SGRP · Read the filing

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, made or respecting by SPAR Group, Inc. ("SGRP") and its subsidiaries (together with SGRP, the "SPAR Group" or the "Company"). See FORWARD-LOOKING STATEMENTS preceding Part I, above. There also are "forward-looking statements" contained elsewhere in this Annual Report, the Proxy Statement, and the other applicable SEC Reports filed with the SEC from time to time under the Securities Act, the Exchange Act and other Securities Laws(as all such terms are defined in FORWARD-LOOKING STATEMENTS, preceding Part I, above).

All forward-looking statements and other information attributable to the Company or persons acting on its behalf are expressly subject to and qualified by all of the risks, uncertainties, cautions, circumstances and other factors ("Risks") facing the Company, including the Risks and other information described in Item IA - Risk Factors, above, or elsewhere in this Annual Report, the Proxy Statement or any other applicable SEC Report.

The Company does not intend, assume any obligation, or promise to publicly update or revise any such forward-looking statement, Risk or information (in whole or in part), whether as a result of new information, new or worsening Risks or uncertainties, changed circumstances, future events, recognition, or otherwise.

Overview

The COVID-19 pandemic has caused a significant loss of life, disrupted businesses and restricted travel worldwide, causing significant economic disruption and uncertainty. This disruption and uncertainty has and continues to have an adverse impact on our business, operations and financial results. For fiscal 2020, our total revenues declined 8.8% in U.S. dollars, compared to a 10.3% increase in 2019. The effects of the pandemic have been more impactful to our international business than our domestic business. Our 2020 International revenue decreased 14.7% compared to an 8.7% increase in 2019. Our 2020 Domestic revenue increased 1.5% compared to a 13.3% increase in 2019.

While our revenue declined year over year, our 2020 net income increased by 38.6%. While we could not plan for the pandemic as 2020 began, we took quick action and worked closely with our clients to manage our resources, expenses and capital to achieve a strong net income result. We are proud of this achievement and the focus of our teams in light of the broad economic market impact of the pandemic across the globe.

While the pandemic continues to impact the markets we serve, we did experience a strong fourth quarter domestically as this market appears to be emerging more quickly than our international markets from the pandemic. Our fourth quarter domestic revenue increased 11.9% compared to our international revenue that decreased 8.7% compared to the fourth quarter prior year. In total, our fourth quarter revenue decreased 2.8% compared to an increase of 7.1% in 2019.

Our fourth quarter net income increased 425% over 2019 reflecting a strong performance and commitment to execution. While we are pleased with this result, we have continued to see pressure on both the domestic and international gross profit margins. The international gross profit margin for the fourth quarter was 20.2% compared to 20.2% in 2019. The domestic profit margin for the fourth quarter was 17.8% versus 18.6%. The gross profit margin results were primarily attributable to wage pressures and an unfavorable mix in lower grow margin project work.

Critical Accounting Estimates

The Company's critical accounting policies, including the assumptions and judgements underlying them, are disclosed in Note 2 to the Company's Consolidated Financial Statements - Summary of Significant Accounting Policies. These policies have been consistently applied in all material respects and address such matters as revenue recognition, doubtful accounts and credit risks, internal use software development costs, asset impairment recognition, consolidation of subsidiaries and other companies. While the estimates and judgements associated with the application of these policies may be affected by different assumptions or conditions, the Company believes the estimates and judgements associated with the reported amounts are appropriate under the circumstances.

Impairment of Long-Lived Assets

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of the Company's property and equipment and intangible assets subjected to amortization may not be recoverable. When indicators of potential impairment exist, the Company assesses the recoverability of the assets by estimating whether the Company will recover its carrying value through the undiscounted future cash flows generated by the use of the asset and its eventual disposition. Based on this analysis, if the Company does not believe that it will be able to recover the carrying value of the asset, the Company records an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. If any assumptions, projections or estimates regarding any asset change in the future, the Company may have to record an impairment to reduce the net book value of such individual asset.

-18-

Accounting for Joint Venture Subsidiaries

For the Company's less than wholly owned subsidiaries, the Company first analyzes to determine if a joint venture subsidiary is a variable interest entity (a "VIE") in accordance with ASC 810, and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has: (i) insufficient equity to permit it to finance its activities without additional subordinated financial support; or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change with changes in the fair value of the VIE's net assets. The Company continuously re-assesses at each level of the joint venture whether the entity is: (i) a VIE; and (ii) if the Company is the primary beneficiary of the VIE. If it was determined that an entity in which the Company holds an interest qualified as a VIE and the Company was the primary beneficiary, it would be consolidated.

Based on the Company's analysis for each of its 51% owned joint ventures, the Company has determined that each is a VIE and that Company is the primary beneficiary of that VIE. In addition to its controlling interest, the Company controls the proprietary information technology that is used at and is significant to each joint venture and the Company has the ability to control other key decisions. Accordingly, the Company has the power to direct key activities and the obligation to absorb losses or the right to receive benefits that could be significant and consolidates each joint venture under the VIE rules and reflects the 49% interests in the Company's consolidated financial statements as non-controlling interests. The Company records these non-controlling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments' net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holder based on its economic ownership percentage.

Revenue Recognition

The Company's services are provided to its clients under contracts or agreements. The Company bills its clients based upon service fee arrangements. Revenues under service fee arrangements are recognized when the service is performed. Customer deposits, which are considered advances on future work, are recorded as revenue in the period services are provided.

The Company records revenue from contracts with its customers through the execution of a Master Service Agreement ("MSA") that are effectuated through individual Statements of Work ("SOW" and with the applicable MSA collectively a "Contract"). The MSAs generally define the financial, service, and communication obligations between the client and SPAR while the SOWs state the project objective, scope of work, time frame, rate and driver in which SPAR will be paid. Only when the MSA and SOW are combined as a Contract can all five revenue standard criteria be met. The Company integrates a series of tasks promised within these Contracts into a bundle of services that represent the combined performance obligation of Merchandising Services. Such Merchandising Services are performed over the duration of the SOW. Most Merchandising Services are performed on a daily, weekly or monthly basis. Revenue from Merchandising Services are recognized as the services are performed based on a rate-per-driver basis (per hour, store visit or unit stocked) with services delivered as they are consumed.

All of the Company's Contracts with customers have a duration of one year or less, with over 90% being completed in less than 30 days, and revenue is recognized as services are performed. Given the nature of the Company's business, how the Contracts are structured and how the Company is compensated, the Company has elected the right-to-invoice practical expedients method allowed under the revenue standard.

Doubtful Accounts and Credit Risks

The Company continually monitors the collectability of its accounts receivable based upon current client credit information and financial condition. Balances that are deemed to be uncollectible after the Company has attempted reasonable collection efforts are written off through a charge to the bad debt allowance and a credit to accounts receivable. Accounts receivable balances, net of any applicable reserves or allowances, are stated at the amount that management expects to collect from the outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to bad debt allowance based in part on management's assessment of the current status of individual accounts. Based on management's assessment, the Company established an allowance for doubtful accounts of $563,000 and $438,000 at December 31, 2020, and 2019, respectively. Bad debt expense was $330,000 and $83,000 for the years ended December 31, 2020 and 2019, respectively.

-19-

Internal Use Software Development Costs

The Company capitalized approximately $1.0 million of costs related to software developed for internal use in both 2020 and 2019, and recognized approximately $1.2 and $1.3 million of amortization of capitalized software for the years ended December 31, 2020 and 2019 respectively.

-20-

Results of Operations

The following table sets forth selected financial data and such data as a percentage of net revenues for the years indicated (dollars in millions).

Year Ended December 31,

Selling, general & administrative expense 33.3 14.5 36.9 14.6

Depreciation & amortization 2.1 0.9 2.2 0.9

Other (income), net (0.2 ) (0.1 ) (0.3 ) (0.1 )

Income before income taxes 9.3 4.0 9.4 3.7

Net income attributable to non-controlling interest (5.6 ) (2.4 ) (3.4 ) (1.4 )

Net income attributable to SPAR Group, Inc. $ 3.4 1.5 % $ 2.4 1.0 %

Results of operations for the year ended December 31, 2020, compared to the year ended December 31, 2019

Net Revenues

Net revenues for the year ended December 31, 2020, were $230.5 million compared to $252.9 million for the year ended December 31, 2019, a decrease of $22.4 million or 8.8%. Domestic contributed an increase of $1.4 million and the international segment contributed a decrease of $23.8 million year over year.

Domestic net revenues totaled $92.1 million and $90.7 million at December 31, 2020 and 2019, respectively. The increase of $1.4 million or 1.5% is primarily attributable to project growth.

International net revenues totaled $138.4 million for the year ended December 31, 2020, compared to $162.2 million for the year ended December 31, 2019, a decrease of $23.8 million or 14.7%. The decrease in 2020 international net revenues was primarily due to foreign exchange impact as well as decreased revenue in Australia, Canada, and Japan. See Note 12 to the Company's Consolidated Financial Statements – Segment Information, below.

Cost of Revenues

The Company's cost of revenues consists of its in-store labor and field management wages, related benefits, travel and other direct labor-related expenses and was 80.4% of net revenue for the year ended December 31, 2020 compared to 80.5% of net revenues for the year ended December 31, 2019.

Domestic cost of revenue as a percent of net revenue was 78.5% and 76.5% for the years ended December 31, 2020 and 2019, respectively. The increase in cost was due to the labor mix and project work.

International cost of revenue as a percent of net revenue was 81.6% and 82.8% for the years ended December 31, 2020 and 2019, respectively. The international cost of revenue percentage decrease of 1.2% percentage point was primarily due to margin improvements in Mexico, India, and Brazil.

-21-

Selling, General and Administrative Expenses

Selling, general and administrative expenses of the Company include its corporate overhead, project management, information technology, executive compensation, human resources, legal and accounting expenses. Selling, general and administrative expenses were approximately $33.3 million and approximately $36.9 million for the years ended December 31, 2020 and 2019, respectively. Due to COVID-19 impact, all countries have managed discretionary spending diligently throughout the year of 2020.

Domestic selling, general and administrative expenses totaled approximately $16.3 million for the year ended December 31, 2020 compared to approximately $16.9 million for the year ended December 31, 2019.

International selling, general and administrative expenses totaled approximately $17.1 million and $20.0 million for the years ended December 31, 2020 and 2019, respectively.

Depreciation and Amortization

Depreciation and amortization expense totaled approximately $2.1 million and $2.2 million for the years ended December 31, 2020 and 2019, respectively.

Interest Expense

The Company's interest expense was $690,000 and $1.0 million for the years ended December 31, 2020 and 2019, respectively.

The international segment contributed $40,000 to the decrease in the Company's 2020 interest expense primarily due to borrowing requirements from the Company's subsidiary in Brazil of $146,000 and change of allocation of business segment of $202,000. In the domestic segment, 2020 interest expense decreased by approximately $650,000 compared to 2019 primarily due to change of allocation of business segment; excluding allocation, the expense increased by $164,000 due to financing rate increases.

