UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
Amendment No.1
10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal year endedDecember 31, |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from |
Commission file number 0-27408
SPAR GROUP, INC.
(Exact name of registrantRegistrant as specified in its charter)
Delaware | 33-0684451 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
1910 Opdyke Court, | 48326 |
(Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: (248) 364-7727
(Former Name or Former Address, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, par value $.01 per share | SGRP | The NASDAQ Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrantRegistrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files) Yes ☒ No ☐
Indicate by check mark whether the registrantRegistrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.). (Check one):
Large Accelerated Filer ☐ | Accelerated Filer ☐ |
Non-Accelerated Filer ☒ | Smaller reporting company ☒ |
Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrantRegistrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐
Indicate by check mark whether the registrantRegistrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrantRegistrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrantRegistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
The aggregate market value of the Common Stock of the Registrant held by non-affiliates of the Registrant on December 31, 2022,2023, based on the closing price of the Common Stock of $1.01 per share as reported by the Nasdaq Capital Market on such date, was approximately $12,639,963.$7,145,820.
The number of shares of the Registrant's Common Stock outstanding as of December 31, 2022,March 15, 2024, was 22,648,16824,215,959 shares.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's Annual ReportPortions of the Definitive Proxy Statement on Form 10-KSchedule 14A for the year ended December 31, 2022, as filed with the SEC on April 17, 2023, as amended is herebyregistrant's 2024 Annual Meeting of Stockholders, are incorporated by reference into Part III of this Amendment to SGRP's Annual Report on Form 10-K/A.
10-K.
SPAR GROUP, INC.
ANNUAL REPORT ON FORM 10-K/A
Amendment No.1
10-K
INDEX | ||
PART I | ||
Page | ||
Item 1 | ||
Item 1A | ||
Item 1B | ||
Item 1C | Cybersecurity | 17 |
Item 2 | ||
Item 3 | ||
Item 4 | ||
PART II | ||
Item 5 | ||
Item 6 | ||
Item 7 | Management's Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A | ||
Item 8 | ||
Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
Item 9A | ||
Item 9B | ||
Item 9C | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 30 |
PART III | ||
Item 10 |
| |
Item 11 |
| |
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 |
| |
PART IV | ||
Item 15 |
| |
Item 16 | ||
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FIRST AMENDMENTNOTE ON FORM 10-K/AForward-Looking Statements
SPAR Group, Inc. (the "Corporation" or "SGRP", and together with its subsidiaries, the "Company") is filing this Amendment No. 1 on Form 10-K/A (this "Amendment") to amend SGRP'sThis Annual Report on Form 10-K for the year ended December 31, 2022 ("Form 10-K"2023 (this "Annual Report"), originally filed with the Securities and Exchange Commission (the "SEC") on April 17, 2023, to include the information required by Part III of our Form 10-K and to make corresponding changes in the table of contents. This information was previously omitted from our Form 10-K in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above referenced items to be incorporated in our Form 10-K by reference from our definitive proxy statement if such statement is filed no later than 120 days after our fiscal year-end. We are filing this Amendment to include Part III information in our Form 10-K because a definitive proxy statement containing such information will not be filed within that period. References to the Annual Report in Form 10-K and in this Amendment shall mean SGRP's 10-K as amended by this Amendment.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended, new Exhibits 31.1 and 31.2 are annexed hereto and filed herewith. Except as described above, this Amendment does not amend or otherwise update any other information in or Exhibit to our Form 10-K. Accordingly, this Amendment should be read in conjunction with our Form 10-K and with our filings with the SEC subsequent to the filing of our Form 10-K.
FORWARD-LOOKING STATEMENTS
This Annual Report (including the 10-K and this Amendment) contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, made by, or respecting, SPAR Group, Inc. ("SGRP"SGRP" or the "Corporation","Corporation") and its subsidiaries (and SGRP together with its subsidiaries may be referred to as "SPAR Group" and"SPAR Group", the "Company""Company" "SPAR", "We", or "Our"). There also are "forward-looking statements" contained in SGRP's definitive Proxy Statement respecting its 2024 Annual Meeting of Stockholders to be held later in 2022 (the "Proxy Statement""Proxy Statement"), which SGRP expects to file approximately 30 days prior to the Annual Meeting of Stockholders,on or about April 26, 2024, with the Securities and Exchange Commission (the "SEC""SEC"), and SGRP's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and statements as and when filed with the SEC (including this Annual Report, Amendment and the Proxy Statement and such Current Reports, each a "SEC Report""SEC Report"). "Forward-looking statements" are defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other applicable federal and state securities laws, rules and regulations, as amended (together with the Securities Act and Exchange Act, the "Securities Laws").
Readers can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as "may," "will," "expect," "intend," "believe," "estimate," "anticipate," "continue," "plan," "project," or the negative of these terms or other similar expressions also identify forward-looking statements. Forward-looking statements made by the Company in this Annual Report may include (without limitation) statements regarding: risks, uncertainties, cautions, circumstances and other factors ("Risks"Risks"); the potential continuing negative effects of the COVID-19 pandemic on the Company's business; the Company's potential non-compliance with applicable Nasdaq director independence; bid price or other rules; the Company's cash flow or financial condition; and plans, intentions, expectations, guidance or other information respecting the pursuit or achievement of the Company's corporate objectives. The Company's forward-looking statements also include (without limitation) those made in this Annual Report in "Business," "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Directors, Executive Officers and Corporate Governance," "Executive Compensation," "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," and "Certain Relationships and Related Transactions, and Director Independence."
PART I
Our Company
SPAR Group, Inc., a Delaware corporation ("SGRP" or the "Corporation"), and its subsidiaries (together with SGRP, "SPAR Group" or the "Company"), is a leading global merchandising and brand marketing services company, providing a broad range of sales enhancing services to retailers across most classes of trade and consumer goods manufacturers and distributors around the world. Our goal is to be the most creative, energizing and effective global services company that drives sales, margins and operating efficiency for our clients.
As of December 31, 2023, we operated in eight countries including the United States, Canada, Mexico, Brazil, South Africa, China, Japan and India. Across all of these countries, we successfully execute programs through our multi-lingual logistics, reporting and communication technology, which provides clients value through real-time insight on store / product conditions.
With more than 50 years of experience, a focus on excellence and industry leadership, we continue to grow our long-term relationships with some of the world's leading businesses. Our unique combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates us from the competition.
Our focus is services. Our team works closely with clients to determine their key objectives to execute globally, focusing on enhancing their sales and profit. At retail, our merchandising brand marketing specialists perform a wide range of programs to maximize product sell-through to consumers. Some of these programs include launching new products, installing displays, assembling product fixtures, and ensuring shelves are fully stocked and reordering when they are not. We also assist with sales and customer service. As retailers adapt to changes and new opportunities, our team engages in the total renovations and transformation of stores, as well as preparing new locations for grand openings. Our distribution associates work in retail and consumer goods distribution centers to prepare the centers to open, testing systems, putting away, picking product and providing peak staffing services for our clients.
We provide the "last two feet" of retail and consumer goods product merchandising and marketing. Our clients make great products. We ensure these products are presented in a compelling and exciting way exactly when and where they need to be to drive sales and margin. Our technology adds to these services by providing clients with detailed insight across all aspects of individual stores.
Our commitment to excellence comes from our people and organizational culture. We are passionate about talent and building a culture of ideas and innovation. We know that attracting, supporting and encouraging our people to do great things for clients results in excellent work. This great work begets more work and creates an energy and enthusiasm for our people and the Company as a partner. We are proud of our people and their dedication to clients and our company success.
We are also a results-driven organization that holds itself to a high standard of execution. We believe that our ability to meet or exceed our commitments to clients and the marketplace are part of how we define success. This is true if we are growing our core business, innovating with technology or testing new services. We aspire to be exceptional.
Our Industry
The merchandising and marketing outsourced services industry plays an important role in the growth and performance of some of the world’s most successful product and retail companies. Merchandising services includes placing orders, retail shelf maintenance, merchandising display setup, reconfiguring products on store shelves and replenishing product inventory. Additional marketing services include, but are not limited to, new store sets and remodels, audits, sales assistance, installation and assembly, product demos/sampling, promotion and more. The Company believes that merchandising and marketing services add value to retailers, manufacturers and other businesses by making a product more visible and more available to consumers.
Historically, retailers staffed their stores to ensure the store was well merchandised and product was properly featured and placed. However, in an effort to control costs and improve margins, most retailers have reduced store payroll and increased their reliance on manufacturers to set up their own products and merchandise the shelves on behalf of the retailer. To begin, manufacturers utilized their own sales representatives to do this work. Over time, this resulted in competing manufacturer representatives working in the same stores. This often led to the best presentation of merchandise resulting from the last manufacturer representative physically in the store. As a result, retailers began looking for third parties who could manage the merchandising process and ensure that the store, in total, was ready for the consumer. The result was the growth of the merchandising and marketing services industry.
We believe this industry will continue to grow and is more important today than ever before. With the acceleration of digital and online retailing, the pressure on the physical store to remain relevant, efficient and compelling has never been higher. In addition, product manufacturers are constantly trying to grab the consumer’s attention and make sure they are everywhere the consumer wants to shop. These are exactly the issues merchandising and marketing services companies solve.
Merchandising and marketing services companies work to ensure the store is exceptionally merchandised and products thoughtfully featured while enabling the retailer to maintain margins and leverage payroll. As the industry evolves, these services will continue to be a significant part of retailer and manufacturer success.
SPAR Group is one of the leading providers of these merchandising and marketing services to companies across the globe. With more than 50 years of history, the Company has established itself as a strategic partner to many of the world’s most exciting product manufacturers and retailers.
Our Growth Strategy
As the need for flexibility and efficiency in merchandising and marketing services continues to increase, both in the United States and internationally, brand owners, consumer goods companies, manufacturers and retailers will continue to rely on third-party providers for these services. SPAR Group is uniquely able to meet these needs because of our global reach, more than 50-year track record, access to over 25,000 merchandisers, breadth of capability, unwavering focus on excellence and deep expertise. We combine great people, an understanding of what is needed and unique technologies, enabling us to offer enhanced service in-country and across geographies.
To capitalize on the growing demand, the Company’s business strategy is focused on three (3) priorities: 1) Grow the Core Business; 2) Introduce or Acquire New Services; and 3) Invest in Technology. The result of this strategic framework will be top-line growth, expanded margins, more value for clients and higher levels of free cash flow to allow us to invest for more growth.
Grow the Core Business
The Company is constantly pursuing new core business services while working to earn more business from current clients. We have a significant number of long-tenured clients that, in order to ensure we understand their businesses, SPAR Group invests resources in people, technology and time, and thus we are well-positioned to meet their needs in the future. This includes expanding the services we offer to existing clients. At the same time, we pursue and solicit requests for proposals ("RFPs"), we actively market our services, we participate in industry events and we continuously look for opportunities to grow our business. We believe our history, relationships, expertise, technology and scale are all competitive advantages for us.
Introduce or Acquire New Services
The Company believes in testing new ideas and services and applying its considerable existing expertise in new ways to increase revenues and expand client relationships. The changing retail landscape and need for enhanced digital, e-commerce and fulfillment capability shapes our thinking. Our objective is to identify and introduce new or complimentary capabilities that we believe the market and our clients need now and in the future. To accomplish this, we pursue business partnerships, look for acquisitions and joint ventures and explore ideas based on market trends and our own unique client experiences. Our market positioning provides us with an unparalleled window into changes and opportunities in the markets we serve. We carefully measure the results of these tests and look for new services that can have a material impact on our financial and operational performance.
Invest in Technology
We believe our current SPARView technology provides us a competitive advantage in the marketplace and is a core competitive strength. Our technology enables us to communicate, plan, track, analyze and optimize our merchandising and marketing services work. However, we recognize that technology and our opportunity to successfully leverage technology continues to change. As a result, we are constantly adapting and innovating. We explore relationships within and across geographies and businesses with solution providers, while simultaneously making investments in our own solutions, with a focus to provide clients with better results, through our broader capability. This will facilitate our ability to offer higher value services over time. Our objective is to provide technology to field merchandisers, our client partners and our management to make smarter decisions that yield better Company results.
Our Business Divisions
The Company operates through three divisions: Americas, Asia Pacific (APAC), and Europe, Middle East and Africa (EMEA). The Americas division encompasses the United States, Canada, Mexico, and Brazil. The APAC division includes Japan, China, Australia, and India. As detailed in Note 10 (Related Party Transactions), the company divested its stake in the Australian joint venture (JV), effective December 31, 2023. The financial results for the full years of 2023 and 2022 incorporate the Australian operations, which will be excluded from the financial results after 2023. The EMEA division consists of South Africa.
The total business is led and operated from our global headquarters in Auburn Hills, Michigan. Each country also has regional leadership and offices in the respective market.
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 | Entity Name | SGRP Percentage Ownership | Principal Office Location | |
Americas | ||||
United States of America | SPAR Marketing Force, Inc. | 100 | % | Auburn Hills, Michigan |
SPAR Assembly and Installation, Inc. | 100 | % | Auburn Hills, Michigan | |
Resource Plus of North Florida, Inc. ("RPI") | 51 | % | Jacksonville, Florida | |
Canada | SPAR Canada Inc, | 100 | % | Vaughan, Ontario, Canada |
Mexico | SPAR TODOPROMO, SAPI, de CV | 51 | % | Mexico City, Mexico |
Brazil | SPAR Brasil Serviços de Merchandising e Tecnologia S.A. and its subsidiaries | 51 | % | Sao Paulo, Brazil |
Asia- Pacific | ||||
Japan | SPAR FM Japan, Inc. | 100 | % | Tokyo, Japan |
India | SPAR KROGNOS Marketing Private Limited | 51 | % | New Delhi, India |
Preceptor Marketing Services Private Limited | 51 | % | New Delhi, India | |
China | SPAR (Shanghai) Marketing Management Company Ltd. | 51 | % | Shanghai, China |
Europe, Middle East, Africa (EMEA) | ||||
South Africa | SGRP Meridian (PTY), Ltd. and its subsidiaries | 51 | % | Durban, South Africa |
The Company tracks and reports certain financial information separately for the individual countries using the same metrics. The primary measurement utilized by management is operating profit, historically the key indicator of long-term growth and profitability, as the Company is focused primarily on reinvesting the operating profits of each of its international subsidiaries back into local markets in an effort to improve its market share and continued expansion efforts. Certain financial information regarding each of the Company's divisions, which includes their respective net revenues and operating income for each of the years ended December 31, 2023 and 2022, and their respective assets as of December 31, 2023 and 2022, is provided in Note 12 to the Company's Consolidated Financial Statements – Segment Information, below.
Our Services
The Company currently provides six (6) principal types of services: Merchandising and Marketing, Category Management and Setup, Remodel and Retail Transformation, Assembly and Installation, Business Analytics and Insights, Fulfilment and Distribution.
Merchandising and Marketing
Merchandising and Marketing services are pivotal in ensuring that retail environments are optimally organized, products are well-presented, and promotions are effectively implemented to drive sales and enhance customer engagement. This category encompasses a broad range of activities tailored to maintain and elevate the retail experience, including: (i) resets and cut-ins, which involve the strategic rearrangement or introduction of products within the retail space to keep the store layout fresh and aligned with current marketing strategies or consumer trends, (ii) price and inventory audits, which ensures that pricing is accurate and inventory levels are properly maintained, providing valuable insights for inventory management and pricing strategies, (iii) stock replenishment and rotation services, which are essential for keeping shelves well-stocked and products fresh, especially for perishable goods, thereby enhancing customer satisfaction and minimizing waste, (iv) out of stock management, which focuses on minimizing the occurrence of stockouts and efficiently addressing them when they happen, thus reducing lost sales opportunities and maintaining customer trust, (v) promotional event setup, which entails the planning and execution of in-store events or displays to highlight specific products or sales promotions, creating an engaging shopping experience, and (vi) display management, which includes the design, setup, and maintenance of product displays to attract customer attention and promote featured items effectively. Together, these Merchandising & Marketing services are crucial for retail success, ensuring products are visible, accessible, and appealing to customers.
Category Management and Setup
Category Management and Setup is a comprehensive suite of services aimed at optimizing retail space and product presentation for enhanced customer experience and sales performance. This service category includes a variety of tasks such as (i) category and product resets, which involve reorganizing and refreshing product arrangements and categories in-store to maintain relevance and appeal; (ii) planogram maintenance, which ensures that the layout of products on shelves aligns with a strategic plan to optimize retail space and product visibility; (iii) display and shelf services, which focuses on the maintenance and arrangement of shelves and displays to ensure products are presented attractively; (iv) POP (Point of Purchase) installation and management, which involves setting up and managing marketing materials at the point of purchase to capture customer attention and encourage sales; and (v) display setup, which includes the assembly and arrangement of product displays to highlight new products or promotions, creating an engaging shopping environment. Together, these services work to maintain a coherent and appealing retail environment that enhances product visibility and shopper engagement.
Remodel and Retail Transformation
Remodel & Retail Transformation encompasses a range of strategic services designed to update and revitalize retail environments, ensuring they meet contemporary shopping expectations and trends. This category includes (i) store remodels, where retail spaces undergo comprehensive renovations to enhance aesthetics, functionality, and shopper experience, (ii) store department resets which involve the reorganization and updating of specific sections within a store to improve navigation and product presentation, (iii) fixture and banner installations, which contribute to refreshing the store's visual appeal and marketing communication, (iv) pop-up store services which offer temporary retail setups that can test new markets, products, or concepts in an agile and cost-effective manner and (v) store closings, managed with a focus on efficiency and minimal disruption, ensuring that transitions are smooth for both the retailer and its customers. Through these services, Remodel & Retail Transformation aims to keep retail environments dynamic, engaging, and aligned with brand identity and consumer expectations.
Assembly and Installation
Assembly and Installation services play a crucial role in enhancing the retail and consumer experience by ensuring that products are properly assembled and set up, whether in-store, in the office, or within the consumer's home. This category covers a broad spectrum of tasks that facilitate the ready-to-use delivery of products, improving convenience and satisfaction for both retailers and end-users. Services include (i) the assembly of merchandise in stores, such as furniture and desks, enabling customers to visualize the final product and making the shopping experience more engaging and efficient; (ii) in-store services, which extend to the maintenance of these products, ensuring they remain in optimal condition for display and use; (iii) office setup/down-sizing services, which cater to businesses undergoing changes in their physical workspace, providing expert assembly and installation support for a seamless transition; (iv) National In-Home Furniture Assembly services, which offer consumers the convenience of having furniture professionally assembled in their homes, eliminating the hassle and time commitment typically associated with DIY assembly; and (v) the assembly and installation of fitness equipment, whether it's in a commercial gym setting or a home fitness space, ensures that equipment is set up safely and correctly, maximizing functionality and user safety. Overall, Assembly and Installation services address a vital need in the post-purchase experience, ensuring products are fully functional and ready for use, thereby enhancing customer satisfaction and loyalty.
Business Analytics and Insights
Business Analytics and Insights services provide a critical foundation for informed decision-making and strategic planning in retail and merchandising environments. This suite of services leverages data analysis and visualization tools to deliver actionable insights that drive efficiency, sales, and customer satisfaction, including: (i) product dashboards, which offer a comprehensive view of product performance, inventory levels, and sales trends, enabling quick adjustments to product strategy and stock management, (ii) stock out reporting, which identifies and analyzes instances where products are unavailable on the shelves, allowing for rapid response to restock items and prevent lost sales opportunities, (iii) visit reporting, which tracks and evaluates the effectiveness and outcomes of merchandising visits, providing insights into operational efficiency and areas for improvement, (iv) real-time service insights, which delivers immediate feedback on the execution of merchandising and marketing initiatives, enabling dynamic adjustments to enhance in-store experiences and promotional effectiveness, (v) share of shelf analytics, which assesses the visibility and presence of products on the retail shelf compared to competitors, crucial for strategic positioning and market share growth, and (vi) photo analysis, which uses visual data to evaluate the compliance and appeal of product displays, ensuring that merchandising standards are met and that displays are engaging to customers. Together, these Business Analytics & Insights services empower businesses with the knowledge to optimize operations, tailor marketing efforts, and ultimately drive better business outcomes through data-driven strategies.
Fulfillment and Distribution
Fulfillment & Distribution is a critical service offering that encompasses a range of services including (i) Distribution Center Staffing, which provides the necessary workforce for the effective operation of distribution centers, including handling and sorting,(ii) POP (Point of Purchase) Fulfillment Services focus on the storage, assembly, and delivery of marketing and promotional materials directly to retail locations, ensuring that displays are ready and available for immediate use, (iii) Kiosk Prep, which involves preparing and equipping kiosks with the necessary products and promotional materials, tailored for specific marketing or sales campaigns, (iv) returns processing, which manages the flow of returned goods, ensuring they are efficiently processed, restocked, or disposed of according to the retailer's policies, (v) picking and packing services, which are crucial for order fulfillment, involving the selection of the correct products from inventory and packing them for shipment to the customer or retail outlet, and (vi) inventory services which provide comprehensive management of stock levels, including tracking, auditing, and reporting, to ensure inventory accuracy and availability. Together, these Fulfillment & Distribution services play an essential role in optimizing our customers' supply chain, enhancing their customers' satisfaction, and maintaining seamless operations from warehouse to consumer.
Our Customers
The Company currently represents numerous manufacturers and/or retail clients in a wide range of retail segments and stores worldwide, and its customers (which it refers to as "clients") include the following markets:
Retail segments served include:
● | Mass Merchandisers | |
● | Grocery | |
● | HBA | |
● | Pharmacies |
● | Discount |
● | Dollar |
● | Convenience |
● | Cash and Carry |
● | Home Improvement |
● | Consumer Electronics |
● | Automotive |
● | Office Supply |
● | Independents |
Manufacturer segments served include:
● | Personal Technology |
● | Consumer Electronics |
● | Beverage |
● | Household Products |
● | Consumables |
● | Financial Products |
● | Automotive Aftermarket |
It is important to note that we also work across all channels: retail and online. Our services make it possible for clients to ensure the online orders can be filled from stores and that the pricing is competitive in individual markets.
We are proud to serve some of the world’s most exciting brands and leading retail businesses. In many cases, our clients cross over geographical boundaries and we provide services to support their business around the world.
The Company did not have any clients that represented 10% or more of the Company's net revenue for the years ended December 31, 2023 and 2022.
Trademarks and Technology Licensing
The Company has numerous registered trademarks. Certain of the Company's "SPAR" trademarks (the "Licensed Marks") are licensed: (i) for use by affiliated companies in the United States royalty free and in perpetuity pursuant to license agreements that commenced in 1999 (ii) for use by its wholly-owned subsidiaries worldwide royalty free and in perpetuity pursuant to informal license arrangements; (iii) for use by joint venture subsidiaries in their respective jurisdictions pursuant to license agreements for limited terms (executed contemporaneously with their respective joint venture agreements); and (iv) for use by the Independent Field Vendor and Independent Field Administrator respectively providing Field Administrators through December 2022 and providing Field Specialists to the Company domestically in the United States for limited terms and modest royalties pursuant to license agreements with (each as defined below). Portions of the Company's proprietary scheduling, tracking, coordination, reporting and expense software (the "Co-Owned Software") currently included in the Company's technology are co-owned by the Company, SPAR Business Services, Inc. ("SBS") and SPAR InfoTech, Inc. ("Infotech"). The Company's global technology systems (including the Co-Owned Software) were maintained and further developed and improved by the Company at its own expense at a cost of $1.0 million in 2023 and $1.5 million in 2022, respectively. Except for SBS and Infotech (they do not need such software licenses because of their co-ownership), each subsidiary and field vendor trademark license and arrangement also licenses the Co-Owned Software to the licensee.
Our Labor Force
Worldwide, the Company utilized a labor force in 2023 of up to approximately 24,288 people depending on seasonality, including the services of Field Specialists and Field Administrators provided by independent third parties.
The Company executes and administers its field services in the USA through the services of field merchandising, auditing, assembly and other field personnel (each a "Field Specialist"), substantially all of whom 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"). Substantially all of its Field Administrators in the USA were in turn employed by other independent third parties through December 2022 and by the Company thereafter.
As of December 31, 2023, the Company's labor force in the Americas totaled approximately 17,032 including the services of Field Specialists and Field Administrators furnished by independent third parties. The Company employed in Americas a labor force of 462 full-time employees and 79 part-time employees engaged in operations. In the Company's Americas Division, the Company's merchandising, audit, assembly and other services for its clients are performed by Field Specialists, and the services of a significant portion of them (approximately 16,491) were supplied to the Company by an independent vendor (the "Independent Field Vendor"). The services of a significant portion of the Field Administrators who supervise the Field Specialists (approximately 60) were provided to the Company in the USA by an independent vendor (the "Independent Field Administrator") through December 2023 and by the Company thereafter.
As of December 31, 2023, the Company's Asia-Pacific Division's labor force totaled approximately 2,001 including the services of field personnel and others furnished by independent third parties. Foreign subsidiaries employed 209 full-time and part-time employees. The Company's Asia-Pacific Division's field force consisted of approximately 1,660 Field Specialists engaged locally by our foreign subsidiaries in their respective international operations.
As of December 31, 2023, the Company's EMEA Division's labor force totaled approximately 5,255 including the services of field personnel and others furnished by independent third parties. Foreign subsidiaries employed 713 full-time and part-time employees. The Company's EMEA Division's field force consisted of approximately 4,400 Field Specialists engaged locally by our foreign subsidiaries in their respective international operations.
The Company continues to evaluate its business model of using third-party independent contractors as Field Specialists (whether or not provided by others) in light of changing client requirements and legal and regulatory environments.
The Company considers its relations with its own employees and independent vendors to be generally good.
Our Competition
The marketing services industry is highly competitive. The Company's competition in all-markets arise from a number of large enterprises. The Company also competes with a large number of relatively small enterprises with specific client, channel or geographic coverage, as well as with the internal marketing and merchandising operations of its existing and prospective clients. The Company believes that the principal competitive factors within its industry include breadth and quality of client services, cost, development and deployment of technology, the ability to execute specific client priorities rapidly and consistently over a wide geographic area, and the ability to ideate and operate as a business partner delivering value above basic services. The Company believes that its current structure favorably addresses these factors and establishes it as a leader in many retailer and manufacturer verticals. The Company also believes it has the ability to execute major national and international initiatives and develop and administer national and international manufacturer programs.
Corporate Website
The Company's website can be found at: http://www.sparinc.com, and the Company's SEC filings are available on that website under the Investors Relations section.
Investing in SGRP's common stock ("SGRP Common Stock") is subject to a number of Risks that could cause the Company's actual results to differ materially from those projected or otherwise expected in any forward-looking statements or other information (see Forward-Looking Statements immediately preceding Part I, above).
You should carefully review and consider the following Risks, but you should not place undue reliance on any of them. 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 such Risks.
Those Risks reflect our expectations, views and assumptions only as of the date of this Annual Report, and the Company does not intend, assume any obligation, or promise to publicly update or revise any such 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.
The markets we operate in are cyclical and subject to the effects of economic downturns.
The markets in which the Company operates are cyclical and subject to the effects of economic downturns. The current political, social and economic conditions, including the impact of terrorism and COVID-19 on consumer and business behavior, make it difficult for the Company, its vendors and its clients to accurately forecast and plan future business activities. Substantially all of the Company's key clients are either retailers, manufacturers or those seeking to do product merchandising at retailers. Should the retail or manufacturing industries experience a significant economic downturn, the resultant reduction in product sales could decrease the Company's revenues. The Company also has risks associated with its clients changing their business plans and/or reducing their third-party services' budgets in response to economic conditions, which could also decrease the Company's revenues. Such revenue decreases could have a material adverse effect on the Company or its performance or condition.
We can be adversely affected if governments pass legislation that mandates an increase in wages, changes labor laws or otherwise drives market behavior that negatively impacts the business or operations of SPAR Group or our clients.
The Company has operations in nine distinct countries and relies on independent contractors as well as other third-party providers to perform work. There is risk that any government legislation that restricts travel, changes labor laws, impacts wages or otherwise incentivizes behavior that negatively impacts our business or our clients could impact our business.
The Company continues to analyze various aspects of potential business impact driven by any legislation in all of the countries we operate. While we do not foresee any material impact in the short-term, the Company will continue to monitor and manage the business accordingly.
Our business depends on variable client projects that can shift from period to period, be delayed, be canceled or otherwise require us to assume higher costs to perform the work.
The Company has experienced and, in the future, may experience fluctuations in quarterly operating results and cash flow. Factors that may cause the Company's quarterly operating results and cash flow to vary from time to time and may result in reduced revenue and profits include: (i) the number of active client projects; (ii) seasonality of client products; (iii) client delays, changes and cancellations in projects; (iv) staffing requirements, indemnifications, risk allocations, primary insurance coverages, intellectual property claims and other contractual provisions and concessions demanded by clients that are unilateral, unreasonable and very time consuming to review and attempt to negotiate; (v) the timing requirements of client projects; (vi) the completion of major client projects; (vii) the timing of new engagements; (viii) the timing of personnel cost increases; (ix) service locations and conditions with higher than contemplated personnel costs (remote areas, weather and health closures, higher minimum wages, higher skill sets required, etc.); and (x) the loss of major clients. In addition, the Company is subject to revenue or profit uncertainties resulting from factors such as unprofitable client work and the failure of clients to pay. These revenue fluctuations could materially and adversely affect the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.
Our business could be adversely affected if retailers and manufacturers elect to perform merchandising and marketing services with their own resources or if they have less stores that need our services.
The business and growth of the Company depends in part on the continued outsourcing of merchandising and marketing services, which the Company believes has increased from the consolidation of retailers and manufacturers, as well as the desire to seek outsourcing specialists to reduce fixed operation expenses and concentrate internal staff on customer service and sales. There can be no assurance that this outsourcing will continue, as companies may elect to perform such services internally.
In addition, retailers with physical store locations are facing increasing consolidation and competition from eCommerce/virtual stores. The Company's business and growth depends in part on the continuing need for in-store merchandising of products and the continuing success of retailers with physical store locations. There can be no assurance that the in-store merchandising of products will increase or even continue at current levels or that retailers with physical store locations will continue to compete successfully in those stores, and some retailers are shifting their sales focus to their virtual online stores.
A significant decrease in such need for in-store merchandising or success of such physical stores could significantly decrease the Company's revenues and such decreased revenues could have a material adverse effect on the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.
We do work with furniture and other related assembly services at stores, in homes and in offices.
The Company's technicians assemble furniture and other products in the stores, homes and offices of customers. Working at a customer's store, home or office could give rise to claims against the Company for errors, omissions or misconduct by those technicians, including (without limitation) objectional behavior, harassment, personal injury, death, damage to or theft of customer property, or other civil or criminal misconduct by such technicians. Claims also could be made against the Company as a result of its involvement in such assembly services due to (among other things) product assembly errors and omissions, product defects, deficiencies, breakdowns or collapse, products that are not merchantable or fit for their particular purpose, products that do not conform to published specifications or satisfy customer expectations, or products that cause personal injury, death or property damage, in each case whether actual, alleged or perceived by customers, and irrespective of how much time may have passed since such assembly. If such claims are asserted and adversely determined against the Company, then to the extent such claims are not covered by indemnification from the product's seller or manufacturer or by insurance, they could have a material adverse effect on the Company or its performance or condition.
We depend upon third-party independent contractors and the services they provide.
The success of the Company's business in the USA is dependent upon the successful execution and administration of its domestic field services through the services of Field Specialists, and a significant portion of them are provided to the Company and are engaged by the Independent Field Vendor and located, scheduled, deployed and administered domestically through the services of Field Administrators (who were provided by an independent vendor through December 2022 and by the Company thereafter). The inability to identify, engage and successfully administer its domestic field services through qualified Field Specialists and Field Administrators could have a material adverse effect on the Company or its performance or condition.
A significant portion of the services of the Field Specialists provided to the Company are supplied by the Independent Field Vendor. It is possible that the appropriateness of the treatment of those Field Specialists as independent contractors by the Independent Field Vendor will be periodically subject to legal review or challenge by various states and others. The Company, in its discretion, may review and decide each request by its Independent Field Vendor for reimbursement of its legal defense expenses on a case-by-case basis, including the relative costs and benefits to the Company of doing so, but the Company has no obligation to do so.
To the Company's knowledge, its Independent Field Vendor is not involved in any material proceeding involving the misclassification of its independent contractors. However: (i) if the Company approves its reimbursement of any material legal defense costs of the Independent Field Vendor; (ii) if the Company somehow becomes liable for any legal expenses incurred by the Independent Field Vendor, any related party or any third party in defending any claim or satisfying any judgment against such parties; (iii) if the Company somehow becomes liable through any judicial determination for any judgment against the Independent Field Vendor, or any related party or other vendor or service provider (in whole or in part); or (iv) if any such proceeding or matter causes: (A) any decrease in the Independent Field Vendor's performance (quality or otherwise); (B) any inability by the Independent Field Vendor to execute the services for the Company or to continue with its present business model; or (C) any increase in the Company's use of employees (rather than independent contractors) as its domestic Field Specialists; then any of the foregoing, in whole or in part, could have a material adverse effect on the Company or its performance or condition.
