SPAR Group, Inc.: Form 10-K for the period ended Dec 31, 2024

Our Company

SPAR Group, Inc., a Delaware corporation ("SGRP" or the "Corporation"), and its subsidiaries (together with SGRP, "SPAR Group" or the "Company"), is a leading 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. Our goal is to be the most creative, energizing and effective retail services company that drives sales, margins and operating efficiency for our clients.

As of December 31, 2024, we operated in the United States and Canada, having exited Mexico, Brazil, South Africa, China, Japan and India during 2024. Now focused on the United States and Canada, we successfully execute programs through our robust logistics, reporting and communication technology, which provides clients value through real-time insight on store / product conditions.

With more than 50 years of experience, a focus on excellence and industry leadership, we continue to grow our long-term relationships with some of the world's leading businesses. Our unique combination of resource scale, deep expertise, advanced technology and unwavering commitment to excellence, separates us from the competition.

Our focus is services. Our team works closely with clients to determine their key objectives to execute, focusing on enhancing their sales and profit. At retail, our merchandising brand marketing specialists perform a wide range of programs to maximize product sell-through to consumers. Some of these programs include launching new products, installing displays, assembling product fixtures, and ensuring shelves are fully stocked and reordering when they are not. We also assist with sales and customer service. As retailers adapt to changes and new opportunities, our team engages in the total renovations and transformation of stores, as well as preparing new locations for grand openings. Our distribution associates work in retail and consumer goods distribution centers to prepare the centers to open, testing systems, putting away, picking product and providing peak staffing services for our clients.

We provide the "last two feet" of retail and consumer goods product merchandising and marketing. Our clients make great products. We ensure these products are presented in a compelling and exciting way exactly when and where they need to be to drive sales and margin. Our technology adds to these services by providing clients with detailed insight across all aspects of individual stores.

Our Industry

The merchandising and marketing outsourced services industry plays an important role in the growth and performance of some of the world’s most successful product and retail companies. Merchandising services include placing orders, retail shelf maintenance, display setup, reconfiguring products on store shelves and replenishing product inventory. Additional marketing services include, but are not limited to, new store sets and remodels, audits, sales assistance, installation and assembly, product demos/sampling, promotion and more. The Company believes that merchandising and marketing services add value to retailers, manufacturers and other businesses by making a product more visible and more available to consumers.

Historically, retailers staffed their stores to ensure the store was well merchandised and product was properly featured and placed. However, in an effort to control costs and improve margins, most retailers have reduced store payroll and increased their reliance on distributors to set up their own products and merchandise the shelves on behalf of the retailer. To begin, distributors utilized their own sales representatives to do this work. Over time, this resulted in competing representatives working in the same stores. This often led to the best presentation of merchandise resulting from the last distributor representative physically in the store. As a result, retailers began looking for third parties who could manage the merchandising process and ensure that the store, in total, was ready for the consumer. The result was the growth of the merchandising and marketing services industry.

We believe this industry will continue to grow and is more important today than ever before. With the acceleration of digital and online retailing, the pressure on the physical store to remain relevant, efficient and compelling has never been higher. In addition, product manufacturers are constantly trying to grab the consumer’s attention and make sure they are everywhere the consumer wants to shop. These are exactly the issues merchandising and marketing services companies solve.

Merchandising and marketing services companies work to ensure the store is exceptionally merchandised and products thoughtfully featured while enabling the retailer to maintain margins and leverage payroll. As the industry evolves, these services will continue to be a significant part of retailer and manufacturer success.

With more than 50 years of history, the Company has established itself as a strategic partner to many of the world’s most exciting product manufacturers and retailers.

Our Growth Strategy

As the need for flexibility and efficiency in merchandising and marketing services continues to increase, brand owners, consumer goods companies, manufacturers, distributors, and retailers will continue to rely on third-party providers for these services. SPAR Group is uniquely able to meet these needs because of our global reach, more than 50-year track record, access to thousands of merchandisers, breadth of capability, unwavering focus on excellence and deep expertise. We combine great people, an understanding of what is needed and unique technologies, enabling us to offer enhanced services.