Other Income

Other income was $242,000 and $266,000 for the years ended December 31, 2020 and 2019, respectively.

Income Tax

The income tax expense for the years ended December 31, 2020 and 2019 was $312,000 and $3.6 million, respectively. The decrease is from a Brazil tax provision adjustment.

Non-Controlling Interest

Net operating profits from the non-controlling interests, relating to the Company's 51% owned subsidiaries, resulted in a reduction of net income attributable to the Company of $5.6 million and $3.4 million for the years ended December 31, 2020 and 2019, respectively.

Net Income

The Company reported a net income attributable to the Company of $9.0 million for the year ended December 31, 2020, or $0.16 per basic share, compared to a net income of $5.8 million for the year ended December 31, 2019, or $0.11 per diluted share, based on basic shares outstanding of 21.1 million at December 31, 2020, and 20.9 million at December 31, 2019.

Off Balance Sheet Arrangements

None.

-22-

Liquidity and Capital Resources

For the years ended December 31, 2020 and 2019, the Company had pre-tax net income before taxes of $9.3 million and $9.4 million, respectively.

Net cash provided by operating activities was $8.8 million and $6.1 million for the years ended December 31, 2020 and 2019, respectively. Net cash provided by operating activities was primarily due to cash impacting earnings and a decrease in accounts receivable, partially offset by decreases in accounts payable and accrued expenses.

Net cash used in investing activities for the years ended December 31, 2020 and 2019, was $1.6 million and $1.4 million, respectively. The net cash used in investing activities during 2020 was attributable to fixed asset purchases.

Net cash provided by financing activities for the year ended December 31, 2020 was approximately $0.1 million compared to $2.0 million used in financing activities in 2019. Net cash provided by financing activities during 2020 was primarily due to net borrowing on lines of credit.

The above activity and the impact of foreign exchange rate changes resulted in an increase in cash and cash equivalents for the year ended December 31, 2020 of approximately $5.5 million.

At December 31, 2020, the Company had net working capital of $25.8 million, as compared to net working capital of $17.4 million at December 31, 2019. The Company's current ratio was 1.6 and 1.4 at December 31, 2020 and December 31, 2019, respectively.

Credit Facilities

The Company is a party to various domestic and international credit facilities. See Note 4 to the Company's Consolidated Financial Statements – Credit Facilities.

These various domestic and international credit facilities require compliance with their respective financial covenants. During 2020, the Company was in compliance with all other financial covenants.

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, a significant reduction in business from such clients, or a negative economic downturn resulting from the impact of the COVID-19 virus, could have a material adverse effect on the Company's business, cash resources and ongoing ability to fund operations.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 8. Financial Statements and Supplementary Data

See Item 15 – Exhibits and Financial Statement Schedules of this Annual Report on Form 10-K.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

-23-

Management's Report on Internal Control Over Financial Reporting

The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting for the registrant, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Management has designed such internal control over financial reporting by the Company to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

The Company's management has evaluated the effectiveness of the Company's internal control over financial reporting using the "Internal Control – Integrated Framework (2013)" created by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") framework. Based on this evaluation, management has concluded that internal controls over financial reporting were effective as of December 31, 2020.

Management's Evaluation of Disclosure Controls and Procedures

The Company's chief executive officer and chief financial officer have each reviewed and evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of December 31, 2020, as required by Exchange Act Rules 13a-15(b) and Rule 15d-15(b). Based on that evaluation, the chief executive officer and chief financial officer have each concluded that the Company's current disclosure controls and procedures are effective to ensure that the information required to be disclosed by the Company in reports it files, or submits under the Exchange Act were recorded, processed, summarized and reported within the time period specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls

There have been no changes in the Company's internal controls over financial reporting that occurred during the Company's quarter ended December 31,2020 that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

Item 9B. Other Information

Failure to Maintain a Majority of Independent Directors on the Board

The Board and the Governance Committee have determined that the Board should always have a majority of independent directors as required by applicable Nasdaq and SEC rules. SGRP's Statement of Policy Regarding Director Qualifications and Nominations dated as of May 18, 2004, requires that (among other things) a majority of the directors of the Board, and all of the members of its Audit Committee, Compensation Committee and Governance Committee, be independent directors as required by applicable Nasdaq and SEC rules. Nasdaq Listing Rule 5605(b)(1) requires a majority of the board of directors of a listed company to consist of independent directors, as defined in Rule 5605(a)(2) (together, the "Board Independence Rules").

At the time of his appointment, Mr. Lazaretos was classified as non-independent and caused SGRP to fail to comply with the Nasdaq's Board Independence Rule. On December 31, 2019, SGRP received a notification letter from Nasdaq (the "Nasdaq Board Independence Deficiency Letter"), stating that SGRP was no longer in compliance with the Board Independence Rule as a result of Mr. Lazaretos being added to the Board pursuant to the Written Consents of the Majority Stockholders. See SGRP's Current Reports on Form 8-K as filed with the SEC on January 31, 2020 and January 7, 2020. See also SGRP's Current Reports on Form 8-K as filed with the SEC on January 31, 2020, September 16, 2019, August 23, 2019 and August 12, 2019.

On January 23, 2020, the Governance Committee re-evaluated the independence of Mr. Lazaretos and Mr. Mayer, which included their re-evaluation of information previously provided. Accordingly, the Governance Committee believes that the Board now has a majority of independent directors and satisfies Nasdaq Listing Rule 5605(b)(1) and has advised Nasdaq of the above in a letter on February 4, 2020. The Governance Committee has also evaluated the independence of Mr. Peter Brown and concluded his independence status with the exception of Brazil and related-party matters.

The Governance Committee has not yet evaluated the independence of Robert G. Brown. However, Robert G. Brown is the uncle of Mr. Peter Brown, and is a significant stockholder of SGRP, a member of a 13D control group, and SGRP's former Chairman and Director. Since there is no presumption of independence under Nasdaq Rules or the Charter of the Governance Committee, Mr. Robert G. Brown will be considered non-independent until determined otherwise by the Governance Committee.

The nine-member Board currently has five independent directors (Arthur H. Baer, Igor Novgorodtsev, Jeffrey A. Mayer, Panagiotis ("Panos") N. Lazaretos and Peter W. Brown) and four non-independent directors (Mike Matacunas, William H. Bartels, Robert G. Brown and James R. Brown, Sr.). Such independent directors constitute a majority of the directors on the Board, which the Company believes satisfies Nasdaq's Board Independence Rules. See SGRP's Current Report on Form 8-K respecting such compliance as filed with the SEC on September 16, 2019 for details respecting Arthur Baer's appointment as an independent director, and for details respecting the re-determination of Peter W. Brown (except for Related Party Matters, see Note 10 Related Party Transaction - Re-determining Independence of Peter W. Brown, below. The Board has one remaining vacancy after the retirement on August 1, 2020 of Arthur B. Drogue and R. Eric McCarthey as independent directors from the Board, the resignation as of August 7, 2020 of Christiaan M. Olivier as a director of SGRP and the Company's President and CEO, the election on January 19, 2021 of James R. Brown, Sr. as a director of SGRP by stockholders at their special meeting, and the appointment on February 4, 2021 of Mike Matacunas as a director of SGRP and the Company's President and CEO.

-24-

PART III

Item 10. Directors, Executive Officers and Corporate Governance

Reference is made to the information set forth under the captions "The Board of Directors of the Corporation", "Executives and Officers of the Corporation", "Security Ownership of Certain Beneficial Owners and Management" and "Corporate Governance" in SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders currently scheduled to be held on May 13, 2021, as and when filed with the SEC (which SGRP plans to file pursuant to Regulation 14A in April of 2021, but not later than 120 days after the end of the Company's 2020 fiscal year),which information is incorporated by reference to this Annual Report. For clarity (and without limitation), information appearing in the sections in such Proxy Statement entitled "PROPOSAL 3 - ADVISORY VOTE ON EXECUTIVE COMPENSATION", "PROPOSAL 4 - ADVISORY VOTE ON THE FREQUENCY THAT THE CORPORATION HOLDS THE ADVISORY VOTE ON EXECUTIVE COMPENSATION", and "REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS" shall not be deemed to be incorporated by reference in this Annual Report.

Item 11. Executive Compensation

Reference is made to the information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management", "Executive Compensation, Directors and Other Information", "Executive Compensation, Equity Awards and Options", and "Compensation Plans", in SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders currently scheduled to be held on May 13, 2021, as and when filed with the SEC (which SGRP plans to file pursuant to Regulation 14A in April of 2021, but not later than 120 days after the end of the Company's 2020 fiscal year), which information is incorporated by reference to this Annual Report. For clarity (and without limitation), information appearing in the sections in such Proxy Statement entitled "PROPOSAL 3 - ADVISORY VOTE ON EXECUTIVE COMPENSATION", "PROPOSAL 4 - ADVISORY VOTE ON THE FREQUENCY THAT THE CORPORATION HOLDS THE ADVISORY VOTE ON EXECUTIVE COMPENSATION", and "REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS" shall not be deemed to be incorporated by reference in this Annual Report.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Reference is made to the information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management", "Executive Compensation, Equity Awards and Options", and "Compensation Plans" in SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders currently scheduled to be held on May 13, 2021, as and when filed with the SEC (which SGRP plans to file pursuant to Regulation 14A in April of 2021, but not later than 120 days after the end of the Company's 2020 fiscal year), which information is incorporated by reference to this Annual Report. For clarity (and without limitation), information appearing in the sections in such Proxy Statement entitled "PROPOSAL 3 - ADVISORY VOTE ON EXECUTIVE COMPENSATION", "PROPOSAL 4 - ADVISORY VOTE ON THE FREQUENCY THAT THE CORPORATION HOLDS THE ADVISORY VOTE ON EXECUTIVE COMPENSATION", and "REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS" shall not be deemed to be incorporated by reference in this Annual Report.

-25-

Item 13. Certain Relationships and Related Transactions, and Director Independence

Reference is made to the information set forth under the caption "Transactions with Related Persons, Promoters and Certain Control Persons" in SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders currently scheduled to be held on May 13, 2021, as and when filed with the SEC (which SGRP plans to file pursuant to Regulation 14A in April of 2021, but not later than 120 days after the end of the Company's 2020 fiscal year), which information is incorporated by reference to this Annual Report. For clarity (and without limitation), information appearing in the sections in such Proxy Statement entitled "PROPOSAL 3 - ADVISORY VOTE ON EXECUTIVE COMPENSATION", "PROPOSAL 4 - ADVISORY VOTE ON THE FREQUENCY THAT THE CORPORATION HOLDS THE ADVISORY VOTE ON EXECUTIVE COMPENSATION", and "REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS" shall not be deemed to be incorporated by reference in this Annual Report.

