SPAR (SGRP) - 2021 Q4 - Annual Report

PART I Business SPAR Group is a global merchandising and brand marketing services company operating in 9 countries, focused on growing its core business, introducing new services, investing in technology, and expanding its global footprint - SPAR Group is a global merchandising and brand marketing services company, providing sales-enhancing services to retailers and consumer goods manufacturers[22] - The company operates in 9 countries: the United States, Canada, Mexico, Brazil, South Africa, Australia, China, Japan, and India[23] - The company's growth strategy focuses on four key areas: 1) Grow the Core Business, 2) Introduce or Acquire New Services, 3) Invest in Technology, and 4) Expand Globally[36] Company Structure and Ownership | Primary Territory | Entity Name | SPAR Percentage Ownership | Principal Office Location | | :--- | :--- | :--- | :--- | | Domestic | | | | | United States | SPAR Group, Inc. | 100% | Auburn Hills, Michigan | | | National Merchandising Services, LLC (NMS) | 51% | Fayetteville, Georgia | | | Resource Plus of North Florida, Inc. (RPI) | 51% | Jacksonville, Florida | | International | | | | | Japan | SPAR FM Japan, Inc. | 100% | Tokyo, Japan | | Canada | SPAR Canada, Inc. | 100% | Vaughan, Ontario, Canada | | South Africa | SGRP Meridian (PTY), Ltd. | 51% | Durban, South Africa | | India | SPAR KROGNOS Marketing Private Limited | 51% | New Delhi, India | | Australia | SPARFACTS Australia (PTY), Ltd. | 51% | Melbourne, Australia | | China | SPAR (Shanghai) Marketing Management Co Ltd. | 51% | Shanghai, China | | Mexico | SPAR TODOPROMO, SAPI, de CV | 51% | Mexico City, Mexico | | Brazil | SGRP Brasil Participações Ltda | 51% | Sao Paulo, Brazil | - The company's principal services include merchandising, brand marketing, new store openings and remodeling, assembly services, distribution staffing, and retail compliance/price audits[47] - For the fiscal years 2021 and 2020, no single client accounted for 10% or more of the company's net revenue[56] Risk Factors The company faces various risks including the lingering impact of COVID-19, economic downturns, legislative changes, reliance on variable projects, competition, third-party contractor dependence, technology failures, stock volatility, and joint venture complexities - The COVID-19 pandemic adversely affected global operations in 2020, with continued negative impacts in certain international countries through 2021[70] - The business is exposed to risks from economic downturns and legislative changes, such as increases in minimum wage, which could negatively impact operations or client budgets[73][74] - Operational risks include dependence on variable client projects that can be delayed or canceled, and the possibility of clients choosing to perform merchandising services in-house[77][78] - The company's domestic business is highly dependent on services provided by third-party independent contractors, which introduces legal and operational risks[82][83] - The common stock (SGRP) has experienced significant price volatility, fluctuating between $1.01 and $3.86 per share during the year ended December 31, 2021[91] - The company's co-founders and related parties (the "Majority Stockholders") beneficially own approximately 43.4% of the common stock, which could increase to 50.4% after vesting of preferred stock, allowing them significant influence[104] - The joint venture business structure, used in 6 of 9 countries and domestically, carries inherent risks related to potential misalignments of business objectives with local partners[106][108] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[111] Properties SPAR Group does not own any real property, leasing all its facilities including its corporate headquarters, and believes alternative leased spaces could be readily found if needed - The Company does not own any real property and leases all office space and storage facilities[112] - The corporate headquarters were relocated to Auburn Hills, Michigan in September 2020[114] Legal Proceedings The company is involved in various legal actions arising from the normal course of business, which management does not expect to have a material adverse effect, and previous claims involving significant stockholders have been resolved - Management does not anticipate that the resolution of various legal actions from the normal course of business will have a material adverse effect on the company[116] - Previous claims involving the Significant Stockholders were resolved and released as part of the CIC Agreement[117] Mine Safety Disclosures This item is not applicable to the company - Not applicable[118] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (SGRP) trades on the Nasdaq Capital Market, with 21.3 million shares outstanding as of December 31, 2021, and no cash dividends have ever been paid, while a 2021 stock repurchase program expired without repurchases, and Series A Preferred Stock was eliminated in January 2022 to create new Series B Preferred Stock - The company's common stock trades on the Nasdaq Capital Market