $0 | $18 | $0 | | Total unrecognized stock-based compensation expense (as of June 30, 2021) | $707 (stock options) | - | $32 (restricted stock) | - | - The 2020 Plan, approved by stockholders on January 19, 2021, authorized the issuance of up to 700,000 non-qualified stock options (NQSOs) but terminated on May 1, 2021, with no further awards permitted unless amended[117][118][122] 8. Commitments and Contingencies This note addresses the company's legal actions, administrative proceedings, and other potential liabilities, including class action settlements and ongoing claims - The company is involved in various legal actions and administrative proceedings, but management does not anticipate a material adverse effect on the company's financial condition or operations[127][250] - Robert G. Brown continues to make claims against the company for SBS, totaling approximately $5.6 million, which the company rejects, asserting it was released from such claims by the SBS Settlement Agreement[144][145][149] - The company settled the Clothier class action case for $1.3 million, with $650,000 paid and $650,000 accrued as of June 30, 2021[153] - The company settled the Hogan class action case for $250,000, with all payments completed by June 2020[158] 9. Segment Information This note provides financial data segmented by the company's domestic and international operations, including revenues and operating income by geographic region Segment Revenue and Operating Income (In thousands): | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue: United States | $27,252 | $22,123 | $50,927 | $45,412 | | Revenue: International | $39,924 | $28,821 | $77,346 | $66,880 | | Operating income: United States | $332 | $315 | $1,090 | $623 | | Operating income: International | $1,555 | $1,648 | $3,516 | $2,817 | | Net income (loss) attributable to SPAR Group, Inc.: United States | $173 | $(471) | $546 | $(434) | | Net income (loss) attributable to SPAR Group, Inc.: International | $341 | $368 | $885 | $627 | International Revenue by Country (In thousands, % of consolidated net revenue): | Country | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Brazil | $13,596 (20.2%) | $10,539 (20.7%) | $25,897 (20.2%) | $26,103 (23.2%) | | South Africa | $8,524 (12.7%) | $6,088 (12.0%) | $16,246 (12.7%) | $13,002 (11.6%) | | Mexico | $8,363 (12.4%) | $4,820 (9.5%) | $15,622 (12.2%) | $10,667 (9.5%) | | China | $3,195 (4.8%) | $2,756 (5.4%) | $6,458 (5.0%) | $5,320 (4.7%) | | Japan | $2,538 (3.8%) | $1,915 (3.8%) | $4,988 (3.9%) | $4,207 (3.7%) | | Canada | $2,040 (3.0%) | $1,004 (2.0%) | $3,918 (3.1%) | $2,720 (2.4%) | | India | $1,358 (2.0%) | $1,649 (3.2%) | $3,584 (2.8%) | $4,431 (3.9%) | | Australia | $310 (0.5%) | $50 (0.1%) | $633 (0.5%) | $430 (0.4%) | | Total international revenue | $39,924 (59.4%) | $28,821 (56.7%) | $77,346 (60.4%) | $66,880 (59.4%) | 10. Recent Accounting Pronouncements This note discusses the adoption of new accounting standards and the evaluation of their potential impact on the company's financial statements - The company adopted ASU 2019-12 (simplifying income tax accounting) in December 2019, which had no material impact on goodwill impairment testing or consolidated financial statements[172] - The company is evaluating the impact of ASU No. 2016-13 (Credit Losses), effective for smaller reporting companies after December 15, 2022[173] 11. Leases This note details the company's lease accounting under ASC 842, including lease liabilities, right-of-use assets, and lease costs - Under ASC 842, SPAR recognizes operating leases on the balance sheet as a lease liability with a corresponding right-of-use (ROU) asset[175] Lease Costs (In thousands): | Lease Costs | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Operating lease cost | $218 | $694 | $435 | $1,368 | | Short-term lease cost | $206 | $100 | $508 | $213 | | Variable costs | $42 | $97 | $92 | $194 | | Total lease cost | $466 | $891 | $1,035 | $1,775 | Maturities of Lease Liabilities (In thousands, as of June 30, 2021): | Period Ending December 31, | Amount | | :------------------------- | :----- | | 2021 | $660 | | 2022 | $795 | | 2023 | $339 | | 2024 | $246 | | 2025 | $392 | | Thereafter | $141 | | Total Lease Payments | $2,573 | | Less: imputed interest | $455 | | Total | $2,118 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial condition and operational results for the periods ended June 30, 2021, including forward-looking statements, business overview, and liquidity Forward-Looking Statements This section highlights statements about future events and financial performance, cautioning readers