Item 14. Principal Accountant Fees and Services

Reference is made to the information set forth under the caption "PROPOSAL 2 - RATIFICATION, ON AN ADVISORY BASIS, OF THE APPOINTMENT OF BDO USA, LLP AS THE COMPANY'S PRINCIPAL INDEPENDENT ACCOUNTANTS" in SGRP's definitive Proxy Statement respecting its Annual Meeting of Stockholders currently scheduled to be held on May 13, 2021, as and when filed with the SEC (which SGRP plans to file pursuant to Regulation 14A in April of 2021, but not later than 120 days after the end of the Company's 2020 fiscal year), which information is incorporated by reference to this Annual Report. For clarity (and without limitation), information appearing in the section "REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS" shall not be deemed to be incorporated by reference in this Annual Report.

-26-

PART IV

Item 15. Exhibits and Financial Statement Schedules

1. Index to Financial Statements filed as part of this report:

Report of Independent Registered Public Accounting Firm F-1

Consolidated Balance Sheets as of December 31, 2020 and 2019 F-2

Notes to Consolidated Financial Statements F-6

2. Financial Statement Schedule

3. Exhibits

Exhibit Number Description

-27-

-28-

-29-

-30-

-31-

-32-

21.1 List of Subsidiaries (as filed herewith).

23.1 Consent of BDO USA, LLP (as filed herewith).

101.INS* XBRL Instance

101.SCH* XBRL Taxonomy Extension Schema

101.CAL* XBRL Taxonomy Extension Calculation

101.DEF* XBRL Taxonomy Extension Definition

101.LAB* XBRL Taxonomy Extension Labels

101.PRE* XBRL Taxonomy Extension Presentation

* XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

Item 16. Form 10-K Summary

None.

-33-

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

SPAR Group, Inc.

By: /s/ Michael R. Matacunas

Michael R. Matacunas

President and Chief Executive Officer

KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Fay DeVriese and Kori G. Belzer and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for her in any and all capacities, to sign any and all amendments to this Report on Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each said attorneys-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities indicated.

SIGNATURE TITLE

/s/ Michael R. Matacunas President, Chief Executive Officer and Director,

Michael R. Matacunas (Principal Executive Officer)

Robert G. Brown Chairman of the Board and Director

Robert G. Brown

/s/ Arthur H. Baer Vice Chairman and Director

Arthur H. Baer

/s/ Igor Novgorodtsev Director

Igor Novgorodtsev

William H. Bartels Director

William H. Bartels

/s/ James R. Brown, Sr. Director

James R. Brown, Sr.

Peter W. Brown Director

Peter W. Brown

/s/ Panagiotis N. Lazaretos Director

Panagiotis N. Lazaretos

/s/ Jeffrey A. Mayer Director

Jeffrey A. Mayer

/s/ Fay DeVriese Chief Financial Officer,

-34-

Report of Independent Registered Public Accounting Firm

Board of The Directors and Stockholders

SPAR Group, Inc. and Subsidiaries

Auburn Hills, Michigan

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of SPAR Group, Inc. (the "Company") and subsidiaries as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, equity, and cash flows for each of the two years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the accompanying index (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2020 and 2019, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements; and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which it relates.

Release of income tax valuation allowance

As more fully described in Note 5 to the consolidated financial statements, the net change in the valuation allowance for income taxes for the fiscal year ended December 31, 2020 was $2.2 million. In assessing the realizability of deferred tax assets, management determined there was sufficient positive evidence that it was more likely than not that the Brazilian net operating loss ("NOL") carryforwards and other related deferred tax assets would be realized and therefore, released the valuation allowance against the Brazilian deferred tax assets during the year ended December 31, 2020. The Brazilian entity is treated as a controlled foreign corporation ("CFC") under U.S. tax law.

We identified management’s judgments related to the determination of the realizability of deferred tax assets recorded in Brazil as a critical audit matter due to significant judgments related to: (i) evaluating the positive and negative evidence available in the determination of the amount of deferred tax assets that were more-likely-than-not to be realized in the future, (ii) complex international tax laws and regulations, and (iii) evaluating whether sufficient projected future taxable income will be generated to support the full valuation allowance release. Auditing these judgments involved especially challenging auditor judgment due to the nature and extent of audit evidence and effort required to address these matters, including the extent of specialized skills or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

/s/ BDO USA, LLP

We have served as the Company's auditor since 2013.

Troy, Michigan

March 31, 2021

F-1

SPAR Group, Inc. and Subsidiaries

Consolidated Balance Sheets

(In thousands, except share and per share data)

Assets

Current assets:

Prepaid expenses and other current assets 3,631 2,404

Operating lease right-of-use assets 2,900 4,948

Liabilities and equity

Current liabilities:

Accrued expenses and other current liabilities 18,745 18,548

Customer incentives and deposits 1,799 594

Lines of credit and short-term loans 9,329 8,932

Current portion of operating lease liabilities 1,398 2,828

Operating lease liabilities, less current portion 1,502 2,120

Commitments and contingencies – See Note 6

Equity:

SPAR Group, Inc. equity

Preferred stock, $.01 par value:

Common stock, $.01 par value:

Accumulated other comprehensive loss (3,913 ) (3,616 )

See accompanying notes to the Company's consolidated financial statements.

F-2

SPAR Group, Inc. and Subsidiaries

Consolidated Statements of Operations and Comprehensive Income

(In thousands, except per share data)

Year Ended December 31,

Selling, general and administrative expense 33,336 36,869

Depreciation and amortization 2,130 2,190

Other (income), net (242 ) (266 )

Income before income tax expense 9,274 9,411

Net income attributable to non-controlling interest (5,595 ) (3,414 )

Net income attributable to SPAR Group, Inc. $ 3,367 $ 2,419

Basic income per common share attributable to SPAR Group, Inc. $ 0.16 $ 0.12

Diluted income per common share attributable to SPAR Group, Inc. $ 0.16 $ 0.11

Weighted average common shares – basic 21,110 20,916

Weighted average common shares – diluted 21,155 21,157

Other comprehensive income (loss):

Foreign currency translation adjustments (1,835 ) 538

Comprehensive income attributable to non-controlling interest (4,057 ) (3,930 )

Comprehensive income attributable to SPAR Group, Inc. $ 3,070 $ 2,441

See accompanying notes to the Company's consolidated financial statements.

F-3

SPAR Group, Inc. and Subsidiaries

Consolidated Statements of Equity

(In thousands)

Shares Amount Shares Amount Capital Loss Earnings Interest Equity

Share-based compensation – – – – 235 – – – 235

Exercise of stock options 317 3 (6 ) 6 (28 ) – – – (19 )

Other comprehensive income – – – – – 22 – 516 538

Share-based compensation – – – – 136 – – – 136

Exercise of stock options 20 – – – (2) – – – (2)

Other comprehensive (loss) – – – – – (297 ) – (1,538 ) (1,835 )

See accompanying notes to the Company's consolidated financial statements.

F-4

SPAR Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

(In thousands)

Year Ended December 31,

Operating activities

Adjustments to reconcile net income to net cash provided by operating activities

Depreciation and amortization 2,130 2,190

Amortization of operating lease assets 2,048 893

Deferred income tax expense (benefit) (654 ) 792

Share based compensation 136 235

Changes in operating assets and liabilities, net of business acquisitions:

Prepaid expenses and other assets (3,833 ) (432 )

Operating lease liabilities (2,048 ) (893 )

Net cash provided by operating activities 8,801 6,147

Investing activities

Purchases of property and equipment and capitalized software (1,600 ) (1,378 )

Net cash used in investing activities (1,600 ) (1,378 )

Financing activities

Net borrowing on lines of credit 466 7,979

Payoff of bank line of credit – (9,598 )

Payments related to stock options exercised (2 ) (19 )

Payments on term debt (333 ) (333 )

Net cash provided by (used in) financing activities 131 (1,971 )

Effect of foreign exchange rate changes on cash (1,818 ) 549

Net increase in cash and cash equivalents 5,514 3,347

Cash and cash equivalents at beginning of year 10,458 7,111

Cash and cash equivalents at end of year $ 15,972 $ 10,458

Supplemental disclosure of cash flows information

See accompanying notes to the Company's consolidated financial statements.

F-5

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

1. Business and Organization

SPAR Group is a leading global merchandising and marketing services company, providing a broad range of services to retailers, manufacturers and distributors around the world. With more than 40 years of experience, merchandising specialists around the world, average multiple store visits a week and long-term relationships with some of the world’s leading manufacturers and retail businesses, SPAR provides specialized capabilities across more than 10 countries and 5 continents.

Our focus is merchandising and marketing. Our specialists are in stores restocking shelves, auditing inventory, performing competitive price shopping, setting up exciting promotions, assembling fixtures and furniture, preparing new locations for grand openings, assisting with sales and more. We provide the “last mile” of retailing and manufacturer product merchandising and marketing.

Our services apply to a wide range of segments and categories. We serve retailers in the grocery, drug, dollar, discount, convenience, cash and carry, home improvement, consumer electronics, automotive, pharmacy, office supply and mass merchandise segments. We serve manufacturers and distributors in the personal technology, electronics, beverage, household product, consumables, automotive aftermarket and consumer product segments. Our ability to recognize trends and opportunities across segments and geographies distinguishes us from local or regional competition.

We operate in markets that represent more than 50% of the world’s population. We have expanded internationally to serve clients but also to capitalize on growing global demand. As of the end of 2020, we are in 10 countries including, United States, Canada, Mexico, Brazil, South Africa, Australia, China, Japan, India, Turkey.

The Company operates under two divisions: Domestic, International. The Domestic division is comprised of all operations within the United States. The International division is a consolidation of all other operations and joint ventures.

The Domestic business is led and operated from our global headquarters in Auburn Hills, MI. The International business is led from our global headquarters, but then has regional leadership and offices in the respective countries.

Our approach to the international marketplace has historically been to establish joint ventures. We believe this approach enables us to bring the breadth of our global capabilities and tools while capitalizing on the strength and importance of local executive leadership and resources.

The following table provides details of the structure of our Domestic and International businesses:

Primary Territory SPAR Percentage Ownership Principal Office Location

Domestic

United States of America 100% Auburn Hills, Michigan

National Merchandising Services, LLC (NMS) 51% Fayetteville, Georgia

Resource Plus of North Florida, Inc. (RPI) 51% Jacksonville, Florida

International

Japan 100% Tokyo, Japan

Canada 100% Vaughan, Ontario, Canada

South Africa 51% Durban, South Africa

India 51% New Delhi, India

Australia 51% Melbourne, Australia

China 51% Shanghai, China

Mexico 51% Mexico City, Mexico

Turkey 51% Istanbul, Turkey

Brazil 51% Sao Paulo, Brazil

F-6

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies

Principles of Consolidation

The Company consolidates its 100% owned subsidiaries and all of its 51% owned joint venture subsidiaries in accordance with the provisions required by the Consolidation Topic 810 of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC"). All significant intercompany accounts and transactions have been eliminated.