There can be no assurance that plaintiffs or someone else will not claim that the Company is liable (under applicable law, through reimbursement or indemnification, or otherwise) for any judgment or similar amount imposed against any provider of Field Specialists or Field Administrators to the Company, which the Company would defend vigorously if pursued. There can be no assurance that the Company would be able to successfully defend any such claim. Any imposition of liability on the Company for any such judgment or amount could have a material adverse effect on the Company or its performance or condition.
Additionally, the Company believes that its business model of executing a significant portion of its services domestically (other than in California and in performing its non-merchandising services elsewhere), where the Company is using its own employees) through independent contractors provided by others is equally effective but inherently less costly than doing so with employees, both under applicable tax and employment laws and otherwise. However, the Company continues to reevaluate its business model of using third party independent contractors as Field Specialists in performing merchandising services outside of California in light of changing client requirements and legal and regulatory environments.
We rely on our systems and third-party vendors.
The Company relies on its proprietary systems for (among other things) the scheduling, tracking, coordination and reporting of its merchandising and marketing services. In addition to proprietary software and applications of the Company, the systems use and rely upon software (including operating system, office, exchange, data base and server programs) licensed and hardware purchased or leased from third parties and telecommunication services provided by third parties, which third-party software, hardware and telecommunication services may not continue to be available at all or (if available) with the necessary access, uptime, speeds or bandwidth, at reasonable prices or on commercially reasonable terms. Any defect, error or other performance failure in such third-party software, hardware or service also could result in a defect, error or performance failure in our client services. Systems can experience excess traffic and related inefficiencies, from increased demand or otherwise, as well as increased cyberattacks by hackers and other saboteurs. To the extent that systems experience increased demands on current capacity and for additional capacity from (among other things) an increase in the numbers of users, frequency or duration of use, bandwidth requirements of software, applications and users (including the increasing demand from the Company's clients for data-intensive as-serviced pictures from the Field Specialists), or cyberattacks, there can be no assurance that the Company's technological systems and third-party software, hardware and telecommunication providers will continue to be able to support the demands placed on them by such increased demand or negative events.
The Company relies on third-party vendors to provide its telecommunication network access and other services used in its business, and the Company has no control over such third-party providers. Additionally, a cybersecurity breach that results in unauthorized access to sensitive consumer or corporate information contained in these systems may adversely affect the Company's reputation and lead to claims against it. Such claims could include identity theft or other similar fraud-related claims and claims related to violations of applicable data privacy laws. Any system failure, accident or security breach could result in disruptions to the Company's operations. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or results in inappropriate disclosure of confidential information, it could cause significant damage to the Company's reputation, affect its relationships with its customers, lead to claims against it and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.
Any such software, hardware or service unavailability or unreasonable pricing or terms, defect, error or other performance failure in such third-party software, hardware or service, increased capacity demands, disruption in services, security breach or protective measures could increase the Company's costs of operation and reduce its efficiency and performance, which could have a material adverse effect on the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.
Our stock is subject to volatility and general market risk.
● | The relatively small public float and corresponding thin trading market for SGRP Common Stock, attributable to (among other things) the large block of voting shares beneficially owned by the Company's Majority Stockholders (as defined below) and generally low trading volumes, and that thin trading market may cause small trades to have significant impacts on SGRP Common Stock price. |
● | The substantial beneficial ownership of the Company's voting stock and potential control by Mr. Robert G. Brown and Mr. William H. Bartels and related parties (the "Majority Stockholders"). See Our significant stockholders may take actions, subject to the restrictions of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement”) and our By-Laws, Item 3 -- Legal Proceedings, below, Note 6 to the Company's Consolidated Financial Statements - Commitments and Contingencies, and Note 10 to the Company's Consolidated Financial Statements - Related Party Transactions - (including Change of Control, Voting and Restricted Stock Agreement), below. |
● | Any announcement, estimate or disclosure by the Company, or any projection or other claim or pronouncement by any of the Company's competitors or any financial analyst, commentator, blogger or other person, respecting: (i) any new service created or improved, significant contract, business acquisition or relationship, or other publicized development by the Company or any of its competitors; or (ii) any change, fluctuation or other development in the Company's actual, 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 or in those of any of the Company's competitors, in each case irrespective of accuracy or validity and whether or not adverse or material. |
● | The general volatility of stock markets, consumer and investor confidence, and the general state of the economy (which often affect the prices of stock issued by the Corporation and many others without regard to financial results or condition). |
If the Corporation issues (other than at fair market value for cash) or the Majority Stockholders sell a large number of shares of SGRP Common Stock, or if the market perceives such an issuance or sale is likely or imminent, the market price of SGRP Common Stock could decline.
The Corporation had in place a 2022 Stock Repurchase Program (as defined and described in Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, below), which ended in May 24, 2023. Repurchases by the Corporation could adversely affect the market liquidity of the SGRP Common Stock.
In addition, the volatility in the market price of SGRP Common Stock could lead to class action securities litigation that could in turn impose substantial costs on the Company, divert management's attention and resources from the day-to-day operations of the Company's business and harm the Corporation's stock price, the Company or its performance or condition.
As a small company with stock price volatility, our stock may be de-listed from NASDAQ.
There can be no assurance that the Corporation will be able to comply in the future with Nasdaq's Board Independence Rule, Audit Committee Composition Rule, Bid Price Rule or other Nasdaq continued listing requirements. See Our significant stockholders may take actions, subject to the restrictions of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement") and our By-Laws, below. If the Corporation fails to satisfy the applicable continued listing requirement again in the future, Nasdaq may commence delisting procedures against the Corporation (during which the Corporation may have additional time of up to six (6) months to appeal and correct its non-compliance). If the SGRP Common Stock shares were ultimately delisted by Nasdaq, trading of the SGRP Common Stock could be limited to "over-the-counter" trades and the market liquidity of the SGRP Common Stock could be adversely affected, which could result in a decrease in the market price of the SGRP Common Stock due to (among other things) the potential for increased spreads between bids and asks, lower trading volumes and reporting delays in over-the-counter trades and the negative implications and perceptions that could arise from such a delisting
In addition to the foregoing, if the SGRP Common Stock is delisted from Nasdaq and is traded on the over-the-counter market, the "penny stock" rules, if applicable, could adversely affect the market price of the SGRP Common Stock and increase the transaction costs to sell those shares. The SEC has adopted specific rules regulating "penny stock", including additional risk disclosure requirements by broker dealers. If applicable in the future, the penny stock rules may also restrict the ability of broker-dealers to sell the SGRP Common Stock and may adversely affect the ability of investors to sell their shares.
We have inherent risk of failure to maintain effective internal controls.
Establishing and maintaining effective internal control over financial reporting and disclosures are necessary for the Company to provide reliable financial and other reporting in accordance with accounting principles generally accepted and applicable securities and other laws in the United States and all other countries in which we operate. Because of its inherent limitations, internal controls over financial and other reporting are not intended to provide absolute assurance that the Company could prevent or detect a misstatement of its financial statements or other reports or any misconduct or fraud. Any failure to maintain an effective system of internal control over financial and disclosure reporting could limit the Company's ability to report its financial results and file its other reports accurately and timely or to detect and prevent misconduct or fraud. A significant financial or disclosure reporting failure or material weakness in internal control over financial or other reporting could cause a loss of investor confidence and a decline in the market price of the SGRP Common Stock. The Company's management is responsible for establishing and maintaining adequate internal controls over its financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act.
Our business is dependent on client payments, business performance and broad economic shifts, and we may be at risk of liquidity constraints and not satisfying all of our credit facility covenants.
Our business and cash flow can be adversely affected by adverse changes in our client payments, our business performance and broad economic shifts. There can be no assurances that in the future the Company will not violate covenants of its current or future credit facilities; and if it does violate them, that the Company's lenders will waive any violations of such covenants affecting the Company's ability to maintain adequate lines of credit or sufficient availability under its lines of credit. Accordingly, minimal profitability by the Company, additional one-time charges and changes in the composition and quality of its borrowing base, as well as any failure to maintain sufficient availability or lines of credit from the Company's lenders (which may involve their subjective judgment), could have a material adverse effect on the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.
Our business and stock liquidity and market value could be adversely affected if we settle outstanding litigation by making payments or issuing stock.
The timing, size and success of litigation settlement efforts and any associated capital commitments cannot be readily predicted. Future litigation settlements may be financed by issuing shares of the SGRP Common Stock (directly or through convertible securities), cash or a combination thereof. If the SGRP Common Stock does not maintain a sufficient market value, or if potential litigants are otherwise unwilling to accept the SGRP Common Stock as part of the consideration for the settlement of their litigation, the Company may be required to obtain additional capital through debt or equity financings. To the extent the SGRP Common Stock is used for all or a portion of the consideration to be paid for legal settlements, dilution may be experienced by existing stockholders. In addition, there can be no assurance that the Company will be able to obtain the additional financing it may need for litigation settlements on terms that the Company deems acceptable. Failure to obtain such capital would materially and adversely affect the Company or its performance or condition. There also can be no assurance that the other parties in any settlement will abide by the terms or any settlement or any related releases. See Item 3 -- Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; Overview, and Note 10 to the Company's Consolidated Financial Statements - Related Party Transactions (including Change of Control, Voting and Restricted Stock Agreement), below.
Our business performance is connected to the experience and retention of key executives.
The business strategy, client relationships and operating knowledge are critical to the Company’s long-term success. We believe we have attracted and developed the most experienced and proven executive leadership team in the industry. However, we work in a competitive industry where talent is visible and other companies may approach and attract our key executives. We continuously review the terms and incentives for our executives to retain them and competitively compensate them to deliver industry leading results on behalf of all shareholders.
Our significant stockholders may take actions, subject to the restrictions of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement") and our By-Laws.
The Company's co-founders, Mr. Robert G. Brown and Mr. William H. Bartels, are significant stockholders ("Significant Stockholders”) and Directors of SGRP and together with certain related parties (collectively, the "Majority Stockholders") beneficially own approximately 62.75% of the SGRP Common Stock and could acquire more. That amount was calculated using their respective individual beneficial ownership, on December 31, 2023, which includes the amounts they represented in the CIC Agreement and subsequent Form 4 filings, the total outstanding ownership (23,446,444 shares) of the SGRP Common Stock on a non-diluted basis as of December 31, 2023. See Security Ownership of Certain Beneficial Owners and Management, in Part III below, Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, and Note 10 to the Company's Consolidated Financial Statements- Related Party Transactions, below.
There is inherent business risk for a joint venture business structure.
The Company's growth strategy for the international markets has been to join forces with local investors having merchandising service expertise, and combine their knowledge of the local market with the Company's proprietary software and expertise in the merchandising business through joint venture business structure. Currently, of the 8 countries the Company is conducting businesses in, 5 are under a joint venture business structure (Brazil, South Africa, Mexico, China, and India). The Company also has begun to use the model in the United States in recent years and formed or acquired two joint ventures, National Merchandising Services, LLC (NMS), and Resource Plus Inc. (RPI), domestically. On December 22, 2023, entered into an agreement with National Retail Remodel Services (the buyer) to sell its 51 percent interest in National Merchandising Services (NMS). See Note 10 to the Company's Consolidated Financial Statements Related Party Transactions
The Company owns 51% of these joint ventures in all cases; the principal of our local minority investors generally is the Chief Executive Officer, and each joint venture is governed by a Board comprised of directors from both parties. SGRP designates half of the directors for the local boards of its joint venture subsidiaries (other than Brazil where it is 60%), and significant actions require local board agreement. All joint ventures are also governed under the Company’s policies and guidelines.
The Company believes its relationship with the joint venture partners are strong. However, there can be no assurance that the Company can successfully manage through inherent business risk due to significant misalignment of business objectives. Any cancellation, nonperformance or material changes of the joint venture could have a material adverse effect of the Company.
We have inherent risks operating international businesses.
The Company operates in 8 countries around the world. There can be no assurances that the respective business environments will remain favorable. In the future, the Company's International operations and sales may be affected by the following risks, which may adversely affect United States companies doing business in foreign countries:
● | Political and economic risks, including terrorist attacks and political instability; | |
● | Various forms of protectionist trade legislation that currently exist or have been proposed; | |
● | Expenses associated with customizing services and technology; | |
● | Local laws and business practices that favor local competition; | |
● | Dependence on local vendors and potential for undisclosed related party transactions; | |
● | Multiple conflicting and changing governmental laws, regulations and enforcement; | |
● | Potentially adverse tax and employment law consequences; | |
● | Local accounting principles, practices and procedures; | |
● | Local legal principles, practices and procedures, local contract review and negotiation, and limited familiarity with contract issues (excessive warranties, extra-territoriality, sweeping intellectual property claims and the like); | |
● | Limited familiarity or an unwillingness to comply with, or wrongly believing the inapplicability of, generally accepted accounting principles in the USA ("GAAP"), applicable corporate controls and policies of the Company (including its ethics code), or applicable law in the USA (including Nasdaq rules, securities laws, anti-terrorism law, Sarbanes Oxley and the Foreign Corrupt Practices Act) by Local Investors; | |
● | Foreign currency exchange rate fluctuations and limits on the export of funds; | |
● | Substantial communication barriers, including those arising from language, culture, custom and time zones; and | |
● | Supervisory challenges arising from local board deadlocks, agreements, distance, physical absences and such communication barriers. |
If any developments should occur with respect to any of those international risks and materially and adversely affect the Company's applicable international subsidiary, such developments could have a material adverse effect on the Company or its performance or condition.
Item 1B. Unresolved Staff Comments
None.
SPAR Group Inc. recognizes the increased global cybersecurity threats and sophisticated, targeted computer crime and the risk it poses to our operations. We rely on information technology and data to operate our business and develop, market and deliver our products and services to our customers.
Our cybersecurity risk management program is led by our Chief Information Officer (“CIO”), who is directly responsible for establishing cybersecurity strategies and structures and managing ongoing cybersecurity risk management activities. Our CIO is part of the executive management team, and updates our CEO and executive management on a monthly, or even more frequent, basis on cybersecurity enhancement and the development and implementation of our roadmap.
We have strategically embedded cybersecurity risk management within an enterprise-wide framework, ensuring that it permeates across various facets of our operations. This integrated approach encompasses administrative protocols, operational strategies, organizational structures, physical safeguards, and technical measures, all tailored to align with the scope and nature of our business.
Cybersecurity Risk Management and Strategy
We believe this integrated approach allows cybersecurity considerations to be an integral part of our decision-making processes. Our day-to-day cybersecurity work is led by our CIO and Head of Infrastructure. Both are highly experienced professionals. This group works closely with our executive management to continuously evaluate and address cybersecurity risks in alignment with our business and operational needs.
Cybersecurity risks related to our business, technical operations, privacy and compliance issues are identified and addressed through a combination of third-party assessments, internal audit, IT security, governance, risk and compliance reviews. To defend, detect and respond to cybersecurity incidents, we, among other things:
● | Proactively review threat intelligence and other information obtained from governmental, public or private sources |
● | Perform network vulnerability scans, cyber-hygiene assessments, and continually evaluate and address perceived gaps. |
● | Conduct companywide cyber awareness training and on-going new employee cyber training. |
● | Deploy a wide array of industry leading 3rd party solutions to continuously monitor network and endpoints. |
● | On-going testing and evaluation of backup processes. |
● | Perform disaster recovery tabletop exercises to assess readiness for possible events. |
As noted, to operate our business, we utilize certain third-party service providers to perform a variety of functions and provide certain security-related services, such as outsourced business critical functions, professional services, SaaS platforms, managed services, cloud-based infrastructure, data center facilities, content delivery to customers, encryption and authentication technology, corporate productivity services, and other functions; as well as third parties that assist us to identify, assess and manage cybersecurity risks, including professional services firms, threat intelligence service providers, cybersecurity software providers, penetration testing firms and other vendors that help to identify, assess or manage cybersecurity risks.
In addition, we have implemented an incident response and breach management plan which has four overarching and interconnected stages:
● | Detection of a security incident, |
● | Identification and containment, |
● | Response, eradication and recovery, |
● | Post-incident analysis and future preparations. |
The plan also provides the process and workflow of communication for escalation of incidents to executive leadership to determine incident classification, impact severity, and if and what further actions are warranted. Incident responses are overseen by leaders from our Software, Infrastructure Engineering, and Executive team.
Cybersecurity Governance
Cybersecurity holds a significant role within our risk management procedures and remains a focal point for our Board and management. Under the Board's oversight of general risk identification and management activities, the Audit Committee specifically monitors cybersecurity risks. Committee members engage in comprehensive discussions with management regarding these risks, as well as the measures taken to safeguard the company's information systems and security, along with reviewing management's steps towards data privacy protection. Additionally, the Audit Committee receives annual cybersecurity updates from senior management, covering both existing and emerging risks, management's responses and mitigation efforts, any cybersecurity or data privacy incidents, and the status of key information security initiatives. Furthermore, our Board members regularly hold informal discussions with management about cybersecurity news events and any updates to our cybersecurity risk management and strategy programs.
The leadership of our cybersecurity risk management and strategy is guided by experts from our Software, Infrastructure Engineering, and Executive teams. With backgrounds spanning: information technology, security, systems, programming, and corporate strategy, these individuals are equipped to oversee prevention, detection, mitigation, and remediation of cybersecurity incidents. They actively engage in managing our cybersecurity risk processes, including executing our incident response plan, and regularly report relevant matters to the executive management and the Audit Committee.
We carry insurance that provides protection against the potential losses arising from a cybersecurity incident. However, there is no assurance that our insurance coverage will cover, or be sufficient to cover, all losses or claims that may result from a cybersecurity incident.
Last year
During the last fiscal year, 2023, the Company did not encounter any material cybersecurity incidents, nor did it incur any notable expenses as a result.
The Company does not own any real property. The Company leases certain office space and storage facilities for its corporate headquarters, and subsidiaries under various operating leases. These leases generally require the Company to pay rents at market rates, subject to periodic adjustments, plus other charges, including utilities, real estate taxes and common area maintenance. The Company believes its relationships with its landlords to be generally good. However, as these leased facilities generally are used for offices and storage, the Company believes that other leased spaces could be readily found and utilized on similar terms should the need arise.
The Company relocated its corporate headquarters from New York to its existing operations office in Auburn Hills, Michigan, in September of 2020. The Company also maintains its data processing center in Southfield, Michigan and its warehouse in Auburn Hills, Michigan, under an extended operating lease expiring October 31, 2025.
The following is a list of the headquarter locations for the Company and its domestic and international subsidiaries:
DOMESTIC: |
Auburn Hills, Michigan (Corporate Headquarters) Southfield, Michigan (Data Center) Jacksonville, Florida (Resource Plus) |
INTERNATIONAL: | |||
Vaughan, Ontario, Canada | Tokyo, Japan | Durban, South Africa | |
New Delhi, India | Sao Paulo, Brazil | Mexico City, Mexico | |
Shanghai, China |
The Company is a party to various legal actions and administrative proceedings arising in the normal course of business. In the opinion of Company's management, resolution of these matters is not anticipated to have a material adverse effect on the Company or its estimated or desired affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition.
All previous open and potential claims between the Significant Stockholders and the Company have been released mutually upon execution of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement"), as of January 28, 2022. See Note 10 to the Company's Consolidated Financial Statements - Related Party Transactions, below. The matters resolved in the CIC Agreement included all previous claims of the Majority Stockholders that the Company was somehow liable for claims and judgments by or against them or their respective companies, as well as all legal bills and other expense and amounts.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
The Company's Capital Stock Generally
SGRP's Certificate of Incorporation authorizes it to issue 47,000,000 shares of SGRP Common Stock ("SGRP Shares") with a par value of $0.01 per share, which all have the same voting, dividend and liquidation rights. SGRP Common Stock is traded on the Nasdaq Capital Market under the symbol "SGRP." On December 31, 2023, there were 23,446,444 shares of SGRP Common Stock outstanding in the aggregate (which does not include Treasury Shares), and there were 7,075,069 shares (or approximately 30%) of SGRP Common Stock beneficially owned by non-affiliates of the Company in the aggregate on a non-diluted basis (i.e., SGRP's public float). See Item IA - Risk Factors - Our significant stockholders may take actions, subject to the restrictions of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement") and our By-Laws, Security Ownership of Certain Beneficial Owners and Management, in Part III below, and Note 10 to the Company's Consolidated Financial Statements- Related Party Transactions, below.
SGRP's Certificate of Incorporation also 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 SGRP's Board of Directors may establish in its discretion from time to time.
On January 25, 2022, the Corporation filed a Certificate of Elimination for its "Certificate of Designation of Series "A" Preferred Stock of SPAR Group, Inc.” (the "Certificate of Elimination"). Pursuant to the Certificate of Elimination, the previous Series A Preferred Stock designation was cancelled and withdrawn. As a result, all 3,000,000 shares the previously authorized Series A Preferred Stock were returned to the Corporation’s authorized "blank check" preferred stock. There were no shares of Series A Preferred Stock outstanding at the time of the cancellation.
Subsequent to filing the Certificate of Elimination, on January 25, 2022, the Corporation filed a "Certificate of Designation of Series "B" Preferred Stock of SPAR Group, Inc.” (the "Preferred Designation") with the Secretary of State of Delaware, which designation had been approved by the Board on January 25, 2022. The Preferred Designation created a series of 2,000,000 shares of Preferred Stock designated as "Series B Preferred Stock” with a par value of $.01 per share (the "Preferred Stock"). The Preferred Stock shares do not carry any voting or dividend rights and automatically convert on vesting into the SGRP Common Stock on a 1 for 1.5 basis. See Note 10 to the Company's Consolidated Financial Statements - Related Party Transactions Domestic Related Party Services (including Change of Control, Voting and Restricted Stock Agreement), below. However, the holders of the Series B Preferred Stock have a liquidation preference over the SGRP Common Stock and vote together for matters pertaining only to the Series B Preferred Stock (such as amending SGRP's Certificate of Designation of Series B Preferred Stock) where only the holders of the Series B Preferred Stock are entitled to vote. The holders of outstanding Series A Preferred Stock do not have the right to vote for directors or other matters submitted to the holders of the SGRP Common Stock.
On January 28, 2022, pursuant to the CIC Agreement, the Company issued to the Majority Stockholders 2,000,000 restricted shares of Series B Preferred Stock, which have all vested and automatically converted into 3,000,000 SGRP Shares pursuant to the 1:1.5 conversion ratio set forth in the Preferred Designation and the CIC Agreement. See Note 10 to the Company's Consolidated Financial Statements - Related Party Transactions (including Change of Control, Voting and Restricted Stock Agreement), below.
During the year ended December 31, 2023, all of the remaining 854,753 shares of Series B convertible preferred stock vested and automatically became convertible into 1,282,129 shares of the Corporation’s common stock of which 307,129 shares of the Corporation’s Common Stock were issued prior to December 31, 2023.
Since there are no more shares of Series B Preferred Stock outstanding, SGRP may change or cancel the authorized Series B Preferred Stock, and to the extent it reduces such authorization without issuance, it can create other series of Preferred Stock with potentially different dividends, preferences and other terms.
SGRP's Common Stock is traded on the Nasdaq Capital Market under the symbol "SGRP". As of December 31, 2023, there were approximately 2,360 stockholders of record.
Dividends
The Corporation has never declared or paid any cash dividends on its Common Stock and does not currently anticipate paying cash dividends on its Common Stock in the foreseeable future. No dividends are payable on the Series B Preferred Stock. The Company historically has retained earnings to finance its operations and fund future growth of the business. Any payment of future dividends will be at the discretion of the Board of Directors of the Corporation and will depend upon, among other things, the Company's earnings, financial condition, capital requirements, cash flow, level of indebtedness, contractual restrictions in respect to the payment of dividends and other factors that the Corporation Board of Directors deems relevant.
Equity Compensation
Information regarding the Company's equity compensation plans may be found in Item 11 of this Annual Report, owhich is hereby incorporated by reference.
Stock Repurchase Program
On May 24, 2022, the Board of Directors of SGRP (the "Board"), authorized SGRP to repurchase up to 500,000 shares of its SGRP Shares pursuant to the 2022 Stock Repurchase Program (the "2022 Stock Repurchase Program"), which repurchases were made from time to time over the one-year period that ended May 24, 2023 in the open market and through privately-negotiated transactions. Those repurchases were made subject to cash availability and general market and other conditions. Through December 31, 2023, 151,156 shares of SGRP Common Stock were repurchased under the 2022 program and became Treasury Shares.
SGRP Common Stock Issuances
During 2023, the Corporation issued 387,306 SGRP Shares (including Treasury Shares and new shares of SGRP Common Stock) in support of its requirement to satisfy the conversion of vested and surrendered Series B Preferred Stock (see above), benefit awards and stock purchase plans, including employee Restricted Stock Units that vested and settled with stock, and the exercise of vested employee stock options. However, that share total does not include the 975,000 shares of SGRP Common Stock that were in the process of being issued and the remaining shares of Series B Preferred Stock were in the process of being returned and cancelled on December 31, 2023. See The Company's Capital Stock Generally, in Item 5 above, and Note 11 to the Company's Consolidated Financial Statements – Share Based Compensation, below.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
n Forward-Looking Statements
This Annual Report on Form 10-K (this " Annual Report ") contains "forward-looking statements" within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, made by, or respecting, SPAR Group, Inc. (" SGRP " or the "Corporation") and its subsidiaries (together with SGRP, " SPAR " , the " SPAR Group " or the " Company "). "Forward-looking statements" are defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the " Exchange Act "), and other applicable federal and state securities laws, rules and regulations, as amended (together with the Securities Act and Exchange Act, the " Securities Laws ").
Readers can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as "may," "will," "expect," "intend," "believe," "estimate," "anticipate," "continue," "plan," "project," or the negative of these terms or other similar expressions also identify forward-looking statements. Forward-looking statements made by the Company in this Annual Report may include (without limitation) statements regarding: risks, uncertainties, cautions, circumstances and other factors (" Risks "); the potential continuing negative effects of the COVID-19 pandemic on the Company's business; the Company's potential non-compliance with applicable Nasdaq director independence; bid price or other rules; the Company's cash flow or financial condition; and plans, intentions, expectations, guidance or other information respecting the pursuit or achievement of the Company's corporate objectives. The Company's forward-looking statements also include (without limitation) those made in this Annual Report in "Business," "Risk Factors," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Directors, Executive Officers and Corporate Governance," "Executive Compensation," "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters," and "Certain Relationships and Related Transactions, and Director Independence."
You should carefully review and consider the Company's forward-looking statements (including all risk factors and other cautions and uncertainties) and other information made, contained or noted in or incorporated by reference into this Quarterly Report, the Annual Report, the Proxy Statement, the First Special Meeting Proxy/Information Statement and the First Special Meeting Report and the other applicable SEC Reports, but you should not place undue reliance on any of them. The results, actions, levels of activity, performance, achievements or condition of the Company (including its affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, liabilities, liquidity, locations, marketing, operations, performance, prospects, sales, strategies, taxation or other achievement, results, risks, trends or condition) and other events and circumstances planned, intended, anticipated, estimated or otherwise expected by the Company (collectively, " Expectations "), and our forward-looking statements (including all Risks) and other information reflect the Company's current views about future events and circumstances. Although the Company believes those Expectations and views are reasonable, the results, actions, levels of activity, performance, achievements or condition of the Company or other events and circumstances may differ materially from our Expectations and views, and they cannot be assured or guaranteed by the Company, since they are subject to Risks and other assumptions, changes in circumstances and unpredictable events (many of which are beyond the Company's control). In addition, new Risks arise from time to time, and it is impossible for the Company to predict these matters or how they may arise or affect the Company. Accordingly, the Company cannot assure you that its Expectations will be achieved in whole or in part, that it has identified all potential Risks, or that it can successfully avoid or mitigate such Risks in whole or in part, any of which could be significant and materially adverse to the Company and the value of your investment in the Company's Common Stock.
These forward-looking statements reflect the Company ' s Expectations, views, Risks and assumptions only as of the date of this Quarterly Report, and the Company does not intend, assume any obligation, or promise to publicly update or revise any forward-looking statements (including any Risks or Expectations) or other information (in whole or in part), whether as a result of new information, new or worsening Risks or uncertainties, changed circumstances, future events, recognition, or otherwise.
Overview of Our Business
SPAR Group is a leading global merchandising and brand marketing services company, providing a broad range of sales enhancing services to retailers across most classes of trade and consumer goods manufacturers and distributors around the world. The Company’s goal is to be the most creative, energizing and effective global services company that drives sales, margins and operating efficiency for our clients.
As of December 31, 2023, the Company operated in eight countries: the United States, Canada, Mexico, Brazil, South Africa, China, Japan and India. Across all of these countries, the Company executes programs through its multi-lingual logistics, reporting and communication technology, which provides clients value through real-time insight on store/product conditions.
With more than 50 years of experience and a diverse network of merchandising specialists around the world, the Company continues to grow its relationships with some of the world’s leading businesses. The combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates the Company from the competition.
The Company is dedicated to delivering a spectrum of specialized services tailored to enhance retail operations and profitability across the globe. Our team collaborates closely with clients to identify their primary goals, ensuring the execution of strategies that boost sales and profit margins. With a focus on merchandising and brand marketing, our specialists deploy a variety of programs aimed at maximizing product sell-through to consumers. These initiatives range from launching new products and setting up promotional displays to assembling fixtures and ensuring consistent stock availability, thus facilitating efficient reordering processes. Furthermore, we extend our expertise to sales enhancement and customer service improvement. As the retail landscape evolves, our team is adept at undertaking comprehensive store renovations and preparing new locations for their grand openings, ensuring they meet the modern consumer's expectations. Additionally, our distribution associates play a pivotal role in retail and consumer goods distribution centers, preparing these facilities for operation, optimizing system functionality, managing product logistics, and providing essential staffing solutions to meet our clients' needs effectively.
The Company’s business is led and operated from its global headquarters in Auburn Hills, Michigan, with local leadership and offices in each country.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure of our operating performance and should not be considered as an alternative to net income as a measure of financial performance or any other performance measure derived in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). Adjusted EBITDA is defined as net (loss) income before (i) depreciation and amortization of long-lived assets, (ii) interest expense (iii) income tax expense, (iv) Board of Directors incremental compensation expense, (v) restructuring, (vi) impairment, (vii) nonrecurring legal settlement costs and associated legal expenses unrelated to the Company's core operations, (viii) and special items as determined by management. This metric is a supplemental measure of our operating performance that is neither required by, nor presented in accordance with, US GAAP.
We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our ongoing operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in future periods, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.
Our management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted to supplement U.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies and to make budgeting decisions.
Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations include:
● | Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments; |
● | Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs; |
● | Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt; |
● | Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized; |
● | Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation; |
● | Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and |
● | Other companies in our industry may calculate Adjusted EBITDA differently than we do. |
Our Consolidated EBITDA was approximately $11.4 million and $7.4 million for the years ended December 31, 2023 and 2022, respectively. The following is a reconciliation of our net income to Adjusted EBITDA for the periods presented:
Year Ended December 31, | ||||
(in thousands) | 2023 | 2022 | ||
Consolidated Net Income | $ 4,776 | $ 2,126 | ||
Depreciation and amortization | 2,001 | 2,033 | ||
Interest expense | 1,919 | 965 | ||
Income tax expense | 2,357 | 2,777 | ||
Other (income), loss | 346 | (482) | ||
Subtotal of Adjustments to Consolidated Net Income | 6,623 | 5,294 | ||
Consolidated EBITDA | $ 11,399 | $ 7,420 | ||
Costs and other relating to CIC | - | (32) | ||
Review of Strategic Alternatives | 544 | 540 | ||
Goodwill impairment | - | 2,458 | ||
Loss on sale of businesses | 408 | - | ||
Restructuring costs | 28 | - | ||
Legal costs / Settlements - non-recurring | 289 | - | ||
Share Based Compensation | 297 | - | ||
Board of Directors incremental compensation | - | 394 | ||
Consolidated Adjusted EBITDA | $ 12,965 | $ 10,780 | ||
Adjusted EBITDA attributable to non-controlling interest | (3,022) | (4,637) | ||
Adjusted EBITDA attributable to SPAR Group, Inc. | 9,943 | 6,143 |
The following table sets forth selected financial data for the years indicated (dollars in millions):
Year Ended December 31, | ||||||||
2023 | % | 2022 | % | |||||
Net revenues | $ 262.7 | 100% | $ 261.3 | 100% | ||||
Related Party - Cost of revenues | 5.2 | 2.0 | $ 8.8 | 3.4 | ||||
Cost of revenues | 202.1 | 76.9 | 201.5 | 77.1 | ||||
Selling, general and administrative expense | 43.7 | 16.6 | 41.1 | 15.8 | ||||
Impairment of Goodwill | - | - | 2.5 | 1.0 | ||||
Loss on sale of business | 0.4 | 0.2 | - | - | ||||
Depreciation and amortization | 2.0 | 0.8 | 2.0 | 0.8 | ||||
Interest expense | 1.9 | 0.7 | 1.0 | 0.4 | ||||
Other expense (income), net | 0.3 | 0.1 | (0.5) | (0.2) | ||||
Income before income taxes | 7.1 | 2.7 | 4.9 | 1.9 | ||||
Income tax expense | 2.4 | 0.9 | 2.8 | 1.1 | ||||
Net income | 4.8 | 1.8 | 2.1 | 0.8 | ||||
Net income attributable to non-controlling interest | (0.9) | (0.3) | (2.9) | (1.1) | ||||
Net income attributable to SPAR Group, Inc. | $ 3.9 | 1.5% | $ (0.7) | (0.3)% |
Net Revenues
Net revenues for the year ended December 31, 2023, were $262.7 million compared to $261.3 million for the year ended December 31, 2022, ("Form 10-K"), originally filed withan increase of $1.4 million or 1%. This increase in revenue was primarily driven by stronger performance in the SecuritiesAmericas, particularly Canada, Brazil and Exchange Commission (the "SEC") on April 17,US SPAR owned business, partially offset by lower performance at Asia Pacific and EMEA and US Joint Ventures. Foreign Currency rates were also a negative headwind in 2023.
The Americas net revenues totaled $203.7 million and $198.6 million for the years ended December 31, 2023 which are incorporated hereinand 2022, respectively. The increase of $5.1 million or 2.6% is the result of 51% growth in the Canadian business, 10% growth in our Brazil joint venture revenue and 3% growth in our US SPAR owned business, partially offset by reference.a 37% and 43% drop in our US Joint Ventures, Resource Plus and NMS respectively. These results reflect growth in our core merchandising services business offset by delays in retail remodel projects to later in the year or early next year by our clients. Core merchandising had a strong growth in the US SPAR owned business, in Brazil and in Canada.
The Asia-Pacific net revenues totaled $24.5 million and $26.0 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $1.5 million or 5.9% is primarily the result of negative foreign exchange rate movement as well as other extraneous conditions.
The EMEA net revenues totaled $34.6 million and $36.7 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $2.1 million or 5.8% is driven by unfavorable foreign exchange rates in South Africa, when compared to 2022 rates. South Africa local currency net revenues increased 5% in 2023 compared to 2022.
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 78.9% of net revenue for the year ended December 31, 2023 compared to 80.5% of net revenues for the year ended December 31, 2022. We delivered a (159)-basis point improvement in gross margins against the global pressure of recruiting and wages.
The Americas cost of revenue as a percent of net revenue was 79.8% and 81.5% for the years ended December 31, 2023 and 2022, respectively. The decrease in cost of 1.6% was the result of 2.5% lower costs in our owned U.S. business and U.S. joint ventures and 1.4% lower cost in Brazil, partially offset by a 230-basis point increase in costs in Mexico. These results were achieved through our persistent emphasis on contract pricing, stabilization of market wages, enhancement of our higher-margin service offerings, and diminution of travel expenditures associated with remodel projects.
The Asia-Pacific cost of revenue as a percent of net revenue was 74.7% and 77.3% for the years ended December 31, 2023 and 2022, respectively. This improvement in cost of 2.6% was partially due to operating fully in China compared to the slow recovery from the zero-tolerance policy in 2022, which inflated cost of revenue ratios in 2022.
The EMEA cost of revenue as a percent of net revenue was 76.3% and 77.4% for the years ended December 31, 2023 and 2022, respectively. The decrease in cost of 1.1% was primarily the result of the service mix during the quarter and our ability to manage gross margins.
Selling, General and Administrative Expenses
The Americas selling, general and administrative expenses totaled $32.2 million and $28.4 million for the years ended December 31, 2023 and 2022, respectively. The increase of $3.7 million, or 13.1% is primarily the result of consulting and legal charges associated with the review of strategic alternatives, higher compensation related expenses, and the annualization of our investment in recruiting and moving our technology to the cloud.
The Asia-Pacific selling, general and administrative expenses totaled $6.5 million and $7.4 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $0.9 million, or 12.0% is primarily attributable to reduction in China and Japan's SG&A's expenses as we carefully manage these businesses in response to the broader economic trends.
The EMEA selling, general and administrative expenses totaled $5.0 million and $5.3 million for the years ended December 31, 2023 and 2022, respectively. SG&A for EMEA was flat compared to 2022.
Depreciation and amortization expense was approximately $2.0 million and $2.0 million for the years ended December 31, 2023 and 2022, respectively
Interest Expense
The Company's interest expense was $1.9 million and $1.0 million for the years ended December 31, 2023 and 2022, respectively.
The America interest expense was $1.4 million and $0.7 million for the years ended December 31, 2023 and 2022, respectively. The increase was a result of higher interest rates.
The Asia-Pacific interest expense of $0.1 for the year ended December 31, 2023 versus $0.0 for the year ended December 31, 2022.
The EMEA incurred interest expense of $0.4 million versus $0.3 million for the years ended December 31, 2023 and 2022, respectively.
Other expense, net was $0.3 million versus income of $0.5 million for the years ended December 31, 2023 and 2022, respectively.
Income Tax Expense
The Company had income tax expense of $2.4 million with an effective tax rate of 33.0% and $2.8 million with an effective rate of 56.6%, for the years ended December 31, 2023 and 2022, respectively. For the year ended December 31, 2023, our effective income tax rate of 33.0% varied from the U.S. federal statutory rate of 21% primarily as a result of foreign rate differential, sale of membership interest disposition of National Merchandising Services, LLC and permanent differences.
Net income attributable to non-controlling interest
Net income attributable to noncontrolling interest was $0.9 million and $2.9 million for the years ended December 31, 2023 and 2022, respectively.
Critical Accounting Policies and Estimates
The Company’s critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Note 2 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K. These policies have been consistently applied in all material respects and address matters such as impairment of long-lived assets, intangible assets, and goodwill, revenue recognition, allowance for credit losses, and internal use software. While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported amounts are appropriate under the circumstances.
Impairment of Long-Lived Assets, Intangible Assets, and Goodwill
The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of the Company’s property and equipment and 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.
When facts and circumstances indicate that the carrying value of definite-lived intangible assets may not be recoverable, the Company assesses the recoverability of the carrying value by preparing estimates of sales volume and the resulting profit and cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, the Company recognizes an impairment loss. The impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value. The Company uses a variety of methodologies to determine the fair value of these assets, including discounted cash flow models, which are consistent with the assumptions hypothetical marketplace participants would use.
Goodwill is subject to annual impairment tests and interim impairment tests if impairment indicators are present. The Company performs the annual impairment test during the third quarter each year. 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.
Revenue Recognition
The Company generates its revenues by providing merchandising services to its clients. Revenues are recognized when the Company satisfies a performance obligation by transferring services promised in a contract to a customer and in an amount that reflects the consideration that the Company expects to receive in exchange for those services. Performance obligations in the Company’s contracts represent distinct or separate services that we provide to the Company’s customers; generally, the Company’s contracts have a single performance obligation. If, at the outset of an arrangement, the Company determines that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met.
The Company’s merchandising services are provided over time, generally on a daily, weekly, or monthly basis, and transaction price is based on the contractually-specified rate-per-driver metric (i.e., rate per hour, rate per store visit, or rate per unit stocked). The Company recognizes revenues for its contracts based on the contractually-specified rate-per-driver metric(s) utilizing the right-to-invoice practical expedient because the Company has a right to consideration for merchandising services completed to date. All of the Company’s contracts have a duration of one year or less and over 90% of the Company’s contracts are completed in less than 30 days.
Customer deposits, which are considered advances on future work, are deferred and recorded as revenue in the period in which the services are provided.
Allowance for Credit Losses
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 credit losses of $1.5 million and $1.6 million at December 31, 2023, and 2022, respectively. Bad debt expense was $0.3 million and $1.3 million for the years ended December 31, 2023 and 2022, respectively.
Internal Use Software
The Company capitalizes certain costs associated with its internally developed software. The Company capitalizes the costs of materials and services incurred in developing or obtaining internal use software and such costs include, but are not limited to: the cost to purchase software, the cost to write program code, and 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 begins during the application development stage once the preliminary project stage is complete, management authorizes and commits to funding the project, and it is probable that the project will be completed and that the software will be used to perform the function intended. Capitalization 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.
The Company capitalized approximately $1.0 million and $1.5 million of costs related to software developed for internal use in 2023 and 2022, respectively, and recognized approximately $1.3 million of amortization of capitalized software for the years ended December 31, 2023 and 2022.
Recent Accounting Pronouncements
See the sections titled "Summary of Significant Accounting Policies—Recent Accounting Pronouncements” and "—Recently issued accounting pronouncements not yet adopted” in Note 2 to the Company's Consolidated Financial Statements, Summary of Significant Accounting Policies, included elsewhere in this Annual Report on Form 10‑K.
Liquidity and Capital Resources
Funding Requirements
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 could have a material adverse effect on the Company's business, cash resources and ongoing ability to fund operations.
The Company is a party to various domestic and international credit facilities. These various domestic and international credit facilities require compliance with their respective financial covenants. For the year ended December 31, 2023, the Company was in compliance with all financial covenants under these arrangements. See Note 4 to the Company's Consolidated Financial Statements, Debt, included elsewhere in this Annual Report on Form 10-K.
Cash Flows for the Years Ended December 31, 2023 and 2022
Net cash provided by operating activities was $6.8 million for the year ended December 31, 2023 and net cash used in operating activities was $5.0 million for the year ended December 31, 2022. The year-over-year increase in net cash provided by operating activities was primarily due to improved working capital management.
Net cash used in investing activities for the years ended December 31, 2023 and 2022, was $2.3 million and $1.8 million, respectively. The net cash used in investing activities was primarily attributable to capitalization of internal use software.
Net cash used in financing activities for the year ended December 31, 2023 was approximately $3.0 million compared to $3.5 million provided in 2022. The year-over-year decrease in net cash provided by financing activities during 2023 was primarily due to repayment of lines of credit.
For the year ended December 31, 2023, the company experienced a net increase in cash and cash equivalents amounting to approximately $1.4 million. This positive change reflects foreign exchange rate fluctuations, which contributed a decrease of $0.2 million. In contrast, the prior fiscal year ending December 31, 2022, recorded a net decrease in cash and cash equivalents of $4.1 million, inclusive of a $0.8 million impact due to foreign exchange rate variations. These figures highlight the significant turnaround in our liquidity position, driven by both improved operational outcomes and favorable exchange rate movements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information required under this item.
Item 8. Financial Statements and Supplementary Data
See Item 15 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
Management's Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our principal executive and financial officers, to allow timely decisions regarding disclosure. The Chief Executive Officer and the Chief Financial Officer, as our principal financial and accounting officer, have reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Management’s Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management utilized the criteria established in the Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to conduct an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2023. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2023.
Remediation of previous year Material Weakness in Internal Control Over Financial Reporting
In the fiscal year ending December 31, 2022, Management identified a material weakness within our internal control over financial reporting, specifically relating to non-recurring transactions with international components. Although this deficiency did not directly lead to any material misstatements in our financial statements for that year or interim periods, it raised the possibility that such misstatements could remain undetected.
In response, during 2023, we implemented our previously disclosed remediation plan that included the appointment of a new Chief Financial Officer, a new Vice President Controller, the creation of a Director of Accounting position and the engagement of an external consultant specializing in SOX compliance. Additionally, we implemented a review process and controls with more precise levels of review for non-recurring transactions with international components including policies and procedures to ensure documentary evidence is maintained, particularly for management review controls.
These controls were in place as of December 31, 2023, and based on management’s evaluation, the previously identified material weakness has been remediated.
Changes in Internal Controls Over Financial Reporting
Except for the changes in connection with our implementation of the remediation plan discussed above, there was no changes in the Company's internal controls over financial reporting that occurred during the Company's quarter ended December 31, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Reference is made below to SGRP’s definitive Proxy Statement respecting its 2024 Annual Meeting of Stockholders currently scheduled to be held in April of 2024, as and when filed with the SEC, which SGRP plans to file pursuant to Regulation 14A in April of 2024, but not later than 120 days after the end of the Company’s 2024 fiscal year (the "2024 Proxy Statement”), For clarity (and without limitation), information appearing in the sections in such 2024 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 10. Directors, Executive Officers and Corporate Governance
TheReference is made to the information set forth under the captions "The Board of Directors of the CorporationCorporation”, "Executives and Officers of the Corporation”, "Security Ownership of Certain Beneficial Owners and Management” and "Corporate Governance” in the 2024 Proxy Statement.
The BoardItem 11. Executive Compensation
Reference is responsible for overseeingmade to the management, policies and direction of the Corporation and its subsidiaries (collectively, the "Company"), both directly and through its committees (See "Corporate Governance", below). The members of the Board and referenced Committees as of December 31, 2022, were asinformation set forth below (7):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 the 2024 Proxy Statement.
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 the 2024 Proxy Statement.
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 the 2024 Proxy Statement.
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 the 2024 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
F. Index to Financial Statements filed as part of this report:
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Consolidated Statements of Cash Flows for the years ended December 31, 2023 and 2022 | 45 | |
Notes to Consolidated Financial Statements | 46 |
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4.3 | Registration Rights Agreement entered into as of January 21, 1992, by and between SGRP (as successor to, by merger in 1996 with, PIA Holding Corporation, f/k/a RVM Holding Corporation, the California Limited Partnership, The Riordan Foundation and Creditanstalt-Bankverine (incorporated by reference to the Form S-1). | |
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101.INS* | Inline XBRL Instance | |
101.SCH* | Inline XBRL Taxonomy Extension Schema | |
101.CAL* | Inline XBRL Taxonomy Extension Calculation | |
101.DEF* | Inline XBRL Taxonomy Extension Definition | |
101.LAB* | Inline XBRL Taxonomy Extension Labels | |
101.PRE* | Inline XBRL Taxonomy Extension Presentation | |
104 | Cover Page Interactive Data File (embedded within the Inline XBRL and contained in Exhibit 101) |
Michael Wager was elected Chairman
* 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 Board on September 15, 2022. He was appointed on October 21, 2021,Securities Act of 1933, as a Director and a memberamended, is deemed not filed for purposes of section 18 of the Audit Committee by the Board. Mr. WagerSecurities Exchange Act of 1934, as amended, and otherwise is an attorney who has specialized in securities, reorganizations, M&A and regulatory compliance throughout his career. He is currently a Senior Counsel with Taft Stettinius & Hollister LLP serving in an advisory role and the Chief Strategy Officer for Byrna Technologies. Mr. Wager is also currently a member of the board and has served as the Chairman of the Audit and Governance Committees for Michael Anthony Holdings. Mr. Wager earned his Bachelor of Arts, Political Science Degree at the American University, College of Public Affairs, his Master of Arts, Political Science Degree at Columbia University, Graduate School of Arts and Sciences, and his Juris Doctor Degree at New York University School of Law.not subject to liability under these sections.
Michael R. Matacunas Item 16. Form 10-K Summaryserves as the Chief Executive Officer, President and a Director of SGRP and has held such positions since his appointment as Chief Executive Officer of SGRP on February 16, 2021. He is a Fortune 500 veteran with more than 30 years of relevant leadership experience. He has worked in public and private companies, developed and led international business growth, driven exceptional operational results and built world-class teams. Mr. Matacunas was previously the Chief Administrative Officer at Dollar Tree, Inc., where he helped lead the successful multi-billion-dollar acquisition and integration of Family Dollar Stores, including, among other things, merchandising, sourcing, operational and executive improvements. Prior to this, Mr. Matacunas was CEO of a successful retail professional services business that transformed leading global retailers, wholesalers and consumer packaged goods companies. Mike's experience also includes strategy, consulting and world-wide roles at leading technology companies, including IBM and Manhattan Associates. Mr. Matacunas earned a BA in Economics from Boston University and an MBA from the College of William & Mary Mason School of Business.
None.
Sean M. WhelanSIGNATURES was appointed
Pursuant to the Governance Committee on September 15, 2022. He was appointed on October 21, 2021, as a Director and a memberrequirements of Section 13 or 15(d) of the Audit Committee and Compensation CommitteeSecurities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the Board, and on October 25, 2021, the Audit Committee elected him as its Chairman. Mr. Whelan is currently the Chief Executive Officer, and was previously the Chief Financial Officer, for Encore Rehabilitation Services. He has also held the Chief Financial Officer role for several other public and private companies including Smile America Partners, Bedrock Manufacturing, LLC, Diplomat Pharmacy and InfuSystem Holdings, Inc. Mr. Whelan is currently a Board member and Chairman of the Audit Committee with Zomedica Corp (NYSE American: ZOM) and also a Board member with OptioRx; he previously served as an Executive Board member with Diplomat Pharmacy and InfuSystem Holding, Inc. Mr. Whelan earned his Bachelor of Business Administration Degree and his Master of Accounting Degree at the University of Michigan's Ross School of Business and is a CPA.
Robert G. Brown rejoined the Board on April 24, 2020. As one (1) of the two (2) founders of the company, Mr. Brown served as Director of SGRP from July 8, 1999 until his retirement on May 3, 2018. Prior to 1999, Mr. Robert G. Brown served as the Chairman, President and Chief Executive Officer of the SPAR Companies since certain of its predecessors were formed in 1979 through 2005. During his tenure, Mr. Brown oversaw the change from a software and consulting company into a merchandising company in the 1980's and in the 1990's converted the reporting and data collection work to the Internet from mainframes and PC's which gave SPAR a strategic cost and quality advantage. In 1999, he executed a reverse merger making SPAR a public company.
William H. Bartels has served as Director of SGRP since July 8, 1999. As one (1) of the two (2) founders of the Company, he was responsible for sales, marketing and developing client relationships across the globe for more than 40 years. He was also responsible for marketing/sales for the SPARLINE technology and its related consulting business for evaluating trade promotion spending and strategies for top tier CPG companies, domestic and international. He gained industry-wide recognition as reported through numerous industry publications and guest speeches at major industry conferences, while also negotiating partnerships with research companies in the U.K. and Australia for using the SPARLINE system. Prior to July 8, 1999, Mr. Bartels served as Vice Chairman, Secretary, Treasurer and Senior Vice President of the SPAR Marketing Companies, since 1967. He retired as an employee of the Company on January 1, 2020.
Peter W. Brown joined the Board of SGRP in May 2018. He was appointed to the Audit Committee by the Board on July 31, 2022. Mr. Brown served as a Board Observer to the Corporation's Board of Directors from 2014 through December 2016. He also serves as a director of and is a consultant to the Corporation's Brazilian subsidiary, SPAR BSMT, and owns EILLC (which owns 10% of SPAR BSMT). Mr. Brown received a BS from the University of Massachusetts's School of Natural Science and an MBA from the University of Massachusetts's Isenberg School of Management.
Executives and Officers of the Corporation
Set forth in the table below are the names, ages and offices held by all Executives and Officers of the Corporation as of December 31, 2022. For biographical information regarding Michael R. Matacunas, See the Board of Directors of the Corporation, above. Antonio Calisto Pato (Age 44) joined SGRP and became Chief Financial Officer, Secretary and Treasurer on February 27, 2023, and his biographical information is included below.undersigned, thereunto duly authorized.
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By: | /s/ Michael R. Matacunas | |||
Michael R. Matacunas | ||||
President and Chief Executive Officer | ||||
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KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Antonio Calisto Pato and Michael R. Matacunas and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for each of them 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.
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/s/ Michael R. Matacunas | President, Chief Executive Officer and Director, | |
Michael R. Matacunas | (Principal Executive Officer) | |
Dated as of: April 1st, 2024 | ||
/s/ James R. Gillis | Director | |
James R. Gillis | ||
Dated as of: April 1st, 2024 | ||
/s/ John Bode | Director | |
John Bode | ||
Dated as of: April 1st, 2024 | ||
/s/ Linda Houston | Director | |
Linda Houston | ||
Dated as of: April 1st, 2024 | ||
/s/ William H. Bartels | Director | |
William H. Bartels | ||
Dated as of: April 1st, 2024 | ||
/s/ Antonio Calisto Pato | Chief Financial Officer, | |
Antonio Calisto Pato | Treasurer and Secretary (Principal Financial and | |
Dated as of: April 1st, 2024 |
Antonio Calisto Pato joined SGRP and became its Chief Financial Officer, Secretary and Treasurer on February 27, 2023. He has leadership experience in business, finance and international and strategy, tax and operational expertise. Most recently, Mr. Calisto Pato held CFO roles and directed all aspects of finance, accounting, treasury and tax as CFO for Earth Shoes and interim CFO for Street Trend. Prior to these roles, he held increasing leadership positions at Chiquita Brands International from 2011 to 2021. Mr. Calisto Pato also held financial and business leadership roles at Cemex in Switzerland and PWC in Luxembourg. He speaks four languages (including those principally used in the Company's Brazilian and Mexican offices) and successfully earned a combined 5-year undergraduate and law degree in Portugal, and went on to complete his post-graduate degree in Tax from the Lisbon Business School. Mr. Calisto Pato also completed a Master of Advanced Studies in International Tax Law in the Netherlands at Leiden University and is completing his MBA from the University of North Carolina, Kenan-Flagler Business School at Chapel Hill, NC.
Fay DeVriese served as the Chief Financial Officer of SGRP from August 2020 to January 31, 2023. Prior to joining SGRP, she served as Chief Financial Officer at Letica Corporation and served in financial leadership roles at DSM Engineering Plastics, Eaton Corporation, Continental Automotive Systems and Motorola. Ms. DeVriese is a certified public accountant, licensed in the State of New York. She earned a Bachelor of Business Administration degree from the State University of New York.
Kori G. Belzer became the Global Chief Operating Officer of SGRP in July 2021 and has served as Chief Operating Officer of SGRP since January 1, 2004. From August 7, 2020, through February 21, 2021, she also served as acting Chief Executive Officer of SGRP. From 2000 through 2003, Ms. Belzer served as the Chief Operating Officer of SPAR Administrative Services, Inc. (then known as SPAR Management Services, Inc.) ("SAS"), and SPAR Business Services, Inc. (then known as SPAR Marketing Services, Inc.), each an affiliate of SGRP (see Transactions with Related Persons, Promoters and Certain Control Persons, below). From 1997 to 2000, Ms. Belzer served as Vice President Operations of SAS and as Regional Director of SAS from 1995 to 1997. Prior to 1995, she served as Client Services Manager for SPAR/Servco, Inc.
William Linnane joined SGRP in July 2021 as its Chief Strategy and Growth Officer. He is an internationally experienced business, merchandising, retail, and finance leader with more than 20 years of relevant leadership experience. He has worked in the US, in Europe and in Australia; leading multi-billion-dollar businesses and driving exceptional operational results with different market conditions. He was recently the CEO of a successful advisory and investment firm focused on M&A and retail restructurings. Prior to that, Mr. Linnane was President of Kmart's Pharmacy, Drugstore and Grocery businesses in the U.S. and Puerto Rico, Chief Merchant at a leading book retailer in Europe, and led the Beverage, Candy and Snacks business for Tesco in the UK, working with Coca-Cola, PepsiCo, Nestle, Mars, Mondelez and others to drive branded growth opportunities via merchandising and other initiatives, including digital strategies. Mr. Linnane is a qualified accountant and started his career in finance working in the UK and Ireland at Kingfisher PLC (LSE: KGFL) and Tesco PLC (LSE:TSCO). He has strong experience in strategy, finance, operations, merchandising, sourcing, and leadership roles. Mr. Linnane holds an MA in Economics from Trinity College, University of Dublin.
Ron Lutz joined SGRP joined SGRP in July 2021 as its Chief Global Commercial Officer. He built a 35-year executive career guiding Fortune 100 companies and private organizations in the retail customer experience space. He has led retail organizations through transformational growth, change management and market expansions. Throughout his career he has held responsibilities in the areas of sales, operations, strategy, marketing, omni-channel customer experience development, international expansion, and acquisitions. Most recently, Ron was consulting as an international strategic retail advisor. Prior to this, he was the Chief Client Officer at a private retail services and solutions company. With his extensive background in the industry, Ron has served in the capacity and/or held titles such as Chief Marketing Officer, Chief Customer Officer, VP Customer Experience Deployment, VP New Store – Remerchandising, VP Enterprise Print /Fixtures, and VP Store Service Solutions. Earlier in his career, he served as a Vice President with Lowe's Companies (NYSE: LOW), where he led the deployment of an omni-channel customer experience solution across 2,000+ North American retail store locations. He also had responsibility for new store development in emerging markets and store renovations across the US, Canada, and Mexico.
Report of Independent Registered Public Accounting Firm
Shareholders and Board of the Directors
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. and subsidiaries (the “Company”) as of December 31, 2023, and 2022, the related consolidated statements of operations and comprehensive (loss) income, stockholders’ equity, and cash flows for the years then ended, and the related notes (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 at December 31, 2023 and 2022, and the results of its operations and its cash flows for the years then ended 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 matter or on the accounts or disclosures to which it relates.
CORPORATE GOVERNANCE
Revenue Recognition
Board Structure, Leadership and Risk Oversight
The Board of Directors of the Corporation (the Board") is responsible for overseeing the Corporation and its subsidiaries (collectively, the "Company"), both directly and through its committees (as described below), pursuantAs indicated in Note 2 to the authority conferred by the Corporation's 2022 By-Laws, charters and policies and by applicable law. The Board's responsibilities include (without limitation) the appointment and oversight of the Company's Chief Executive Officer. The Board also provides oversight of risks that could affectconsolidated financial statements, the Company both directly and throughgenerates revenues by providing merchandising services to its committees with respect tocustomers, generally on a daily, weekly, or monthly basis. The Company recognizes revenues as the most significant risks facingservices are performed based on the Company (including material operationalcontractually-specified rate-per-driver metric(s) (i.e., rate per hour, rate per store visit or financial risks)rate per unit stocked). Pursuant to their respective charters, the Board has established and delegated various oversight and other responsibilities to the Audit Committee, the Compensation Committee and the Governance Committee, as such committees are defined and more fully described below under the headings "Audit Committee", "Compensation Committee" and "Governance Committee".
The Board is comprised of Independent Directors, Super Independent Directors (See Board Size, Quorum and Voting, Director Nominations: Experience, Integrity, Diversity and other Criteria and 2022 By Laws, below) and Non- Independent Directors. The Governance Committee is responsible for determining and recommending to the full Board whether a Director satisfies the applicable Nasdaq independent requirements or the more comprehensive super-independence requirements established in the 2022 By-Laws. The super-independence requirement establishes specific criteria to ensure a Director is unaffiliated with any specific significant stockholder. In addition, the Board has established the position of Chairman of the Board, which is a non-executive position, and Chief Executive Officer (who is also President). Per the 2022 By-Laws, the Chairman, the Vice Chairman and Chairman of any Committee must be Super Independent Directors. The Board believes these definitions and criteria ensure a strong, experienced and independent Board to provide oversight on behalf of all stockholders.
To assist the Board and its Committees in their respective oversight roles, the Company's Chief Executive Officer brings members of the Company's management from various business or administrative areas into meetings of the Board or applicable Committee from time to time to make presentations, answer questions and provide insight to the members, including insights into areas of potential risk. Each Committee endeavors to satisfy its responsibilities through: (i) its receipt and review of regular reports directly from officers responsible for oversight of particular risks within the Company; (ii) direct communications by the Committee or its Chairman with the Corporation's senior management; (iii) independent registered public accounting firm (in the case of the Audit Committee) and counsel respecting such matters and related risks; (iv) its executive sessions; (v) its reports (generally through its Chairman) to the full Board respecting the Committee's considerations; and (vi) if applicable, actions and recommendations regarding such matters and risks as deemed appropriate.
Risk oversight is conducted primarily through the Audit Committee, but also is conducted through the Compensation Committee or Governance Committee, as applicable. The Audit Committee is responsible for overseeing the accounting, auditing and financial reporting and disclosure principles, policies, practices and controls of the Company and regularly considers (among other things) financial, reporting, internal control, related party, legal and other issues and related risks and uncertainties material to the Company. The Compensation Committee is responsible for overseeing the performance and compensation of the executives, director compensation and the other compensation, equity incentive, related policies, and material benefits of the Company. The Governance Committee is responsible for overseeing the finding, vetting and nomination of directors and committee members for the Board and senior Executives for SGRP, and the content and application of the 'Ethics Code, corporate documents and governance policies and practices.
Each of the Committee charters requires the Board to determine that each of its members satisfy applicable Nasdaq requirements for the respective Committee and be free from any relationship which may interfere with the exercise of his or her independent judgment as a member. The 2022 By-Laws also require that the Chairman of each Committee and at least two (2) of its members be a Super Independent Director (See Board Size, Quorum and Voting, and Director Nominations: Experience, Integrity, Diversity and other Criteria, below).
Board Meetings
The Board meets regularly to receive and discuss operating and financial reports presented by management of SGRP and its advisors. DuringFor the year ended December 31, 2022,2023, the Board held sixteen (16) meetings. Each incumbent Director is required to attend 75% of the board meetings. In 2022, all then current members attended at least 75% of the meetings.Company’s net revenues were $262.7 million.
Board Size, QuorumWe identified revenue recognition from merchandising services as a critical audit matter due to the large volume of customer contracts and Voting
Undertransactions. The principal consideration for our determination is the 2022 By-Laws:increased extent of auditor effort involved in performing procedures and evaluating audit evidence related to the current Board size is fixed at seven (7) directors as of January 25, 2022; the Chairman and at least three (3) of the Board members must be Super Independent Directors (as defined therein), and the Chairman, Vice Chairman and Chairman of each Committee and at least two (2) of each Committee's members must be a Super Independent Director.Company’s revenue recognition.
The Board size can only be changed from timeprimary procedures we performed to time by amending the 2022 By-Laws.
Board meetings require an attendance quorum of at least 70% of its members, including a majority of the Super Independent Directors.
Except as noted below: each director shall be entitled to one (1) vote; and the vote of the majority of the directors present at any meeting at which a quorum is present shall be the act of the Board.
However, in the event the Board:
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In addition, Section 3.12 of the 2022 By-Laws requires that certain actions by the Board be approved by a super-majority of the Board consisting of at least 70% of the directors then in office, including a majority of the Super Independent Directors. Those super-majority actions include any amendment to the 2022 By-Laws, any Committee Charter, or SGRP's Ethics Code, and the issuance of more than 250,000 shares of SGRP's Common Stock or any right to acquire them (See Director Nominations: Experience, Integrity, Diversity and other Criteria, below).
Board Committees
From time to time the Board may establish permanent standing committees and temporary special committees to assist the Board in carrying out its responsibilities, and may delegate Board power and authority pursuant to charters approved by the Board. Under the 2022 By-Laws (see below), a "super majority" vote of at least 70% of all SGRP directors is now required for any new committee, change in any committee charter, or certain other actions (meaning any such Board action brought before a Board consisting of seven directors can be blocked by any three (3) directors), and an absolute majority of the Board is now required for the appointment to or removal of any director from any committee (meaning any such Board action brought before a Board consisting of seven directors can be blocked by any four (4) directors). Currently, SGRP has three (3) permanent standing committees; the Audit Committee, the Compensation Committee, and the Governance Committee. Anaddress this critical audit committee is required by the Nasdaq Stock Market, Inc. ("Nasdaq"), the SEC, and applicable law. While SGRP is not similarly required to have either a compensation committee or governance committee, certain responsibilities assigned to these committees in their respective charters are required to be fulfilled by independent directors by Nasdaq Rules or SEC Rules.
Each of the Committee charters requires the Board to determine that each of its members satisfy applicable Nasdaq requirements for such a Committee and be free from any relationship would interfere with the exercise of his or her independent judgment as a member. The 2022 By-Laws also require that the Chairman of each Committee and at least two (2) of the members of the Audit Committee and Governance Committee be a Super Independent Director (See Board Size, Quorum and Voting, above, and Director Nominations: Experience, Integrity, Diversity and other Criteria, and 2022 By-Laws, below).
The standing committees of the Board are the Audit Committee of the Board (the "Audit Committee"), the Compensation Committee of the Board (the "Compensation Committee"), and the Governance Committee of the Board (the "Governance Committee"), as provided in the Corporation's 2022 By-Laws and their respective charters (See Limitation of Liability and Indemnification Matters, below).