under the symbol "SGRP" As of December 31, 2021, there were 21,320,414 shares outstanding[121][125] - The company has never declared or paid cash dividends on its common stock and does not anticipate doing so in the foreseeable future[126] - The 2021 Stock Repurchase Program, authorizing the repurchase of up to 500,000 shares, expired with no shares having been repurchased[128] - In January 2022, the company cancelled its Series A Preferred Stock and created 2,000,000 shares of a new Series B Preferred Stock, which are non-voting and convertible into common stock on a 1 for 1.5 basis[123][124] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2021, SPAR Group achieved record annual revenue of $255.7 million, a 10.9% increase, driven by post-pandemic recovery, but a $4.5 million Change of Control expense led to a $1.8 million net loss and decreased operating cash flow Overview In 2021, the company achieved record annual revenue with 10.9% growth driven by post-pandemic recovery, but gross profit declined due to increased labor costs, and a one-time Change of Control Agreement expense negatively impacted financials - Annual revenue grew 10.9% in 2021 to a record high, with International revenue up 12.3% and Domestic revenue up 8.9%[134] - Gross profit declined by 1% compared to 2020 due to incremental labor expenses, higher travel costs for the remodel business, and client pressure on operating efficiency[136] - The Change of Control (CIC) Agreement with majority shareholders was a significant event, resolving all outstanding claims and disputes but resulting in a one-time negative financial effect in 2021[138] - The 2021 net loss of $1.8 million is attributed to the one-time financial impact of the CIC Agreement Excluding this and a 2020 deferred tax benefit, net income would have shown year-over-year improvement[142] Critical Accounting Estimates The company identifies critical accounting estimates including goodwill impairment, revenue recognition, allowance for doubtful accounts, and capitalization of internal-use software development costs, with no goodwill impairment in 2021 or 2020 and $1.2 million capitalized for software development in 2021 - Goodwill is tested for impairment annually or when triggering events occur No impairment loss was recognized in 2021 or 2020[144][145] - Revenue from contracts, which are typically one year or less, is recognized as services are performed using the right-to-invoice practical expedient[151][152] - The company capitalized approximately $1.2 million in costs for internally developed software in 2021, compared to $1.0 million in 2020[156] Results of Operations Net revenues increased 10.9% to $255.7 million in 2021, but rising cost of revenues and a $4.5 million Change of Control charge resulted in a net loss of $1.8 million compared to net income in 2020 Consolidated Results of Operations (in millions) | | 2021 | 2020 | | :--- | :--- | :--- | | Net revenues | $255.7 | $230.5 | | Cost of revenues | $208.2 | $185.3 | | Gross Profit | $47.5 | $45.2 | | Selling, general & administrative expense | $36.8 | $33.3 | | Majority stockholders change of control agreement | $4.5 | - | | Operating Income | $4.2 | $9.7 | | Income before income taxes | $4.1 | $9.3 | | Net income | $2.0 | $9.0 | | Net (loss) income attributable to SPAR Group, Inc. | ($1.8) | $3.4 | | (Loss) Income per share | ($0.08) | $0.16 | - Net revenues increased by $25.2 million (10.9%), with the Domestic segment growing by $8.2 million and the International segment by $17.0 million[159] - Cost of revenues as a percentage of net revenue increased from 80.4% to 81.4%, primarily driven by higher labor costs and an unfavorable project mix in the Domestic segment[162][163] - Selling, general and administrative expenses included a one-time $4.5 million expense related to the CIC Agreement[165] Liquidity and Capital Resources Net cash from operations decreased to $2.6 million in 2021 due to increased accounts receivable, with net working capital at $22.1 million, though management anticipates sufficient liquidity for the next year - Net cash provided by operating activities decreased from $8.8 million in 2020 to $2.6 million in 2021, mainly due to an increase in accounts receivable[175] - Net cash used in investing activities was $1.7 million, primarily for capitalization of internal use software[176] - Net working capital stood at $22.1 million at December 31, 2021, compared to $23.6 million at the end of 2020[178] - Management believes cash availability will be manageable and sufficient to support ongoing operations over the next year[181] Quantitative and Qualitative Disclosures about Market Risk This item is not applicable to the company - Not applicable[182] Financial Statements and Supplementary Data This section refers to Item 15 for the company's full financial statements and schedules - Refers to Item 15 for the full financial statements[183] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company states that all information required to be disclosed under Form 8-K during the fourth quarter of 2021 was disclosed - All required 