SPAR Group, Inc.: Form 10-Q for the period ended Sep 30, 2023

Forward-Looking Statements

This Quarterly Report on Form 10-Q (this "Quarterly 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") and its subsidiaries (together with SGRP, “SPAR”, the "SPAR Group" or the "Company"). There also are forward-looking statements contained in: (a) SGRP's 2022 Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the Securities and Exchange Commission (the "SEC") on April 17, 2023, and SGRP's First Amendment to the 2022 Annual Report on Form 10-K/A for the year ended December 31, 2022, as filed with the SEC on May 1, 2023 (as so amended, the "Annual Report"); and (b) SGRP's Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other reports and statements as and when filed with the SEC (including this Quarterly Report and the Annual Report, each a "SEC Report"). "Forward-looking statements" are defined in Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and other applicable federal and state securities laws, rules and regulations, as amended (together with the Securities Act and Exchange Act, the "Securities Laws").

Readers can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. Words such as "may," "will," "expect," "intend," "believe," "estimate," "anticipate," "continue," "plan," "project," or the negative of these terms or other similar expressions also identify forward-looking statements. Forward-looking statements made by the Company in this Quarterly 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 Quarterly Report in "Risk Factors," "Legal Proceedings," and "Management's Discussion and Analysis of Financial Condition and Results of Operations.”

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, 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 merchandising, brand marketing, distribution services and analytics company, providing a broad range of sales enhancing services and insights 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 September 30, 2023, the Company operated in nine countries, including the United States, Canada, Mexico, Brazil, South Africa, Australia, China, Japan and India. Across all of these countries, the Company successfully executes programs through its multi-lingual logistics, reporting and communication technology, which provides clients value through real-time insight on store and 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’s focus is providing services. The team works closely with clients to determine their key objectives to execute globally, focusing on enhancing their sales and profit. At retail, the Company’s merchandising brand marketing specialists perform a wide range of programs to maximize product sell-through to consumers. Some of these programs include launching new products, installing displays, assembling product fixtures, and ensuring shelves are fully stocked and reordering when they are not. The Company also assists with sales and customer service. As retailers adapt to changes and new opportunities, our team engages in the total renovations and updating of stores, as well as preparing new locations for grand openings. The Company’s distribution associates work in retail and consumer goods distribution and fulfilment centers to prepare the centers to open, testing systems, putting away, picking products and providing peak staffing services for our clients to optimize their supply chain.

The Company reviews its results in three segments, as follows: (i) the Americas, which is comprised of the United States, Canada, Brazil and Mexico; (ii) Asia-Pacific ("APAC”), which is comprised of Japan, China, India and Australia; and (iii) Europe, the Middle East and Africa ("EMEA”), which is comprised of South Africa

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 ("U.S. GAAP"). "Adjusted EBITDA" is defined as net income before (i) depreciation and amortization, (ii) interest expense, net, (iii) income tax expense, (iv) Board of Directors incremental compensation expense, (v) restructuring, (vi) goodwill impairment, (vii) nonrecurring legal settlement costs and associated legal expenses unrelated to the Company's core operations, and (viii) 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, U.S. 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 U.S. GAAP. Some of these limitations include:

• Adjusted EBITDA does not reflect our cash expenditure or future requirements for capital expenditures or contractual commitments;
• Adjusted EBITDA does not reflect changes in our cash requirements for our working capital needs;
• Adjusted EBITDA does not reflect the interest expense and the cash requirements necessary to service interest or principal payments on our debt;
• Adjusted EBITDA does not reflect cash requirements for replacement of assets that are being depreciated and amortized;
• Adjusted EBITDA does not reflect non-cash compensation, which is a key element of our overall long-term compensation;
• Adjusted EBITDA does not reflect the impact of certain cash charges or cash receipts resulting from matters we do not find indicative of our ongoing operations; and
• Other companies in our industry may calculate Adjusted EBITDA differently than we do.

The following is a reconciliation of our net income to Adjusted EBITDA for the periods presented:

RESULTS OF OPERATIONS

For the three months ended September 30, 2023, compared to the three months ended September 30, 2022

The following table sets forth selected financial data and data as a percentage of Net revenues for the periods indicated (in thousands).

Net Revenues

Net revenues for the three months ended September 30, 2023 were $67.3 million, compared to $69.8 million for the three months ended September 30, 2022, a decrease of $2.5 million, or 3.6%. This was driven by lower revenue in APAC and EMEA impact by exchange rates and underlying performance, with Americas revenue marginally higher year on year.

For the three months ended September 30, 2023 and 2022, the Americas net revenue was $53.8 million and $53.7 million, respectively, reflecting 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 quarter in the US SPAR owned business, in Brazil and in Canada.