about inherent risks and uncertainties - The report contains forward-looking statements regarding potential negative effects of COVID-19, cash flow, corporate objectives (growth, customer value, employee development, productivity, EPS), and strategies for organic growth, new business, and acquisitions[186] - Readers are cautioned not to place undue reliance on forward-looking statements, as actual results may differ materially due to various risks and unpredictable events beyond the company's control[187] General Business Overview This section provides a summary of SPAR Group's global merchandising and marketing services, its operational structure, and market segments - SPAR Group is a global merchandising and marketing services company operating in 9 countries across 4 continents, providing 'last mile' retailing and manufacturer product merchandising[190][191][193] - The company serves diverse segments including grocery, drug, home improvement, and consumer electronics, and operates through Domestic and International divisions, often utilizing joint ventures internationally[192][194][195] Results of Operations This section analyzes the company's financial performance, including revenues, costs, and profitability, for the reported periods Three months ended June 30, 2021, compared to three months ended June 30, 2020 This section compares the company's financial results for the three-month periods ended June 30, 2021, and 2020, highlighting key changes in revenues and expenses Financial Performance (Three Months Ended June 30, In thousands, except percent data): | Metric | 2021 | % of Net Revenues | 2020 | % of Net Revenues | Change ($) | Change (%) | | :------------------------------------------ | :----- | :---------------- | :----- | :---------------- | :--------- | :--------- | | Net revenues | $67,176 | 100.0% | $50,944 | 100.0% | $16,232 | 31.9% | | Cost of revenues | $55,170 | 82.1% | $41,072 | 80.6% | $14,098 | 34.3% | | Gross profit | $12,006 | 17.9% | $9,872 | 19.4% | $2,134 | 21.6% | | Selling, general & administrative expense | $9,585 | 14.3% | $7,370 | 14.5% | $2,215 | 30.1% | | Operating income | $1,887 | 2.8% | $1,963 | 3.8% | $(76) | -3.9% | | Net income (loss) attributable to SPAR Group, Inc. | $514 | 0.8% | $(103) | -0.4% | $617 | -599.0% | - International net revenues increased by $11.1 million or 38.5% due to foreign currency translation and increased revenues in Brazil, Mexico, and South Africa[203] - Cost of revenues increased as a percentage of net revenues (82.1% in 2021 vs 80.6% in 2020) due to increased wage pressure and an unfavorable mix of project work domestically, and increasing labor costs globally[204][205][206] - Selling, general and administrative expenses increased by $2.2 million, reflecting reduced savings from 2020 pandemic-related furloughs and continued investment in business growth[208] Six months ended June 30, 2021, compared to six months ended June 30, 2020 This section compares the company's financial results for the six-month periods ended June 30, 2021, and 2020, detailing changes in revenues, costs, and profitability Financial Performance (Six Months Ended June 30, In thousands, except percent data): | Metric | 2021 | % of Net Revenues | 2020 | % of Net Revenues | Change ($) | Change (%) | | :------------------------------------------ | :----- | :---------------- | :----- | :---------------- | :--------- | :--------- | | Net revenues | $128,273 | 100.0% | $112,292 | 100.0% | $15,981 | 14.2% | | Cost of revenues | $104,008 | 81.1% | $90,632 | 80.7% | $13,376 | 14.8% | | Gross profit | $24,265 | 18.9% | $21,660 | 19.3% | $2,605 | 12.0% | | Selling, general & administrative expense | $18,595 | 14.5% | $17,141 | 15.3% | $1,454 | 8.5% | | Operating income | $4,606 | 3.6% | $3,440 | 3.0% | $1,166 | 33.9% | | Net income attributable to SPAR Group, Inc. | $1,431 | 1.1% | $193 | 0.1% | $1,238 | 641.5% | - Net revenues increased by $16.0 million or 14.2% year-over-year, driven by business development efforts and global pandemic recovery[220] - Domestic cost of revenues increased as a percentage of net domestic revenues (79.5% in 2021 vs 77.6% in 2020) due to increased wage pressures and a shift in project mix[223] - International selling, general and administrative expenses increased by $1.6 million, reflecting continued investment in business growth[227] Liquidity and Capital Resources This section assesses the company's ability to generate and manage cash, including operating cash flows, financing activities, and available capital to meet future obligations - Net cash provided by operating activities decreased