Audit Committee
The Audit Committee assists the Board in fulfilling its oversight responsibilities respecting the accounting, auditing and financial reporting and disclosure principles, policies, practices and controls of the Company, the integrity of the Company's consolidated financial statements, the audits of the financial statements of the Company and the Company's compliance with legal and regulatory requirements and disclosure. The specific functions and responsibilities of the Audit Committee are set forth in the written Amended and Restated Charter of the Audit Committee of the Board of Directors of SPAR Group, Inc., dated (as of) May 18, 2004 (the "Audit Charter"), approved and recommended by the Audit Committee and Governance Committee and adopted by the Board on May 18, 2004. The Audit Committee also is given specific functions and responsibilities by and is subject to Nasdaq Rules, SEC Rules, the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley"), and other applicable law, which are reflected in the Audit Charter. You can obtain and review a current copy of the Audit Charter on the Company's web site (www.sparinc.com), on which it is posted and available to stockholders and the public under the Investor Relations tab and Corporate Governance sub-tab. The Audit Charter was amended and restated to reflect the evolution of the Audit Committee's expanding responsibilities, the adoption of Sarbanes-Oxley, and changes in Nasdaq Rules, SEC Rules, securities laws and other applicable law pertaining to all audit committees. The Audit Committee reviews and reassesses the Audit Charter annually and recommends any needed changes to the Board for approval.
The Audit Committee (among other things and as more fully provided in the Audit Charter):
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As of December 31, 2022, the Audit Committee consisted of Mr. Sean M. Whelan (its Chairman), Mr. Peter W. Brown, and Michael Wager, each of whom has been determined by the Governance Committee and the Board to meet the independence requirements for Audit Committee members under Nasdaq Rules and SEC Rules and the 2022 By-Laws require that its Chairman and at least two (2) of the members of the Audit Committee and Governance Committee be Super Independent Directors. In connection with his appointment as a Director, the Governance Committee and the Board determined that Mr. Whelan was qualified to be the "Audit Committee financial expert" as required by Nasdaq Rules, SEC Rules and other applicable law.
During the year ended December 31, 2022, the Audit Committee met five (5) times. All then current members attended at least 75% of the meetings.
Compensation Committee
The Compensation Committee assists the Board in fulfilling its oversight responsibilities respecting the compensation of the named executive officers and the other related policies of the Company, through which the Company endeavors to attract, motivate and retain the executive talent needed to optimize stockholder value in a competitive environment while facilitating the business strategies and long-range plans of the Company. The specific functions and responsibilities of the Compensation Committee are set forth in the written Charter of the Compensation Committee of the Board of Directors of SPAR Group, Inc., dated (as of) May 18, 2004, and amended through August 12, 2020 (the "Compensation Charter"), approved and recommended by the Compensation Committee and Governance Committee and adopted by the Board on May 18, 2004, and amended on August 12, 2020. The Compensation Committee also is given specific functions and responsibilities by and is subject to Nasdaq Rules, SEC Rules, Sarbanes-Oxley and other applicable law. You can obtain and review a current copy of the Compensation Charter on the Company's web site (www.sparinc.com), on which it is posted and available to stockholders and the public under the Investor Relations tab and Corporate Governance sub-tab. The Compensation Charter was adopted to reflect the evolution of the Compensation Committee's informal responsibilities, the adoption of Sarbanes- Oxley, and changes in Nasdaq Rules, SEC Rules, securities laws and other applicable law pertaining to compensation committees. The Compensation Committee reviews and reassesses the Compensation Charter annually and recommends any needed changes to the Board for approval.
The Compensation Committee (among other things and as more fully provided in the Compensation Charter):
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As of December 31, 2022, the Compensation Committee consisted of Mr. Peter W. Brown and Mr. Sean M. Whelan, each of whom has been determined by the Governance Committee and the Board to meet the independence requirements for Compensation Committee members under Nasdaq Rules and SEC Rules.
During the year ended December 31, 2022, the Compensation Committee met six (6) times. All then current members attended at least 75% of the meetings.
Governance Committee
The Governance Committee assists the Board in fulfilling its oversight responsibilities respecting the nomination of directors and committee members for the Board and the corporate documents and governance policies and practices of the Corporation. The specific functions and responsibilities of the Governance Committee are set forth in the written Charter of the Governance Committee of the Board of Directors of SPAR Group, Inc., Dated (as of) May 18, 2004 (the "Governance Charter"), approved and recommended by the Governance Committee and adopted by the Board on May 18, 2004, and amended on March 18, 2021. The Governance Committee also is given specific functions and responsibilities by and is subject to the Nasdaq Rules, SEC Rules, Sarbanes-Oxley, and other applicable law, which are reflected in the Governance Charter. You can obtain and review a current copy of the Governance Charter on the Company's web site (www.sparinc.com), on which it is posted and available to stockholders and the public under the Investor Relations tab and Corporate Governance sub-tab. The Governance Charter was adopted to reflect the evolution of the Governance Committee's informal responsibilities, the adoption of Sarbanes-Oxley, and changes in Nasdaq Rules, SEC Rules, securities laws, and other applicable law pertaining to governance committees. The Governance Committee reviews and reassesses the Governance Charter, Nomination Policy and Ethics Code (as such terms are defined below), as well as the 2022 By-Laws of the Corporation and the other Committee Charters, annually and recommends any needed changes to the Board for approval.
The Governance Committee (among other things and as more fully provided in the Governance Charter):
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As of December 31, 2022, the Governance Committee consisted of Mr. Peter W. Brown, Mr. Michael Wager, and Mr. Sean M. Whelan, each of whom has been determined by the Governance Committee and the Board to meet the independence requirements for Governance Committee members under Nasdaq Rules and SEC Rules. Mr. Michael Wager also has been determined by the Governance Committee and the Board to be a Super Independent Director satisfying the new stricter requirements of the 2022 By-Laws. The 2022 By-Laws require that the Governance Committee's Chairman and at least two (2) of the members of the Audit Committee and Governance Committee to be a Super Independent Director. See Board Size, Quorum and Voting, above, and 2022 By-Laws, below.
During the year ended December 31, 2022, the Governance Committee met seven (7) times. All then current members attended at least 75% of the meetings.
Director Nominations: Experience, Integrity, Diversity and other Criteria
The Governance Committee oversees the identification, vetting and nomination of candidates for directors and the selection of committee members, the review of their qualifications (including outside director independence), and recommends any proposed nominees to the Board in accordance with the Governance Charter and with the SPAR Group, Inc. Statement of Policy Regarding Director Qualifications and Nominations dated as of May 18, 2004 (the "Nomination Policy"), as approved and recommended by the Governance Committee and adopted by the Board on May 18, 2004. You can obtain and review a current copy of this policy on the Company's web site (www.sparinc.com), on which it is posted and available to stockholders and the public under the Investor Relations tab and Corporate Governance sub-tab.
The Nomination Policy, applicable law and exchange rules require that a majority of the directors satisfy the independence requirements under the applicable Nasdaq Rules and SEC Rules and Delaware law. Each of the Committee charters requires the Board to determine that each of the members satisfy applicable Nasdaq requirements for such a Committee and be free from any relationship would interfere with the exercise of his or her independent judgment as a member. The By- Laws also require that the Chairman of the Board, at least three (3) Board members and the Chairman and at least two (2) members of each Committee be a Super- Independent Director (See Board Size, Quorum and Voting, above).
The Nomination Policy identifies numerous characteristics believed important by the Board for any nominee for director and provides that each nominee for director should possess as many of them as practicable. These desirable characteristics include (among other things) the highest professional and personal ethics and integrity, sufficient time and attention to devote to Board and Committee duties and responsibilities, strong relevant business and industry knowledge and contacts, and business and financial sophistication, common sense and wisdom, the contribution to the diversity of perspectives in the Board and its Committees, and the ability to make informed judgments on a wide range of issues, the ability and willingness to exercise and express independent judgments, and the apparent ability and willingness to meet or exceed the Board's performance expectations. The Nomination Policy specifically recognizes the desirability of ethnic, racial, gender and geographic diversity for the Board but does not specify any metrics for evaluating potential candidates in that regard. However, the Governance Committee takes all relevant factors (including such diversity) into account when identifying and evaluating candidates for Board membership.
Performance expectations for each director have also been established by the Board in the Nomination Policy, including (among other things) the director's regular preparation for, attendance at and participation in all meetings (including appropriate questioning), support and advice to management in his areas of expertise, maintenance of focus on the Board's agenda, understanding the business, finances, plans and strategies of Company, professional and collegial interaction, acting in the best interests of the Company and the stockholders, and compliance with the Company's Ethics Code.
Candidates for vacant positions on the Board may be suggested to the Governance Committee from time to time by its members or by officers or other directors of the Corporation. The Governance Committee from time to time also has used and may use recruiting firms to consider as director candidates. The Governance Committee generally will consider recommending the re-nomination of incumbent directors in accordance with the Nomination Policy, provided that they continue to satisfy the applicable personal characteristic criteria and performance expectations. The Nomination Policy reflects the Board's belief that qualified incumbent directors are generally uniquely positioned to provide stockholders the benefit of continuity of leadership and seasoned judgment gained through experience as a director of SGRP, and that the value of these benefits may outweigh many other factors. However, the Governance Committee is not required to recommend to the Board the nomination of any eligible incumbent director for re-election (See Stockholder Communications - Submission of Stockholder Proposals and Director Nominations, below).
Each nominee for director was required to complete and submit a Directors' and Officers' Questionnaire as part of the process for making director nominations and preparation of this Proxy Statement.
In considering the potential director nominee slate (including incumbent directors) to recommend to the Board, the Nomination Policy directs the Governance Committee to take into account: (i) the benefits of incumbency, as noted above; (ii) any perceived needs of Board, any Committee or the Company at the time for business contacts, skills or experience or other particular desirable personal characteristics; (iii) the collegiality of Board members; (iv) the need for independent directors or financial experts under that Policy or applicable law for the Board or its Committees; (v) any other requirements of applicable law or exchange rules; and (vi) the desirability of ethnic, racial, gender and geographic diversity. The Governance Committee will consider proposed nominees from any source, including those properly submitted by stockholders (See Stockholder Communications - Submission of Stockholder Proposals and Director Nominations, below).
At least three of the seven directors on the Board must be Super Independent Directors as defined in the 2022 By-Laws. All of the non-Super Independent Director positions must be filled pursuant to contracts with SGRP. Under the CIC Agreement (See Change of Control, Voting and Restricted Stock Agreement in Domestic Related Party Transactions, below, and Board Size, Quorum and Voting, above), Mr. Robert G. Brown is entitled to nominate two (2) directors (including himself), and Mr. William H. Bartels is entitled to nominate one (1) director (including himself). Under the terms of his employment as SGRP's Chief Executive Officer, Michael R. Matacunas is entitled to be a director.
There is currently one vacancy on the SGRP Board, which under the 2022 By-Laws must be filled with a Super Independent Director. See Board Size, Quorum and Voting, and Director Nominations: Experience, Integrity, Diversity and other Criteria, above, and 2022 By-Laws, below.
Based on the prior Directors' and Officers' Questionnaires of each director, as required by the Nominations Policy and the committee charters, the Governance Committee and Board each determined that: (i) Mr. Sean M. Whelan, Mr. Peter W. Brown and Mr. Michael Wager each satisfies the independence requirements for Audit Committee members under Nasdaq Rules and SEC Rules and the Audit Committee Charter, and Mr. Sean M. Whelan is an "audit committee financial expert" under SEC Rules, as required by such rules and the Audit Charter; (ii) Mr. Sean M. Whelan and Mr. Michael Wager are Super Independent Directors under the 2022 By-Laws (See Board Size, Quorum, and Voting, above); (iii) Mr. Michael Wager, Mr. Sean Whelan and Mr. Peter W. Brown each satisfies the independence requirements for Governance Committee members under Nasdaq Rules and SEC Rules and the Governance Committee Charter; (iv) Mr. Sean M. Whelan and Mr. Peter W. Brown each satisfies the independence requirements for Compensation Committee members under Nasdaq Rules and SEC Rules and the Compensation Committee Charter; and (v) Mr. Robert G. Brown satisfies the general independence requirements for independent directors of the Board under Nasdaq Rules and SEC Rules and the 2022 By-Laws.
2022 By-Laws
On January 25, 2022, the Board adopted and approved amendments to SGRP's then existing Amended 2022 By-Laws in connection with the entry into the CIC Agreement (the "Amendments", and as amended, the "2022 By-Laws"). The Amendments include the following:
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The 2022 By-Laws continue to require that each candidate for director sign a written irrevocable letter of resignation and retirement effective upon such person failing to be re-elected by the required majority stockholder vote.
The foregoing description is only a summary of the Amendments and is qualified in its entirety by reference to a copy of 2022 By-Laws, which is incorporated by reference into this Annual Report as Exhibit 3.3 hereto.
Limitation of Liability and Indemnification Matters
The Corporation's Certificate of Incorporation, as amended, eliminates the liability of all directors to the Corporation and its stockholders for monetary damages for breaches of their fiduciary duties as directors to the maximum extent such liability can be eliminated or limited under the Delaware General Corporation Law, as amended (the "DGCL"), which applies to the Corporation as a Delaware corporation. The DGCL permits a certificate of incorporation to include a provision eliminating such personal liability of its directors, and such elimination is effective under the DGCL, except that such liability currently may not be eliminated or limited under the DGCL: (i) for any breach of their duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) for unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the DGCL; or (iv) for any transaction from which the director derived an improper personal benefit.
The 2022 By-Laws (unchanged in this regard by the latest restatement) provide that the Corporation must indemnify each of its current and former directors, executive officers and other designated persons (including those serving its affiliates in such capacities at the Corporation's request), and may in the Board's discretion indemnify the other current and former officers, employees and other agents of the Company, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit or proceeding against them in such capacity to the fullest extent permitted by DGCL. The 2022 By-Laws also provide that the Corporation must advance the expenses (including attorneys' fees) actually and reasonably incurred by any director in defending any such action, suit or proceeding in advance of its final disposition, subject to such person's agreement to the extent required by the DGCL under the circumstances to reimburse the Corporation if such person is not entitled to indemnification. The 2022 By-Laws and these mandatory indemnification provisions were approved and recommended by the Governance Committee and adopted by the Board of Directors of the Corporation in order to conform to the current practices of most public companies and to attract and maintain quality candidates for its directors and management, and are included in the 2022 By-Law is (see above). A current copy of the 2022 By-Laws is posted and available to stockholders and the public on the Corporation's web site (www.sparinc.com).
Section 145 of the DGCL provides that the Corporation (as a Delaware corporation) has the power to indemnify under various circumstances anyone who is or was serving as a director, officer, employee or agent of the Corporation or (at its request) another corporation, partnership, joint venture, trust or other enterprise, which includes indemnification against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation), but only if: (i) such person acted in good faith and in a manner reasonably believed to be in or not opposed to the best interests of the Corporation; (ii) in the case of any criminal action or proceeding, such person had no reasonable cause to believe his or her conduct was unlawful; and (iii) in the case of any suit by or in the right of the Corporation in which the person is adjudged to be liable to the Corporation, the applicable court determines such person is nevertheless fairly and reasonably entitled to such indemnification under the circumstances. Section 145 of the DGCL also permits the Corporation to pay or advance the expenses (including attorneys' fees) actually and reasonably incurred by any such person in defending any such action, suit or proceeding, and requires that the Corporation indemnify such person for such unpaid expenses upon a successful defense of such action, suit or proceeding.
The Company maintains director and officer liability insurance that (subject to deductibles, maximums and exceptions) covers most liabilities arising out of the acts or omissions of any officer, director, employee or other covered person, both for the benefit of the Company and the direct benefit of its directors and officers, regardless of whether the 2022 By-Laws or DGCL Section 145 would permit indemnification of the matters covered by such insurance. The 2022 By-Laws (and DGCL Section 145) expressly permit the Corporation to secure such insurance and expressly provide that their respective indemnification provisions are not exclusive of any other rights to which the indemnified party may be entitled, including such insurance.
There is no pending action, suit or proceeding involving any director, officer, employee or agent of the Company in such capacity in which advancement or indemnification may be required or permitted.
Ethics Codes
SGRP has adopted codes of ethical conduct applicable to all of its directors, officers and employees, as approved and recommended by the Governance Committee and Audit Committee and adopted by the Board, in accordance with Nasdaq Rules and SEC Rules. These codes of conduct (collectively, the " Ethics Code") consist of: (1) the SPAR Group Code of Ethical Conduct for its Directors, Executives, Officers, Employees, Consultants and other Representatives Amended and Restated (as of) March 15, 2018 (the "Restated Ethical Code"); and (2) Statement of Policy Regarding Personal Securities Transactions in SGRP Stock and Non-Public Information, as amended and restated on May 1, 2004, and as further amended through March 10, 2011. Both Committees were involved because general authority over the Ethics Codes shifted from the Audit Committee to the Governance Committee with the adoption of the committee charters on May 18, 2004. However, the Audit Committee retained the express duty to review and approve the overall fairness of all material related-party transactions. You can obtain and review current copies of such code and policy on the Company's web site (www.sparinc.com), which are posted and available to stockholders and the public under the Investor Relations tab and Corporate Governance sub-tab.
The Ethics Code is intended to promote and reward honest, ethical, respectful and professional conduct by each director, executive, officer, employee, consultant and other representative of any of SGRP and its subsidiaries (together with SGRP, the "Company") and each other Covered Person (as defined in the Ethics Code) in his or her position with the Company anywhere in the world, including (among other things) serving each customer, dealing with each vendor and treating each other with integrity and respect, and behaving honestly, ethically and professionally with each customer, each vendor, each other and the Company. Article II of the Ethics Code specifically prohibits various forms of self-dealing (including dealing with relatives) and collusion and Article V of the Ethics Code generally prohibits each "Covered Person" (including SGRP's officers and directors) from using or disclosing the Confidential Information of the Company or any of its customers or vendors, seeking or accepting anything of value from any competitor, customer, vendor, or other person relating to doing business with the Company, or engaging in any business activity that conflicts with his or her duties to the Company, and directs each "Covered Person" to avoid any activity or interest that is inconsistent with the best interests of the SPAR Group, in each case except for any "Approved Activity" (as such terms are defined in the Ethics Code). Examples of violations include (among other things) having any ownership interest in, acting as a director or officer of or otherwise personally benefiting from business with any competitor, customer or vendor of the Company other than pursuant to any Approved Activity. Approved Activities include (among other things) any contract with an affiliated person (each an "Approved Affiliate Contract") or anything else disclosed to and approved by SGRP's Audit Committee, as well as the ownership, board, executive and other positions held in and services and other contributions to affiliates of SGRP and its subsidiaries by certain directors, officers or employees of SGRP, any of its subsidiaries or any of their respective family members. The Company's senior management is generally responsible for monitoring compliance with the Ethics Code and establishing and maintaining compliance systems, including those related to the oversight and approval of conflicting relationships and transactions, subject to the review and oversight of SGRP's Governance Committee as provided in Part I Sections 2, 3, 11 and 12 of the Governance Committee's Charter, and SGRP's Audit Committee as provided in Part IV Section 15 of the Audit Committee's Charter.
Significant Stockholder Governance Limitations
In consideration and as part of the CIC Agreement, the Majority Stockholders agreed that they and their affiliates will not directly or indirectly take any of the listed actions (the "Covered Matters") during the term of the CIC Agreement respecting their SGRP Shares (including voting, consents, proxies or other corporate actions), alone or in conjunction with other stockholders of the Corporation, unless any of the matters are the subject of a vote at a meeting of the Corporation's stockholders called by the Board.
The Covered Matters include taking or attempting any of the following:
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The foregoing description is only a summary of the CIC Agreement and is qualified in its entirety by reference to a copy of the CIC Agreement, which is incorporated by reference into this Annual Report as Exhibit 10.9.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth all compensation for services rendered to the Company in all capacities for the years ended December 31, 2022 and 2021 (but See - Transactions with Related Persons, Promoters and Certain Control Persons, below), by: (i) the Corporation's Chief Executive Officer; and (ii) each of the other persons named below, which include the two (2) most highly compensated Executives or other Officers of the Company. "Named Executive Officers" shall mean each of the individuals listed below, other than Mr. Bartels. The Company does not have any Non-Equity Incentive Compensation Plans other than as part of its individual Incentive Bonus Plans, any pension plans or any non-qualified deferred compensation plans, and accordingly those columns have been omitted.
Effective as of February 22, 2021, SGRP appointed Mr. Mike Matacunas as its Chief Executive Officer and President and as a Director of SGRP. Ms. Fay DeVriese departed SGRP effective as of January 31, 2023. Mr. Antonio Calisto Pato joined SGRP and became Chief Financial Officer, Secretary and Treasurer on February 27, 2023 (4). Effective July 13, 2021, SGRP appointed Ron Lutz as its Chief Global Commercial Officer and William Linnane as its Chief Strategy and Growth Officer of SGRP. Effective as of August 31, 2020, Ms. Fay DeVriese became the Chief Financial Officer of SGRP. Mr. Steven J. Adolph resigned as President International of SGRP effective April 23, 2021. Mr. Gerard Marrone retired as Chief Revenue Officer of SGRP effective June 15, 2021.
Name and Principal Positions |
Year |
Salary ($) |
Bonus ($) (1) |
Option and RSU Compensation ($) (2) | All Other Compensation ($) (3) |
Total ($) |
Michael R. Matacunas | 2022 | 407,813 | 200,000 | -- | 4,800 | 612,613 |
Chief Executive Officer, President and Director | 2021 | 250,000 | 50,000 | -- | 4,086 | 304,086 |
Fay DeVriese (4) (5) | 2022 | 329,583 | 72,233 | 54,304 | 4,800 | 460,920 |
Chief Financial Officer, Treasurer and Secretary | 2021 | 278,750 | -- | 37,445 | 2,400 | 318,595 |
Kori Belzer (6) | 2022 | 306,042 | 68,244 | 10,359 | 4,800 | 389,445 |
Global Chief Operating Officer | 2021 | 261,848 | -- | 94,026 | 4,800 | 360,674 |
William Linnane | 2022 | 296,042 | 85,000 | 30,914 | 4,800 | 416,756 |
Chief Strategy and Growth Officer | 2021 | 110,833 | 50,000 | -- | 2,400 | 163,233 |
Ron Lutz | 2022 | 296,042 | 62,500 | 30,914 | 4,800 | 394,256 |
Chief Global Commercial Officer | 2021 | 110,833 | 50,000 | -- | 2,400 | 163,233 |
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Narrative to Summary Compensation Table
Compensation Elements
As indicated in the Summary Compensation Table above, in addition to base salary, we provide the following compensation and benefits to our Named Executive Officers:matter included:
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/s/ BDO USA, P.C.
We have served as the Company's auditor since 2013.
Troy, Michigan USA
April 1, 2024
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive (Loss) Income
(In thousands, except per share data)
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Net revenues | $ | 262,747 | $ | 261,268 | ||||
Related Party - Cost of revenues | 5,197 | 8,804 | ||||||
Cost of revenues | 202,070 | 201,452 | ||||||
Gross profit | 55,480 | 51,012 | ||||||
Selling, general and administrative expense | 43,673 | 41,135 | ||||||
Loss on sale of business | 408 | - | ||||||
Depreciation and amortization | 2,001 | 2,033 | ||||||
Impairment of goodwill | - | 2,458 | ||||||
Operating income | 9,398 | 5,386 | ||||||
Interest expense | 1,919 | 965 | ||||||
Other expense (income), net | 346 | (482 | ) | |||||
Income before income tax expense | 7,133 | 4,903 | ||||||
Income tax expense | 2,357 | 2,777 | ||||||
Net income | 4,776 | 2,126 | ||||||
Net income attributable to non-controlling interest | (874 | ) | (2,858 | ) | ||||
Net Income (loss) attributable to SPAR Group, Inc. | $ | 3,902 | $ | (732 | ) | |||
Basic earnings (loss) per common share attributable to SPAR Group, Inc. | $ | 0.17 | $ | (0.03 | ) | |||
Diluted earnings (loss) per common share attributable to SPAR Group, Inc. | $ | 0.16 | $ | (0.03 | ) | |||
Weighted average common shares – basic | 23,333 | 22,110 | ||||||
Weighted average common shares – diluted | 24,455 | 22,110 | ||||||
Net income | $ | 4,776 | $ | 2,126 | ||||
Other comprehensive (loss): | ||||||||
Foreign currency translation adjustments | 1,283 | (391 | ) | |||||
Comprehensive income | 6,059 | 1,735 | ||||||
Comprehensive income attributable to non-controlling interest | (317 | ) | (2,380 | ) | ||||
Comprehensive income (loss) attributable to SPAR Group, Inc. | $ | 5,742 | $ | (645 | ) |
See accompanying notes to the Company's consolidated financial statements.
SPAR Group, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31, 2023 | December 31, 2022 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 10,719 | $ | 9,345 | ||||
Accounts receivable, net | 59,776 | 63,714 | ||||||
Prepaid expenses and other current assets | 5,614 | 7,861 | ||||||
Total current assets | 76,109 | 80,920 | ||||||
Property and equipment, net | 2,871 | 3,261 | ||||||
Operating lease right-of-use assets | 2,323 | 969 | ||||||
Goodwill | 1,382 | 1,708 | ||||||
Intangible assets, net | 1,180 | 2,040 | ||||||
Deferred income taxes | 4,687 | 3,766 | ||||||
Other assets | 1,729 | 1,934 | ||||||
Total assets | $ | 90,281 | $ | 94,598 | ||||
Liabilities and equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 9,488 | $ | 10,588 | ||||
Accrued expenses and other current liabilities | 15,274 | 20,261 | ||||||
Due to affiliates | 3,205 | 2,964 | ||||||
Customer incentives and deposits | 1,905 | 2,399 | ||||||
Lines of credit and short-term loans | 17,530 | 17,980 | ||||||
Current portion of operating lease liabilities | 1,163 | 363 | ||||||
Total current liabilities | 48,565 | 54,555 | ||||||
Operating lease liabilities, less current portion | 1,160 | 606 | ||||||
Long-term debt | 310 | 1,376 | ||||||
Total liabilities | 50,035 | 56,537 | ||||||
Commitments and contingencies – See Note 6 | ||||||||
Equity: | ||||||||
SPAR Group, Inc. equity | ||||||||
Preferred stock, Series - A, $.01 par value: | ||||||||
Authorized and available shares– 2,445,598 Issued and outstanding shares– None | – | – | ||||||
Preferred stock, Series - B. $.01 par value: | ||||||||
Authorized and available shares– 2,000,000 Issued and outstanding shares– 650,000 at December 31, 2023 and 854,753 at December 31, 2022 | 7 | 9 | ||||||
Common stock, $.01 par value: | ||||||||
Authorized shares – 47,000,000 Issued and outstanding shares – 23,446,444 at December 31, 2023 and 23,055,633 at December 31, 2022 | 232 | 229 | ||||||
Treasury stock, at cost 205,485 shares at December 31, 2023 and 205,485 Shares at December 31, 2022 | (285 | ) | (285 | ) | ||||
Additional paid-in capital | 21,004 | 20,708 | ||||||
Accumulated other comprehensive loss | (3,341 | ) | (4,941 | ) | ||||
Retained earnings | 10,609 | 6,707 | ||||||
Total SPAR Group, Inc. equity | 28,226 | 22,427 | ||||||
Non-controlling interest | 12,020 | 15,634 | ||||||
Total equity | 40,246 | 38,061 | ||||||
Total liabilities and equity | $ | 90,281 | $ | 94,598 |
See accompanying notes to the Company's consolidated financial statements.
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands)
Common Stock | Series B Preferred Stock | Treasury Stock | Additional Paid-In | Accumulated Other Comprehensive | Retained | Non- Controlling | Total | |||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | Capital | Loss | Earnings | Interest | Equity | ||||||||||||||||||||||||||||||||||
Balance at January 1, 2022 | 21,320 | $ | 213 | - | $ | - | 54 | $ | (104 | ) | $ | 17,231 | $ | (5,028 | ) | $ | 7,439 | $ | 17,597 | $ | 37,348 | |||||||||||||||||||||||
Share-based compensation | – | – | – | – | – | – | 346 | – | – | – | 346 | |||||||||||||||||||||||||||||||||
Exercise of stock options | 74 | – | – | – | – | – | (118 | ) | – | – | – | (118 | ) | |||||||||||||||||||||||||||||||
Majority shareholder agreement | – | – | 2,000 | 20 | – | – | 3,249 | – | – | – | 3,269 | |||||||||||||||||||||||||||||||||
Conversion of Series B convertible preferred stock | 1,718 | 16 | (1,145 | ) | (11 | ) | – | – | – | – | – | – | 5 | |||||||||||||||||||||||||||||||
Control change of NCI | – | – | – | – | – | – | – | – | – | (2,558 | ) | (2,558 | ) | |||||||||||||||||||||||||||||||
Distribution to non-controlling investors | – | – | – | – | – | – | – | – | – | (1,785 | ) | (1,785 | ) | |||||||||||||||||||||||||||||||
Repurchases of common stock | – | – | – | – | 151 | (181 | ) | – | – | – | – | (181 | ) | |||||||||||||||||||||||||||||||
Retirement of shares | (151 | ) | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | – | – | – | – | – | – | – | 87 | – | (478 | ) | (391 | ) | |||||||||||||||||||||||||||||||
Net (loss) income | – | – | – | – | – | – | – | – | (732 | ) | 2,858 | 2,126 | ||||||||||||||||||||||||||||||||
Balance at December 31, 2022 | 22,961 | $ | 229 | 855 | $ | 9 | 205 | $ | (285 | ) | $ | 20,708 | $ | (4,941 | ) | $ | 6,707 | $ | 15,634 | $ | 38,061 | |||||||||||||||||||||||
Share-based compensation | – | – | – | – | – | – | 297 | – | – | – | 297 | |||||||||||||||||||||||||||||||||
Conversion of Series B convertible preferred stock | 307 | 3 | (205 | ) | (2 | ) | – | – | (1 | ) | – | – | – | – | ||||||||||||||||||||||||||||||
Retirement of Shares | (27 | ) | – | – | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||||||||||
Payments to Acquire NCI | – | – | – | – | – | – | – | – | – | (460 | ) | (460 | ) | |||||||||||||||||||||||||||||||
Sale of Joint Ventures | – | – | – | – | – | – | – | – | – | (694 | ) | (694 | ) | |||||||||||||||||||||||||||||||
Distribution to non-controlling investors | – | – | – | – | – | – | – | – | – | (3,017 | ) | (3,017 | ) | |||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | – | – | – | – | – | – | – | 1,600 | – | (317 | ) | 1,283 | ||||||||||||||||||||||||||||||||
Net income | – | – | – | – | – | – | – | – | 3,902 | 874 | 4,776 | |||||||||||||||||||||||||||||||||
Balance at December 31, 2023 | 23,241 | $ | 232 | $ | 650 | $ | 7 | 205 | $ | (285 | ) | $ | 21,004 | $ | (3,341 | ) | 10,609 | $ | 12,020 | $ | 40,246 |
See accompanying notes to the Company's consolidated financial statements.