For the three months ended September 30, 2023 and 2022, APAC net revenue was $5.7 million and $7.1 million, respectively, a decrease of $1.4 million, or 20.6%. This decrease is partially the result of negative foreign exchange rate movement as well as other extraneous conditions such as the minimum wage increase in Japan.

For the three months ended September 30, 2023 and 2022, EMEA net revenue was $7.9 million and $8.9 million, respectively, a decrease of $1.0 million, or 12.1% partially a consequence the foreign exchange rate impact. The economy in South Africa experienced high inflation, rolling power blackouts and rising food prices during the three-month period. These items combined with a negative foreign exchange rate impact contributed to the quarter results.

Cost of Revenues

The Company's cost of revenues consists of its in-store labor and field management wages, related benefits, travel and other direct labor-related expenses and was 80.1% of net revenue for the quarter ended September 30, 2023 compared to 81.6% of net revenues for the quarter ended September 30, 2022. We delivered an 150-basis point improvement in gross margins against the global pressure of recruiting and continued though more modest wage inflation.

Cost of revenues for the three months ended September 30, 2023 were $54.0 million, compared to $57.0 million for the three months ended September 30, 2022, a decrease of $3.0 million, or 5.3%.

For the three months ended September 30, 2023 and 2022, the Americas cost of revenues were $43.9 million and $44.5 million, respectively, a decrease of $0.6 million, or 1.4%. The Americas cost of revenue as a percent of net revenue was 81.6% for the quarter ended September 30, 2023 and 82.8% for the quarter ended September 30, 2022, reflecting a 120-basis-point improvement in gross margin. We were able to achieve these results by our continued focus on contract pricing, a stabilization in market wages, increasing our higher margin services mix, and reducing travel expenses related to remodel projects.

For the three months ended September 30, 2023 and 2022, APAC cost of revenues were $4.1 million and $5.6 million, respectively, a decrease of $1.5 million, or 27.0%. The APAC cost of revenue as a percent of net revenue was 72.5% and 78.8% for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022. The improvement was partially due to operating fully in China compared to the slow recovery from the zero-tolerance policy in 2022 third quarter, which inflated cost of revenue ratios in 2022.

For the three months ended September 30, 2023 and 2022, EMEA cost of revenues were $5.9 million and $6.9 million, respectively a decrease of $1.0 million, or 13.2%. The EMEA cost of revenue as a percent of net revenue was 75.6% and 76.6% for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022. The decrease in cost 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 $11.3 million, or 16.8% of net revenue, and approximately $10.6 million, or 15.2% of net revenue for the quarters ended September 30, 2023 and 2022, respectively. Selling, general and administrative expenses for the quarter ended September 30, 2023 includes several one-time expenses of approximately $.4 million related to our consideration of strategic alternatives, restructuring initiatives, and exceptional legal costs.

For the three months ended September 30, 2023 and 2022, Americas selling, general and administrative expenses were approximately $8.1 million and $7.3 million, respectively, an increase of $0.8 million, or 10.8%. The increase includes the one-time strategic alternative expenses and the annualization of our investment in recruiting and moving our technology to the cloud.

For the three months ended September 30, 2023 and 2022, APAC selling, general and administrative expenses were approximately $1.7 million and $1.8 million, respectively, a decrease is of $0.1 million, or 5.4%. The decrease 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.

For the three months ended September 30, 2023 and 2022, EMEA selling, general and administrative expenses were approximately $1.5 million and $1.5 million, respectively, a decrease of less than $0.1 million, or 1.5%.

Depreciation and Amortization

For the three months ended September 30, 2023 and 2022, depreciation and amortization was approximately $0.5 million and $0.5 million, respectively.

Interest Expense

For the three months ended September 30, 2023 and 2022, interest expense was approximately $0.4 million and $0.3 million, respectively which reflects higher leverage (to support growth) and an increase in interest rates.

Other Income, Net

For the three months ended September 30, 2023 and 2022, other (income), net was approximately (0.1) million and ($0.1) million, respectively driven by higher other income net in EMEA.

Income Tax Expense

For the three months ended September 30, 2023 and 2022, income tax expense was approximately $0.2 million with an effective rate of 17% and $0.7 million with an effective rate of 43%, respectively. For the third quarter of 2023, our effective rate varied from the U.S. federal statutory rate of 21% primarily as a result of dispersion of global income and impact of higher foreign tax rates and permanent items including non-deductible expenses.

For the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022

The following table sets forth selected financial data and data as a percentage of net revenues for the periods indicated (in thousands).

Net Revenues

Net revenues for the nine months ended September 30, 2023 were $197.7 million, compared to $196.6 million for the nine months ended September 30, 2022, an increase of $1.1 million, or 0.6%.

