SPAR GROUP, INC. 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,
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
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's focus is services. The team works closely with clients to determine their key objectives to execute globally, focusing on enhancing their sales and profit. At retail, the Company's 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. The Company also assists with sales and customer service. As retailers adapt to changes and new opportunities, our team engages in the total renovations and updating of stores, as well as preparing new locations for grand openings. The Company's distribution associates work in retail and consumer goods distribution centers to prepare the centers to open, testing systems, putting away, picking products and providing peak staffing services for our clients.
The Company's business is led and operated from its global headquarters in
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
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
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 $7.4 million and $6.3 million for the
years ended December 31, 2022 and 2021, respectively. The following is a
reconciliation of our net (loss) income to Adjusted EBITDA for the periods
presented:
Twelve Months Ended December 31,
(in thousands) 2022 2021
Consolidated Net Income $ 2,126 $ 2,000
Depreciation and amortization 2,033 2,083
Interest expense 965 585
Income Tax expense 2,777 2,108
Other income (482 ) (509 )
Consolidated EDITDA 7,419 6,268
Costs and other relating to CIC (32 ) 4,814
Review of Strategic Alternatives 540 72
Goodwill impairment 2,458 -
Board of Directors compensation - 711
Board of Directors incremental 394 -
compensation
Consolidated Adjusted EBITDA 10,779 11,864 Adjusted EBITDA attributable to (4,637 ) (4,908 ) non-controlling interest Adjusted EBITDA attributable to SPAR 6,142 $ 6,957 Group, Inc. $ Results of Operations
The following table sets forth selected financial data and such data as a percentage of net revenues for the years indicated (dollars in millions):
Year Ended December 31,
2022 % 2021 %
Net revenues $ 261.3 100 % $ 255.7 100 %
Related party - cost of
revenues 8.8 3.4 7.4 2.9
Cost of revenues 201.5 77.1 200.8 78.5
Selling, general and
administrative expense 41.1 15.7 36.8 14.4
Majority stockholders change
of control agreement - - 4.5 1.8
Depreciation and
amortization 2.0 0.8 2.1 0.8
Impairment of goodwill 2.5 1.0 - -
Interest expense, net 1.0 0.4 0.5 0.2
Other income, net (0.5 ) (0.2 ) (0.5 ) (0.2 )
Income before income taxes 4.9 1.9 4.1 1.6
Income tax expense 2.8 1.1 2.1 0.8
Net income 2.1 0.8 2.0 0.8
Net income attributable to
noncontrolling interest (2.9 ) (1.1 ) (3.8 ) (1.5 )
Net loss attributable to
SPAR Group, Inc. $ (0.7 ) (0.3 )% $ (1.8 ) (0.7 )%
Results of operations for the year ended
Net Revenues
Net revenues for the year ended
The
The
The EMEA net revenues totaled
Cost of Revenues
The Company's cost of revenues consists of its in-store labor and field
management wages, related benefits, travel and other direct labor-related
expenses and was 80.5% of net revenue for the year ended
The
The
The EMEA cost of revenue as a percent of net revenue was 77.4% and 79.5% for the
years ended
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Selling, General and Administrative Expenses
Selling, general and administrative expenses of the Company include its
corporate overhead, project management, information technology, executive
compensation, human resources, legal and accounting expenses. Selling, general
and administrative expenses were approximately
The
The
The EMEA selling, general and administrative expenses totaled
Depreciation and Amortization
Depreciation and amortization expense was approximately
Impairment ofGoodwill
Impairment of goodwill was
Interest Expense, Net
The Company's interest expense, net was
The America interest expense, net was
The
The EMEA interest income of
Other Income, Net
Other income, net was
Income Tax Expense
The Company had income tax expense of
Noncontrolling Interest
Net income attributable to noncontrolling interest was
Critical Accounting Policies and Estimates
The Company's critical accounting policies, including the assumptions and judgements underlying them, are disclosed in Note 2 to the Company's consolidated financial statements 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 doubtful accounts, and internal use software. While the estimates and judgements associated with the application of these policies may be affected by different assumptions or conditions, the Company believes the estimates and judgements associated with the reported amounts are appropriate under the circumstances.
Impairment of Long-Lived Assets, Intangible Assets, and
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.
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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 Doubtful Accounts
The Company continually monitors the collectability of its accounts receivable based upon current client credit information and financial condition. Balances that are deemed to be uncollectible after the Company has attempted reasonable collection efforts are written off through a charge to the bad debt allowance and a credit to accounts receivable. Accounts receivable balances, net of any applicable reserves or allowances, are stated at the amount that management expects to collect from the outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to bad debt allowance based in part on management's assessment of the current status of individual accounts.
Based on management's assessment, the Company established an allowance for
doubtful accounts of
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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
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 our consolidated financial statements included elsewhere in this Annual Report on Form 10K.
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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 resulting from the continuing impact of the COVID-19 pandemic, 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
Cash Flows for the Years Ended
Net cash used in operating activities was
Net cash used in investing activities for the years ended
Net cash provided by financing activities for the year ended
The above activity and the impact of foreign exchange rate changes resulted in a
decrease in cash and cash equivalents for the year ended
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