SPAR Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 4,776 | $ | 2,126 | ||||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||||
Depreciation and amortization | 2,001 | 2,033 | ||||||
Impairment of goodwill | - | 2,458 | ||||||
Amortization of operating lease assets | 875 | 646 | ||||||
Provision for expected credit losses | 88 | 1,092 | ||||||
Deferred income tax expense | 921 | 994 | ||||||
Share based compensation | 297 | 346 | ||||||
Loss on disposal of business | 408 | - | ||||||
Changes in operating assets and liabilities, net of business disposals: | ||||||||
Accounts receivable | 3,232 | (11,237 | ) | |||||
Prepaid expenses and other assets | 2,082 | (3,285 | ) | |||||
Accounts payable | (2,960 | ) | 1,718 | |||||
Operating lease liabilities | (875 | ) | (744 | ) | ||||
Accrued expenses, other current liabilities and customer incentives and deposits | (4,024 | ) | (1,191 | ) | ||||
Net cash provided by (used in) operating activities | 6,821 | (5,044 | ) | |||||
Cash flows from investing activities: | ||||||||
Cash transferred in sale of business | (1,111 | ) | - | |||||
Purchases of property and equipment and capitalized software | (1,242 | ) | (1,797 | ) | ||||
Other investing | 84 | - | ||||||
Net cash used in investing activities | (2,269 | ) | (1,797 | ) | ||||
Cash flows from financing activities: | ||||||||
Borrowings under lines of credit | 103,742 | 30,467 | ||||||
Repayments under lines of credit | (104,845 | ) | (25,648 | ) | ||||
Proceeds from stock options exercised | – | 118 | ||||||
Repurchase of common stock | - | (181 | ) | |||||
Distribution to non-controlling investors | (1,673 | ) | (1,785 | ) | ||||
Payments to acquire noncontrolling interests | (473 | ) | (2,558 | ) | ||||
Proceeds from term debt | 930 | 3,530 | ||||||
Payments on term debt | (701 | ) | (454 | ) | ||||
Net cash used in financing activities | (3,020 | ) | 3,489 | |||||
Effect of foreign exchange rate changes on cash | (158 | ) | (776 | ) | ||||
Net increase (decrease) in cash and cash equivalents | 1,374 | (4,128 | ) | |||||
Cash and cash equivalents at beginning of year | 9,345 | 13,473 | ||||||
Cash and cash equivalents at end of year | $ | 10,719 | $ | 9,345 | ||||
Supplemental disclosure of cash flows information | ||||||||
Interest paid | $ | 2,331 | $ | 1,200 | ||||
Income taxes paid | $ | 1,585 | $ | 2,287 | ||||
Non-cash Majority Stockholders Agreement | $ | - | $ | 3,270 | ||||
See accompanying notes to the Company's consolidated financial statements.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Nature of the Business
SPAR Group, Inc. ("SGRP" or the "Corporation"), and its subsidiaries (and SGRP together with its subsidiaries may be referred to as "SPAR Group", the "Company", "SPAR", "We", or "Our") is a global merchandising and brand marketing services company, providing a broad range of services to retailers, consumer goods manufacturers and distributors around the world.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The Company consolidates its 100%-owned subsidiaries and all of the 51%-owned joint ventures in which the Company has a controlling financial interest. All significant intercompany transactions have been eliminated in the consolidated financial statements.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States ("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. Significant balances subject to such estimates and assumptions include carrying amounts of property and equipment and intangible assets, valuation allowances for receivables, carrying amounts for deferred tax assets and liabilities, and liabilities incurred from operations and customer incentives. Actual results could differ from those estimates.
Segment Reporting
Reportable segments are components of the Company for which separate financial information is available that is evaluated on a regular basis by the Chief Operating Decision Maker ("CODM”) in deciding how to allocate resources and in assessing performance. The Company's CODM is the Chief Executive Officer.
The Company provides similar merchandising, marketing and business services throughout the world and has three reportable regional segments: (i) Americas, which is comprised of United States, Canada, Brazil and Mexico; (ii) Asia-Pacific ("APAC”), which is comprised of Japan, China, and India; and (iii) Europe, Middle East and Africa ("EMEA”), which is comprised of South Africa. Certain corporate expenses have been allocated to segments based on each segment’s revenue as a percentage of total company revenue.
Variable Interest Entities
The Company consolidates all entities where a controlling financial interest exists. The Company has considered its relationships with its 51%-owned joint ventures to determine whether the Company has a variable interest in these entities, and if so, whether the Company is the primary beneficiary of the relationship. US GAAP requires variable interest entities ("VIEs”) to be consolidated if an entity’s interest in the VIE is a controlling financial interest. Under the variable model, a controlling financial interest is determined based on which entity, if any, has (i) the power to direct the activities of the VIE that most significantly impacts the VIE’s economic performance and (ii) the obligations to absorb losses that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE.
Management performs ongoing reassessments of whether changes in the facts and circumstances regarding the Company’s involvement with a VIE will cause the consolidation conclusion to change. The consolidation status of a VIE may change as a result of such reassessments. Changes in consolidation status are applied prospectively in accordance with US GAAP.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Cash Equivalents
The Company considers all short-term, highly liquid investments with original maturities of three months or less at the date of purchase to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company maintains cash balances with high quality financial institutions and periodically evaluates the creditworthiness of such institutions. At times, the Company’s cash and cash equivalents balances with individual banking institutions are in excess of insured limits. The Company does not believe it is exposed to significant credit risk and the Company has not experienced any losses related to its cash and cash equivalents balances. No customer accounted for more than 10% of the Company’s net revenue for the years ended December 31, 2023 and December 31, 2022. No customer accounted for more than 10% of the Company’s accounts receivable, net as of December 31, 2023 and December 31, 2022.
Revenue Recognition
The Company generates its revenues by providing merchandising services to its clients. Revenues are recognized when the Company satisfies a performance obligation by transferring services promised in a contract to a customer and in an amount that reflects the consideration that the Company expects to receive in exchange for those services. Performance obligations in the Company’s contracts represent distinct or separate services that we provide to the Company’s customers; generally, the Company’s contracts have a single performance obligation. If, at the outset of an arrangement, the Company determines that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met.
The Company’s merchandising services are provided over time, generally on a daily, weekly, or monthly basis, and transaction price is based on the contractually-specified rate-per-driver metric (i.e., rate per hour, rate per store visit, or rate per unit stocked). The Company recognizes revenues for its contracts based on the contractually-specified rate-per-driver metric(s) utilizing the right-to-invoice practical expedient because the Company has a right to consideration for merchandising services completed to date. In general, (i) Standard Merchandising Service Contracts have a duration of 1 to 3 years with indexed rate increases while individual brand projects can be added with less than 6 months duration. (ii) Retail Remodel Contracts typically auto-renew with annual project SOWs, with regional awards typically granted 6 to 12 months in advance and individual projects assigned quarterly/monthly. (iii) Fulfillment Contracts are typically an annual award and selected projects can be less than 6 months. (iv) Standard Assembly Service Agreements are 1 to 3 years in duration with indexed rates increases. Customer deposits, which are considered advances on future work, are deferred and recorded as revenue in the period in which the services are provided.
Unbilled Accounts Receivable
Unbilled accounts receivable represents services performed but not billed and are included as accounts receivable.
Allowance for Credit Losses
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 allowance for credit losses 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 allowance for credit losses 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 credit losses of $1.5 million and $1.6 million at December 31, 2023, and 2022, respectively. Credit loss expense was $0.3 million and $1.3 million for the years ended December 31, 2023 and 2022, respectively.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Leases
The Company determines if a contract contains a lease at inception. The Company’s material operating leases consist of office space and equipment. The Company recognizes a right-of-use ("ROU”) asset and lease liability for operating leases with a term of greater than one year. The ROU asset is measured as the sum of (1) the present value of all remaining fixed and in-substance fixed payments using the rate implicit in the lease whenever that is readily determinable or the Company’s incremental borrowing rate, (2) any lease payments made at or before the commencement date (less any lease incentives received) and (3) any initial direct costs incurred. The lease liability is measured similarly to the ROU asset, but excludes any payments made before the commencement date and initial direct costs incurred. Lease terms include options to extend or terminate the lease if it is reasonably certain the Company will exercise these options. Expense for operating leases and leases with a term of one year or less is recognized on a straight-line basis over the term of the lease, unless another systematic and rational basis is more representative of the derivation of benefit from use of the leased property. Variable lease payments are recognized in the period in which the related obligation is incurred and consist primarily of payments for insurance and property taxes. Operating lease expense and variable lease payments are recorded in selling, general and administrative expense in the consolidated statements of operations and comprehensive income (loss).
Property and Equipment, Net
Property and equipment, including leasehold improvements, are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to seven years for equipment, three to seven years for furniture and fixtures, and three to five years for capitalized software costs. Leasehold improvements are depreciated over the shorter of their estimated useful lives or the related lease terms, which range from three to fifteen years. Maintenance and minor repairs are expensed as incurred.
Internal Use Software
The Company capitalizes certain costs associated with its internally developed software. The Company capitalizes the costs of materials and services incurred in developing or obtaining internal use software and such costs include, but are not limited to: the cost to purchase software, the cost to write program code, and payroll and related benefits for those employees who are directly involved with and who devote time to the Company’s software development projects. Capitalization of such costs begins during the application development stage once the preliminary project stage is complete, management authorizes and commits to funding the project, and it is probable that the project will be completed and that the software will be used to perform the function intended. Capitalization 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.
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 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.
Intangible Assets, Net
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 the pattern in which the economic benefits of the intangible assets are estimated to be realized. When facts and circumstances indicate that the carrying value of definite-lived intangible assets may not be recoverable, the Company assesses the recoverability of the carrying value by preparing estimates of sales volume and the resulting profit and cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, the Company recognizes an impairment loss. The impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
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 Company performs the annual impairment test as of October 31st each year. 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.
Treasury Stock
The Company records treasury stock activities under the cost method whereby the cost of the acquired stock is recorded as treasury stock. The Company’s accounting policy upon the formal retirement of treasury stock is to deduct the par value from the Company’s common stock and to reflect any excess of cost over par value as a reduction to additional paid-in capital (to the extent created by previous issuances of the shares).
Noncontrolling Interest
The Company recognizes noncontrolling interest related to VIEs, in which the Company is the primary beneficiary, as equity in the consolidated financial statements separate from the parent entity’s equity. The amount of net income or loss attributable to noncontrolling interests is included in consolidated net income on the face of the consolidated statements of operations and comprehensive loss. Changes in the parent entity’s ownership interest in a subsidiary that do not result in deconsolidation are treated as equity transactions if the parent entity retains its controlling financial interest. In addition, when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary will be initially measured at fair value and the difference between the carrying value and fair value of the retained interest will be recorded as a gain or loss. Because these transactions take place between entities under common control, any gains or losses attributable to these transactions are required to be included within additional paid-in-capital on the consolidated balance sheets.
Advertising and Promotional Expenses
Advertising and promotional expenses are included in selling, general and administrative expenses within the consolidated statements of operations and comprehensive loss and are expensed when incurred. Advertising and promotional expenses were $9,466 and $19,549 during the years ended December 31, 2023 and 2022, respectively.
Share-Based Compensation
The Company measures all share-based awards granted to employees and directors based on the fair value on the date of the grant and recognizes compensation expense for those awards, over the requisite service period, which is generally the vesting period of the respective award, on a straight-line basis for the entire award. The fair value of stock options is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the fair market value of the Company’s common stock, expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and the Company’s expected dividend yield.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
The Company classifies share-based compensation expense in its consolidated statements of operations and comprehensive (loss) income in the same manner in which the award recipient’s payroll costs are classified or in which the award recipient’s service payments are classified. The Company made a policy election to estimate the number of share-based compensation awards that are expected to vest to determine the amount of compensation expense recognized in earnings. Forfeiture estimates are revised if subsequent information indicates that the actual number of forfeitures is likely to differ from previous estimates.
Excess tax benefits are realized from the exercise of stock options and are reported as a financing cash inflow in the consolidated statement of cash flows.
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 US GAAP fair value framework uses a three-tiered approach. Fair value measurements are classified and disclosed in one of the following three categories:
● | Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities; |
● | Level 2 – Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations in which |
● | Level 3 – Prices or valuation techniques where little or no market data is available that requires inputs significant to |
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-term nature, the carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses approximated the fair values (Level 1) as of December 31, 2023 and 2022. 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).
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.
Recently Adopted Accounting Pronouncements
In June 2016, the FASB issued ASU No.2016-13,Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU No.2016-13”), which replaced the incurred loss impairment model with an expected credit loss model. The Company adopted ASU No.2016-13 on January 1, 2023. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements or disclosures for the year ended December 31, 2023.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Summary of Significant Accounting Policies (continued)
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2023, the FASB issued ASU No.2023-05,Business Combinations – Joint Venture Formations (Subtopic 805):Recognition and Initial Measurement, which will require joint ventures to recognize and initially measure its assets and liabilities at fair value upon formation. The guidance will be effective for the Company prospectively for all joint venture formations on or after January 1, 2025. Early adoption and retrospective application is permitted. The Company does not believe adoption will have a material effect on its consolidated financial statements and related disclosures.
In November 2023, the FASB issued ASU No.2023-07, Segment Reporting (Topic 280):Improvements to Reportable Segment Disclosures, which will require Companies to report additional segment information, including certain significant segment expenses, and permit the disclosure of additional measures of a segment’s profit or loss. The guidance will be effective for the Company’s fiscal year beginning January 1, 2024 and for interim periods thereafter. The Company is currently evaluating the impact adoption will have on its consolidated financial statements and related disclosures.
In December 2023, the FASB issued ASU No.2023-09, Income Taxes (Topic 740):Improvements to Income Tax Disclosures, which will require Companies to report specific categories of rate-reconciliation, certain details of income taxes paid and of certain information by tax jurisdictions. The guidance will be effective for the Company’s fiscal year beginning January 1, 2025. The Company is currently evaluating the impact adoption will have on its consolidated financial statements and related disclosures.
3. Supplemental Balance Sheet Information
December 31, | ||||||||
Accounts receivable, net, consists of the following: | 2023 | 2022 | ||||||
(in thousands) | ||||||||
Trade | $ | 51,567 | $ | 53,658 | ||||
Unbilled | 6,537 | 10,436 | ||||||
Non-trade | 3,133 | 1,274 | ||||||
Gross Accounts Receivable | 61,237 | 65,368 | ||||||
Less allowance for credit losses | (1,461 | ) | (1,654 | ) | ||||
Accounts Receivable, net | $ | 59,776 | $ | 63,714 |
December 31, | ||||||||
Activity in allowance for credit losses | 2023 | 2022 | ||||||
(in thousands) | ||||||||
Beginning balance in allowance for credit losses | $ | 1,654 | $ | 564 | ||||
Current provision for expected credit losses | 261 | 1,269 | ||||||
Allowances associated with businesses sold | (281 | ) | - | |||||
Write-offs charged against the allowance | (126 | ) | (179 | ) | ||||
Recoveries of amounts previously written off | (47 | ) | - | |||||
Ending balance in allowance for credit losses | $ | 1,461 | $ | 1,654 |
December 31, | ||||||||
Property and equipment consist of the following: | 2023 | 2022 | ||||||
(in thousands) | ||||||||
Equipment | $ | 5,062 | $ | 5,109 | ||||
Furniture and fixtures | 2,330 | 2,319 | ||||||
Leasehold improvements | 366 | 352 | ||||||
Capitalized software development costs | 18,336 | 17,298 | ||||||
26,094 | 25,078 | |||||||
Less accumulated depreciation and amortization | (23,223 | ) | (21,817 | ) | ||||
Property and equipment, net | $ | 2,871 | $ | 3,261 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Supplemental Balance Sheet Information (continued)
Depreciation expense (including amortization of internal use software and intangible assets as described below) was $2.0 million and $2.0 million for the years ended December 31, 2023 and 2022, respectively. The Company capitalized $1.0 million and $1.5 million of costs related to internal use software in the years ended December 31, 2023 and 2022, respectively. The Company recognized approximately $1.1 million and $1.2 million of amortization expense related to internal use software for the years ended December 31, 2023 and 2022, respectively.
Americas | Asia-Pacific | EMEA | Total | |||||||||||||
Goodwill | ||||||||||||||||
(in thousands) | ||||||||||||||||
Balance at January 1, 2022 | ||||||||||||||||
Aggregate goodwill acquired | $ | 3,728 | $ | - | $ | 438 | $ | 4,166 | ||||||||
Accumulated impairment losses | $ | (2,458 | ) | $ | - | $ | - | $ | (2,458 | ) | ||||||
Balance at December 31, 2022 | $ | 1,270 | $ | - | $ | 438 | $ | 1,708 | ||||||||
Change in goodwill due to impact of foreign currency | $ | 7 | $ | - | $ | 7 | ||||||||||
Sale of business | (333 | ) | – | – | (333 | ) | ||||||||||
Balance at December 31, 2023 | $ | 944 | $ | - | $ | 438 | $ | 1,382 |
Goodwill is generally deductible for tax purposes, except for the portion related to purchase accounting step-up goodwill. For the years ended December 31, 2023 and 2022, impairment losses of goodwill were $0 million and $2.5 million, respectively.
Goodwill Impairment of Resource Plus of North Florida, Inc.
The Company acquired Resource Plus of North Florida, Inc. ("Resource Plus”) in 2018 as a joint venture partnership and owns 51% of the Resource Plus business. At the time of the acquisition, the Company recorded $2.0 million of goodwill. Due to the loss of a significant customer, during the year ended December 31, 2022, Resource Plus did not meet original forecast and reduced forecasts. The Company tested recorded goodwill for impairment using a combination of discounted cash flow and guideline public company methodologies.
Key assumptions include management's estimates of forecasted revenue and forecasted cash flows. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates, and market factors. Estimating the fair value of individual reporting units requires the Company to make assumptions and estimates regarding its future plans, as well as industry, economic, and regulatory conditions. These assumptions and estimates include estimated future annual net cash flows, income tax considerations, discount rates, growth rates, and other market factors. The Company’s expectations also include certain assumptions that could be negatively impacted if the Company is unable to meet its cost expectations in relation to inflation. If current expectations of future growth rates and margins are not met, if market factors outside of the Company’s control, such as discount rates, income tax rates, foreign currency exchange rates, inflation, or any other factors, change, or if management’s expectations or plans otherwise change, including updates to the Company’s long-term operating plans, then one or more of our reporting units might become impaired in the future.
The impairment test indicated the goodwill of Resource Plus was fully impaired and the Company recorded an impairment loss of $2.0 million during the year ended December 31, 2022.
Goodwill Impairment ofSPAR TODOPROMO, SAPI, de CV
The Company acquired SPAR TODOPROMO, SAPI, de CV ("SPAR Mexico”) in 2011 as a joint venture partnership and currently owns 51% of the SPAR Mexico business. At time of acquisition, the Company recorded $0.5 million of goodwill. During year ended December 31, 2022, SPAR Mexico did not meet original forecasts due to labor law changes in Mexico. The Company tested recorded goodwill for impairment using a combination of discounted cash flow and guideline public company methodologies. The impairment test indicated that the goodwill of SPAR Mexico was fully impaired and the Company recorded an impairment loss of $0.5 million during the year ended December 31, 2022.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
3. Supplemental Balance Sheet Information (continued)
Intangible Assets
December 31, | ||||||||
Intangible assets consist of the following: | 2023 | 2022 | ||||||
(in thousands) | ||||||||
Customer contracts and lists | $ | 3,011 | $ | 3,543 | ||||
Trade names | 900 | 900 | ||||||
Patents | 870 | 870 | ||||||
Non-compete | - | 520 | ||||||
4,781 | 5,833 | |||||||
Less accumulated amortization | (3,601 | ) | (3,793 | ) | ||||
Intangible assets, net | $ | 1,180 | $ | 2,040 |
The decline in gross intangible assets of $1.1 million is due to the sale of NMS and Australia. Please see note 10. Related Party Transactions for more information.
The Company is amortizing its intangible assets over lives ranging from 5 to 25 years. Amortization expense for the years ended December 31, 2023 and 2022 was approximately $0.4 and $0.4, respectively.
The annual amortization for each of the following years succeeding December 31, 2023 is summarized as follows (in thousands):
(in thousands) | ||||
Year | Amount | |||
2024 | $ | 172 | ||
2025 | 188 | |||
2026 | 188 | |||
2027 | 91 | |||
2028 | 36 | |||
Thereafter | 504 | |||
Total | $ | 1,180 |
December 31, | ||||||||
Accrued expenses and other current liabilities: | 2023 | 2022 | ||||||
(in thousands) | ||||||||
Taxes payable | $ | 1,598 | $ | 2,660 | ||||
Accrued salaries and wages | 9,206 | 9,327 | ||||||
Accrued accounting and legal expenses | 1,018 | 2,186 | ||||||
Accrued third party labor | 1,477 | 2,411 | ||||||
Other | 1,975 | 3,677 | ||||||
Accrued expenses and other current liabilities | $ | 15,274 | $ | 20,261 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Debt
North Mill Capital Credit Facility
The Company, through SPAR Marketing Force, Inc. ("SMF") and SPAR Canada Company ULC ("SCC", and collectively with SMF, the “NM Borrowers”), has a secured revolving credit facility in the United States (the "US Revolving Credit Facility") and Canada (the "Canada Revolving Credit Facility", and collectively with the US Revolving Credit Facility, the "NM Credit Facility") with North Mill Capital, LLC, d/b/a SLR Business Credit ("NM").In order to obtain, document and govern the NM Credit Facility, SMF, SCC, SGRP and certain of SGRP's direct and indirect subsidiaries in the United States and Canada (including SMF and SCC as borrowers and SGRP as a guarantor, collectively, the "NM Loan Parties") entered into a Loan and Security Agreement with NM dated as of April 10, 2019, which, as amended from time to time (as amended, the "NM Loan Agreement"), governs the NM Credit Facility. Pursuant to the NM Loan Agreement, the NM Borrowers agreed to reimburse NM for legal and documentation fees incurred in connection with the NM Loan Agreement and such amendments.
On July 1, 2022, the NM Loan Parties and NM executed and delivered a Fourth Modification Agreement, effective as of June 30, 2022 (the "Fourth Modification Agreement"), pursuant to which the NM Loan Parties and NM agreed to extend the NM Credit Facility from October 10, 2023, to October 10, 2024, and increased the amount of the US Revolving Credit Facility to $17.5 million while the Canada Revolving Credit Facility remained at CDN$1.5 million. In addition, the Fourth Modification Agreement permanently increased SMF's borrowing base availability for billed receivables to up to 90% from 85%, and unbilled receivables to up to 80% from 70%, and increased the cap on unbilled accounts for SMF to $6.5 million from $5.5 million.
On August 9, 2022, the NM Loan Parties and NM executed and delivered a Fifth Modification Agreement, effective immediately (the "Fifth Modification Agreement"), pursuant to which the NM Loan Parties and NM agreed to temporarily increase the borrowing base availability under the NM Credit Facility, and the NM Borrowers agreed to pay certain additional fees.
On February 1, 2023, the NM Loan Parties and NM executed and delivered a Sixth Modification Agreement, effective immediately (the "Sixth Modification Agreement"), pursuant to which the NM Loan Parties and NM agreed to increase the amount of the US Revolving Credit Facility to $28.0 million and increase the Canada Revolving Credit Facility to CDN$2.0 million. In addition, the Sixth Modification Agreement increased the cap on unbilled accounts in the borrowing base for SMF to $7.0 million from $6.5 million.
On March 27, 2024, the NM Loan Parties and NM executed and delivered a Seventh Modification Agreement, effective immediately (the "Seventh Modification Agreement"), pursuant to which the NM Loan Parties and NM agreed to extend the NM Credit Facility from October 10, 2024 to October 10, 2025.
The Restated US Note and Restated Canadian Note (together, the "NM Notes") and the NM Loan Agreement together require the NM Borrowers to pay interest on the loans thereunder equal to: (i) the Prime Rate designated from time to time by Wells Fargo Bank; plus (ii) one and nine-tenths percentage points (1.90%) or an aggregate minimum of 6.75% per annum. In addition, the NM Borrowers are paying a facility fee to NM in an amount equal to: (i) for the year commencing on October 10, 2022, approximately $0.1 million plus 0.80% of the amount of any advances other than under the US Revolving Credit Facility plus an additional facility fee of $15,000 for every incremental $1.0 million of loan balance in excess of $21.0 million, and (ii) for the year commencing on October 10, 2023, approximately $0.2 million plus 0.80% of the amount of any advances other than under the US Revolving Credit Facility plus an additional facility fee of $15,000 for every incremental $1.0 million of loan balance in excess of $21.0 million. For the Sixth Modification Agreement, the NM Borrowers paid NM a fee of approximately $28,000 for the US and $3,000 for Canada.
As of December 31, 2023, the aggregate interest rate was 10.40% per annum and the aggregate outstanding loan balance was approximately $12.5 million, which is included within lines of credit and short-term loans in the condensed consolidated balance sheets. The aggregate outstanding loan balance is divided between the US Revolving Credit Facility and the Canada Revolving Credit Facility as follows: (i) the outstanding loan balance under the US Revolving Credit Facility was approximately $11.9 million; and (ii) the outstanding loan balance under the Canada Revolving Credit Facility was approximately $0.6 million.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
The NM Credit Facility contains certain financial and other restrictive covenants and also limits certain expenditures by the NM Loan Parties, including maintaining a positive trailing EBITDA for each the NM Borrowers (i.e., SMF and SCC) and imposes limits on all of the NM Loan Parties (including SGRP) on non-ordinary course payments and transactions, incurring or guaranteeing indebtedness, increases in executive, officer or director compensation, capital expenditures and certain other investments. The NM Loan Parties were in compliance with such covenants as of December 31, 2023. The obligations of the NM Borrowers are secured by the receivables and other assets of the NM Borrowers and substantially all of the assets of the other NM Loan Parties, however, the obligations are not secured by any equity in, financial asset respecting or asset of any Excluded Subsidiary (as such term is defined in the NM Loan Agreement). Pursuant to the NM Loan Agreement, Excluded Subsidiary means each of the following direct or indirect subsidiaries of SGRP: (i) Resource Plus of North Florida, Inc. (“Resource Plus”), Mobex of North Florida, Inc., and Leasex, LLC, and their respective subsidiaries; (ii) NMS Retail Services ULC, which is an inactive Nova Scotia ULC; (iii) SPAR Group International, Inc.; (iv) SPAR FM Japan, Inc.; (v) SPAR International, Ltd.; (vi) each other subsidiary formed outside of the United States or Canada; and (vii) any other entity in which any such subsidiary is a partner, joint venture or other equity investor.
Resource Plus – Seller Notes
Effective with the closing of the Company's acquisition of Resource Plus in 2018, the Company issued into promissory notes with the sellers of $2.7 million. As of December 31, 2023, the annual interest rate was 1.85% and the balance outstanding under the promissory notes was approximately $1.1 million, payable in January 2024, which is included in lines of credit and short-term loans in the consolidated balance sheets.
International Credit Facilities
In December 2020, SPAR China secured a loan with Industrial Bank for 2.0 million Chinese Yuan. The loan was renewed in December 22 2023, with an expiration date in December 2024.
In December 2021, SPAR China secured a loan with Industrial and Commercial Bank of China for 2.0 million Chinese Yuan. The loan was paid in July 2023 and a new loan was secured in November 2023 for 2.0 million Chinese Yuan with expiration date of November 2024.
In March 2022, SGRP Meridian (Pty), Ltd. secured loans with Investec Bank Ltd, for 105 million South African Rand which expires July 2025. This loan is secured by the company's available cash and Accounts Receivable and is being repaid in monthly installments commensurate with an amortization schedule. The interest rate of 11.75% is calculated based on the South African Prime rate. As part of the agreement, SGRP Meridian is subject to covenant restrictions that mandate minimum levels of Debt to EBITDA, Asset and Accounts Receivable balances, and coverage ratios.
SGRP Meridian is in compliance with these covenants as of December 31, 2023
Summary of the Company’s lines of credit and short-term loans (in thousands):
Interest Rate as of | Balance as of | Interest Rate as of | Balance as of | |||||||||||||
December 31, 2023 | December 31, 2023 | December 31, 2022 | December 31, 2022 | |||||||||||||
USA - North Mill Capital | 10.40 | % | $ | 12,475 | 5.25 | % | $ | 14,399 | ||||||||
USA - Resource Plus Sellers | 1.85 | % | 1,120 | 1.85 | % | 1,000 | ||||||||||
Australia - National Australia Bank | N/A | - | 10.60 | % | 156 | |||||||||||
South Africa - Investec Bank Ltd. | 11.75 | % | 3,369 | 10.50 | % | 1,700 | ||||||||||
China- Industrial Bank | 3.56 | % | 283 | 4.00 | % | 435 | ||||||||||
China- Industrial and Commercial Bank of China | 4.00 | % | 283 | 4.15 | % | 290 | ||||||||||
Total | $ | 17,530 | $ | 17,980 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
Summary of Unused Company Credit and Other Debt Facilities (in thousands):
December 31, 2023 | December 31, 2022 | |||||||
Unused Availability: | ||||||||
United States | $ | 6,525 | $ | 4,601 | ||||
Mexico | – | 1 | ||||||
Australia | – | 390 | ||||||
South Africa | 2,064 | 454 | ||||||
Total Unused Availability | $ | 8,589 | $ | 5,446 |
Summary of the Company’s Long- term debt (dollars in thousands):
Interest Rate as of | Balance Outstanding | Interest Rate as of | Balance Outstanding | |||||||||||||
December 31, 2023 | December 31, 2023 | December 21, 2022 | December 31, 2022 | |||||||||||||
South Africa - Investec Bank Ltd. | 11.75 | % | $ | 310 | 10.50 | % | $ | 1,376 | ||||||||
Total | $ | 310 | $ | 1,376 |
5. Income Taxes
Beginning in 2018, the Tax Cuts and Jobs Act (the "Act”) included two (2) new U.S. corporate tax provisions, the global intangible low-taxed income regime ("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 provision resulting in a financial statement impact of approximately $0 and $0.3 million for the year ended December 31, 2023 and December 31, 2022 respectively. The Company is below the three-year average gross receipts threshold for BEAT to apply.
Income (loss) before income taxes is summarized as follows (in thousands):
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Domestic | $ | (2,134 | ) | $ | (4,079 | ) | ||
Foreign | 9,267 | 8,982 | ||||||
Total: | $ | 7,133 | $ | 4,903 |
The income tax expense (benefit) is summarized as follows (in thousands):
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Current: | ||||||||
Federal | $ | (54 | ) | $ | 24 | |||
Foreign | 2,311 | 2,705 | ||||||
State | 150 | 66 | ||||||
Deferred: | ||||||||
Federal | (145 | ) | (128 | ) | ||||
Foreign | 91 | 317 | ||||||
State | 4 | (207 | ) | |||||
Net expense | $ | 2,357 | $ | 2,777 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
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, | ||||||||||||||||
2023 | Rate | 2022 | Rate | |||||||||||||
Provision for income taxes at federal statutory rate | $ | 1,498 | 21.0 | % | $ | 1,030 | 21.0 | % | ||||||||
State income taxes, net of federal benefit | 123 | 1.7 | % | (125 | ) | (2.5 | )% | |||||||||
Permanent differences | 282 | 4.0 | % | (19 | ) | (0.4 | )% | |||||||||
Goodwill adjustment | - | - | 517 | 10.5 | % | |||||||||||
Section 162(m) adjustment | 55 | 0.8 | % | - | - | |||||||||||
Return to provision adjustment | (339 | ) | (4.8 | )% | (223 | ) | (4.5 | )% | ||||||||
Foreign tax rate differential | 877 | 12.3 | % | 1,016 | 20.7 | % | ||||||||||
GILTI tax | - | - | 323 | 6.6 | % | |||||||||||
Sale of membership interest | 149 | 2.1 | % | - | - | |||||||||||
Change in valuation allowance | (268 | ) | (3.8 | )% | 308 | 6.3 | % | |||||||||
Other | (20 | ) | (0.3 | )% | (50 | ) | (1.1 | )% | ||||||||
Net expense | $ | 2,357 | 33.0 | % | $ | 2,777 | 56.6 | % |
In 2023, our effective income tax rate of 33.0% varied from the U.S. federal statutory rate of 21% primarily as a result of foreign rate differential, sale of membership interest disposition of National Merchandising Services, LLC, and permanent differences.
Deferred taxes consist of the following (in thousands): | December 31, | |||||||
2023 | 2022 | |||||||
Deferred tax assets: | ||||||||
Net operating loss carry forwards | $ | 2,270 | $ | 2,627 | ||||
Capital loss carry forwards | 58 | - | ||||||
Federal Research and Development Credit | 240 | 240 | ||||||
Foreign withholding tax | 316 | - | ||||||
Deferred revenue | – | 86 | ||||||
Accrued payroll | 155 | 270 | ||||||
Outside basis in domestic partnership | – | 16 | ||||||
Allowance for credit losses and other receivable | 63 | 327 | ||||||
Share-based compensation expense | 253 | 326 | ||||||
Business interest limitation | 519 | 340 | ||||||
Operating lease liability | 504 | 134 | ||||||
Capitalized software development costs | 63 | - | ||||||
Other | 1,371 | 739 | ||||||
Total deferred tax assets, gross | 5,812 | 5,105 | ||||||
Valuation allowance | (242 | ) | (611 | ) | ||||
Total deferred tax assets | 5,570 | 4,494 | ||||||
Deferred tax liabilities: | ||||||||
Goodwill & Intangible assets of subsidiaries | 324 | 376 | ||||||
Capitalized software development costs | - | 135 | ||||||
Right to Use Asset | 504 | 134 | ||||||
Depreciation | 55 | 83 | ||||||
Total deferred tax liabilities | 883 | 728 | ||||||
Net deferred income taxes | $ | 4,687 | $ | 3,766 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
As of December 31, 2023, the Company’s deferred tax assets were primarily the result of U.S. Net Operating Loss ("NOL”) and Brazil NOL. The Company has gross U.S. Federal NOL carryforwards of $5.0 million and tax effected amount of $1.1 million. Of the $1.1 million U.S. Federal NOL carryforward, approximately $0.6 million has no expiration date, and the remaining balance, if unused, will expire in years 2027 through 2031. The Company has a U.S. State NOL deferred tax asset of $0.1 million of varying expiration dates from 2024 to 2041. The Company has gross $0.3 million of US Capital Loss carryforwards with expiration date of 2028. The tax effected amount of US Capital Loss carryforward is $0.1 million. The Company has $0.2 million US Research and Development credits with expiration dates ranging 2031 to 2035. The Company has additional gross NOL carryforwards of $1.7 million in Brazil, all of which has no expiration date. The tax effected amount of the Brazil NOL carryforwards is $0.6 million. The Company has additional gross NOL carryforwards of $1.0 million in China, and $1.1 million in Mexico with expiration dates beginning in 2028, and 2033, respectively. The tax effected amounts of China, and Mexico NOL carryforwards are $0.2 million, and $0.3 million respectively.