Immaterial Revision

In 2020, an error was identified in the Company’s deferred tax table within the income tax footnote in the 2019 consolidated financial statements. As a result, deferred tax assets from net operating loss carryforwards as of December 31, 2019 were understated by $2.2 million, and the Company’s valuation allowance was understated by the same amount. These immaterial adjustments to the disclosures had no effect on the consolidated balance sheets, statements of operations and comprehensive income, equity and cash flows for any periods presented. The correction relates to the Company’s Brazil subsidiary. See Note 5 for further details.

Accounting for Joint Venture Subsidiaries

For the Company's less than wholly owned subsidiaries, the Company first analyzes to determine if a joint venture subsidiary is a variable interest entity (a "VIE") in accordance with ASC 810 and if so, whether the Company is the primary beneficiary requiring consolidation. A VIE is an entity that has: (i) insufficient equity to permit it to finance its activities without additional subordinated financial support; or (ii) equity holders that lack the characteristics of a controlling financial interest. VIEs are consolidated by the primary beneficiary, which is the entity that has both the power to direct the activities that most significantly impact the entity's economic performance and the obligation to absorb losses or the right to receive benefits from the entity that potentially could be significant to the entity. Variable interests in a VIE are contractual, ownership, or other financial interests in a VIE that change with changes in the fair value of the VIE's net assets. The Company continuously re-assesses at each level of the joint venture whether the entity is: (i) a VIE; and (ii) if the Company is the primary beneficiary of the VIE. If it was determined that an entity in which the Company holds an interest qualified as a VIE and the Company was the primary beneficiary, it would be consolidated.

Based on the Company's analysis for each of its 51% owned joint ventures, the Company has determined that each is a VIE and the Company is the primary beneficiary of that VIE. In addition to its controlling interest, the Company controls the proprietary information technology that is used at and is significant to each joint venture and the Company has the ability to control other key decisions. Accordingly, the Company has the power to direct key activities and the obligation to absorb losses or the right to receive benefits that could be significant and consolidates each joint venture under the VIE rules and reflects the 49% interests in the Company's consolidated financial statements as non-controlling interests. The Company records these non-controlling interests at their initial fair value, adjusting the basis prospectively for their share of the respective consolidated investments' net income or loss or equity contributions and distributions. These non-controlling interests are not redeemable by the equity holders and are presented as part of permanent equity. Income and losses are allocated to the non-controlling interest holder based on its economic ownership percentage.

Use of Estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the US ("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. Actual results could differ from those estimates.

Cash Equivalents

The Company considers all highly liquid short-term investments with original maturities of three months or less at the time of acquisition to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.

Concentration of Credit Risk

The Company maintains cash balances with high quality financial institutions and periodically evaluates the creditworthiness of such institutions and believes that the Company is not exposed to significant credit risk.

Revenue Recognition

F-7

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Unbilled Accounts Receivable

Unbilled accounts receivable represents services performed but not billed and are included as accounts receivable.

Doubtful Accounts and Credit Risks

Leases

The Company's Right-of-use ("ROU") assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Since most of the Company’s leases do not have an implicit borrowing rate, the Company’s incremental borrowing rate is based on the information available at commencement date in determining the present value of lease payments. Leases may include options allowing the Company at its sole discretion to extend or terminate the lease, and when it is reasonably certain that those options will be exercised, the Company will include those periods in the lease term. Variable costs, such as payments for insurance and tax payments, are expensed when the obligation for those payments is incurred.

Property and Equipment and Depreciation

Property and equipment, including leasehold improvements, are stated at cost. Depreciation is calculated on a straight-line basis over estimated useful lives of the related assets, which range from three to seven years. Leasehold improvements are depreciated over the shorter of their estimated useful lives or lease term, using the straight-line method. Maintenance and minor repairs are charged to expense as incurred. Depreciation expense for both years ended December 31, 2020 and 2019 (including amortization of capitalized software as described below) was $1.7 million.

Internal Use Software Development Costs

The Company capitalizes certain costs associated with its internally developed software. Specifically, the Company capitalizes the costs of materials and services incurred in developing or obtaining internal use software. These costs include (but are not limited to) the cost to purchase software, the cost to write program code, payroll and related benefits and travel expenses for those employees who are directly involved with and who devote time to the Company's software development projects. Capitalization of such costs ceases when the project is substantially complete and ready for its intended purpose. Costs incurred during preliminary project and post-implementation stages, as well as software maintenance and training costs, are expensed in the period in which they are incurred. Capitalized software development costs are amortized over three years on a straight-line basis.

The Company capitalized $1.0 million of costs related to software developed for internal use in both 2020 and 2019, and recognized approximately $1.2 and $1.3 million of amortization of capitalized software for the years ended December 31, 2020 and 2019, respectively.

F-8

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets

Goodwill

Goodwill may result from business acquisitions. Goodwill is assigned to reporting units based on the expected benefit from the synergies arising from each business combination, determined by using certain financial metrics, including the forecast discounted cash flows associated with each reporting unit. The goodwill acquired in a business combination is allocated to the appropriate reporting unit as of the acquisition date.

Goodwill is subject to annual impairment tests and interim impairment tests if impairment indicators are present. The impairment tests require the Company to first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If it is determined that it is more likely than not, or if the Company elects not to perform a qualitative assessment, the Company proceeds with the quantitative assessment. Under the quantitative test, if the fair value of a reporting unit exceeds its carrying amount, then goodwill of the reporting unit is considered to not be impaired. If the carrying amount of the reporting unit exceeds its fair value, then an impairment loss is recognized in an amount equal to the excess, up to the value of the goodwill. The Company has determined that a quantitative goodwill impairment test was only considered necessary for one of the domestic reporting units, as of December 31, 2020 and 2019. Based on the results of this test, no impairment loss was recognized.

Accounting for Share Based Compensation

The Company measures all employee share-based compensation awards using a fair value method and records the related expense in the financial statements over the period during which an employee is required to provide service in exchange for the award. Excess tax benefits are realized from the exercise of stock options and are reported as a financing cash inflow rather than as a reduction of taxes paid in cash flow from operations. For each award that has a graded vesting schedule, the Company recognizes compensation cost on a straight-line basis over the requisite service period for the entire award. Share based employee compensation expense for the years ended December 31, 2020 and 2019 was $136,000 and $235,000, respectively.

Fair Value Measurements

Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The generally accepted accounting principles fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:

F-9

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

If the inputs used to measure the fair value fall within different levels of the hierarchy, the fair value is determined based upon the lowest level input that is significant to the fair value measurement. Whenever possible, the Company uses quoted market prices to determine fair value. In the absence of quoted market prices, the Company uses independent sources and data to determine fair value. Due to their short maturity, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximated the fair values (Level 1) at December 31, 2020 and 2019. The carrying value of the Company's long-term debt with variable interest rates approximates fair value based on instruments with similar terms (Level 2).

Accounting for Income Taxes

Income tax provisions and benefits are made for taxes currently payable or refundable, and for deferred income taxes arising from future tax consequences of events that were recognized in the Company's financial statements or tax returns and tax credit carry forwards. The effects of income taxes are measured based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. If necessary, a valuation allowance is established to reduce deferred income tax assets to an amount that will more likely than not be realized.

The calculation of income taxes involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step involves evaluating the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step involves estimating and measuring the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. It is inherently difficult and subjective to estimate such amounts, as the Company has to determine the probability of various possible outcomes. The Company's evaluation of uncertain tax positions is based on factors including, but not limited to, changes in facts or circumstances, changes in tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition or measurement would result in the recognition of a tax benefit or an additional charge to the tax provision.

Net Income Per Share

Basic net income per share amounts are based upon the weighted average number of common shares outstanding. Diluted net income per share amounts are based upon the weighted average number of common and potential common shares outstanding except for periods in which such potential common shares are anti-dilutive. Potential common shares outstanding include stock options and restricted stock and are calculated using the treasury stock method.

Translation of Foreign Currencies

The financial statements of the foreign entities consolidated into the Company's consolidated financial statements were translated into United States dollar equivalents at exchange rates as follows: balance sheet accounts for assets and liabilities were converted at year-end rates, equity at historical rates and income statement accounts at average exchange rates for the year. The resulting translation gains and losses are reflected in accumulated other comprehensive income or loss in the consolidated statements of equity.

New Accounting Pronouncements

Recently Adopted

F-10

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

In August 2018, the FASB issued ASU 2018-13 which eliminates, adds and modifies certain fair value measurement disclosures. The ASU is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual periods, with early adoption permitted. The adoption of the standard did not have a material impact to the consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04 simplifying the accounting for goodwill impairment for all entities. The new guidance eliminates the requirement to calculate the implied fair value of goodwill (Step 2 of the current two-step goodwill impairment test under ASC 350). Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (Step 1 of the current two-step goodwill impairment test). The ASU is effective prospectively for reporting periods beginning after December 15, 2019, with early adoption permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The adoption of this standard did not have a material impact on the goodwill impairment testing process or the consolidated financial statements.

Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12 simplifying various aspects related to the accounting for income taxes. The guidance removes exceptions to the general principles in Topic 740 related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. The Company does not expect the adoption of the new guidance to have a material impact on the consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments (Topic 326) Credit Losses”. Topic 326 changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. Topic 326 is effective as of January 1, 2020, although in November 2019, the FASB delayed the effective date until fiscal years beginning after December 15, 2022 for SEC filers eligible to be smaller reporting companies under the SEC’s definition, as well as private companies and not-for-profit entities. The Company qualifies as a smaller reporting company under the SEC’s definition. Early adoption is permitted. The Company is currently evaluating the impact of Topic 326 on its consolidated balance sheets, statements of operations, statements of cash flows and related disclosures.

Novel Coronavirus(COVID-19) Outbreak

In March 2020, the World Health Organization declared the novel strain of Coronavirus (COVID-19) a global pandemic and recommended containment and mitigation measures worldwide. The full impact of the COVID-19 outbreak continues to evolve as of the date of this report. As such, it is uncertain as to the full magnitude that the pandemic will have on the Company’s financial condition, liquidity, and future results of operations. Management is actively monitoring the impact of the global situation on its financial condition, liquidity, operations, suppliers, industry, and workforce.

In the USA, many of our clients have been affected by business closure and stay at home orders, which has hampered our ability to perform in-store services since March 2020. As of the date of this filing, many of our Company subsidiaries globally have been impacted by temporary retail closures or reduced in-store hours, although most of our customer’s locations remain open to provide essential products. New store openings and remodels with the Company's assistance are particularly susceptible to such external factors and are being delayed by many of the Company's clients due to the effects of the Novel Coronavirus. The Company has initiated mitigation efforts and is monitoring the situation on a country-by-country basis. The Company has also implemented several cost savings measures which include a reduction in the use of contracted workers, furloughing employees, reducing hours and a reduction in other corporate and non-critical expenses.