8-K disclosures for the fourth quarter of 2021 were made[184] Controls and Procedures As of December 31, 2021, management, including the CEO and CFO, concluded that the company's internal controls over financial reporting and disclosure controls and procedures were effective, with no material changes to internal controls during the year - Management concluded that internal controls over financial reporting were effective as of December 31, 2021, based on the COSO framework[187] - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[188] - No changes in internal controls over financial reporting occurred during the year that materially affected, or are reasonably likely to materially affect, the company's internal controls[189] PART III Directors, Executive Officers, Compensation, Security Ownership, and Accountant Fees Information for Items 10 through 14, covering directors, executive officers, corporate governance, executive compensation, security ownership, related party transactions, director independence, and principal accountant fees, is incorporated by reference from the company's 2022 Proxy Statement - Information regarding Directors, Executive Officers, Corporate Governance, Executive Compensation, Security Ownership, Certain Relationships and Related Transactions, and Principal Accountant Fees and Services is incorporated by reference from the company's 2022 Proxy Statement[194][195][196][197][198] PART IV Exhibits and Financial Statement Schedules This section provides an index to the consolidated financial statements and lists all exhibits filed with the Form 10-K, including corporate governance documents, compensation plans, material contracts, and certifications - Provides an index to the audited consolidated financial statements and the financial statement schedule for valuation and qualifying accounts[201] - Lists all exhibits filed with the report, including corporate governance documents, compensation plans, material contracts, and certifications[202] Form 10-K Summary The company did not provide a summary for this item - None[211] Financial Statements and Notes Report of Independent Registered Public Accounting Firm BDO USA, LLP issued an unqualified opinion on the financial statements, identifying the Realizability of Deferred Tax Assets as a critical audit matter due to significant subjective judgments - The auditor, BDO USA, LLP, provided an unqualified opinion, stating the financial statements are fairly presented in conformity with U.S GAAP[219] - The audit identified the "Realizability of Deferred Tax Assets" as a critical audit matter due to the complex and subjective judgments involved in assessing their future utilization[223][225] Consolidated Financial Statements In 2021, the company reported $255.7 million in net revenues and a $1.8 million net loss, with total assets of $89.0 million and cash decreasing to $13.5 million Key Financial Performance (in thousands) | | Year Ended Dec 31, 2021 | Year Ended Dec 31, 2020 | | :--- | :--- | :--- | | Net revenues | $255,719 | $230,517 | | Gross profit | $47,522 | $45,188 | | Operating income | $4,183 | $9,722 | | Net (loss) income attributable to SPAR Group, Inc. | $(1,779) | $3,367 | | Basic (loss) income per share | $(0.08) | $0.16 | Key Balance Sheet Data (in thousands) | | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $13,473 | $15,972 | | Accounts receivable, net | $54,171 | $46,914 | | Total current assets | $72,026 | $66,517 | | Total assets | $89,016 | $84,029 | | Total current liabilities | $50,206 | $42,905 | | Total liabilities | $51,668 | $45,407 | | Total equity | $37,348 | $38,622 | Notes to Consolidated Financial Statements The notes detail accounting policies, including joint venture consolidation, credit facilities, income taxes, the $4.5 million Change of Control Agreement, stock-based compensation, and segment performance showing a profitable International division - The company consolidates its 51% owned joint ventures as Variable Interest Entities (VIEs) for which it is the primary beneficiary (Note 2)[254] - The company's primary domestic credit facility with North Mill Capital was extended to October 2023 Total outstanding debt on lines of credit and short-term loans was $11.0 million at year-end (Note 4)[293][312] - The effective tax rate for 2021 was 51.3%, driven by foreign tax rate differentials and GILTI tax This compares to 3.3% in 2020, which benefited from a $2.1 million valuation allowance release in Brazil (Note 5)[316][319] - A Change of Control (CIC) Agreement with majority stockholders resulted in a $4.5 million charge to earnings in 2021, consisting of convertible preferred stock, cash, and assumption of liabilities (Note 10)[344][345] - Total stock-based compensation expense was $711,000 in 2021, a significant increase from $136,000 in 2020, largely due to inducement grants for new executives (Note 11)[272] Segment Performance 2021 (in thousands) | Segment | Revenue | Operating (Loss) Income | | :--- | :--- | :--- | | Domestic | $100,326 | $(4,228) | | International | $155,393 | $8,411 | | Total | $255,719 | $4,183 |