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. U.S.-based net deferred tax assets are approximately $2.3 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 include our expectation of continued improvements in U.S. operating results and the period of time available to generate future taxable income. For Brazil, and Mexico losses it is expected to be more likely than not that there will be sufficient taxable income to utilize the losses in future years. For China management does not expect its more likely than not deferred tax assets can be realized and therefore a full valuation allowance is recorded with respect to these jurisdictions.
A reconciliation of the beginning and ending amount of uncertain tax position reserves is as follows (in thousands):
Year Ended December 31, | ||||||
2023 | 2022 | |||||
Beginning balance | $ | 46 | $ | 42 | ||
Additions based on tax positions related to the current year | 8 | 4 | ||||
Removal for tax provisions of prior years | - | – | ||||
Ending balance | $ | 54 | $ | 46 |
The provision for income taxes includes the impact of uncertain tax position reserves and changes to reserves that are considered appropriate. As of December 31, 2023, included in the balance of uncertain tax position reserves are $0.05 million of reserves that, if recognized, would affect the effective rate of income from continuing operations. 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. We accrued penalties of $1 thousand and interest of $.4 thousand during 2023 and in total, as of December 31, 2023 recognized a liability related to the uncertain tax position reserves noted above for penalties of $15 thousand and interest of $17 thousand. During 2022, we accrued penalties of $.8 thousand and interest of $.3 thousand and in total, as of December 31, 2022, recognized a liability of penalties of $14 thousand and interest of $16 thousand. Management does not expect in the next 12 months that the uncertain tax position reserves will significantly increase or decrease. Consistent with that expectation, interest and penalties related to the uncertain tax position reserve should not significantly increase.
Taxes | Interest | Penalty | Total Tax Liability | |||||||||||||
Domestic | ||||||||||||||||
State | $ | 54 | $ | 17 | $ | 15 | $ | 86 | ||||||||
Federal | – | – | – | – | ||||||||||||
International | – | – | – | – | ||||||||||||
Total reserve | $ | 54 | $ | 17 | $ | 15 | $ | 86 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Income Taxes (continued)
In management's view, the Company's tax reserves at December 31, 2023 and 2022, 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 2020 through the present. Foreign entities are subject to tax audits that vary based on jurisdiction. 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.
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.
In the year ended December 31, 2022, prior open and potential claims between significant stockholders and the Company were released mutually upon execution of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement"), as of January 28, 2022. See Note 10,Related Party Transactions.
All prior litigations associated with the Company through SPAR Business Services, Inc., a corporation ("SBS") and its independent contractors have been resolved, including the claims of SBS and the Company in the SBS bankruptcy and settlement, and all additional related claims raised later by SBS and Robert G Brown were released by them in the CIC Agreement.
In the year ended December 31, 2022, final payment of the prior SBS Clothier litigation settlement was paid in full.
7. Common Stock
As of December 31, 2023, the Corporation's certificate of incorporation authorized the Corporation to issue 47,000,000 shares of common stock, par value $0.01 per share. The voting, dividend and liquidation rights of the holders of the Corporation's common stock are subject to and qualified by the rights, powers and preferences of the holders of the Corporation's Series B convertible preferred stock. Each share of the Corporation's common stock are entitled to one vote on all matters submitted to a vote of the Corporation's stockholders. Holders of the Corporation's common stock are entitled to receive dividends as may be declared by the Corporation's board of directors (the "Board"), if any, subject to the preferential dividend rights of the Corporation's Series B convertible preferred stock. No cash dividends had been declared or paid during the periods presented.
In May 2022, the Board authorized the Corporation to repurchase up to 500,000 shares of the Corporation's common stock pursuant to the 2022 Stock Repurchase Program (the "2022 Stock Repurchase Program"), which ended May 2023. During the year ended December 31, 2022, there were 151,156 shares of common stock repurchased for $187,427 under the 2022 Stock Repurchase Program. There were no share repurchases that were significantly in excess of the current market price at time of repurchase.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Preferred Stock
The Corporation’s certificate of incorporation authorizes it to issue 3,000,000 shares of preferred stock with a par value of $0.01 per share, which may have such preferences and priorities over the Corporation’s common stock and other rights, powers and privileges as the Board of may establish in its discretion.
In January 2022, the Corporation filed a Certificate of Elimination for its "Certificate of Designation of Series "A” Preferred Stock of SPAR Group, Inc.” (the "Certificate of Elimination”). Pursuant to the Certificate of Elimination, the previous Series A convertible preferred stock designation was cancelled and withdrawn. As a result, all 3,000,000 shares of the previously authorized Series A convertible preferred stock were returned to the Corporation's authorized "blank check” preferred stock. There were no shares of Series A convertible preferred stock outstanding at the time of the cancellation.
Subsequent to filing the Certificate of Elimination, in January 2022, the Corporation filed a "Certificate of Designation of Series "B” Preferred Stock of SPAR Group, Inc.” (the "Preferred Designation”) with the Secretary of State of Delaware, which designation had been approved by the Board in January 2022. The Preferred Designation created a series of 2,000,000 shares of convertible preferred stock designated as "Series B” convertible preferred stock, par value of $0.01 per share.
The Series B convertible preferred stock do not carry any voting or dividend rights and upon vesting converted into the Corporation's common stock at a ratio of 1-to-1.5. SeeNote 10. The holders of the Series B convertible preferred stock had a liquidation preference over the Corporation's common stock and voted together for matters pertaining only to the Series B convertible preferred stock where only the holders of the Series B convertible preferred stock are entitled to vote. The holders of outstanding Series B Preferred Stock do not have the right to vote for directors or other matters submitted to the holders of the Corporation's common stock.
In January 2022, 2,000,000 shares of Series B convertible preferred stock were issued to the majority stockholders and related parties pursuant to the Change of Control, Voting and Restricted Stock Agreement. See Note 10.
During the year ended December 31, 2022, 1,145,247 shares of Series B convertible preferred stock converted to 1,717,870 shares of the Corporation's common stock. As of the year ended December 31, 2022, 854,753 shares of Series B convertible preferred stock were outstanding, which upon vesting would automatically convert into 1,282,129 shares of the Corporation's common stock.
During the year ended December 31, 2023, all of the remaining 854,753 shares of Series B convertible preferred stock vested and automatically became convertible into 1,282,129 shares of the Corporation's common stock of which 307,129 shares of the Corporation's Common Stock were issued prior to December 31, 2023. However, at December 31, 2023, 975,000 shares of SGRP Common Stock were in the process of being issued and the remaining shares of Series B Preferred Stock were in the process of being returned and cancelled.
Once the shares of Series B Preferred Stock are fully retired, SGRP may change or cancel the authorized Series B Preferred Stock, and to the extent it reduces such authorization without issuance, it can create other series of Preferred Stock with potentially different dividends, preferences and other terms.
9. Retirement Plans
The Company has a 401(k) Profit Sharing Plan covering substantially all eligible domestic employees. The Company made discretionary contributions of $0.1 million and $0.1 million for the years ended December 31, 2023 and 2022, respectively.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions
Domestic Related Party Transactions
Change of Control, Voting and Restricted Stock Agreement
The Change of Control, Voting and Restricted Stock Agreement (the "CIC Agreement") became effective on January 28, 2022, when signed by the Company and Robert G. Brown, ("Mr. Brown"), William H. Bartels, ("Mr. Bartels"), SPAR Administrative Services, Inc., a corporation ("SAS"), and collectively with Mr. Brown, Mr. Bartels and SAS, the ("Majority Stockholders"). Mr. Bartels and Mr. Brown are Directors of the Corporation. Mr. Brown was the Chairman of the Board of Directors of SGRP (the "Board"), but ceased holding that position when the 2022 By-Laws (as defined below) became effective on January 25, 2022.
The execution of the CIC Agreement was conditional upon making the changes to and restatement of the Corporation's 2022 By-Laws, which were approved by the Board and became effective on January 25, 2022 (the "2022 By-Laws").
The financial terms of the CIC Agreement to the Majority Stockholders, totaled $4,477,585, consisting of the following:
a. | The Corporation |
b. | The Corporation |
|
|
James R. Brown, Sr. Advisor Agreement
On January 25, 2022, the Company entered into a consulting agreement with Mr. James R. Brown, Sr., effective January 26, 2022, following his retirement as a director of SGRP on January 25, 2022, pursuant to which Mr. Brown will serve as a Board advisor to SGRP from time to time for a term of one (1) year (the "Brown Advisor Agreement"). As compensation for his services, Mr. Brown was entitled to receive compensation at a rate of $55,000 for the term of the Brown Advisor Agreement. Payments will be made in equal quarterly installments and will be pro-rated for partial quarters. The agreement expired in the year ended December 31, 2022.
Panagiotis Lazaretos Consulting Agreement
On January 27, 2022, the Corporation entered into a consulting agreement with Thenablers, Ltd. effective February 1, 2022 (the " Lazaretos Consulting Agreement"). Thenablers, Ltd. is wholly owned by Mr. Panagiotis Lazaretos, a retired director of the Corporation. Following Mr. Lazaretos' retirement as a director on January 25, 2022, Thenablers, Ltd. agreed to provide the consulting services of Mr. Lazaretos to the Corporation regarding global sales and new markets' expansion. The Lazaretos Consulting Agreement cannot be terminated by the consent of either party for the firsttwelve (12) months, and automatically expires on January 31, 2024. As compensation for its services, Thenablers, Ltd. is entitled to receive: (i) base compensation at a rate of $10,000 per month for the term of the Consulting Agreement; (ii) incentive based compensation as calculated in Exhibit A of the Lazaretos Consulting Agreement; and (iii) the outstanding options granted to Mr. Panagiotis ("Panos") N. Lazaretos on February 4, 2022 will continue to be outstanding and vest according to their terms under the agreement. As permitted by that agreement, on February 2, 2023, the Corporation gave notice that it was terminating that agreement effective July 31, 2023.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
Other Domestic Related Party Transactions
Resource Plus, is a consolidated domestic subsidiary of the Company and is owned jointly by the Company and by Mr. Richard Justus. Mr. Justus has an ownership interest in RJ Holdings which owns the buildings where Resource Plus is headquartered and operates. Both buildings are subleased to Resource Plus.
On December 1, 2021, the Corporation entered into the Agreement for Marketing and Advertising Services (the "WB Agreement") with WB Marketing, Inc. (the "Agent", and together with the Company, the "Parties"). The Agent is an entity owned and controlled by Mrs. Jean Matacunas who is the wife of President and Chief Executive Officer, Michael R. Matacunas. Mr. Matacunas is also a minority owner of the Agent. The service fees paid to WB Marketing for the years ended December 31, 2023 and 2022, were $103,000 and $189,000, respectively.
Prior to December 31, 2023, National Merchandising Services, LLC ("NMS"), was a consolidated domestic subsidiary of the Company owned jointly by SGRP and by National Merchandising of America, Inc. ("NMA"). Mr. Edward Burdekin was the Chief Executive Officer and President and a director of NMS and also an executive officer and director of NMA. Ms. Andrea Burdekin, Mr. Burdekin's wife, was the sole stockholder and also a director of both NMA and NMS. NMA was a related party of the Company but is not under the control of or consolidated with the Company. Mr. Burdekin's wife also owns National Remodel & Setup Services, LLC ("NRSS"). During the years ended December 31, 2022 and 2023, NRSS provided substantially all of the domestic merchandising specialist field force used by NMS. For those services, NMS reimbursed NRSS certain costs for providing those services plus a premium ranging from 4.0% to 10.0% of certain costs. NMS also leased office space from Mr. Burdekin's personal property. In December 2023, the Company sold its ownership interest in NMS.
On December 22, 2023, the Company entered into an agreement with National Retail Remodel Services (the "Buyer") to sell its 51% ownership interest in National Merchandising Services, LLC ("NMS") to the Buyer for total consideration of $1,441,004. The transaction closed on December 31, 2023. Per the agreement, the purchase price is due from the Buyer as follows: (1) a payment of $700,000 due immediately to the escrow agent upon closing, releasable to the Company in January 2024; (2) $523,000 in the form of the Buyer's promissory note due and payable on January 31, 2024; and (3) a payment of up to $209,004 contingent upon collection of an outstanding receivable. The $700,000 and $523,000 portions of consideration for this transaction are recorded in "Other Receivables" at December 31, 2023. The Company’s December 31, 2023 financial results include a loss on this sale of approximately $427,000, primarily reflecting the write-off of remaining goodwill related to NMS. The Company has not included the contingent purchase price payment in the determination of the amount of the loss as collection of that receivable is not known as of filing date.
International Related Party Services
The Company's principal Brazilian subsidiary, SPAR BSMT, is owned 51% by the Company. Mr. Jonathan Dagues Martins, ("JDM") is the Chief Executive Officer and President of each SPAR Brazil subsidiary pursuant to a Management Agreement between JDM and SPAR BSMT dated September 13, 2016. JDM also is a director of SPAR BSMT. Accordingly, JDM is a related party of the Company. EILLC is owned by Mr. Peter W. Brown, a director of SPAR BSMT and the Corporation.
Prior to December 31, 2023, SPARFACTS was a consolidated international subsidiary of the Company owned 51% by SGRP. Ms. Lydna Chapman was a director of SPARFACTS. Her various companies provide office lease, accounting and consultant services to SPARFACTS. In December 2023, the Company sold its ownership interest in SPARFACTS.
On December 22, 2023, the Company entered into an agreement with Sabizz Pty Ltd CAN (the buyer) to sell its 51 percent interest in SPARfacts Pty Limited CAN for (1) one dollar; (2) assumption of all liabilities and obligations related to ownership of the shares; and (3) $75 thousand AUD for the rights to use the SPARfacts brand and name for up to 6 months following the closing date. The transaction closed on December 31, 2023. The Company’s 2023 year end financial results include a $19,000 gain on the sale.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
Summary of Certain Related Party Transactions
The following costs of affiliates were charged to the Company (in thousands):
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Services provided by affiliates: | ||||||||
National Remodel & Setup Services (NRSS) (1) | $ | 5,173 | $ | 8,565 | ||||
Consulting and administrative services (RJ Holdings) (2) | 472 | 477 | ||||||
Office lease expenses (RJ Holdings) (2) | 8 | 248 | ||||||
Consulting and administrative fees (SPARFACTS) (2) | 112 | 431 | ||||||
Other (2) | 178 | 157 | ||||||
Total services provided by affiliates | $ | 5,943 | $ | 9,878 |
Due to affiliates consists of the following (in thousands): | December 31, | |||||||
2023 | 2022 | |||||||
Loans from local investors:(3) | ||||||||
China | $ | 2,316 | $ | 1,382 | ||||
Mexico | 623 | 623 | ||||||
Australia | - | 693 | ||||||
Resource Plus | 266 | 266 | ||||||
Total due to affiliates | $ | 3,205 | $ | 2,964 |
(1) Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms and are due on demand.
(2) These expenses are reflected in "Selling, general, and administrative expense" expense in the consolidated statements of operations and comprehensive (loss) income.
(3) Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms and are due on demand.
Bartels' Retirement and Director Compensation
William H. Bartels retired as an employee of the Company as of January 1, 2020. However, he continues to serve as a member of SPAR's Board. Mr. Bartels is also one of the founders and a significant stockholder of SGRP.
Effective as of January 18, 2020, SPAR's Governance Committee proposed and unanimously approved retirement benefits for the five-year period commencing January 1, 2020, and ending December 31, 2024 (the "Five-Year Period"), for Mr. Bartels. The aggregate value of benefits payable to Mr. Bartels is approximately $220,558 per year and a total of $1,102,790 for the Five-Year Period. The Company recognized $700,000 of retirement benefits during the year ended December 31, 2020, representing the present value of the future Retirement Compensation, Supplemental Fees and Medical Benefits payments due Mr. Bartels. As of December 31, 2023 $200,923 of retirement benefits remains outstanding and is included within Accrued expenses and other current liabilities on the consolidated balance sheets.
Chief Executive Officer (PEO) Pay Versus Performance Table
Year | Summary Compensation Table Total for Michael R. | Summary Compensation Table Total for Kori G. Belzer |
Compensation Actually Michael R. |
Compensation Kori G. Belzer | Average Summary Compensation Table Total for Non-PEO NEOs | Average Compensation Actually Paid (3) to Non-PEO NEOs |
Total Shareholder |
Company’s Net Income | ||||||||||||||||||||||||
2022 | $ | 612,613 | N/A | $ | 749,718 | N/A | $ | 415,344 | $ | 384,882 | 113.04 | $ | 2,126,000 | |||||||||||||||||||
2021 | $ | 304,086 (1) | $ | 60,112 (2) | $ | 722,932 (1) | 50,878 (2) | $ | 348,448 | $ | 324,647 | 106.96 | $ | 2,000,000 |
(1) Ms. Belzer was acting Chief Executive Officer of SGRP through February, 2021.
(2) Mr. Matacunas became Chief Executive Office of SGRP on February 22, 2021.
(3) Amount includes non-cash compensation respecting certain stock-based awards adjusted for changes in equity award values.
Potential Severance Payments upon a Change-In-ControlSPAR Group, Inc. and TerminationSubsidiaries
Notes to Consolidated Financial Statements (continued)
In order to retain and motivate certain highly qualified executives in the event of a "Change-in-Control", the Corporation entered into separate Change of Control Severance Agreements (each a "CICSA") with Messrs. Michael R. Matacunas, Antonio Calisto Pato, William Linnane, Ron Lutz and Ms. Kori Belzer. Ms. Fay DeVriese had a CICSA which ended and was released as part of her departure.
Each CICSA provides that the applicable executive will receive a lump sum severance payment if both: (1) a "Change in Control" occurs; and (2) within the "Protected Period" the executive is terminated other than in a "Termination For Cause". The Protected Period is equal to the Term or 24 months from the then most recent Change in Control. The term is 36 months and automatically extends daily for another day unless the Corporation gives notice of non-renewal (in which case the Term ends on the third anniversary of such notice). The CICSA severance payment is equal to the sum of: (i) two (2) (Mr. Matacunas), or one (1) times the executive's annual salary plus (ii) the maximum bonus paid to such executive in either of the last two (2) years.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth unexercised options, unvested stock options and certain related information for each Named Officer outstanding as of December 31, 2022.
Stock Option Awards
Name |
Grant Date | Number of Securities Underlying Unexercised Options Exercisable at 12/31/22 (#) | Number of Securities Underlying Unexercised Options Not Exercisable at 12/31/22 (#) |
Option Price ($) |
Option Date |
Kori Belzer | 08/06/13 | 35,000 | -- | $ 2.14 | 08/06/23 |
05/07/17 | 6,250 | --(1) | $ 0.90 | 05/17/27 | |
05/03/18 | 15,000 | 5,000(1) | $ 1.23 | 05/03/28 | |
04/05/19 | -- | 12,500(2) | $ 0.64 | 04/05/29 | |
Fay DeVriese | 08/31/20 | -- | 150,000(3) | $ 0.85 | 08/31/30 |
William Linnane | -- | -- | -- | -- | -- |
Ron Lutz | -- | -- | -- | -- | -- |
Michael Matacunas | 02/22/21 | -- | 630,000(1) | $ 1.90 | 02/22/31 |
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Compensation of Directors
The following table sets forth all compensation costs of the Corporation for services rendered to it by its directors (other than any Named Officer), and certain other amounts that may have been received by or allocated to them, for the year ended December 31, 2022. The Corporation has not given restricted stock unit awards to its directors and does not have pension plans or non-qualified deferred compensation plans for its directors, so those columns have been omitted.
Name |
Year | Fees Earned or Paid in Cash ($) |
RSU and Option Awards ($)(1) |
All Other Compensation ($) |
Total ($) |
William H. Bartels (7) (8) | 2022 | 180,000 | -- | -- | 180,000 |
James R. Brown, Sr. (2) | 2022 | 56,243 | -- | -- | 56,243 |
Peter W. Brown (5) | 2022 | 131,613 | -- | -- | 131,613 |
Robert G. Brown (8) | 2022 | 132,726 | -- | -- | 132,726 |
Panagiotis N. Lazaretos (6) | 2022 | -- | -- | -- | -- |
Michael Wager (3) | 2022 | 142,500 | -- | -- | 142,500 |
Sean M. Whelan (4) | 2022 | 140,000 | -- | -- | 140,000 |
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Discussion of Directors' Compensation
The Compensation Committee administers the compensation of directors pursuant to SGRP's Director Compensation Plan for its outside Directors, as approved and amended by the Committee from time to time (the "Directors Compensation Plan"), as well as the compensation for SGRP's executives. The Directors Compensation Plan was modified in the March 16, 2017, quarterly meeting of the Compensation Committee, effective April 1, 2017.
Under the Directors Compensation Plan taking effect for all periods on and after April 1, 2017: (i) each Independent Director and Non- Employee Director is entitled to receive director's fees of $55,000 per annum and a one-time cash fee of $75,000 for 2022; (ii) each applicable Independent Director is entitled to receive for chairing the applicable committee an additional $10,000 per annum fee in the case of the Audit Committee Chairman; and (iii) an additional $7,500 per annum fee in the case of the Chairman of each of the Governance or Compensation Committees in each case payable quarterly in cash. The Compensation Committee in May 2018 approved total compensation of $90,000 per year for the Corporation's Chairman.
In addition to their cash compensation, in the past, each Independent Director received options to purchase 10,000 SGRP Shares upon acceptance of the directorship, options to purchase 10,000 additional SGRP Shares after one (1) year of service, and options to purchase 10,000 additional SGRP Shares for each additional year of service thereafter (typically granted by the Corporation at the regularly scheduled board meeting which coincided with the Annual Meeting). All such options have an exercise price equal to 100% of the fair market value of a SGRP Share at the date of grant and prior to 2020 vested 100% on the first anniversary of the Award's grant date and for grants in 2020 or later over four (4) years, with one fourth of the original grant amount vesting on each anniversary of the grant date, if the Participant 's relationship as a director of SGRP or employee of the Company has not terminated by such anniversary.
All stock options and restricted stock awards to Independent Directors have been granted under the 2018 Plan and Prior Plans, under which each member of the Board is eligible to participate. Independent Directors will be reimbursed for all reasonable expenses incurred during the course of their duties. There is no additional compensation for committee participation, phone meetings, or other Board activities.
Compensation Plans
Equity Compensation Plans
The following table contains a summary of the number of shares of Common Stock of SGRP to be issued upon the vesting of the RSU's (if SGRP elects to issue shares instead of paying cash) or the exercise of stock options outstanding at December 31, 2022, under the Inducement Plans, 2020 Plan, 2018 Plan, 2008 Plan and the Prior Plans, the weighted-average exercise price of those outstanding stock options, and the number of additional shares of Common Stock remaining available for future issuance of stock options and other stock-based awards.
Equity Compensation Plan Information
Plan Category |
Number of securities to be issued upon exercise of outstanding stock options and stock rights (#) |
Weighted average exercise price of outstanding stock options and stock rights ($) | Number of securities remaining available for future issuance of options, rights and other stock- based awards (#) |
Equity compensation plans approved by security holders: | |||
2008 Plan | 691,162 | 1.53 | – |
2018 Plan | 160,000 | .93 | – |
2020 Plan | 385,000 | 1.55 | – |
CFO Option Inducement | 150,000 | .85 | – |
CEO Option Inducement | 630,000 | 1.90 | – |
CEO RSU Inducement | 26,315 | 1.90 | – |
CEO RSU Inducement | 89,286 | 1.12 | – |
Inducement Stock Based Award Summary10. Related Party Transactions (continued)
On August 2, 2021, as an inducement to Ron Lutz to become the Corporation's Chief Global Commercial Officer, the
The Corporation granted to Mr. Lutz's RSU Awards issued and effective on that date havingprepared a fair market value of $50,000 (representing 26,882 SGRP Shares at $1.86 per share) as of that date and vesting in one (1) year. On August 2, 2022 those RSUs automatically vested and converted and became payable either, at the option of SGRP, in cash or SGRP's Common Stock issued directly from SGRP. On September 30, 2022, SGRP elected to issue Common Stock in a letter to Mr. Lutz, giving rise to Mr. Lutz's right to receive such Common Stock but no exercise price or other payment for such shares was required.
On August 2, 2021, as an inducement to William Linnane to become the Corporation's Chief Strategy and Growth Officer, the Corporation granted to Mr. Linnane RSU Awards issued and effective on that date having a fair market value of $50,000 (representing 26,882 SGRP Shares at $1.86 per share) as of that date and vesting in one (1) year. On August 2, 2022, those RSUs automatically vested and converted and became payable either, at the option of SGRP, in cash or SGRP's Common Stock issued directly from SGRP. On September 30, 2022, SGRP elected to issue Common Stock in a letter to Mr. Linnane, giving rise to Mr. Linnane 's right to receive such Common Stock but no exercise price or other payment for such shares was required.
On February 22, 2021, Michael R. Matacunas received the following inducement awards approved by SGRP's (the Issuer) Board of Directors for:
1. Options to purchase 630,000 shares of the Common Stock of the Issuer at an exercise price of $1.90 per share (which was the market price on February 22, 2021, the date the options were issued). Subject to certain conditions (including Mr. Matacunas' continued employment by the Issuer at such time), the options were scheduled to automatically vest in one year. On February 22, 2022, the options automatically vested and became exercisable at the option of the Reporting Person, which requires notice and payment of $1.90 per share to SGRP to effect such exercise. The options automatically expire on February 22, 2031.
2. Restricted Stock Units (RSUs) for $50,000 of shares of SGRP's Common Stock representing 26,315 shares of SGRP's Common Stock based on the market price of $1.90 per share on February 22, 2021 (the RSU issuance date). On February 22, 2022, those RSUs automatically vested and converted and became payable either, at the option of SGRP, in cash or SGRP's Common Stock issued directly from SGRP. On September 30, 2022, SGRP elected to issue Common Stock in a letter to Mr. Matacunas, giving rise to Mr. Matacunas' right to receive such Common Stock but no exercise price or other payment for such shares was required.
3. RSUs for $100,000 of shares of SGRP's Common Stock issuable on May 15 of each year he remains employed by SGRP, commencing in 2022. On May 15, 2022, Mr. Matacunas automatically received from SGRP for RSUs for 89,286 shares of the SGRP's Common Stock based on the market price of $1.12 per share on May 13, 2022 (the last trading day preceding the RSU issuance date). Subject to certain conditions (including Mr. Matacunas' continued employment by the Issuer at such time), those RSUs (and each of the anniversary issuances) are scheduled to automatically vest one year after their May 15 issuance and convert and become payable either (at the option of SGRP) in cash or Common Stock issued directly from the Issuer, but no exercise price or other payment for such shares is required.
On August 31, 2020, as an inducement to Fay DeVriese to become the Corporation's Chief Financial Officer, Treasurer and Secretary, the Corporation granted to Ms. DeVriese an Award consisting of nonqualified options to acquire 200,000 SGRP shares at $0.85 per share, vesting twenty-five percent (25%) of the total number of shares of Common Stock subject hereto on August 31, 2021, and the balance of the Option shall thereafter were to have vested and become exercisable in a series of three (3) successive equal annual installments upon the Optionee's completion of each additional year of employment over the three-year period following August 31, 2021. An additional twenty-five percent (25%) of the total number of shares of Common Stock subject to such option vested on August 31, 2022. The remaining unvested balance of the fifty percent (50%) of shares subject to such options expired when Ms. DeVriese left employment with the Company on February 27, 2023. None of Ms. DeVriese's vested options have been exercised.
2021 Plan
On June 4, 2021, the Board and the Board's Compensation Committee (the "Compensation Committee") approved the revised proposed 2021 Stock Compensation Plan of SPAR Group, Inc. (the "2021 Plan") for submission, approval and ratification by the Corporation's stockholders at their Annual Meeting on August 12, 2021. At that meeting, the 2021 Plan was ratified and approved by the Corporation's stockholders and became effective immediately on August 12, 2021 (the "2021 Plan Effective Date"), through May 31, 2022 (the "2021 Plan Period"). The 2021 Plan terminated on May 31, 2022.
The 2021 Plan provides for the issuance ofwould have included Awards for NQSOs and RSUs (as defined below) respecting shares, but that plan was never submitted to its shareholders for approval. However, the Board had previously approved, for certain key executives, incentive stock based awards for 2022 using RSUs or cash. Since there were no plan based RSUs available, those executives instead received deferred compensation.
On and effective as of March 24, 2022, the Corporation issued an award of 111,111 Phantom Stock Units to each of its executives: Kori G. Belzer; William Linnane; and Ron Lutz. Each Phantom Stock Unit represents the right of the grantee to receive cash payments based on the fair market value of SGRP's Common Stock ("SGRP Shares") covering up to a total of 400,000 SGRP Shares ("Maximum Award") under the 2021 Plan ("New Awards") to, in or otherwise respecting SGRP Shares ("New Award Shares") so long as the New Award Shares covered by each proposed New Award or group of New Awards in the aggregate (NQSOs plus RSUs) do not at the time of vesting. Vesting will occur in three tranches of one-third each over the proposed issuance exceedthree (3) year period following the Maximum AwardGrant Date, provided that (i) the Grantee is an employee of the Company at the time and (ii) the RSU component does Corporation has achieved 90% of the agreed upon the applicable financial target for the year commencing with 2022 (which was EBITDA for 2022), but tranches will rollover to the following year and be payable upon achievement of 120% of the agreed upon the applicable financial target for such following year. The Phantom Stock Units do not exceed 150,000 New Award Shares. possess the rights of common stockholders of the Corporation, including any voting or dividend rights, and cannot be exercised or traded for the SGRP's Common Stock. Due to the cash settlement feature, the Phantom Stock Units are classified as liabilities in accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheet. Accrued expenses and other current liabilities on the Consolidated Balance Sheet included $555 thousand and $0 related to Phantom Stock Units as of December 31, 2023 and December 31, 2022, respectively.
No Option Awards were granted in 2022 or 2021Other Related Party Transactions and Arrangements
SPAR Business Services, Inc. ("SBS"), and SPAR InfoTech, Inc. ("Infotech"), are related parties and affiliates of SGRP, but are not under the 2021 Plan.control or part of the consolidated Company. SBS is an affiliate and related party because it is owned by SBS LLC, which in turn is beneficially owned by Robert G. Brown, Director and significant shareholder of SGRP. Infotech is an affiliate and related party because it is owned principally by Robert G. Brown. SPAR Administrative Services, Inc. ("SAS"), is a related party and affiliate of SGRP, but is not under the control or part of the consolidated Company. SAS is an affiliate and related party because it is beneficially owned by William H Bartels (a Director and significant stockholder of SGRP) and family members of Robert G. Brown. See Change of Controls, Voting and Restricted Stock Agreement, above.
In July 1999 SMF, SBS and Infotech entered into a perpetual software ownership agreement providing that each party independently owned an undivided share of, and has the right to unilaterally license and exploit, certain portions of the Company's proprietary scheduling, tracking, coordination, reporting and expense software and each of SBS and Infotech entered into non-exclusive royalty-free licenses from the Company to use certain "SPAR" trademarks in the United States. SAS uses the "SPAR name through the SBS License.
11. Share Based Compensation
As of December 31, 2021, RSU Awards covering 58,011 SGRP Shares had been2023, the Company has outstanding stock options and unvested restricted stock units granted under the 2021its 2008 Stock Compensation Plan, 2018 Stock Compensation Plan, 2020 Stock Compensation Plan and no RSU Awards were granted in 20222021 Stock Compensation Plan, which generally permitted stock-based awards under terms determined by the 2021 Plan. RSU Awards covering 14,502. SGRP Shares granted under the 2021 Plan vested during 2022, which the Corporation electedCompany’s board of directors. Stock options and RSUs generally provided for vesting over service periods of one to satisfy through the issuance of SGRP Shares, and RSU Awards covering 29,004 SGRP Shares granted under the 2021 Plan remained unvested at December 31, 2022.
