SGRP · Read the filing

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

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:

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,

Depreciation and amortization 2,001 2,033

Subtotal of Adjustments to Consolidated Net Income 6,623 5,294

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

Adjusted EBITDA attributable to non-controlling interest (3,022) (4,637)

Adjusted EBITDA attributable to SPAR Group, Inc. 9,943 6,143

Results of Operations

The following table sets forth selected financial data for the years indicated (dollars in millions):

Year Ended December 31,

Related Party - Cost of revenues 5.2 2.0 $ 8.8 3.4

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

Other expense (income), net 0.3 0.1 (0.5) (0.2)

Income before income taxes 7.1 2.7 4.9 1.9

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)%

Results of operations for the year ended December 31, 2023, compared to the year ended December 31, 2022.

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, an increase of $1.4 million or 1%. This increase in revenue was primarily driven by stronger performance in the Americas, particularly Canada, Brazil and 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 and 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 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

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

$43.7 million, or 16.7% of net revenue, and approximately

$41.1 million, or 15.8% of net revenue for the years ended December 31, 2023 and 2022, respectively. Selling, general and administrative expenses for the year-ended December 31, 2023 includes expenses of approximately $0.5 million related to our consideration of strategic alternatives and higher salary and benefits cost, partially offset by lower bad debt expense as 2022 reflected the impending bankruptcy of a larger client.

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

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 (Income), Net

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.

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.

Item 9B. Other Information

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

Reference is made to the information set forth under the captions "The Board of Directors of the Corporation”, "Executives and Officers of the Corporation”, "Security Ownership of Certain Beneficial Owners and Management” and "Corporate Governance” in the 2024 Proxy Statement.

Item 11. Executive Compensation

Reference is made to the information set forth under the captions "Security Ownership of Certain Beneficial Owners and Management”, "Executive Compensation, Directors and Other Information”, "Executive Compensation, Equity Awards and Options” and "Compensation Plans” in 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:

Consolidated Balance Sheets as of December 31, 2023 and 2022 43

Notes to Consolidated Financial Statements 46

3. Exhibits

Exhibit Number Description

21.1 List of Subsidiaries (as filed herewith).

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

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

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

Item 16. Form 10-K Summary

None.

SIGNATURES

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

SPAR Group, Inc.

By: /s/ Michael R. Matacunas

Michael R. Matacunas

President and Chief Executive Officer

Dated as of: April [ ], 2024

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.

SIGNATURE TITLE

/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,

Dated as of: April 1st, 2024

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.

Revenue Recognition

As indicated in Note 2 to the consolidated financial statements, the Company generates revenues by providing merchandising services to its customers, generally on a daily, weekly, or monthly basis. The Company recognizes revenues as the services are performed based on the contractually-specified rate-per-driver metric(s) (i.e., rate per hour, rate per store visit or rate per unit stocked). For the year ended December 31, 2023, the Company’s net revenues were $262.7 million.

We identified revenue recognition from merchandising services as a critical audit matter due to the large volume of customer contracts and transactions. The principal consideration for our determination is the increased extent of auditor effort involved in performing procedures and evaluating audit evidence related to the Company’s revenue recognition.

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

/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,

Related Party - Cost of revenues 5,197 8,804

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

Other expense (income), net 346 (482 )

Income before income tax expense 7,133 4,903

Net income attributable to non-controlling interest (874 ) (2,858 )

Net Income (loss) attributable to SPAR Group, Inc. $ 3,902 $ (732 )

Weighted average common shares – basic 23,333 22,110

Weighted average common shares – diluted 24,455 22,110

Other comprehensive (loss):

Foreign currency translation adjustments 1,283 (391 )

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)

Assets

Current assets:

Prepaid expenses and other current assets 5,614 7,861

Operating lease right-of-use assets 2,323 969

Liabilities and equity

Current liabilities:

Accrued expenses and other current liabilities 15,274 20,261

Customer incentives and deposits 1,905 2,399

Current portion of operating lease liabilities 1,163 363

Operating lease liabilities, less current portion 1,160 606

Commitments and contingencies – See Note 6

Equity:

SPAR Group, Inc. equity

Preferred stock, Series - A, $.01 par value:

Preferred stock, Series - B. $.01 par value:

Common stock, $.01 par value:

Accumulated other comprehensive loss (3,341 ) (4,941 )

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

SPAR Group, Inc. and Subsidiaries

Consolidated Statements of Stockholders' Equity

(In thousands)

Shares Amount Shares Amount Shares Amount Capital Loss Earnings Interest Equity

Share-based compensation – – – – – – 346 – – – 346

Exercise of stock options 74 – – – – – (118 ) – – – (118 )

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 )

Share-based compensation – – – – – – 297 – – – 297

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

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,

Cash flows from operating activities:

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:

Prepaid expenses and other assets 2,082 (3,285 )

Operating lease liabilities (875 ) (744 )

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:

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 )

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

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’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

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:

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)

Less allowance for credit losses (1,461 ) (1,654 )

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)

Capitalized software development costs 18,336 17,298

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

Accumulated impairment losses $ (2,458 ) $ - $ - $ (2,458 )

Change in goodwill due to impact of foreign currency $ 7 $ - $ 7

Sale of business (333 ) – – (333 )

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

Non-compete - 520

Less accumulated amortization (3,601 ) (3,793 )

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

December 31,

Accrued expenses and other current liabilities: 2023 2022

(in thousands)

Accrued accounting and legal expenses 1,018 2,186

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

Australia - National Australia Bank N/A - 10.60 % 156

China- Industrial and Commercial Bank of China 4.00 % 283 4.15 % 290

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):

Unused Availability:

Mexico – 1

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

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,

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

Year Ended December 31,

Current:

Deferred:

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,

State income taxes, net of federal benefit 123 1.7 % (125 ) (2.5 )%

Goodwill adjustment - - 517 10.5 %

Section 162(m) adjustment 55 0.8 % - -

Return to provision adjustment (339 ) (4.8 )% (223 ) (4.5 )%

Sale of membership interest 149 2.1 % - -

Change in valuation allowance (268 ) (3.8 )% 308 6.3 %

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,

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

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 -

Total deferred tax assets, gross 5,812 5,105

Valuation allowance (242 ) (611 )

Deferred tax liabilities:

Goodwill & Intangible assets of subsidiaries 324 376

Capitalized software development costs - 135

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,

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.

Details of the Company's tax reserves at

December 31, 2023 are outlined in the table below (in thousands):

Taxes Interest Penalty Total Tax Liability

Domestic

Federal – – – –

International – – – –

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:

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.

SGRP US Equity

SGRP · 10-K · period ended 2023-12-31

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

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

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

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

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

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

SGRP US Equity☆

SGRP · 10-K · period ended 2023-12-31

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

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

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

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Item 10. Directors, Executive Officers and Corporate Governance

Item 11. Executive Compensation

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

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

Item 14. Principal Accountant Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

SGRP US Equity