While the COVID-19 pandemic has not had any material unfavorable effects in our financial results for the year ended December 31, 2020, the extent of the impact in the future, if any, will depend on future developments, which are highly uncertain, cannot be predicted and could have a material adverse impact on our financial position, operating results and cash flows. A prolonged outbreak could, among other things, strain our business continuity plans, create delays in our growth and strategic initiatives, reduce our sales and marketing activities, limit our access to financing on favorable terms, increase our exposure to potential impairment charges related to long-lived and intangible assets, hinder our ability to support our clients and operate our business effectively, heighten the risk of disruption to our information and reporting systems and internal controls, including those over financial reporting and other risk management systems, or require us to incur substantial costs. We are closely monitoring the impact of the COVID-19 pandemic on all aspects of our business and may take further actions as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, customers and partners. As the conditions surrounding the COVID-19 pandemic continue to evolve rapidly, we will continue to actively manage our response in collaboration with customers, government officials and stakeholders, and assess any potential impacts to our financial position and operating results, as well as adverse developments in our business.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law. The CARES Act is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions related to refundable payroll tax credits, deferment of the employer portion of social security payments, net operating loss carryback periods, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. As of December 31, 2020, we have elected to defer the employer-paid portion of social security taxes of $1.3 million, which is included in "Accrued expenses and other liabilities" in the Consolidated Balance Sheets.

F-11

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

3. Supplemental Balance Sheet Information (in thousands)

December 31,

Accounts receivable, net, consists of the following: 2020 2019

Less allowance for doubtful accounts (563 ) (438 )

December 31,

Property and equipment consist of the following: 2020 2019

Capitalized software development costs 14,680 13,549

Less accumulated depreciation and amortization (18,840 ) (17,390 )

Property and equipment, net $ 2,795 $ 2,848

United States International Total

Goodwill:

Change in goodwill due to impact of foreign currency – (24 ) (24 )

December 31,

Intangible assets consist of the following: 2020 2019

Customer contracts and lists $ 2,731 $ 2,731

Less accumulated amortization (2,766 ) (2,225 )

Intangible assets consist primarily of customer contracts and lists, trade names, patents and non-compete agreements, all of which have a finite useful life. Intangible assets are amortized based on either the pattern in which the economic benefits of the intangible assets are estimated to be realized or on a straight-line basis, which approximates the manner in which the economic benefits of the intangible asset will be consumed. Amortization is generally not deductible for tax purposes.

F-12

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

3. Supplemental Balance Sheet Information (continued)

The Company is amortizing its intangible assets of $5.0 million over lives ranging from 5 to 25 years. Amortization expense for the years ended December 31, 2020 and 2019 was approximately $534,000 and $476,000, respectively. The annual amortization for each of the following years succeeding December 31, 2020, is summarized as follows:

Year Amount

December 31,

Accrued expenses and other current liabilities: 2020 2019

Accrued accounting and legal expenses 1,389 1,944

Accrued expenses and other current liabilities $ 18,745 $ 18,548

4. Credit Facilities

Domestic Credit Facilities

North Mill Capital Credit Facility

On April 10, 2019, the Company repaid and replaced its 2018 credit facility with PNC Bank, National Association with a new secured revolving credit facility in the United States and Canada (the "NM Credit Facility") with North Mill Capital, LLC ("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, namely SPAR Marketing Force, Inc. ("SMF"), and SPAR Canada Company ("SCC") and SPAR Canada, Inc., SPAR Acquisition, Inc., SPAR Assembly and Installation, Inc., and SPAR Trademarks, Inc. (together with SGRP, each a "NM Guarantor" and collectively, the "NM Guarantors", and together with SMF and SCC, each a "NM Loan Party" and collectively, the "NM Loan Parties"), entered into 18-month individual Loan and Security Agreements with NM dated as of April 10, 2019 (as amended by the Modification Agreement defined below, the "NM Loan Agreements"), which governs the obligations of the NM Loan Parties to NM and secures them with pledges of substantially all of the assets of the NM Loan Parties (other than SGRP's foreign subsidiaries, certain designated domestic subsidiaries, and their respective equity and assets).

On January 5, 2021, the NM Loan Parties and NM executed and delivered a Waiver and Modification Agreement entered in as of January 4, 2021, and effective as of December 31, 2020 (the "Modification Agreement"), pursuant to which NM and the NM Loan Parties agreed to extend the NM Loan Agreements from October 2021 to April 10, 2022, and increased the amounts of the credit facilities for SMF to $14.5 (USD) million in the USA and decreased the SCC facility to $1.5 (CDN) million in Canada; in addition the Modification Agreement increased SMF's borrowing base availability for unbilled receivables to up to 70% from January 1, 2021 through June 30, 2021, which thereafter reverts to 65%, and increased the unbilled cap for SMF to $4.5 million (USD) from $3.9 million (USD). SCC's facility received similar increases.

To evidence the increase in the US Revolving Credit Facility, SMF executed and delivered to NM a $14.5 (USD) million Amended and Restated Revolving Credit Master Promissory Note (the "Restated US Note"), which amends, restates, supersedes and replaces the prior note. To evidence the decrease in the Canadian Revolving Credit Facility, SCC executed and delivered to NM a $1.5 (CDN) million Amended and Restated Revolving Credit Master Promissory Note (the "Restated Canadian Note"), which amends, restates, supersedes and replaces the prior CDN$ note.

The Restated US Note and Restated Canadian Note (together, the "NM Notes") continue to require the NM Borrowers to pay interest on the loans thereunder 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 Modification Agreement, SGRP paid NM a fee of $7,500 and agreed to reimburse NM's legal and documentation fees. On December 31, 2020, the aggregate interest rate was 6.75% per annum, and the outstanding loan balance was $8.3 million. Outstanding amounts are classified as short-term debt.

F-13

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

4. Credit Facilities (continued)

Revolving loans are available to the Borrowers under the NM Credit Facility based upon the borrowing base formula defined in the NM Loan Agreement.

The NM Credit Facility contains certain financial and other restrictive covenants and also limits certain expenditures by the NM Borrowers, including, maintaining a positive trailing EBITDA for each Borrower, limits on executive compensation increases, capital expenditures and other investments. The Company was in compliance of such covenants as of December 31, 2020.

Fifth Third Credit Facility

On January 9, 2018, the Company completed its acquisition of a 51% interest in its new subsidiaries, Resource Plus of North Florida, Inc., and related companies (collectively, "Resource Plus"). When acquired, Resource Plus was a party to a revolving line of credit facility it secured on May 23, 2016, (the "Fifth Third Credit Facility") from Fifth Third Bank for $3.5 million. Effective April 11, 2018, the term of the Fifth Third Credit Facility was extended and was due on April 23, 2020. Subsequently, the term of the Fifth Third Credit Facility has been extended and is currently scheduled to become due on June 16, 2022.

Revolving loans of up to $3.5 million are available to Resource Plus under the Fifth Third Credit Facility based upon the borrowing base formula defined in the agreement (principally 80% of "eligible" accounts receivable less certain reserves). As of December 31, 2020, there was no outstanding balance. The Fifth Third Credit Facility is secured by substantially all assets of Resource Plus.

The Fifth Third Credit Facility currently requires Resource Plus to pay interest on the loans there under equal to: (A) the Daily LIBOR Rate (as defined in the agreement) per annum; plus (B) two hundred fifty basis points (2.50%). On December 31, 2020, the aggregate interest rate under that formula was 5.2% per annum. The Fifth Third Credit Facility contains certain financial and other restrictive covenants. Resource Plus was in compliance with such covenants as of December 31, 2020.

Other Debt

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 based on scheduled maturities. The total balance owed at December 31, 2020 is $1.3 million.

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 $617,000 USD (based upon the exchange rate at December 31, 2020). The facility provides for borrowing based upon a formula, as defined in the agreement (principally 80% of eligible accounts receivable less certain deductions). The outstanding balance with National Australia Bank as of December 31, 2020 was $200,000 (Australian) or $154,000 USD and is due on demand.

F-14

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

4. Credit Facilities (continued)

On October 5, 2018, SPAR Brazil secured a line of credit facility with Branco Santander for approximately 381,000 Brazilian Real or approximately $73,000 USD (based upon the exchange rate at December 31, 2020). The account was closed in September 2020.

SPAR China has secured a loan with Industrial Bank for 3.0 million Chinese Yuan or approximately $460,000 USD (based upon exchange rate at December 31, 2020). The loan will expire December 17, 2021. The annual interest rate was 4.65% as of December 31, 2020. The outstanding balance with Industrial Bank as of December 31, 2020 was 3.0 million Chinese Yuan or $460,000 USD and is due on demand.

SPAR China has secured a loan with CCB Bank for 1.0 million Chinese Yuan or approximately $153,000 USD (based upon exchange rate at December 31, 2020). The annual interest rate was 4.25% as of December 31, 2020. The outstanding balance with Industrial Bank as of December 31, 2020 was 1.0 million Chinese Yuan or $153,000 USD and is due on demand. The note was subsequently paid and closed on January 7, 2021.

SPAR Todopromo has secured a line of credit facility with Ve Por Mos for 5.0 million Mexican Pesos or approximately $262,000 USD (based upon exchange rate at December 31, 2020). The revolving line of credit will expire May 2021. The annual interest rate was 8.00% as of December 31, 2020. There is no outstanding balance at December 31, 2020.

Interest Rate as of

USA - North Mill Capital 6.75 % 8,262 – – – –

USA - Fifth Third Bank 3.60 % – – – – –

Australia - National Australia Bank 6.56 % 154 – – – –

China - Industrial Bank 4.65 % 460 – – – –

China - CCB Bank 4.25 % 153 – – – –

Mexico - Ve Por Mas 8.00 % – – – – –

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

Unused Availability:

Brazil – 49

F-15

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

4. Credit Facilities (continued)

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.

5. Income Taxes

Beginning in 2018, the Tax Cuts and Jobs Act (the "Act") included two new U.S. corporate tax provisions, the global intangible low-taxed income (“GILTI”) and the base-erosion and anti-abuse tax (“BEAT”). The GILTI provision requires the Company to include in its U.S. income tax return non-U.S. subsidiary earnings in excess of an allowable return on the non-U.S. subsidiary’s tangible assets. The Company has elected to treat GILTI as a period cost. The Company evaluated the GILTI resulting in a financial statement impact of approximately $350,000 and $400,000 for the year ended December 31, 2020 and December 31, 2019 respectively. The Company is below the three-year average gross receipts threshold for BEAT to apply.