Option Awards under the 2021 Plan expirefour years, with option exercise prices generally equal to fair market value on the fifth anniversary of grant or sooner as provided in the 2021 Plan, whether or not vested. Once vested under the 2021 Plan, RSU Awards do not expire. Under the 2021 Plan: (i) each stock option Award must vest over a four-year period following the date of grant in four (4) equal amounts annually starting on the first anniversarygrant. As of the grant date; (ii) any RSU Award granted to an employee shall vest over a three-year period following the date of grant annually in three (3) equal amounts starting on the first anniversary of the RSU grant date; and (iii) any RSU Award granted to a Director shall vest over a one-year period following the date of grant in four (4) equal amounts quarterly with one (1) installment vesting at the end of each three-month period following the date of the RSU grant date.
2020 Plan
The Board authorized and approved the revised proposed 2020 stock compensation plan of SGRP (the "December 31, 2023, 2020 Planno"), which was submitted to and approved by SGRP's stockholders at the Special Meeting of SGRP's stockholders on January 19, 2021 (the "2020 Plan Effective Date"). The 2020 Plan became effective immediately upon such approval.
The 2020 Plan: (a) has a four-month term from the 2020 Plan Effective Date (as defined below) through May 1, 2021 (the "2020 Plan Period"); and (b) provides for the issuance of "non-qualified" option awards to purchase further shares of SGRP's Common Stock ("SGRP Shares") aggregating: (i) 550,000 SGRP Shares; plus (ii) 50,000 SGRP Shares for each of up to the first three (3) additional new Directors during the period December 1, 2020, to April 30, 2021 (for a possible total of 700,000 SGRP Shares)were available under these plans for future Awards during the 2020 Plan Periodawards. The Company also granted stock options and restricted stock units as outlined below (the "20-21 Maximum")inducements under 2020 Plan. Since one (1) new director joined the Board on the 2020 Plan Effective Date, 600,000 SGRP Shares were available for Awards on the 2020 Plan Effective Date.
The 2020 Plan required the Corporation to issue as of the plan effective date new awards for options to purchase: (i) an aggregate of 125,000 SGRP Shares to 19 employees (other than the Named Executive Officers) in individual amounts designated by the Board; (ii) 10,000 SGRP Shares to each of Panagiotis N. Lazaretos, Igor Novgorodtsev, Robert G. Brown and Arthur H. Baer (each a director); and (iii) 50,000 SGRP Shares to each member of the Board of Directors on the Effective Date of the Plan. Those options were granted by the Board on February 4, 2021. The 2020 Plan was terminated on May 1, 2021, and no further options were granted under it.contracts with selected executives.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
Stock options
2008Plan Summary
2008 Plan Stock option award activity for the years ended December 31, 2022 2023 and 20212022 is summarized below for the periods presented:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2021 | 1,457,936 | $ | 1.31 | 3.63 | $ | 113 | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | 679,062 | 1.08 | – | 295 | ||||||||||||
Forfeited or expired | (87,712 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2021 | 691,162 | $ | 1.53 | 2.60 | $ | 72 | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised | 57,500 | 1.07 | – | 10 | ||||||||||||
Forfeited or expired | (120,562 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 513,100 | $ | 1.63 | 2.16 | $ | 68 | ||||||||||
Exercisable at December 31, 2022 | 513,100 | $ | 1.63 | 2.15 | $ | 68 |
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 691,162 | $ | 1.53 | 2.60 | $ | 72 | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised / cancelled | (57,500 | ) | 1.07 | – | 10 | |||||||||||
Forfeited or expired | (120,562 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 513,100 | 1.63 | 2.16 | 68 | ||||||||||||
Granted | – | – | ||||||||||||||
Exercised / cancelled | – | – | ||||||||||||||
Forfeited or expired | (291,100 | ) | 2.10 | |||||||||||||
Outstanding at December 31, 2023 | $ | 222,000 | $ | 1.01 | 3.27 | $ | 12 | |||||||||
Exercisable at December 31, 2023 | 222,000 | $ | 1.01 | 3.27 | $ | 12 |
The Company recognized no stock-based compensation expense relating to stock option awards during the years ended December 31, 2023 and 2022.
2018Plan Summary
2018 Plan Stock option award activity for the years ended December 31, 2023 and 2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 160,000 | $0.93 | 6.82 | $31 | ||||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | (12,500 | ) | 0.76 | – | 8 | |||||||||||
Forfeited or expired | (2,500 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 145,000 | $0.94 | 5.79 | $52 | ||||||||||||
Granted | – | – | ||||||||||||||
Exercised | – | – | ||||||||||||||
Forfeited or expired | – | – | ||||||||||||||
Outstanding at December 31, 2023 | 145,000 | $0.94 | 4.79 | $26 | ||||||||||||
Exercisable at December 31, 2023 | 145,000 | $0.94 | 4.79 | $26 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
No stock options were granted in 2023 under the 2018 Plan. The total intrinsic value of stock options awards exercised during the year ended December 31, 2023 and 2022 was $0 and $13,000$8,000, respectively.
The Company recognized $1,000 and $6,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2022 2023 and 2021,2022, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2022 2023 and 2021,2022 was approximately $0 and $3,000,$2,000, respectively.
As of December 31, 2022, total2023, there was no unrecognized stock-based compensation expense related to stock options was $0.granted under the 2018 Plan.
2018 2020Plan Summary
20182020 Plan Stock option award activity for the years ended December 31, 2022 2023 and 20212022 are summarized below:
Weighted- | Weighted- | |||||||||||||||||||||||||||||||
Weighted- | Average | Aggregate | Weighted- | Average | Aggregate | |||||||||||||||||||||||||||
Average | Remaining | Intrinsic | Average | Remaining | Intrinsic | |||||||||||||||||||||||||||
Exercise | Contractual | Value | Exercise | Contractual | Value | |||||||||||||||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | Shares | Price | Term (Years) | (thousands) | ||||||||||||||||||||||||
Outstanding at January 1, 2021 | 430,000 | $ | 0.90 | 7.87 | $ | 8 | ||||||||||||||||||||||||||
Outstanding at January 1, 2022 | 385,000 | $1.55 | 4.10 | $- | ||||||||||||||||||||||||||||
Granted | – | - | – | – | – | – | – | – | ||||||||||||||||||||||||
Exercised/cancelled | 230,000 | 0.85 | – | 235 | – | – | – | – | ||||||||||||||||||||||||
Forfeited or expired | (40,000 | ) | – | – | – | (10,000 | ) | – | – | – | ||||||||||||||||||||||
Outstanding at December 31, 2021 | 160,000 | $ | 0.93 | 6.82 | $ | 31 | ||||||||||||||||||||||||||
Outstanding at December 31, 2022 | 375,000 | $1.55 | 3.10 | $- | ||||||||||||||||||||||||||||
Granted | – | – | – | – | – | |||||||||||||||||||||||||||
Exercised | 12,500 | 0.76 | – | 8 | – | |||||||||||||||||||||||||||
Forfeited or expired | (2,500 | ) | - | – | – | (20,000 | ) | – | – | – | ||||||||||||||||||||||
Outstanding at December 31, 2022 | 145,000 | $ | 0.94 | 5.79 | $ | 52 | ||||||||||||||||||||||||||
Exercisable at December 31, 2022 | 135,000 | $ | 0.98 | 5.64 | $ | 44 | ||||||||||||||||||||||||||
Outstanding at December 31, 2023 | 355,000 | $1.55 | 2.10 | $- | ||||||||||||||||||||||||||||
Exercisable at December 31, 2023 | 177,500 | $1.55 | 2.10 | $- |
No stock options were granted in 20222023 under the 20182020 Plan. The total intrinsic value of stock optionsoption awards exercised during the yearyears ended December 31, 2022 2023 and 20212022 was $8,000 and $235,000, respectively.$0.
The Company recognized $6,000$47,000 and $23,000$58,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2022 2023 and 2021,2022, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2022 2023 and 20212022 was approximately $2,000$12,000 and $6,000,$15,000, respectively.
As of December 31, 2022, there was no unrecognized stock-based compensation expense related to stock options granted under the 2018 Plan.
2020 Plan Summary
Following are the specific valuation assumptions used for options granted in 2021 for the 2020 Plan:
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2020 Plan Stock option award activity for the years ended December 31, 2022 and 2021 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2021 | – | $ | – | – | $ | – | ||||||||||
Granted | 565,000 | 1.55 | 4.10 | – | ||||||||||||
Exercised/cancelled | – | – | – | – | ||||||||||||
Forfeited or expired | (180,000 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2021 | 385,000 | $ | 1.55 | 4.10 | $ | – | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised | – | – | – | – | ||||||||||||
Forfeited or expired | (10,000 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 375,000 | $ | 1.55 | 3.10 | $ | – | ||||||||||
Exercisable at December 31, 2022 | 91,250 | $ | 1.55 | 3.10 | $ | – |
No stock options were granted in 2022 under the 2020 Plan. The total intrinsic value of stock option awards exercised during the years ended December 31, 2022 and 2021 was $0.
The Company recognized $58,000 and $57,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2022 and 2021, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2022 and 2021 was approximately $15,000 and $16,000, respectively.
As of December 31, 2022, 2023, total unrecognized stock-based compensation expense related to stock options was $121,000.$58,000. This expense is expected to be recognized over a weighted average period of approximately 2.11.1 years.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
CFO Inducement Award Stock OptionPlan Summary
CFO Inducement Award stockPlan Stock option award activity for the years ended December 31, 2022 2023 and 20212022 are summarized below:
Weighted- | Weighted- | |||||||||||||||||||||||||||||||
Weighted- | Average | Aggregate | Weighted- | Average | Aggregate | |||||||||||||||||||||||||||
Average | Remaining | Intrinsic | Average | Remaining | Intrinsic | |||||||||||||||||||||||||||
Exercise | Contractual | Value | Exercise | Contractual | Value | |||||||||||||||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | Shares | Price | Term (Years) | (thousands) | ||||||||||||||||||||||||
Outstanding at January 1, 2021 | 200,000 | $ | 0.85 | 9.67 | $ | 60.00 | ||||||||||||||||||||||||||
Outstanding at January 1, 2022 | 150,000 | 0.85 | 8.67 | 57 | ||||||||||||||||||||||||||||
Granted | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Exercised/cancelled | 50,000 | 0.85 | – | – | (50,000 | ) | 0.85 | – | – | |||||||||||||||||||||||
Forfeited or expired | – | – | – | – | – | – | – | – | ||||||||||||||||||||||||
Outstanding at December 31, 2021 | 150,000 | $ | 0.85 | 8.67 | $ | 57 | ||||||||||||||||||||||||||
Outstanding at December 31, 2022 | 100,000 | $ | 0.85 | 7.67 | $ | 45 | ||||||||||||||||||||||||||
Granted | – | – | – | – | ||||||||||||||||||||||||||||
Exercised | 50,000 | 0.85 | – | – | ||||||||||||||||||||||||||||
Forfeited or expired | – | – | – | – | (100,000 | ) | $ | 0.85 | – | – | ||||||||||||||||||||||
Outstanding at December 31, 2022 | 100,000 | $ | 0.85 | 7.67 | $ | 45 | ||||||||||||||||||||||||||
Exercisable at December 31, 2022 | – | $ | – | – | $ | – | ||||||||||||||||||||||||||
Outstanding at December 31, 2023 | $ | - | $ | - | $ | - | $ | - | ||||||||||||||||||||||||
Exercisable at December 31, 2023 | $ | - | $ | - | $ | - | $ | - |
CEO Inducement Award Stock Option Summary
Following are the specific valuation assumptions used for the stock option awards granted in 2021 for the CEO Inducement Award:
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CEO Inducement Award stock option activity for the years ended December 31, 2022 and 2021 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2021 | – | $ | – | – | $ | – | ||||||||||
Granted | 630,000 | 1.90 | 9.15 | – | ||||||||||||
Exercised/cancelled | – | – | – | – | ||||||||||||
Forfeited or expired | – | – | – | – | ||||||||||||
Outstanding at December 31, 2021 | 630,000 | $ | 1.90 | 9.15 | $ | – | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised | – | – | – | – | ||||||||||||
Forfeited or expired | – | – | – | – | ||||||||||||
Outstanding at December 31, 2022 | 630,000 | $ | 1.90 | 8.15 | $ | – | ||||||||||
Exercisable at December 31, 2022 | 630,000 | $ | 1.90 | 8.15 | $ | – |
No stock options were granted in 2022 under the CEO Inducement Award. The total intrinsic value of stock option awards exercised during the years ended December 31, 2022 and 2021 was $0.
The Company recognized $85,000 and $509,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2022 and 2021, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2022 and 2021, was $21,000 and $126,000, respectively.
As of December 31, 2022, 2023,
CEO InducementSummary of Certain Related Party Transactions
The following costs of affiliates were charged to the Company (in thousands):
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Services provided by affiliates: | ||||||||
National Remodel & Setup Services (NRSS) (1) | $ | 5,173 | $ | 8,565 | ||||
Consulting and administrative services (RJ Holdings) (2) | 472 | 477 | ||||||
Office lease expenses (RJ Holdings) (2) | 8 | 248 | ||||||
Consulting and administrative fees (SPARFACTS) (2) | 112 | 431 | ||||||
Other (2) | 178 | 157 | ||||||
Total services provided by affiliates | $ | 5,943 | $ | 9,878 |
Due to affiliates consists of the following (in thousands): | December 31, | |||||||
2023 | 2022 | |||||||
Loans from local investors:(3) | ||||||||
China | $ | 2,316 | $ | 1,382 | ||||
Mexico | 623 | 623 | ||||||
Australia | - | 693 | ||||||
Resource Plus | 266 | 266 | ||||||
Total due to affiliates | $ | 3,205 | $ | 2,964 |
(1) Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms and are due on demand.
(2) These expenses are reflected in "Selling, general, and administrative expense" expense in the consolidated statements of operations and comprehensive (loss) income.
(3) Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms and are due on demand.
Bartels' Retirement and Director Compensation
William H. Bartels retired as an employee of the Company as of January 1, 2020. However, he continues to serve as a member of SPAR's Board. Mr. Bartels is also one of the founders and a significant stockholder of SGRP.
Effective as of January 18, 2020, SPAR's Governance Committee proposed and unanimously approved retirement benefits for the five-year period commencing January 1, 2020, and ending December 31, 2024 (the "Five-Year Period"), for Mr. Bartels. The aggregate value of benefits payable to Mr. Bartels is approximately $220,558 per year and a total of $1,102,790 for the Five-Year Period. The Company recognized $700,000 of retirement benefits during the year ended December 31, 2020, representing the present value of the future Retirement Compensation, Supplemental Fees and Medical Benefits payments due Mr. Bartels. As of December 31, 2023 $200,923 of retirement benefits remains outstanding and is included within Accrued expenses and other current liabilities on the consolidated balance sheets.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
The Corporation prepared a 2022 Stock Compensation Plan that would have included Awards for NQSOs and RSUs (as defined below), but that plan was never submitted to its shareholders for approval. However, the Board had previously approved, for certain key executives, incentive stock based awards for 2022 using RSUs or cash. Since there were no plan based RSUs available, those executives instead received deferred compensation.
On and effective as of March 24, 2022, the Corporation issued an award of 111,111 Phantom Stock Units to each of its executives: Kori G. Belzer; William Linnane; and Ron Lutz. Each Phantom Stock Unit represents the right of the grantee to receive cash payments based on the fair market value of SGRP's Common Stock at the time of vesting. Vesting will occur in three tranches of one-third each over the three (3) year period following the Grant Date, provided that (i) the Grantee is an employee of the Company at the time and (ii) the Corporation has achieved 90% of the agreed upon the applicable financial target for the year commencing with 2022 (which was EBITDA for 2022), but tranches will rollover to the following year and be payable upon achievement of 120% of the agreed upon the applicable financial target for such following year. The Phantom Stock Units do not possess the rights of common stockholders of the Corporation, including any voting or dividend rights, and cannot be exercised or traded for the SGRP's Common Stock. Due to the cash settlement feature, the Phantom Stock Units are classified as liabilities in accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheet. Accrued expenses and other current liabilities on the Consolidated Balance Sheet included $555 thousand and $0 related to Phantom Stock Units as of December 31, 2023 and December 31, 2022, respectively.
Other Related Party Transactions and Arrangements
SPAR Business Services, Inc. ("SBS"), and SPAR InfoTech, Inc. ("Infotech"), are related parties and affiliates of SGRP, but are not under the control or part of the consolidated Company. SBS is an affiliate and related party because it is owned by SBS LLC, which in turn is beneficially owned by Robert G. Brown, Director and significant shareholder of SGRP. Infotech is an affiliate and related party because it is owned principally by Robert G. Brown. SPAR Administrative Services, Inc. ("SAS"), is a related party and affiliate of SGRP, but is not under the control or part of the consolidated Company. SAS is an affiliate and related party because it is beneficially owned by William H Bartels (a Director and significant stockholder of SGRP) and family members of Robert G. Brown. See Change of Controls, Voting and Restricted Stock Agreement, above.
In July 1999 SMF, SBS and Infotech entered into a perpetual software ownership agreement providing that each party independently owned an undivided share of, and has the right to unilaterally license and exploit, certain portions of the Company's proprietary scheduling, tracking, coordination, reporting and expense software and each of SBS and Infotech entered into non-exclusive royalty-free licenses from the Company to use certain "SPAR" trademarks in the United States. SAS uses the "SPAR name through the SBS License.
11. Share Based Compensation
As of December 31, 2023, the Company has outstanding stock options and unvested restricted stock units granted under its 2008 Stock Compensation Plan, 2018 Stock Compensation Plan, 2020 Stock Compensation Plan and 2021 Stock Compensation Plan, which generally permitted stock-based awards under terms determined by the Company’s board of directors. Stock options and RSUs generally provided for vesting over service periods of one to four years, with option exercise prices generally equal to fair market value on the date of grant. As of December 31, 2023, no further shares were available under these plans for future awards. The Company also granted stock options and restricted stock units as inducements under contracts with selected executives.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
Stock options
2008 Award RSUPlan Summary
The following table summarizes the2008 Plan Stock option award activity for Restricted Stock Unit (RSU) CEOthe years ended December 31, 2023 and 2022 is summarized below for the periods presented:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 691,162 | $ | 1.53 | 2.60 | $ | 72 | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised / cancelled | (57,500 | ) | 1.07 | – | 10 | |||||||||||
Forfeited or expired | (120,562 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 513,100 | 1.63 | 2.16 | 68 | ||||||||||||
Granted | – | – | ||||||||||||||
Exercised / cancelled | – | – | ||||||||||||||
Forfeited or expired | (291,100 | ) | 2.10 | |||||||||||||
Outstanding at December 31, 2023 | $ | 222,000 | $ | 1.01 | 3.27 | $ | 12 | |||||||||
Exercisable at December 31, 2023 | 222,000 | $ | 1.01 | 3.27 | $ | 12 |
The Company recognized no stock-based compensation expense relating to stock option awards during the years ended December 31, 2022 2023 and 2021:2022.
Weighted- | ||||||||
Average | ||||||||
Grant Date | ||||||||
Fair Value | ||||||||
Shares | per Share | |||||||
Unvested at January 1, 2021 | – | $ | – | |||||
Granted | 138,090 | 1.87 | ||||||
Vested | – | – | ||||||
Forfeited | – | – | ||||||
Unvested at December 31, 2021 | 138,090 | $ | 1.85 | |||||
Granted | - | – | ||||||
Vested | 99,415 | 1.86 | ||||||
Forfeited | – | – | ||||||
Unvested at December 31, 2022 | 38,675 | $ | 1.81 |
2018Plan Summary
During2018 Plan Stock option award activity for the years ended December 31, 2022 2023 and 2021,2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 160,000 | $0.93 | 6.82 | $31 | ||||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | (12,500 | ) | 0.76 | – | 8 | |||||||||||
Forfeited or expired | (2,500 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 145,000 | $0.94 | 5.79 | $52 | ||||||||||||
Granted | – | – | ||||||||||||||
Exercised | – | – | ||||||||||||||
Forfeited or expired | – | – | ||||||||||||||
Outstanding at December 31, 2023 | 145,000 | $0.94 | 4.79 | $26 | ||||||||||||
Exercisable at December 31, 2023 | 145,000 | $0.94 | 4.79 | $26 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
No stock options were granted in 2023 under the2018 Plan. The total intrinsic value of stock options awards exercised during the year ended December 31, 2023 and 2022 was $0 and $8,000, respectively.
The Company recognized approximately $101,000$1,000 and $87,000, respectively, of$6,000 in stock-based compensation expense relatedrelating to RSUs.stock option awards during the years ended December 31, 2023 and 2022, respectively. The recognized tax benefit on stock-based compensation expense related to RSUsstock options during the years ended December 31, 2022 2023 and 20212022 was approximately $25,000$0 and $21,000, respectively.
During the years ended December 31, 2022 and 2021, the total fair value of RSUs vested was $120,000 and $0$2,000, respectively.
As of December 31, 2023, there was no unrecognized stock-based compensation expense related to stock options granted under the 2018 Plan.
2020Plan Summary
2020 Plan Stock option award activity for the years ended December 31, 2023 and 2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 385,000 | $1.55 | 4.10 | $- | ||||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | – | – | – | – | ||||||||||||
Forfeited or expired | (10,000 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 375,000 | $1.55 | 3.10 | $- | ||||||||||||
Granted | – | |||||||||||||||
Exercised | – | |||||||||||||||
Forfeited or expired | (20,000 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2023 | 355,000 | $1.55 | 2.10 | $- | ||||||||||||
Exercisable at December 31, 2023 | 177,500 | $1.55 | 2.10 | $- |
No stock options were granted in 2023 under the 2020 Plan. The total intrinsic value of stock option awards exercised during the years ended December 31, 2023 and 2022 was $0.
The Company recognized $47,000 and $58,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2023 and 2022, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2023 and 2022 was approximately $12,000 and $15,000, respectively.
As of December 31, 2023, total unrecognized stock-based compensation expense related to unvested RSUs awardsstock options was $56,000.$58,000. This expense is expected to be recognized over a weighted average period of approximately 1.61.1 years.
Share-Based Compensation Expense
Share-based compensation expense for the years ended December 31, 2022 and 2021 was $346,000 and $711,000, respectively.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
Employee Stock Purchase PlansCFO InducementPlan Summary
In 2001, SGRP adopted its 2001 EmployeeCFO Inducement Plan Stock Purchase Plan (the "ESP Plan"), which replaced its earlier existing plan, option award activity for the years ended December 31, 2023 and its 2001 Consultant Stock Purchase Plan (the "CSP Plan"). These plans2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 150,000 | 0.85 | 8.67 | 57 | ||||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | (50,000 | ) | 0.85 | – | – | |||||||||||
Forfeited or expired | – | – | – | – | ||||||||||||
Outstanding at December 31, 2022 | 100,000 | $ | 0.85 | 7.67 | $ | 45 | ||||||||||
Granted | ||||||||||||||||
Exercised | ||||||||||||||||
Forfeited or expired | (100,000 | ) | $ | 0.85 | – | – | ||||||||||
Outstanding at December 31, 2023 | $ | - | $ | - | $ | - | $ | - | ||||||||
Exercisable at December 31, 2023 | $ | - | $ | - | $ | - | $ | - |
Audit and Compensation Committee Interlocks and Insider Participation
No member of the Board's Audit Committee, Compensation Committee or Governance Committee was at any timeoption awards exercised during the yearyears ended December 31, 2021, or at any other time an officer or employee of the Company. No executive officer of the Company or Board member (including any member of SGRP's Board, Audit Committee, Compensation Committee or Governance Committee) serves as a member of the board of directors, audit, compensation or governance committee of any other entity, except for the positions of Messrs. Brown 2023 and Bartels as directors of SGRP2022 was $0 and as directors and officers of certain of its affiliates, including SBS, SAS and Infotech (See Transactions with Related Persons, Promoters and Certain Control Persons, below).
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information regarding beneficial ownership of SGRP's Common Stock as of December 31, 2022, by: (i) each person who is known by SGRP to own beneficially more than 5% of SGRP's Common Stock; (ii) each of SGRP's directors; and (iii) each of the Named Executive Officers in the Summary Compensation Table. Except as indicated in the footnotes to this table, the persons named in the table, based on information provided by such persons, have sole voting and sole investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable.
Title of Class | Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | See Note # |
Percentage |
Common Shares | Robert G. Brown | 7,194,789 | (1) | 30.28% |
Common Shares | William H. Bartels | 5,309,214 | (1) | 22.35% |
Common Shares | Michael R. Matacunas | 645,393 | (1) (2) | 2.72% |
Common Shares | Peter W. Brown | 132,694 | (1) (3) | * |
Common Shares | Kori G. Belzer | 74,173 | (1) (4) | * |
Common Shares | James R. Brown, Sr. | 43,084 | (1) | * |
Common Shares | Fay DeVriese | 21,471 | (1) | * |
Common Shares | William Linnane | 17,909 | (1) | * |
Common Shares | Ronald Lutz | 17,678 | (1) | * |
Common Shares | Michael Wager | 12,500 | (1) | * |
Common Shares | Sean Whelan | 12,500 | (1) | * |
Common Shares | All Executives and Directors | 13,481,405 | - | 56.75% |
* Less than 1%
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Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act ("Section 16(a)") requires SGRP's directors and certain of its officers and persons who own more than 10% of SGRP's Common Stock to file reports of ownership and changes in their ownership of SGRP's Common Stock with the Commission. Insiders are required by Commission regulations to furnish SGRP with copies of all Section 16(a) forms they file. The following is a report of late Section 16(a) filings by the current officers and directors of SGRP (collectively, "Insiders").
Based solely on its review of the copies of such forms received by it for the year ended December 31, 2019 ("2019"), filings by certain Insiders during or for 2019, or written representations from such Insiders for 2019, SGRP believes that its Insiders complied with all applicable Section 16(a) filing requirements for such year, with the exception that: (i) eight (8) Form 4s were filed late by Mr. Robert G. Brown; and (ii) three (3) Form 4s were filed late by Ms. Kori G. Belzer.
Based solely on its review of the copies of such forms received by it for the year ended December 31, 2020 ("2020"), filings by certain Insiders during or for 2020, or written representations from such Insiders for 2020, SGRP believes that its Insiders complied with all applicable Section 16(a) filing requirements for such year, with the exception that: (i) one (1) Form 4 was filed late by Mr. Robert G. Brown; (ii) one (1) Form 3 was filed late by Mr. Peter W. Brown; and (iii) one (1) Form 4 was filed late by Ms. Kori G. Belzer.
Based solely on its review of the copies of such forms received by it for the year ended December 31, 2021 ("2021"), filings by certain Insiders during or for 2021, or written representations from such Insiders for 2021, SGRP believes that its Insiders complied with all applicable Section 16(a) filing requirements for such year, with the exception that: (i) four (4) Form 4s were filed late by Mr. Robert G. Brown; (ii) five (5) Form 4s were filed late by Mr. William H. Bartels; (iii) one (1) Form 3 was filed late by Mr. James R. Brown, Sr.; (iv) one (1) Form 3 was filed late by Mr. Michael Wager; (v) one (1) Form 3 was filed late by Mr. Sean Whelan; (vi) one (1) Form 3 was filed late by Mr. Michael R. Matacunas; (vii) four (4) Form 4s were filed late by Ms. Kori G. Belzer; and (viii) one (1) Form 3 was filed late by Ms. Fay DeVriese.
Based solely on its review of the copies of such forms received by it for the year ended December 31, 2022 ("2022"), filings by certain Insiders during or for 2022, or written representations from such Insiders for 2022, SGRP believes that its Insiders complied with all applicable Section 16(a) filing requirements for such year, with the exception that: (i) one (1) Form 4 was filed late by Mr. Robert G. Brown; (ii) one (1) Form 3 and one (1) Form 4 were filed late by SPAR Business Services, Inc., respecting shares beneficially owned by Mr. Robert G. Brown, and several of his Form 4s were amended in early 2023; (iii) three (3) Form 4s were filed late by Mr. William H. Bartels, which were filed in early 2023; (iv) one (1) Form 4 was filed late by Mr. Michael R. Matacunas, which was filed in early 2023; (v) two (2) Form 4s were filed late by Kori G. Belzer; (vi) one (1) Form 3 and one (1) Form 4 were filed late by Mr. William Linnane; (vii) one (1) Form 3 and one (1) Form 4 were filed late by Mr. Ronald Lutz; and (viii) three (3) Form 4s were filed late by Ms. Fay DeVriese.
All such Section 16(a) filing requirements have since been completed by each of the aforementioned Insiders.
Item 13. Certain Relationships and Related Transactions, and Director Independence
SPAR's policy respecting approval of transactions with related persons, promoters and control persons is contained in the Ethics Code (See Ethics Code, above) The Company's senior management is generally responsible for monitoring compliance with the Ethics Code and establishing and maintaining compliance systems, including those related to the oversight and approval of conflicting relationships and transactions, subject to the review and oversight of SGRP's Governance Committee as provided in Part I Sections 2, 3, 11 and 12 of the Governance Committee's Charter, and SGRP's Audit Committee as provided in Part IV Section 15 of the Audit Committee's Charter. The Governance Committee and Audit Committee each consist solely of independent directors. The 2022 By-Laws require that the Chairman of each such Committee and at least two (2) of its members be a Super Independent Director (See Item 10. Board Size, Quorum and Voting, Director Nominations: Experience, Integrity, Diversity and other Criteria, 2022 By-Laws, and Significant Stockholder Governance Limitations, above).
SPAR's Audit Committee has the specific duty and responsibility to review and approve the overall fairness to the Company and terms of all material related- party transactions and payments. The Audit Committee reviews all related party transactions, in accordance with the Audit Committee Charter, the Ethics Code, the Nasdaq rules and other applicable law to ensure that the overall economic and other terms will be (or continue to be) no less favorable to the Company than would be the case in an arms-length contract with an unrelated provider of similar services (i.e., its overall fairness to the Company, including pricing, payments to related parties and the ability to provide services at comparable performance levels).
Domestic Related Party Transactions
Mr. Robert G. Brown and Mr. William H. Bartels are directors and significant stockholders of SGRP, and thus each is a related party and affiliate of SGRP. Mr. Robert G. Brown was the Chairman of the Board of Directors of SGRP (the "Board"), but ceased to be eligible to hold that position when the 2022 By-Laws became effective on January 25, 2022. SPAR Business Services, Inc. ("SBS"), SPAR InfoTech, Inc. ("Infotech"), and SPAR Administrative Services, Inc. ("SAS"), are related parties and affiliates of SGRP, but are not under the control or part of the Company. SBS is a related party and affiliate of SGRP because it is owned by SBS LLC, which in turn is beneficially owned by Mr. Robert G. Brown. Infotech is a related party and affiliate because it is owned principally by Mr. Robert G. Brown. SAS is a related party and affiliate of SGRP because it is owned principally by Mr. William H. Bartels and entities owned by affiliates of Mr. Robert G. Brown.
Change of Control, Voting and Restricted Stock Agreement
The Change of Control, Voting and Restricted Stock Agreement (the "CIC Agreement") became effective on January 28, 2022, when signed by the Company and Robert G. Brown, ("Mr. Brown"), William H. Bartels, ("Mr. Bartels"), SPAR Administrative Services, Inc., a corporation ("SAS"), and collectively with Mr. Brown, Mr. Bartels and SAS, the ("Majority Stockholders"). Mr. Bartels and Mr. Brown are Directors of the Corporation. Mr. Brown was the Chairman of the Board of Directors of SGRP (the "Board"), but ceased holding that position when the 2022 By-Laws (as defined below) became effective on January 25, 2022.
The execution of the CIC Agreement was conditional upon making the changes to and restatement of the Corporation's 2022 By-Laws, which were approved by the Board and became effective on January 25, 2022 (the "2022 By-Laws").
The financial terms of the CIC Agreement to the Majority Stockholders, totaled $4,477,585, consisting of the following:
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Pursuant to the CIC Agreement, all actions, claims and demands between the Majority Stockholders and the Company were resolved; and the Majority Stockholders and their affiliates during the five-year term of the CIC Agreement have agreed to give up their rights to do any of the following; (i) act or attempt to act by written consent; (ii) submit or attempt to submit any stockholder proposals in advance of any annual or special stockholders meeting of the Corporation; (iii) call or attempt to call any special meetings of the Corporation's stockholders; (iv) continue or commence or attempt to continue or commence any legal claims against the Company; (v) change or attempt to change the size of the Board; (vi) appoint or remove or attempt to appoint or remove any director or officer of the Corporation, except as expressly permitted with in the CIC Agreement; (vii) amend or attempt to amend the Corporation's Certificate of Incorporation or 2022 By-Laws; and (viii) enter or attempt to enter into any agreement, arrangement or understanding with any other person in an effort to take any of those actions.