significantly to $1.0 million for the six months ended June 30, 2021, from $8.8 million in the prior year, primarily due to an increase in accounts receivable[235] - Net cash provided by financing activities was $2.0 million for the six months ended June 30, 2021, compared to cash used of $792,000 in the prior year, mainly due to net draws on lines of credit[238] - The company believes existing cash, short-term investments, available debt, and cash from operations will be sufficient to meet working capital and capital expenditure requirements for at least the next twelve months[235] Working Capital and Current Ratio (In millions): | Metric | June 30, 2021 | December 31, 2020 | | :-------------------- | :-------------- | :---------------- | | Net working capital | $25.9 | $23.6 | | Current ratio | 1.5 | 1.6 | Item 3. Quantitative and Qualitative Disclosures about Market Risk As a smaller reporting company, SPAR Group, Inc. is not required to provide quantitative and qualitative disclosures about market risk - SPAR Group, Inc. is a smaller reporting company and is exempt from providing quantitative and qualitative disclosures about market risk[240] Item 4. Controls and Procedures This section details management's evaluation of the company's disclosure controls and procedures and internal control over financial reporting, identifying a material weakness related to the oversight by the Board of Directors due to the resignation of the entire Audit Committee Management's Evaluation of Disclosure Controls and Procedures Management's assessment of the effectiveness of the company's disclosure controls and procedures as of June 30, 2021 - The CEO and CFO concluded that the company's disclosure controls and procedures were not effective as of June 30, 2021, due to a material weakness in internal control over financial reporting[241] Management's Report on Internal Control Over Financial Reporting Management's report on the effectiveness of internal control over financial reporting, noting a material weakness related to Board oversight - A material weakness existed as of June 30, 2021, related to the Board's oversight of internal control development and performance, specifically due to the resignation of the entire Audit Committee[245] - Management believes this material weakness did not affect financial results or oversight effectiveness for the current period but could lead to material misstatements in future financial statements[246] - Remediation efforts are underway, with the company expecting to appoint additional Board members to serve on the Audit Committee[247] Changes in Internal Controls Over Financial Reporting This section reports on any changes in internal controls over financial reporting during the quarter ended June 30, 2021 - Other than the identified material weakness, there were no changes in internal controls over financial reporting during the quarter ended June 30, 2021, that materially affected or are reasonably likely to materially affect them[248] PART II: OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings The company is involved in various legal actions and administrative proceedings in the normal course of business, which management does not anticipate will have a material adverse effect on the company's financial condition or operations - The company is a party to various legal actions and administrative proceedings, but management believes their resolution will not have a material adverse effect on the company[250] Item 1A. Risk Factors This section incorporates by reference the existing risk factors from the 2020 Annual Report, noting no material changes since that filing, and advises readers to review all identified risk factors - Existing risk factors from the 2020 Annual Report are incorporated by reference, with no material changes reported since that filing[254] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable to the company for the reporting period Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period Item 5. Other Information This item is not applicable to the company for the reporting period Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and CFO under the Sarbanes-Oxley Act and Inline XBRL documents - Exhibits include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and various Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[262] SIGNATURES The report is duly signed on behalf of SPAR Group, Inc. by Fay DeVriese, Chief Financial Officer, Treasurer, and Secretary, as of August 16, 2021 - The report was signed by Fay DeVriese, Chief Financial Officer, Treasurer, and Secretary, on August 16, 2021[265]