Income before income taxes is summarized as follows (in thousands):

Year Ended December 31,

The income tax expense (benefit) is summarized as follows (in thousands):

Year Ended December 31,

Current:

Deferred:

The provision for income taxes is different from that which would be obtained by applying the statutory federal income tax rate to income before income taxes. The items causing this difference are as follows (dollars in thousands):

Year Ended December 31,

State income taxes, net of federal benefit 144 1.6 % 214 2.3 %

Brazil deferred tax allowance release (2,158 ) -23.3 % – 0.0 %

F-16

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

5. Income Taxes (continued)

Deferred taxes consist of the following (in thousands): December 31,

Deferred tax assets:

Net operating loss carry forwards $ 1,158 $ 2,875

Federal Research and Development Credit 240 240

Deferred revenue – 43

Accrued payroll – 88

Payroll taxes payable 328 –

Outside basis in domestic partnership 92 –

Allowance for doubtful accounts and other receivable 77 18

Share-based compensation expense 434 524

Deferred tax liabilities:

Goodwill & Intangible assets of subsidiaries 558 879

Capitalized software development costs 482 505

Total deferred tax liabilities 4,089 3,114

As part of the Company’s review of the annual financial statements and relating notes, it was determined that the Company’s 2019 tax footnote presentation was incorrect as both the tax effected net operating loss carry forward deferred tax asset and corresponding valuation allowance were understated by $2.2 million, due to the existence of $10.5 million of NOL carryforwards in Brazil as of December 31, 2019. There was no net impact to the net deferred tax asset and tax expense as the increase in the net operating loss carryforward was offset completely by a corresponding adjustment to the Company’s overall valuation allowance. For comparative purposes, the Company’s prior year income tax footnote has been revised to reflect the adjustment to the net operating loss carryforwards and valuation allowance.

As of December 31, 2020, the Company’s deferred tax assets were primarily the result of U.S. NOL, Brazil NOL and temporary differences. The Company has Federal and State NOL carryforwards of $5.44 million which if unused will expire in years 2026 through 2032, except for approximately $1.58 million that has no expiration. For the year ended December 31, 2020, the Company recorded a net valuation allowance release of $2.1 million (comprising a full-year valuation release related to the Brazil operations), on the basis of management’s reassessment of the amount of its deferred tax assets that are more likely than not to be realized. As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. As of December 31, 2020, in part because in the current year the Company achieved three years of cumulative pretax income in the Brazil federal tax jurisdiction, management determined that there is sufficient positive evidence to conclude that it is more likely than not that additional deferred taxes of $15.4 million are realizable. It therefore reduced the valuation allowance accordingly.

Approximately $300,000 of the NOLs were incurred prior to the acquisition of PIA Merchandising Services, Inc. in 1999. The acquisition resulted in a change of ownership under Internal Revenue Code ("IRC") section 382 and placed a limit on the amount of pre-acquisition NOLs that may be used each year to reduce taxable income. This NOL of approximately $300,000 was unused in 2018 and was written off, resulting in an $84,000 tax expense.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing net deferred tax assets. For the U.S. based net deferred tax assets, which are approximately $1.2 million, management continues to monitor its operating performance and currently believes that the achievement of the required future taxable income necessary to realize these deferred assets is more likely than not. Key considerations in this assessment includes current tax law that is expected to continue to generate future U.S. taxable income based on the results of our foreign operations (GILTI tax), our expectation of continued improvements in U.S. operating results and the period of time available to generate future taxable income. It is reasonably possible that this belief could change in the near term requiring the establishment of a valuation allowance which could significantly impact our operating results.

A reconciliation of the beginning and ending amount of uncertain tax position reserves is as follows (in thousands):

Year Ended December 31,

Beginning balance $ 8 $ 101

Current year provision 5 -

Removal for tax provisions of prior years - (93 )

Ending balance $ 13 $ 8

Interest and penalties that the tax law requires to be paid on the underpayment of taxes should be accrued on the difference between the amount claimed or expected to be claimed on the return and the tax benefit recognized in the financial statements. The Company's policy is to record this interest and penalties as additional tax expense.

F-17

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

5. Income Taxes (continued)

Details of the Company's tax reserves at December 31, 2020, are outlined in the table below (in thousands):

Taxes Interest Penalty Total Tax Liability

Domestic

Federal – – – –

International – – – –

Total reserve $ 13 $ 6 $ 1 $ 20

In management's view, the Company's tax reserves at December 31, 2020 and 2019, for potential domestic state tax liabilities were sufficient. The Company has evaluated the tax liabilities of its international subsidiaries and does not believe a reserve is necessary at this time.

SPAR and its subsidiaries file numerous consolidated, combined and separate company income tax returns in the U.S. Federal jurisdiction and in many U.S. states and foreign jurisdictions. With few exceptions, SPAR is subject to U.S. Federal, state and local income tax examinations for the years 2014 through the present. However, tax authorities have the ability to review years prior to the position taken by the Company to the extent that SPAR utilized tax attributes carried forward from those prior years.

On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). Intended to provide economic relief to those impacted by the COVID-19 pandemic, the CARES Act includes provisions, among others, addressing the carryback of net operating losses for specific periods, temporary modifications to the limitations placed on the tax deductibility of net interest expenses, and technical amendments for qualified improvement property. Additionally, the CARES Act, in efforts to enhance business' liquidity, provides for the deferral of the employer-paid portion of social security taxes. As of December 31, 2020, the Company has elected to defer the employer-paid portion of social security taxes of $1.3 million, which is included in "Accrued expenses and other current liabilities" in the Consolidated Balance Sheets.

6. 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.

RELATED PARTIES AND RELATED PARTY LITIGATION:

SBS, SPAR Administrative Services, Inc. ("SAS"), and SPAR InfoTech, Inc. ("Infotech"), provided services up until 2018 to the Company and are related parties and affiliates of SGRP, but were not under the control or part of the consolidated Company. SBS was an affiliate because it is owned by an entity controlled by Mr. Robert G. Brown and prior to November 2018 was owned by Mr. Robert G. Brown and Mr. William H. Bartels. SAS was an affiliate because it is owned by Mr. William H. Bartels, Mr. Peter W. Brown and certain other relatives of Mr. Robert G. Brown or entities controlled by them (each of whom are considered affiliates of the Company for related party purposes). Infotech was an affiliate because it is owned by Mr. Robert G. Brown. Messrs. Brown and Bartels (including, as applicable, certain related parties, the "Majority Stockholders") collectively own approximately 53.2% of SGRP's common stock and were the founders of SGRP. Mr. Robert G. Brown is a significant stockholder of SGRP, a member of a 13D control group, SGRP's former Chairman and Director of SGRP and became a director again on April 24, 2020, pursuant to the written consents of Robert G. Brown, William H. Bartels and related parties. Mr. William H. Bartels is a Director of SGRP. Mr. William H. Bartels retired as an employee of the Company as of January 1, 2020 (in accordance with the actions of SGRP's Compensation Committee on January 22, 2020). Messrs. Brown, Bartels and related parties also are stockholders, directors and/or executive officers of various affiliates of SGRP.

See Delaware Litigation Settlement, Advancement Claims, SBS Bankruptcy, Settlement and March 2020 Claim, Infotech Litigation and Settlement, SBS Field Specialist Litigation, SBS Clothier Litigation, SBS and SGRP Hogan Litigation, and SBS Rodgers Litigation in this Note, below,and see Domestic Related Party Services and Disputes, Affinity Insurance and Related Reimbursement Dispute, Bartels' Retirement and Director Compensation, Re-determining Independence of Peter W. Brown, and Other Related Party Transactions and Arrangements in Note 10 to the Company's Consolidated Financial Statements – Related Party Transactions, below.

F-18

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. Commitments and Contingencies (continued)

Delaware Litigation Settlement

In 2018, SGRP sued the Majority Stockholders in Delaware (the "By-Laws Action") to invalidate the proposed amendments to SGRP's By-Laws put forth in a written consent by Robert G. Brown, William H. Bartels and related parties (the "Proposed Amendments") because the Board's Governance Committee believed that the Proposed Amendments would have negatively impacted all stockholders (particularly minority stockholders). Robert G. Brown then sued SGRP in Delaware (the "225 Action") seeking to enforce written stockholder consents removing Lorrence T. Kellar from the Board and adding Jeffrey Mayer to the Board. On January 18, 2019, the parties agreed to settle (the "Delaware Settlement") the By-Laws Action and the 225 Action (together, the "Delaware Actions"), executed limited mutual releases (the "Delaware Releases"), and had the Delaware Actions then dismissed.

In the Delaware Settlement, the parties agreed to amend and restate SGRP's By-Laws (the "2019 Restated By-Laws") with negotiated changes to the Proposed Amendments that (among other things) preserved the then current roles of the Governance Committee and Board in the location, evaluation, and selection of candidates for and their appointment as "director." The Board approved and adopted the 2019 Restated By-Laws on January 18, 2019, incorporating those negotiated changes, which the Governance Committee and the Board intended to help maintain the independent Board desired by them.

The Delaware Releases are limited to matters related to those actions described therein and subject to specific exclusions, and the parties expressly preserved all unrelated actions and claims. Accordingly, there remain a number of unresolved claims and actions (each a "Non-Settled Matter") between the Company and certain related parties, including (without limitation) post termination claims by and against SBS (which has been resolved in a voluntary bankruptcy proceeding in Nevada by SBS -- see SBS Bankruptcy, Settlement, and March 2020 Claim, below) and SAS and the lawsuit by Infotech against the Company (which has been resolved in a settlement – see Infotech Litigation and Settlement, below), and the claims by Messrs. Brown and Bartels for advancement and indemnification of legal fees and expenses in connection with the Delaware Actions and certain related party claims (see Advancement Claims, below).

Advancement Claims

From October 2018 through January 2019, Robert G. Brown and William H. Bartels, in a series of correspondence, demanded from SGRP advancement and indemnification of their respective shares of legal fees and expenses incurred by them in connection with the Delaware Actions and other related party litigation matters.

SGRP denied Mr. Bartels' claims for advancement and indemnification because (among other things) Mr. Bartels was sued predominately as a stockholder in the By-Laws Action and not as a director and the By-Laws Action alleged numerous instances of improper conduct that could preclude indemnification. Mr. Bartels sued SGRP for advancement. Counsel advised SGRP that generally advancement was somewhat different than indemnification as money was advanced on the condition (which Bartels has accepted in writing) that the advances be repaid if indemnification was determined to be improper and that Mr. Bartels was a sitting director. Accordingly, SGRP settled with Mr. Bartels, pursuant to which his action was dismissed and Mr. Bartels' accepted allocated By-Laws expenses of approximately $106,000 were paid by SGRP in April 2019.

F-19

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. Commitments and Contingencies (continued)

On December 3, 2018, Robert G. Brown sent an email to Mr. McCarthey, Chairman of SGRP's Audit Committee, demanding advancement from SGRP for his proportionate share of the legal fees and expenses incurred by him in the Delaware Actions (the "Brown Advancement Demand").