For the nine months ended September 30, 2023 and 2022, the Americas net revenue was $154.4 million and $150.0 million, respectively, an increase of $4.4 million, or 2.9%. This increase is due to continued strength in our merchandising services, remodel and distribution services in the U.S. partially offset by a temporary decline in the remodel business especially in our US joint ventures as key clients are pushing projects into the future. Our Canadian operations continued merchandising work while expanding store remodel work. Other contributors are the continued demand momentum in Brazil with stronger revenue and margins as the year started and stability in Mexico.

For the nine months ended September 30, 2023 and 2022, APAC net revenue was $17.4 million and $19.4 million, respectively, a decrease of $2.0 million, or 9.9%. This decrease reflects that despite some sense of recovery in Q2, there is still strong continued economic pressures in China and Japan partially offset by growth in Australia.

For the nine months ended September 30, 2023 and 2022, EMEA net revenue was $25.8 million and $27.3 million, respectively, a decrease of $1.5 million, or 5.6%. We have expanded relationships with key clients and continued our focus on profitability in our South African joint venture.

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 79.5% of net revenue for the nine months ended September 30, 2023 compared to 80.9% of net revenues for the nine months ended September 30, 2022. We delivered a 140-basis point improvement in gross margins against the global pressure of recruiting and wage inflation.

Cost of revenues for the nine months ended September 30, 2023 were $157.0 million, compared to $159.0 million for the nine months ended September 30, 2022, a decrease of $2.0 million, or 1.2%.

For the nine months ended September 30, 2023 and 2022, the Americas cost of revenues were $123.9 million and $122.5 million, respectively, an increase of $1.4 million, or 1.1%. The Americas cost of revenue as a percent of net revenue was 80.2% for the nine months ended September 30, 2023 and 81.7% for the nine months ended September 30, 2022, reflecting a 150-basis point improvement in gross margin. We were able to achieve these results by focusing on contract pricing, increasing our higher margin services mix and reducing overtime among other improvements. These results also reflect a stabilizing of market wages.

For the nine months ended September 30, 2023 and 2022, APAC cost of revenues were $12.9 million and $14.9 million, respectively, a decrease of $2.0 million, or 13.3%. The APAC cost of revenue as a percent of net revenue was 74.1% and 77.0% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in cost of revenue was primarily the result of efficiencies in the Indian and Chinese operations relative to 2022 challenges.

For the nine months ended September 30, 2023 and 2022, EMEA cost of revenues were $20.2 million and $21.6 million, respectively a decrease of $1.4 million, or 6.4%. The EMEA cost of revenue as a percent of net revenue was 78.3% for the nine months ended September 30, 2023 compared to 79.0% for the nine months ended September 30, 2022. The decrease in cost was primarily the result of our continuous focus on pricing, operating improvements and new client business.

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 $32.3 million, or 16.4% of net revenue, and approximately $30.0 million, or 15.2% of net revenue for the nine months ended September 30, 2023 and 2022, respectively. Selling, general and administrative expenses for the nine months ended September 30, 2023 includes several one-time expenses of approximately $.9 million related to our consideration of strategic alternatives, restructuring initiatives, and exceptional legal costs.

For the nine months ended September 30, 2023 and 2022, Americas selling, general and administrative expenses were approximately $23.2 million and $20.1 million, respectively, an increase of $3.1 million, or 15.4%. The increase is primarily the result of the one-time strategic alternative expenses, and investment in SG&A to support the accelerated growth.

For the nine months ended September 30, 2023 and 2022, APAC selling, general and administrative expenses were approximately $5.0 million and $5.9 million, respectively, a decrease is of $0.9 million, or 16.0%. The decrease 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.

For the nine months ended September 30, 2023 and 2022, EMEA selling, general and administrative expenses were approximately $4.1 million and $3.9 million, respectively, an increase of $0.2 million, or 6.0%, primarily reflecting an increase in corporate overhead partly related to the one-time expenses referenced above.,

Depreciation and Amortization

For the nine months ended September 30, 2023 and 2022, depreciation and amortization was approximately $1.6 million and $1.5 million, respectively.

Interest Expense

For the nine months ended September 30, 2023 and 2022, interest expense was approximately $1.2 million and $0.6 million, respectively which reflects higher leverage (to support growth) and an increase in interest rates.

Other Income, Net

For the nine months ended September 30, 2023 and 2022, other expense (income), net was approximately ($0.3) million and ($0.4) million, respectively.