The Corporation's amended and restated 2022 By-Laws were adopted to increase the independence of the Board by making the following changes (among others): (i) the Board size was fixed at 7 and must consist of at least three (3) Super Independent Directors (as defined below) plus the CEO at all times; (ii) the Chairman, Vice Chairman and all Committee Chairpersons must qualify as Super Independent Directors ; and (iii) to establish a quorum, any Board meeting must have 70% of the Directors including the majority of Super Independent Directors. If there are less than three (3) Super Independent Directors, than the least tenured non-Super Independent Director, other than the CEO, may not vote on Board matters, which helps to ensure that the Board remains under independent governance. As defined in the 2022 By-Laws "Super Independent Director" means a member of the Board who: (1) qualifies as an independent director under applicable laws and regulations; (2) is affirmatively determined to be an independent director by the Governance Committee of the Board; (3) excludes the Majority Stockholders, Spar Administrative Services, Inc. and Spar Business Services, Inc. and any of their respective Relatives, Family Members, or Affiliates; and (4) excludes any Person that is or was a present or past employee or advisor of any company with which any of the Majority Stockholders has been involved and any Person that is, or was in the past, related or affiliated in any way to any of the Majority Stockholders, including, without limitation, any Affiliates of Innovative Global Technologies, LLC or SP/R, Inc. Defined Benefit Pension Trust.
In January 2022, for the CIC Agreement and 2022 By-Law to go into effect, two (2) of the Board members at the time, James R. Brown, Sr. and Panagiotis Lazaretos, who are affiliated with the Majority Stockholders, retired from the Board and assumed other advisory roles with the Company under separate agreements (see below).
For the current Board composition and corporate, governance, see Item 10 Directors, Executive Officers and Corporate Governance, above.
James R. Brown, Sr. Advisor Agreement
On January 25, 2022, the Corporation entered into a consulting agreement with Mr. James R. Brown, Sr., effective January 26, 2022, following his retirement as a director of SGRP on January 25, 2022, pursuant to which Mr. Brown will serve as a Board advisor to SGRP from time to time for a term of one (1) year (the "Brown Advisor Agreement"). As compensation for his services, Mr. Brown was entitled to receive compensation at a rate of $55,000 for the term of the Brown Advisor Agreement. Payments will be made in equal quarterly installments and will be pro-rated for partial quarters. This agreement has expired.
Panagiotis Lazaretos Consulting Agreement
On January 27, 2022, the Corporation entered into a consulting agreement with Thenablers, Ltd. effective February 1, 2022 (the " Lazaretos Consulting Agreement"). Thenablers, Ltd. is wholly owned by Mr. Panagiotis Lazaretos, a retired director of the Corporation. Following Mr. Lazaretos' retirement as a director on January 25, 2022, Thenablers, Ltd. agreed to provide the consulting services of Mr. Lazaretos to the Corporation regarding global sales and new markets' expansion. The Lazaretos Consulting Agreement cannot be terminated by the consent of either party for the first twelve (12) months, and automatically expires on January 31, 2024. As compensation for its services, Thenablers, Ltd. is entitled to receive: (i) base compensation at a rate of $10,000 per month for the term of the Consulting Agreement; (ii) incentive-based compensation as calculated in Exhibit A of the Lazaretos Consulting Agreement; and (iii) the outstanding options granted to Mr. Panagiotis ("Panos") N. Lazaretos on February 4, 2022 will continue to be outstanding and vest according to their terms under the agreement. As permitted by that agreement, on February 2, 2023, the Corporation gave notice that it was terminating that agreement effective July 31, 2023.
Other Domestic Related Party Transactions
National Merchandising Services, LLC ("NMS"), is a consolidated domestic subsidiary of the Company and is owned jointly by SGRP and by National Merchandising of America, Inc. ("NMA"). Mr. Edward Burdekin is the Chief Executive Officer and President and a director of NMS and also is an executive officer and director of NMA. Ms. Andrea Burdekin, Mr. Burdekin's wife, is the sole stockholder and also a director of both NMA and NMS. NMA is a related party of the Company but is not under the control of or consolidated with the Company. Mr. Burdekin's wife also owns National Store Retail Services ("NSRS"). Since September 2018 through June of 2021, NSRS provided substantially all of the domestic merchandising specialist field force used by NMS. For those services, NMS agrees to reimburse NSRS certain costs for providing those services plus a premium ranging from 4.0% to 10.0% of certain costs. Starting in July of 2021, the domestic merchandising specialist field force services provided by NSRS was transitioned to National Remodel & Setup Services, LLC ("NRSS") with the same financial arrangement. Ms. Andrea Burdekin is the owner of NRSS. NMS also leases office space from Mr. Burdekin's Personal property.
Resource Plus, is a consolidated domestic subsidiary of the Company and is owned jointly by the Company and by Mr. Richard Justus. Mr. Justus has an ownership interest in RJ Holdings which owns the buildings where Resource Plus is headquartered and operates. Both buildings are subleased to Resource Plus.
On December 1, 2021, the Corporation entered into the Agreement for Marketing and Advertising Services (the "WB Agreement") with WB Marketing, Inc. (the "Agent", and together with the Company, the "Parties"). The Agent is an entity owned and controlled by Mrs. Jean Matacunas who is the wife of President and Chief Executive Officer, Michael R. Matacunas. Mr. Matacunas is also a minority owner of the Agent. The service fees paid to WB Marketing for the year ended December 31, 2022 was $189,000.
International Related Party Services
SGRP Meridian (Pty), Ltd. ("Meridian") is a consolidated international subsidiary of the Company and is owned 51% by the Company, Mr. Adrian Wingfield, who is a Director of Meridian, is one of the owners of Merhold Holding Trust ("MHT"). MHT owns the building where Meridian is headquartered.
The Corporation's principal Brazilian subsidiary, SPAR BSMT, is owned 51% by the Company, 39% by JK Consultoria Empresarial Ltda.-ME, a Brazilian limitada ("JKC"), and 10% by Earth Investments, LLC ("EILLC"). JKC is owned by Mr. Jonathan Dagues Martins ("JDM") and his sister, Ms. Karla Dagues Martins. JDM is the Chief Executive Officer and President of SPAR BSMT and each of its subsidiaries pursuant to a Management Agreement between JDM and SPAR BSMT dated September 13, 2016. JDM also is a director of SPAR BSMT. Accordingly, JKC and JDM are each a related party respecting the Company. EILLC is owned by Mr. Peter W. Brown, who is a director of SPAR BSMT and SGRP, and who also is the nephew of Robert G. Brown.
SPARFACTS is a consolidated international subsidiary of the Company and is owned 51% by SGRP. Ms. Lynda Chapman is a director of SPARFACTS. Her various companies provide office lease, accounting and consultant services to SPARFACTS.
Summary of Certain Related Party Transactions
The following costs of affiliates were charged to the Company (in thousands):
Year Ended December 31, | Year Ended December 31, | |||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Services provided by affiliates: | ||||||||||||||||
National Store Retail Services (NSRS) (1) | $ | - | $ | 3,799 | ||||||||||||
National Remodel & Setup Services (NRSS) (1) | 8,565 | 3,484 | $ | 5,173 | $ | 8,565 | ||||||||||
Consulting and administrative services (RJ Holdings) (2) | 477 | 567 | 472 | 477 | ||||||||||||
Office lease expenses (RJ Holdings) (2) | 248 | 248 | 8 | 248 | ||||||||||||
Office and vehicle lease expenses (MPT, MCPT, MHT) (2) | - | 115 | ||||||||||||||
Consulting and administrative fees (SPARFACTS) (2) | 431 | 325 | 112 | 431 | ||||||||||||
Other (2) | 157 | 151 | 178 | 157 | ||||||||||||
Total services provided by affiliates | $ | 9,878 | $ | 8,689 | $ | 5,943 | $ | 9,878 |
Due to affiliates consists of the following (in thousands): | December 31, | December 31, | ||||||||||||||
2022 | 2021 | 2023 | 2022 | |||||||||||||
Loans from local investors:(3) | ||||||||||||||||
China | $ | 1,382 | $ | 1,784 | $ | 2,316 | $ | 1,382 | ||||||||
Mexico | 623 | 623 | 623 | 623 | ||||||||||||
Australia | 693 | 597 | - | 693 | ||||||||||||
Resource Plus | 266 | 266 | 266 | 266 | ||||||||||||
Total due to affiliates | $ | 2,964 | $ | 3,270 | $ | 3,205 | $ | 2,964 |
(1)(1) Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms and are due on demand.
(2)(2) These expenses are reflected in "Selling, general, and administrative expense" expense in the consolidated statements of operations and comprehensive (loss) income.
(3)(3) Represent loans from the local investors into the Company's subsidiaries (representing their proportionate share of working capital loans). The loans have no payment terms and are due on demand.
Bartels' Retirement and Director Compensation
William H. Bartels retired as an employee of the Company as of January 1, 2020. However, he continues to serve as a member of SPAR's Board. Mr. Bartels is also one of the founders and a significant stockholder of SGRP.
Effective as of January 18, 2020, SPAR's Governance Committee proposed and unanimously approved retirement benefits for the five-yearfive-year period commencing January 1, 2020, and ending December 31, 2024 (the "Five-Year Period"(the "Five-Year Period"), for Mr. Bartels. The aggregate value of benefits payable to Mr. Bartels is approximately $220,558 per year and a total of $1,102,790 for the Five-Year Period. The Company recognized $700,000 of retirement benefits during the year ended December 31, 2020, representing the present value of the future Retirement Compensation, Supplemental Fees and Medical Benefits payments due Mr. Bartels. As of December 31, 2022 $290,9172023 $200,923 of retirement benefits remains outstanding and is included within Accrued expenses and other current liabilities on the consolidated balance sheets.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Related Party Transactions (continued)
The Corporation prepared a 2022 Stock Compensation Plan that would have included Awards for NQSOs and RSUs (as defined below), but that plan was never submitted to its shareholders for approval. However, the Board had previously approved, for certain key executives, incentive stock-basedstock based awards for 2022 using RSUs or cash. Since there were no plan based RSUs available, those executives instead received deferred compensation.
On and effective as of March 24, 2022, the Corporation issued an award of 111,111 Phantom Stock Units to each of its executives: Kori G. Belzer; William Linnane; and Ron Lutz. Each Phantom Stock Unit represents the right of the grantee to receive cash payments based on the fair market value of SGRP's Common Stock at the time of vesting. Vesting will occur in three tranches of one-thirdone-third each over the three (3) year period following the Grant Date, provided that (i) the Grantee is an employee of the Company at the time and (ii) the Corporation has achieved 90% of the agreed upon the applicable financial target for the year commencing with 2022 (which was EBITDA for 2022)2022), but tranches will rollover to the following year and be payable upon achievement of 120% of the agreed upon the applicable financial target for such following year. The Phantom Stock Units do not possess the rights of common stockholders of the Corporation, including any voting or dividend rights, and cannot be exercised or traded for the SGRP's Common Stock. Due to the cash settlement feature, the Phantom Stock Units are classified as liabilities in accrued expenses and other current liabilities and other long-term liabilities in the consolidated balance sheet. AsAccrued expenses and other current liabilities on the Consolidated Balance Sheet included $555 thousand and $0 related to Phantom Stock Units as of December 31, 2023 and December 31, 2022, no Phantom Stock Unit had vested and performance targets are not probable of being met, therefore no expense has been recognized for these awards.respectively.
Other Related Party Transactions and Arrangements
SPAR Business Services, Inc. ("SBS"), and SPAR InfoTech, Inc. ("Infotech"), are related parties and affiliates of SGRP, but are not under the control or part of the consolidated Company. SBS is an affiliate and related party because it is owned by SBS LLC, which in turn is beneficially owned by Robert G. Brown, Director and significant shareholder of SGRP. Infotech is an affiliate and related party because it is owned principally by Robert G. Brown. SPAR Administrative Services, Inc. ("SAS"), is a related party and affiliate of SGRP, but is not under the control or part of the consolidated Company. SAS is an affiliate and related party because it is beneficially owned by William H Bartels (a Director and significant stockholder of SGRP) and family members of Robert G. Brown. See Change of Controls, Voting and Restricted Stock Agreement, above.
In July 1999 SMF, SBS and Infotech entered into a perpetual software ownership agreement providing that each party independently owned an undivided share of, and has the right to unilaterally license and exploit, certain portions of the Company's proprietary scheduling, tracking, coordination, reporting and expense software are co-owned withand each of SBS and Infotech and each entered into a non-exclusive royalty-free licenselicenses from the Company to use certain "SPAR" trademarks in the United States. SAS uses the "SPAR name through the SBS License.
Director Independence11. Share Based Compensation
As of December 31, 2023, the Company has outstanding stock options and unvested restricted stock units granted under its 2008 Stock Compensation Plan, 2018 Stock Compensation Plan, 2020 Stock Compensation Plan and 2021 Stock Compensation Plan, which generally permitted stock-based awards under terms determined by the Company’s board of directors. Stock options and RSUs generally provided for vesting over service periods of one to four years, with option exercise prices generally equal to fair market value on the date of grant. As of December 31, 2023, no further shares were available under these plans for future awards. The Company also granted stock options and restricted stock units as inducements under contracts with selected executives.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
Stock options
2008Plan Summary
2008 Plan Stock option award activity for the years ended December 31, 2023 and 2022 is summarized below for the periods presented:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 691,162 | $ | 1.53 | 2.60 | $ | 72 | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised / cancelled | (57,500 | ) | 1.07 | – | 10 | |||||||||||
Forfeited or expired | (120,562 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 513,100 | 1.63 | 2.16 | 68 | ||||||||||||
Granted | – | – | ||||||||||||||
Exercised / cancelled | – | – | ||||||||||||||
Forfeited or expired | (291,100 | ) | 2.10 | |||||||||||||
Outstanding at December 31, 2023 | $ | 222,000 | $ | 1.01 | 3.27 | $ | 12 | |||||||||
Exercisable at December 31, 2023 | 222,000 | $ | 1.01 | 3.27 | $ | 12 |
The Company recognized no stock-based compensation expense relating to stock option awards during the years ended December 31, 2023 and 2022.
2018Plan Summary
2018 Plan Stock option award activity for the years ended December 31, 2023 and 2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 160,000 | $0.93 | 6.82 | $31 | ||||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | (12,500 | ) | 0.76 | – | 8 | |||||||||||
Forfeited or expired | (2,500 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 145,000 | $0.94 | 5.79 | $52 | ||||||||||||
Granted | – | – | ||||||||||||||
Exercised | – | – | ||||||||||||||
Forfeited or expired | – | – | ||||||||||||||
Outstanding at December 31, 2023 | 145,000 | $0.94 | 4.79 | $26 | ||||||||||||
Exercisable at December 31, 2023 | 145,000 | $0.94 | 4.79 | $26 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
No stock options were granted in 2023 under the 2018 Plan. The total intrinsic value of stock options awards exercised during the year ended December 31, 2023 and 2022 was $0 and $8,000, respectively.
The Company recognized $1,000 and $6,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2023 and 2022, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2023 and 2022 was approximately $0 and $2,000, respectively.
As of December 31, 2023, there was no unrecognized stock-based compensation expense related to stock options granted under the 2018 Plan.
2020Plan Summary
2020 Plan Stock option award activity for the years ended December 31, 2023 and 2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 385,000 | $1.55 | 4.10 | $- | ||||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | – | – | – | – | ||||||||||||
Forfeited or expired | (10,000 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2022 | 375,000 | $1.55 | 3.10 | $- | ||||||||||||
Granted | – | |||||||||||||||
Exercised | – | |||||||||||||||
Forfeited or expired | (20,000 | ) | – | – | – | |||||||||||
Outstanding at December 31, 2023 | 355,000 | $1.55 | 2.10 | $- | ||||||||||||
Exercisable at December 31, 2023 | 177,500 | $1.55 | 2.10 | $- |
No stock options were granted in 2023 under the 2020 Plan. The total intrinsic value of stock option awards exercised during the years ended December 31, 2023 and 2022 was $0.
The Company recognized $47,000 and $58,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2023 and 2022, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2023 and 2022 was approximately $12,000 and $15,000, respectively.
As of December 31, 2023, total unrecognized stock-based compensation expense related to stock options was $58,000. This expense is expected to be recognized over a weighted average period of approximately 1.1 years.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
CFO InducementPlan Summary
CFO Inducement Plan Stock option award activity for the years ended December 31, 2023 and 2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 150,000 | 0.85 | 8.67 | 57 | ||||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | (50,000 | ) | 0.85 | – | – | |||||||||||
Forfeited or expired | – | – | – | – | ||||||||||||
Outstanding at December 31, 2022 | 100,000 | $ | 0.85 | 7.67 | $ | 45 | ||||||||||
Granted | ||||||||||||||||
Exercised | ||||||||||||||||
Forfeited or expired | (100,000 | ) | $ | 0.85 | – | – | ||||||||||
Outstanding at December 31, 2023 | $ | - | $ | - | $ | - | $ | - | ||||||||
Exercisable at December 31, 2023 | $ | - | $ | - | $ | - | $ | - |
CEO InducementPlan Summary
CEO Inducement Plan stock option award activity for the years ended December 31, 2023 and 2022 are summarized below:
Weighted- | ||||||||||||||||
Weighted- | Average | Aggregate | ||||||||||||||
Average | Remaining | Intrinsic | ||||||||||||||
Exercise | Contractual | Value | ||||||||||||||
Option Awards | Shares | Price | Term (Years) | (thousands) | ||||||||||||
Outstanding at January 1, 2022 | 630,000 | $ | 1.90 | 9.15 | $ | - | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised/cancelled | – | – | – | – | ||||||||||||
Forfeited or expired | – | – | – | – | ||||||||||||
Outstanding at December 31, 2022 | 630,000 | $ | 1.90 | 8.15 | $ | - | ||||||||||
Granted | – | – | – | – | ||||||||||||
Exercised | – | – | – | – | ||||||||||||
Forfeited or expired | – | – | – | – | ||||||||||||
Outstanding at December 31, 2023 | 630,000 | $ | 1.90 | 7.15 | $ | - | ||||||||||
Exercisable at December 31, 2023 | 630,000 | $ | 1.90 | 7.15 | $ | - |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Share Based Compensation (continued)
No stock options were granted in 2023 under the CEO Inducement Plan. The total intrinsic value of stock option awards exercised during the years ended December 31, 2023 and 2022 was $0.
The Company recognized $0 and $85,000 in stock-based compensation expense relating to stock option awards during the years ended December 31, 2023 and 2022, respectively. The recognized tax benefit on stock-based compensation expense related to stock options during the years ended December 31, 2023 and 2022, was $0 and $21,000, respectively.
As of December 31, 2023, there was no unrecognized share-based compensation expense related to stock options granted under the CEO Inducement Plan.
Weighted- | ||||||||
Average | ||||||||
Grant Date | ||||||||
Fair Value | ||||||||
Shares | per Share | |||||||
Unvested at January 1, 2022 | 138,090 | $ | 1.85 | |||||
Granted | – | – | ||||||
Vested | (99,415 | ) | 1.86 | |||||
Forfeited | – | – | ||||||
Unvested at December 31, 2022 | 38,675 | $ | 1.81 | |||||
Granted | 304,513 | 1.16 | ||||||
Vested | (100,337 | ) | 1.20 | |||||
Forfeited | (16,575 | ) | 1.81 | |||||
Unvested at December 31, 2023 | 226,276 | $ | 1.19 |
During the years ended December 31, 2023 and 2022, the Company recognized approximately $235,000 and $101,000, respectively, of stock-based compensation expense related to RSUs. During the years ended December 31, 2023 and 2022, the total fair value of RSUs vested was $104,000 and $120,000, respectively. As of December 31, 2023, total unrecognized stock-based compensation expense related to unvested RSUs awards was $78,000, which is expected to be recognized over a weighted average period of approximately 0.3 years.
Phantom Stock Awards
See Note 10,Board Size, Quorum and VotingRelated Party Transactions and Director Nominations: Experience, Integrity, Diversity and other Criteria, and 2022 By-Laws, above.for a description of the Company’s phantom stock awards.
Item 14. Principal Accountant Fees and Services12. Segment Information
The aggregate fees billed to us for professional accounting servicesCompany reports net revenues from operating income by BDO USA, LLP, including the auditreportable segment. Reportable segments are components of the Company's annualCompany for which separate financial statementsinformation is available that is evaluated on a regular basis by the chief operating decisionmaker in deciding how to allocate resources and in assessing performance.
The Company provides similar merchandising and marketing services throughout the world, operating within three reportable geographic segments. The Company evaluates those segments to improve its administration and operational and strategic focuses, and it tracks and reports certain financial information separately for each of those segments. The Company measures the years ended December 31, 2022performance of its segments and 2021, are setsubsidiaries using the same metrics. The primary measurement utilized by management is operating profits, historically the key indicator of long-term growth and profitability, as the Company may reinvest the operating profits of each of its international subsidiaries in its local markets in an effort to improve market share and continue expansion efforts.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Segment Information (continued)
(in Thousands) | Year Ended December 31, | |||||||
2023 | 2022 | |||||||
Net revenues | ||||||||
Americas | $ | 203,705 | $ | 198,581 | ||||
Asia - Pacific | 24,480 | 26,009 | ||||||
EMEA | 34,562 | 36,678 | ||||||
Total Net revenues | $ | 262,747 | $ | 261,268 | ||||
Operating Income (loss) | ||||||||
Americas | $ | 7,240 | $ | 4,103 | ||||
Asia - Pacific | (599 | ) | (1,621 | ) | ||||
EMEA | 2,757 | 2,904 | ||||||
Total Operating Income (loss) | $ | 9,398 | $ | 5,386 | ||||
Interest expense | ||||||||
Americas | $ | 1,388 | $ | 675 | ||||
Asia - Pacific | 122 | 39 | ||||||
EMEA | 409 | 251 | ||||||
Total Interest expense | $ | 1,919 | $ | 965 | ||||
Other expense (income), net | ||||||||
Americas | $ | 1,070 | $ | (38 | ) | |||
Asia - Pacific | (759 | ) | (62 | ) | ||||
EMEA | 35 | (382 | ) | |||||
Total Other expense (income), net | $ | 346 | $ | (482 | ) | |||
Income before income tax expense | ||||||||
Americas | $ | 4,304 | $ | 3,466 | ||||
Asia - Pacific | 236 | (1,598 | ) | |||||
EMEA | 2,593 | 3,035 | ||||||
Total Income before income tax expense | $ | 7,133 | $ | 4,903 | ||||
Income tax expense | ||||||||
Americas | $ | 1,543 | $ | 1,949 | ||||
Asia - Pacific | 62 | (18 | ) | |||||
EMEA | 752 | 846 | ||||||
Total Income tax expense | $ | 2,357 | $ | 2,777 | ||||
Net income | ||||||||
Americas | $ | 3,236 | $ | 1,517 | ||||
Asia - Pacific | (24 | ) | (1,580 | ) | ||||
EMEA | 1,564 | 2,189 | ||||||
Total Net income | $ | 4,776 | $ | 2,126 | ||||
Net income (loss) attributable to non-controlling interest | ||||||||
Americas | $ | (492 | ) | $ | 1,857 | |||
Asia - Pacific | 33 | (650 | ) | |||||
EMEA | 1,333 | 1,651 | ||||||
Total Net income (loss) attributable to non-controlling interest | $ | 874 | $ | 2,858 | ||||
Net Income (loss) attributable to SPAR Group, Inc. | ||||||||
Americas | $ | 3,729 | $ | (340 | ) | |||
Asia - Pacific | (57 | ) | (930 | ) | ||||
EMEA | 230 | 538 | ||||||
Total Net Income (loss) attributable to SPAR Group, Inc. | $ | 3,902 | $ | (732 | ) | |||
Depreciation and amortization: | ||||||||
Americas | $ | 1,737 | $ | 1,821 | ||||
Asia - Pacific | 94 | 104 | ||||||
EMEA | 170 | 108 | ||||||
Total Depreciation and amortization: | $ | 2,001 | $ | 2,033 | ||||
Impairment of goodwill | ||||||||
Americas | $ | - | $ | 2,458 | ||||
Asia - Pacific | - | - | ||||||
EMEA | - | - | ||||||
Total Impairment of goodwill | $ | - | $ | 2,458 | ||||
Capital expenditures: | ||||||||
Americas | $ | 1,077 | $ | 1,805 | ||||
Asia - Pacific | 71 | 20 | ||||||
EMEA | 101 | 100 | ||||||
Total Capital expenditures: | $ | 1,249 | $ | 1,925 |
There were no inter-segment sales for 2023 or 2022.
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Segment Information (continued)
December 31, | ||||||||
2023 | 2022 | |||||||
Assets: | ||||||||
Americas | $ | 71,372 | $ | 75,440 | ||||
Asia - Pacific | 13,361 | 5,952 | ||||||
EMEA | 5,548 | 13,206 | ||||||
Total assets | $ | 90,281 | $ | 94,598 |
Geographic Data (in thousands)
Year Ended December 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Net international revenue: | % of consolidated net revenue | % of consolidated net revenue | ||||||||||||||
United States | $ | 104,647 | 39.8 | % | $ | 112,327 | 43.0 | % | ||||||||
Brazil | 74,873 | 28.5 | 68,301 | 26.1 | % | |||||||||||
South Africa | 34,562 | 13.2 | 36,678 | 14.0 | ||||||||||||
Mexico | 11,691 | 4.4 | 9,706 | 3.7 | ||||||||||||
China | 10,167 | 3.9 | 10,931 | 4.2 | ||||||||||||
Japan | 6,256 | 2.4 | 7,133 | 2.7 | ||||||||||||
India | 6,148 | 2.3 | 6,276 | 2.4 | ||||||||||||
Canada | 12,494 | 4.8 | 8,247 | 3.2 | ||||||||||||
Australia | 1,909 | 0.7 | 1,669 | 0.6 | ||||||||||||
Total net international revenue | $ | 262,747 | 100.0 | % | $ | 261,268 | 100.0 | % |
(in thousands) | Year Ended December 31, | |||||||
2023 | 2022 | |||||||
Long lived assets: | ||||||||
Americas | $ | 4,585 | $ | 4,605 | ||||
Asia - Pacific | 1,015 | 1,244 | ||||||
EMEA | 745 | 315 | ||||||
Total long lived assets | $ | 6,345 | $ | 6,164 |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Earnings Per Share
The following table sets forth in the table below (amounts in thousands)computations of basic and diluted earnings per share (in thousands, except per share data):
| 2022 |
| 2021 | |
Audit fees | $ | 903 | 640 | |
Audit-related fees | 33 | 50 | ||
Tax fees | 169 | 187 | ||
Total | $ | 1,105 | $ | 877 |
Year Ended December 31, | ||||||||
2023 | 2022 | |||||||
Numerator: | ||||||||
Net income attributable to SPAR Group, Inc. | $ | 3,902 | $ | (732 | ) | |||
Denominator: | ||||||||
Shares used in basic net income per share calculation | 23,333 | 22,110 | ||||||
Effect of diluted securities: | ||||||||
Stock options and unvested restricted shares | 147 | – | ||||||
Convertible Series B Preferred Stock | 975 | – | ||||||
Shares used in diluted net income per share calculations | 24,455 | 22,110 | ||||||
Basic net income (loss) per common share: | $ | 0.17 | $ | (0.03 | ) | |||
Diluted net income (loss) per common share: | $ | 0.16 | $ | (0.03 | ) |
For purposesThe Company excluded 1,753,100 stock options, 38,675 RSUs and 854,753 shares of Series B convertible preferred stock, from the preceding table professional fees are classified as follows:
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Since the Audit Committee's formation in 2003, as required by applicable law and Nasdaq rules, each audit-related or tax or other non-audit service performed by the Company's independent registered accounting firm either: (i) was approved in advance on a case-by-case basis by SGRP's Audit Committee; or (ii) fit within a pre-approved "basket"computation of audit-related or tax and other non-audit services of limited amount, scope and duration established in advance by SGRP's Audit Committee. In connection with the standards for independence of the Company's independent registered accounting firm promulgated by the SEC, the Audit Committee considers (among other things) whether the provision of such services would be compatible with maintaining the independence of the Company's registered independent accounting firm.
PART IV
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14. Leases
The Company is a lessee under certain operating leases for office space and equipment.
The components of lease expenses consisted of the following for the periods presented (in thousands):
Year Ended | Year Ended | |||||||||
Lease Costs | Classification | December 31, 2023 | December 31, 2022 | |||||||
Operating lease cost | Selling, General and Administrative Expense | $ | 875 | $ | 470 | |||||
Short-term lease cost | Selling, General and Administrative Expense | 378 | 502 | |||||||
Variable costs (1) | Selling, General and Administrative Expense | - | 20 | |||||||
Total lease cost | $ | 1,253 | $ | 992 |
The following includes supplemental information for the periods presented (in thousands).
Year Ended | Year Ended | |||||||
December 31, 2023 | December 31, 2022 | |||||||
Cash paid for amounts included in the measurement of lease liabilities | ||||||||
Operating cash flows from operating leases | $ | 875 | $ | 997 | ||||
Right-of-use assets obtained in exchange for lease obligations | ||||||||
Operating leases | $ | 2,229 | $ | - |
SPAR Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Balance sheet information related to leases consisted of the following as of the periods presented (in thousands):
Leases | December 31, 2023 | December 31, 2022 | ||||||
Assets: | ||||||||
Operating lease right-of-use assets | $ | 2,323 | $ | 969 | ||||
Liabilities: | ||||||||
Current portion of operating lease liabilities | 1,163 | 363 | ||||||
Non-current portion of operating lease liabilities | 1,160 | 606 | ||||||
Total operating lease liabilities | $ | 2,323 | $ | 969 | ||||
Weighted average remaining lease term - operating leases (in years) | 2.64 | 2.04 | ||||||
Weighted average discount rate - operating leases | 8.8 | % | 6.4 | % |
For the Year Ended December 31, | Amount | |||
2024 | $ | 1,315 | ||
2025 | 838 | |||
2026 | 188 | |||
2027 | 155 | |||
2028 | 112 | |||
Thereafter | 5 | |||
Total future operating lease liability | $2,613 | |||
Less: present value discount | 290 | |||
Present value of operating lease liabilities | $2,323 |
Form 10-K15. Subsequent Events
")Agreement to sell the Company’s ownership interest in its South African Joint Venture
On February 7, 2024, the Company entered into a Sale of Shares Agreement to sell its 51% ownership interest in SGRP Meridian Proprietary Limited to Friedshelf 401 (Pty) Ltd., originally filedLindicom Proprietary Limited, and Lindicom Empowerment Holdings Proprietary Limited for 180,700,000 South African Rand (approximately $9.9 million using the exchange rates on December 31, 2023), 80% of which would be paid upon closing. Closing of the sale is dependent upon a number of conditions (including the approval by the South African government), and closing is expected in the second quarter of 2024.
Agreement to sell the Company’s ownership interest in its Chinese Joint Venture
On February 23, 2024, the Company entered into an Equity Transfer Agreement to sell its 51% ownership interest in SPAR (Shanghai) Marketing Management Co., Ltd. to Shanghai Jingbo Enterprise Consulting Co., Ltd. and Shanghai Wedone Marketing Management Co. Ltd. The total price to be paid to the Company is $200,000. The sale is deemed completed when the transferred equity is registered in the name of the buyers with the Securities and Exchange Commission (the "SEC") on April 17, 2023, which are incorporated herein by reference.Chinese Market Supervision Administration.
SGRP's Independent Registered Public Accounting Firm is BDO USA, LLP; Troy, Michigan; PCAOB ID#243.
SIGNATURESAgreement to sell the Company’s Brazilian subsidiary that owns its interest in its Brazilian Joint Venture
PursuantOn March 26, 2024, the Company signed a share purchase agreement with JK Consultoria Empresarial Ltda. ("JKC") for JKC to acquire the requirements of Section 13Company's Brazilian holding company (which in turn owns the Company's 51 percent interest in its Brazilian joint venture subsidiary) for BRL 58.9 million or 15(d)approximately $11.8 million. Closing of the Securities Exchange Actsale is dependent upon a number of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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KNOW ALL THESE PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutesconditions and appoints Michael R. Matacunas and Antonio Calisto Pato and each of them, jointly and severally, his attorneys-in-fact, each with full power of substitution, for them 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 andis expected in the capacities indicated.
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(1) Executed on his behalf by Michael R. Matacunas pursuant to the powersecond quarter of attorney granted to Mr. Matacunas by such director SGRP's Annual Report on Form 10-K for the year ended December 31, 2022, filed with the Securities and Exchange Commission on April 17, 2023.