Counsel advised that Brown had been sued as a stockholder and conspirator in the By-Laws Action against him, and not as a director, Brown was not a director at the time, and they didn't believe Brown could reasonably succeed in a lawsuit for advancement. SGRP, with the support of its Audit Committee, rejected the Brown Advancement Demand, stating that "The bylaw action does not sue you in your capacity as an officer or director of the company. Section 6.02 of the bylaws requires the proceeding subject to advancement to be brought "by /reason of the Indemnitee's position with the Corporation or any of its subsidiaries ... at the request of the Corporation ...." This provision does not, and was not intended to, cover shareholders for advancement.

On January 27, 2019, Mr. Robert G. Brown sent a draft of his proposed Delaware litigation complaint in an email to Arthur Drogue, SGRP's Chairman, threatening to sue SGRP respecting the Brown Advancement Demand, which he repeated in an email to Mr. McCarthey on February 2, 2019. Mr. Brown on several occasions has sent copies of that complaint to SGRP in 2020; however, through March 26, 2021, no such complaint has been properly served by Mr. Brown. SGRP continues to deny the Brown Advancement Demand. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of Robert G. Brown, William H. Bartels and related parties.

SBS Bankruptcy, Settlement and March 2020 Claim

In 2019, the Company filed claims against Robert G, Brown's company, SBS, in its federal bankruptcy proceeding in Nevada (the "SBS Chapter 11 Case") seeking reimbursement for $378,838 for SMF's funding of the Affinity Security Deposits and $12,963 for SMF's funding of the field payment checks that would have otherwise bounced, and $1,839,459 for indemnification of SGRP for its settlement (see below) of the Clothier class action case in California ("Clothier") and legal costs and an unspecified amount for indemnification of SGRP for the Hogan action (see below) and other to be discovered indemnified claims.

The Company settled with SBS pursuant to their Compromise and Settlement Agreement, dated July 26, 2019 (the "Settlement Agreement"). The Settlement Agreement was submitted to the court in the SBS Chapter 11 Case. Pursuant to the Settlement Agreement, the Company settled its claims for (among other things) indemnification from SBS in the Clothier and the Rodgers class action case in Texas ("Rodgers"). See SBS Clothier Litigation, SBS and SGRP Hogan Litigation, and SBS Rodgers Litigation in this Note, below.

On August 6, 2019, the Bankruptcy Court approved the Settlement Agreement and the SBS reorganization pursuant to SBS' First Amended Chapter 11 Plan of Reorganization, as amended by the Settlement Agreement (the "Plan of Reorganization"). Pursuant to its Plan of Reorganization, SBS also settled its potential liability in the Clothier and Rodgers cases, but the Company believes that Robert G. Brown and William H. Bartels were not released from Clothier, any related case or Rodgers. See SBS Rodgers Litigation, below. In the Settlement Agreement, except for the carve-out described below, SBS completely released the Company from all obligations that may be owed to SBS, and the Company’s $2.2 million in claims were settled for $174,097.34, payable by SBS over 24 monthly installments starting January 1, 2020, and without any interest (collectively, the "Discounted Claim Payments"), as such terms are defined in the SBS Settlement Agreement.

On August 6, 2019, with the support of (among others) the Clothier and Rodgers plaintiffs and the Company, the Court approved the SBS Settlement Agreement and the SBS Reorganization pursuant to the SBS Plan (as defined in the SBS Settlement Release).

The SBS Settlement Agreement provides for a comprehensive mutual release of claims (the "SBS Releases"), including the SBS Claims and the SGRP Claims (as defined therein), except for the Discounted Claim Payments payable by SBS and the proven Unpaid A/R (as defined in the SBS Settlement Agreement) if any payable by the Company upon its determination. In the SBS Settlement Agreement, the parties agreed to have a third party financial and accounting services firm independently determine the Proven Unpaid A/R based on parameters set forth in the SBS Settlement Agreement and to accept that third party determination as final and binding. That third party financial and accounting services firm has determined that the Company had paid all amounts due to SBS and has no further obligation (the "Independent Final Determination").

F-20

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. Commitments and Contingencies (continued)

The Company has recorded the total settlement amount of $174,097 as of December 31, 2019. To date, SBS is in default of the first fifteen payments totaling $108,810 and formal default notices have been sent to SBS. As of this date the Company believes these SBS payments must ultimately be paid by SBS and will continue to evaluate its collectability from SBS and establish reserves as appropriate. As of December 31, 2020, the total settlement amount has been reserved.

On March 6, 2020, Robert G. Brown, President, Director and indirect owner of SBS, sent an email communication on behalf of SBS to Arthur B. Drogue and Arthur H. Baer demanding payment of $1,707,374 to SBS from the Company pursuant to (among other things) the SBS Settlement Agreement (the "March 2020 Claim"). The Company has reviewed the March 2020 Claim in detail (although Brown has provided no backup or proof) and the Company strongly disagrees that any such amount is owed. The Company believes that the Independent Final Determination and the robust and comprehensive mutual releases and other provisions in the SBS Settlement Agreement provide relief from all such claims and potential future claims and litigation by SBS respecting the Company's past involvement with SBS, including the March 2020 Claim. However, since and notwithstanding the Independent Final Determination, the SBS Release and the Court's approval of the SBS Settlement Agreement, Robert G. Brown has continued to make unproven and undocumented claims that amounts that were fully released pursuant to the SBS Settlement Agreement and SBS Releases and approved by the bankruptcy court are nevertheless due to SBS from the Company, and the Company strongly disagrees. The Company is prepared to take action in Nevada Bankruptcy Court by reopening the SBS Chapter 11 Case and petitioning official settlement of this matter. Since all such claims have been completely released by SBS (with Mr. Robert G. Brown's approval), the Company owes nothing and has not accrued anything respecting Mr. Robert G. Brown's renewed claims. Mr. Robert G. Brown is significant stockholder of SGRP, and member of a 13D control group, SGRP's former Chairman and director of SGRP, and became a director again on April 24, 2020, pursuant to the written consents of Robert G. Brown, William H. Bartels and related parties.

At SGRP’s March 2020 Board meeting, Mr. Bartels was requested by an independent director to compile a list of claims that he and Mr. Brown believe are owed to them by the Company. On March 17, 2020, that list was given to the Audit Committee Chairman and included additional claims, net of an anticipated reduction, totaling approximately $1.3 million, bringing their total claims to approximately $3 million. The Company has rejected these claims, and believes it was released from all such claims by SBS in the SBS Releases.

The March 2020 Claim includes estimates for the individual legal defenses of Robert G. Brown and William H. Bartels in the private attorney general action in California ("PAGA") and Texas ("Rodgers") in cases that do not involve and never included the Company and for which the Company believes it has no liability. The March 2020 Claim also includes defense expenses for the SBS Clothier case, which expenses SBS settled for a highly discounted amount in its bankruptcy reorganization but now wants the Company to pay in full. SBS in its bankruptcy reorganization settled its potential liability in the Rodgers and Clothier cases, and since July 2019, SBS has had no more defense expenses in those cases. SGRP settled Clothier separately and was never in the Rodgers case. However, the alleged continued willful misclassification by SBS of its independent contractors after the Clothier misclassification determination is the basis for the PAGA lawsuit against Brown and Bartels. See Legal Proceedings -- SBS Field Specialist Litigation, SBS Clothier Litigation, and SGRP Hogan Litigation below. Mr. Bartels' list also includes payments of $500,000 per year to Robert G. Brown for extended retirement and advisory fees, although the Company has never proposed, committed or agreed to them and on several occasions specifically rejected Mr. Brown's proposals in various forms for them.

F-21

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. Commitments and Contingencies (continued)

Infotech Litigation and Settlement

In 2018, SPAR InfoTech, Inc. ("Infotech"), an affiliate of SGRP that is owned principally by Robert G Brown, sued the Company in New York (the "Infotech Action") seeking payment of approximately $190,000 for alleged lost tax benefits, significant salary allocations for unauthorized personnel and other expenses that it claims to have incurred in connection with SGRP's acquisition of its Brazilian subsidiary SPAR BSMT (see International Related Party Services in Note 10 to the Company's Consolidated Financial Statements – Related Party Transactions, below). The Company had previously reimbursed $50,000 of infotech's acquisition expense, but reimbursement of those additional expenses were denied on multiple occasions by both management and SGRP's Audit Committee (whose approval was required because Infotech is a related party). The Company vigorously denied owing any of those amounts.

In 2018, Mr. Brown on behalf of Infotech, also threatened to sue the Company in Romania for approximately $900,000 for programming services allegedly owed to the Company's former Romanian subsidiary (sold at book value to Infotech in 2013) and not provided to Infotech (the "Romanian Claim"). Infotech gave a draft complaint to the Company in 2018. The Company also vigorously denied owing any of those obligations or amounts.

In order to avoid the expenses of protracted litigation, SGRP's Management and the Audit Committee agreed that it would be in the best interest of all stockholders to reach a reasonable settlement of both the Infotech Action and the Romanian Claim for installment payments in reasonable amounts and mutual releases of all other related claims. Management agreed to a settlement offer of $275,000. Robert G. Brown accepted the $275,000 offer and the parties entered into the Confidential Settlement Agreement and Mutual Release on October 8, 2019 (the "Infotech Settlement Agreement"), which was approved and ordered by the Court on October 30, 2019, and the Infotech Action was discontinued (dismissed) with prejudice. The Company has paid all the $275,000 in installments with its final payment to Infotech in January 2020.

The Company believes that the robust and comprehensive mutual releases in the Infotech Settlement Agreement provide valuable relief from potential future claims and litigation by Infotech respecting the Company's past involvement with Infotech in the Brazilian and Romanian transactions.

SBS Field Specialist Litigation

The Company's merchandising, audit, assembly and other services for its domestic clients are performed by field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), a significant portion of them were furnished by others and substantially all of whose services were provided to the Company from 2000 to August 2018 by SBS.

F-22

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. Commitments and Contingencies (continued)

The appropriateness of SBS' treatment of Field Specialists as independent contractors had been periodically subject to legal challenge (both currently and historically) by various states and others. SBS' expenses of defending those challenges and other proceedings generally were, through but not after the termination of the SBS services, reimbursed by the Company after and to the extent the Company determined (on a case-by-case basis) that those defense expenses were costs of providing services to the Company.

The Company settled its potential liability (as a current or former party) under two class action lawsuits against SBS, namely Clothier and Hogan. SBS was separately dismissed from the Hogan class action prior to the Company's settlement. SBS settled with Clothier and Rodgers in the SBS Chapter 11 Case, but the Company believes that Robert G. Brown and William H. Bartels were not released from Clothier, any related case or Rodgers (see above). The Company has never been a party to the Rodgers case. The Company has been comprehensively released by SBS pursuant to the Settlement Agreement and SBS Releases, but Mr. Brown continues to make claims for SBS against the Company. See SBS Bankruptcy, Settlement and March 2020 Claim, above.