Income Tax Expense

For the nine months ended September 30, 2023 and 2022, income tax expense was approximately $1.8 million with an effective rate of 31% and $1.9 million with an effective rate of 31%, respectively. For the first nine months of 2023, our effective rate varied from the U.S. federal statutory rate of 21% primarily as a result of dispersion of global income and impact of higher foreign tax rates and permanent items including non-deductible expenses.

Critical Accounting Estimates

The preparation of our consolidated financial statements in conformity with US GAAP requires us to make estimates and judgments that affect the amounts reported in those financial statements and related notes thereto. However, we believe we have used reasonable estimates and assumptions in preparing the unaudited condensed consolidated financial statements. Although we believe that the estimates we use are reasonable, due to the inherent uncertainty involved in making those estimates, actual results reported in future periods could differ from those estimates.

The significant accounting policies and estimates used in preparation of the unaudited condensed consolidated financial statements are described in our audited consolidated financial statements as of and for the fiscal year ended December 31, 2022, and the notes thereto, which are included in the 2022 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on April 17, 2023. Except as detailed in Note 2 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q, there have been no material changes to our significant accounting policies during the three months ended September 30, 2023.

Liquidity and Capital Resources

Funding Requirements

Cash from operations could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and the other risks detailed in the section titled "Risk Factors" included elsewhere in our 2022 Annual Report on Form 10-K. The Company 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 working capital and capital expenditure requirements over the next 12 months. However, delays in collection of receivables due from any of the Company's major clients, a significant reduction in business from such clients, or a negative economic downturn resulting from the continuing impact of the COVID-19 pandemic, could have a material adverse effect on the Company's business, cash resources, and ongoing ability to fund operations.

The Company is a party to various domestic and international credit facilities. These various domestic and international credit facilities require compliance with their respective financial covenants. See Note 3 to the Company's unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Cash Flows for the nine Months Ended September 30, 2023 and 2022

Net cash provided by (used in) operating activities $1.6 million and ($4.2) million for the nine months ended September 30, 2023 and 2022, respectively.

Net cash used in investing activities was approximately $1.1 million and $1.2 million for the nine months ended September 30, 2023 and 2022, respectively.

Net cash (used in) provided by financing activities was approximately ($1.5) million and $9.2 million for the nine months ended September 30, 2023 and 2022, respectively.

Reflecting the impact of foreign exchange rate changes on the activity above resulted in a decrease in cash, cash equivalents and restricted cash for the nine months ended September 30, 2023 and 2022 of approximately $0.4 million and $5.2 million, respectively.

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.

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 Quarterly Report on Form 10-Q and, based on their evaluation, have concluded that the disclosure controls and procedures were not effective as of such date due to material weaknesses in internal control over financial reporting, described below.

Changes in Internal Controls 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 September 30, 2023. In connection with the audit of our consolidated financial statements for the year ended December 31, 2022, we identified a material weakness in internal control over financial reporting, as described below.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

Material Weakness in Internal Control Over Financial Reporting

Management has determined that a material weakness in its internal control over financial reporting existed as the Company has not designed and implemented effective controls used in the financial close process over non-recurring transactions involving international components. While this control deficiency did not result in a material error in the annual or interim financial statements, there was a reasonable possibility that a material misstatement in the annual or interim financial statements would not have been detected.

Remediation Efforts

The Company has begun the process of, and is focused on, designing and implementing effective internal control measures to improve its internal control over financial reporting and remediate the material weakness identified above. The Company's internal control remediation efforts include the following:

• In the nine months ended September 30, 2023, the Company hired a new Chief Financial Officer, an interim Vice President Controller, and a Director of Accounting;
• The Company is in the process of implementing a risk assessment process by which management identifies risks of misstatement related to all account balances;
• Enhancing policies and procedures to retain adequate documentary evidence for certain management review controls over certain business processes including precision of review and evidence of review procedures performed to demonstrate effective operation of such controls; and
• Strengthening monitoring activities and protocols that will allow the Company to timely assess the design and the operating effectiveness of controls over financial reporting and make necessary changes to the design of controls, if any.

The Company expects that the actions described above and resulting improvements in controls will strengthen its internal control over financial reporting and will address the identified material weaknesses.

Changes in Internal Controls Over Financial Reporting

Except for the material weakness and corrective measures discussed above, there was no other changes in the Company's internal controls over financial reporting that occurred during the three months ended September 30, 2023 that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.

Existing Risk Factors

Various risk factors applicable to the Company and its businesses are described in Item 1A under the caption "Risk Factors" in the 2022 Annual Report on Form 10-K for the year ended December 31, 2022, which Risk Factors are incorporated by reference into this Quarterly Report on Form 10-Q for the three months ended September 30, 2023.

There have been no material changes in the Company's risk factors since the 2022 Annual Report on Form 10-K for the year ended December 31, 2022.