Any claim made and proven by Robert G. Brown, William H. Bartels, SBS, SAS, any other related party or any third party that the Company is somehow liable (through indemnification or otherwise) for any judgment or similar amount imposed against Mr. Brown, Mr. Bartels, SBS or SAS or any other related party, in each case in whole or in part, could have a material adverse effect on the Company or its performance or condition (including its assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition), whether actual or as planned, intended, anticipated, estimated or otherwise expected.

SBS Clothier Litigation

Melissa Clothier provided services to SBS (then known as SPAR Marketing Services, Inc.) pursuant to an "Independent Merchandiser Agreement" (prepared solely by SBS) acknowledging her engagement as an independent contractor. In 2014, Ms. Clothier sued SBS and the Company in Alameda County, California (the "Clothier Case"), in which Ms. Clothier asserted claims on behalf of herself and a putative class of similarly situated merchandisers in California who were classified by SBS as independent contractors. Ms. Clothier alleged that she and other class members were misclassified by SBS as independent contractors (instead of as employees) and that, as a result of this misclassification, the defendants improperly underpaid them in violation of various California minimum wage and overtime laws. The Company was originally a defendant in the Clothier Case but was subsequently dismissed from the action without prejudice (meaning it could have been joined back into the case).

The court ordered that the case be heard in two phases. Phase one was limited to the determination of whether members of the class were misclassified as independent contractors. After hearing evidence, receiving post-trial briefings and considering the issues, the Court issued its Statement of Decision on September 9, 2016, finding that the class members had been misclassified by SBS as independent contractors rather than employees (the "Clothier Misclassification Determination"). The plaintiffs and SBS then moved into phase two to determine damages (if any), which has included discovery as to the measure of damages in this case.

Facing significant potential damages in the Clothier Case, SGRP chose to enter into mediation on June 7, 2018, with the plaintiffs and plaintiff's counsel in the Clothier Case to try to settle any potential future liability for any possible judgment against SGRP related to that case. SGRP asked SBS to participate financially and provide its knowledge in that mediation, but SBS and its stockholders wanted Mr. Brown to lead that mediation SGRP to bear the full cost of any settlement and on several occasions they declined or failed to participate in that mediation. SGRP disagreed, insisting on the economic participation of the Majority Stockholders and SBS. After extensive discussions with the plaintiffs and plaintiff's counsel in the Clothier Case, SGRP reached a settlement and entered into a memorandum of settlement agreement, pursuant to which the Company would pay a maximum settlement amount of $1.3 million, payable in four equal annual installments of $325,000 each that commenced in December 2019, subject to the final court approval (the "Clothier Settlement"). Final approval was granted on September 20, 2019, and the Company was released by plaintiff and the settlement class from all other liability under the Clothier Case. The Company recorded a $1.3 million charge for the Clothier Settlement during 2018, when the agreement in the Clothier Settlement was reached. To date, the Company has made two installment payments totaling $650,000 under the Clothier Settlement.

Since SGRP has no further involvement in the Clothier Case, SGRP stopped paying (as of June 7, 2018) for SBS' legal expenses (defense and appeal) in the Clothier Case and notified SBS. Defendants continue to demand that those expenses be reimbursed by SGRP notwithstanding the Independent Final Determination and the SBS Releases. See SBS Bankruptcy, Settlement and March 2020 Claim, above.

F-23

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

6. Commitments and Contingencies (continued)

SBS and SGRP Hogan Litigation

Paradise Hogan and others provided services to SBS pursuant to the terms of their separate Independent Contractor Master Agreements with SBS (prepared solely by SBS), and in such agreements acknowledging their engagement as an independent contractor. In January 2017, Hogan sued SBS and SGRP in the U.S. District Court in Massachusetts asserting claims on behalf of himself and an alleged nationwide class of similarly situated individuals who provided services to SBS. Hogan alleged that he and other alleged class members were misclassified by SBS as independent contractors (instead of as employees), and as a result of this purported misclassification, Hogan asserted claims on behalf of himself and the alleged Massachusetts class members under federal and state law for failure to pay overtime and minimum wages and other state law claims. On March 28, 2017, SGRP moved to refer Hogan's claim to arbitration pursuant to his agreement, to dismiss or stay Hogan's case pending arbitration, and to dismiss Hogan's case for failure to state a specific claim upon which relief could be granted.

On March 12, 2018, the Court denied the Motion to Compel Arbitration as to SGRP because as drafted by SBS, the arbitration clause did not reference or protect SGRP according to the Court. However, the Court eventually granted SBS the right to arbitrate without SGRP. SGRP appealed to the First Circuit but lost as the appeals court decided that the arbitration clause (as written by SBS) did not protect SGRP. As a result, SGRP would have been required to go to trial without SBS.

Facing lengthy and costly litigation and significant potential damages in the Hogan Case, on March 27, 2019, SGRP entered into mediation with the plaintiffs and plaintiff's counsel in the Hogan Case to try to settle any potential future liability for any possible judgment against SGRP in that case. SBS and its stockholders were no longer involved in that case and so were not involved in that mediation. SGRP reached a settlement and entered into a memorandum of settlement agreement (the "Hogan Settlement"), which was approved by the court and became final in November 2019, and the Company was released by plaintiff and the settlement class from all other liability under the Hogan Case. Pursuant to the Hogan Settlement, SGRP agreed to a settlement amount of $250,000 (in three installments), which payments commenced in December 2019 with the first payment of $150,000. $50,000 was paid in March 2020 and the remaining $50,000 was paid in June 2020.

SBS Rodgers Litigation

Maceo Rodgers provided services to SBS pursuant to the terms of his "Master Agreements", and in such agreements acknowledging his engagement as an independent contractor. On February 21, 2014, Rodgers filed suit against SBS, Robert G. Brown and William H. Bartels in the U.S. District Court for the Southern District of Texas. Plaintiff asserted claims on behalf of himself and an alleged class of similarly situated individuals who provided services to SBS as independent contractors, claiming they all were misclassified by SBS independent contractors and that, as a result of this misclassification, the Defendants improperly underpaid them in violation of the Fair Labor Standards Act's overtime and minimum wage provisions.

Rodgers settled for a claim of approximately $618,000 against SBS (but not any claims against Brown or Bartels), in the SBS Chapter 11, and in full settlement of that claim they agreed upon a discounted payment amount of approximately $48,000, payable in equal quarterly installments over a five-year period.

7. Treasury Stock

Pursuant to the Company's 2017 Stock Repurchase Program (the "2017 Repurchase Program"), the Company may repurchase shares of SGRP Common Stock through November 10, 2020, but not more than 500,000 shares in total, and those repurchases would be made from time to time in the open market and through privately-negotiated transactions, subject to general market and other conditions. SGRP does not intend to repurchase any shares in the market during any blackout period applicable to its officers and directors. Under the preceding stock repurchase program (adopted in 2012 and extended and modified in 2015), the Company repurchased all 532,235 shares through December 31, 2020.

On December 22, 2020, the Board of Directors of SGRP (the "Board"), authorized SGRP to repurchase up to 500,000 shares of its SGRP Shares pursuant to the 2021 Stock Repurchase Program (the "2021 Stock RepurchaseProgram"), which repurchases would be made from time to time over a one year period in the open market and through privately-negotiated transactions, subject to cash availability and general market and other conditions.

SGRP's repurchase program will be financed out of internally generated corporate funds. Shares acquired would be available later for issuance upon the exercise of stock options through its 2020 Stock Compensation Plan (if approved at the January Special Meeting of Stockholders) and other outstanding options and for other corporate purposes. SPAR Group may terminate or limit the stock repurchase program at any time, and SPAR Group may never repurchase any SGRP Shares. There were no share repurchases made during the year ended December 31, 2020.

F-24

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

8. Preferred Stock

SGRP's Certificate of Incorporation authorizes it to issue 3,000,000 shares of preferred stock with a par value of $0.01 per share (the "SGRP Preferred Stock"), which may have such preferences and priorities over the SGRP Common Stock and other rights, powers and privileges as the Company's Board of Directors may establish in its discretion from time to time. The Company has created and authorized the issuance of a maximum of 3,000,000 shares of Series A Preferred Stock pursuant to SGRP's Certificate of Designation of Series "A" Preferred Stock (the "SGRP Series A Preferred Stock"), which have dividend and liquidation preferences, have a cumulative dividend of 10% per year, are redeemable at the Company's option and are convertible at the holder's option (and without further consideration) on a one-to-one basis into SGRP Common Stock. The Company issued 554,402 of SGRP shares to affiliated retirement plans which were all converted into common shares in 2011 (including dividends earned thereon), leaving 2,445,598 shares of remaining authorized preferred stock. At December 31, 2020, no shares of SGRP Series A Preferred Stock were issued and outstanding.

9. Retirement Plans

The Company has a 401(k) Profit Sharing Plan covering substantially all eligible domestic employees. The Company made discretionary contributions of $72,000 and $50,000 for the years ended December 31, 2020 and 2019 respectively.

F-25

SPAR Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

10. Related Party Transactions

Domestic Related Party Services and Disputes

SPAR Business Services, Inc. ("SBS"), SPAR Administrative Services, Inc. ("SAS"), and SPAR InfoTech, Inc. ("Infotech"), have provided services from time to time to the Company and 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. SAS is an affiliate because it is owned by William H. Bartels and certain relatives of Robert G. Brown or entities controlled by them (each of whom are considered affiliates of the Company for related party purposes). Infotech is an affiliate because it is owned principally by Robert G. Brown.

The Company executes its domestic field services through the services of field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), and a significant portion of them are provided to the Company and engaged by independent third parties and located, scheduled, deployed and administered domestically through the services of local, regional, district and other personnel (each a "Field Administrator"), and a significant portion of the Field Administrators are in turn are employed by other independent third parties.

SBS provided substantially all of the Field Specialist services in the U.S.A. to the Company from 2000 to 2018 and from January 1 through July 27, 2018, and an independent vendor and licensee provided them for the balance of 2018 and for 2019 and 2020.

Due to (among other things) the adverse determination in 2016 in the Clothier case (as defined below) that SBS had misclassified its employees as independent contractors and the ongoing proceedings against SBS (which could have had a material adverse effect on SBS's ability to provide future services needed by the Company), SBS' continued higher charges and expense reimbursement disputes, and the Company's identification of an experienced independent third party company (the "Independent Field Vendor") who would provide comparable services on substantially better terms, the Company terminated the services of SBS effective July 27, 2018, and the Company has engaged that Independent Field Vendor to replace those field services previously provided by SBS (other than in California). The Company similarly terminated SAS and has engaged another independent third-party company to replace those administrative services formerly provided by SAS, effective August 1, 2018 (the "Independent Field Administrator").

F-26

SGRP US Equity

SGRP · 10-K · period ended 2020-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

SGRP US Equity☆

SGRP · 10-K · period ended 2020-12-31

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

SGRP US Equity