To capitalize on the growing demand, the Company’s business strategy is focused on three (3) priorities: 1) Grow the Core Business; 2) Introduce or Acquire New Services; and 3) Invest in Technology. The result of this strategic framework will be top-line growth, expanded margins, more value for clients and higher levels of free cash flow to allow us to invest in future growth.

Grow the Core Business

The Company is constantly pursuing new core business services while working to earn more business from current clients. We have a significant number of long-tenured clients that, in order to ensure we understand their businesses, SPAR Group invests resources in people, technology and time, and thus we are well-positioned to meet their needs in the future. This includes expanding the services we offer to existing clients. At the same time, we pursue and solicit requests for proposals ("RFPs"), we actively market our services, we participate in industry events and we continuously look for opportunities to grow our business. We believe our history, relationships, expertise, technology and scale are all competitive advantages for us.

Introduce or Acquire New Services

The Company believes in testing new ideas and services and applying its considerable existing expertise in new ways to increase revenues and expand client relationships. The changing retail landscape and need for enhanced digital, e-commerce, and fulfillment capability along with the opportunities arising from the emergence of Artificial Intelligence ("AI"), deep learning, and computer vision shapes our thinking. Our objective is to identify and introduce new or complimentary capabilities that we believe the market and our clients need now and in the future. To accomplish this, we pursue business partnerships, look for acquisitions and joint ventures and explore ideas based on market trends and our own unique client experiences. Our market positioning provides us with an unparalleled window into changes and opportunities in the markets we serve. We carefully measure the results of these tests and look for new services that can have a material impact on our financial and operational performance.

Invest in Technology

We believe our current SPARView technology provides us with a competitive advantage in the marketplace. Our technology enables us to communicate, plan, track, analyze, and optimize our merchandising and marketing services work. However, we recognize that technology and our opportunity to successfully leverage technology continues to change. As a result, we are constantly adapting and innovating. We explore relationships within and across geographies and businesses with solution providers, while simultaneously making investments in our own solutions, with a focus to provide clients with better results, through our broader capability. This will facilitate our ability to offer higher value services over time. Our objective is to provide technology to field merchandisers, our client partners and our management to make smarter decisions that yield better customer and Company results.

Our Business Divisions

In 2023 and 2024, the Company operated through three divisions: Americas, Asia Pacific (APAC), and Europe, Middle East and Africa (EMEA). The Americas division encompassed the United States, Canada, Mexico, and Brazil. The APAC division included Japan, China, Australia, and India. The EMEA division consisted of South Africa. As part of the strategic review of our businesses, the Company has exited all its international joint ventures. The financial results for the full years of 2024 and 2023 incorporate the results of these operations for the time periods that those joint ventures were held.

The total business is led and operated from our global headquarters in Auburn Hills, Michigan. Our Canada business has a regional leadership office in Vaughan, Ontario.

The following table provides details of the structure of our Domestic and International businesses as of December 31, 2024:

The Company tracks and reports certain financial information separately for the individual countries using the same metrics. The primary measurement utilized by management is operating profit, historically the key indicator of long-term growth and profitability. Certain financial information regarding each of the Company's divisions, which includes their respective net revenues and operating income for each of the years ended December 31, 2024 and 2023, and their respective assets as of December 31, 2024 and 2023, is provided in Note 12 to the Company's Consolidated Financial Statements – Segment Information, below.

Our Services

The Company currently provides six (6) principal types of services: Merchandising and Marketing, Category Management and Setup, Remodel and Retail Transformation, Assembly and Installation, Business Analytics and Insights, and Fulfilment and Distribution.

Merchandising and Marketing

Merchandising and Marketing services are pivotal in ensuring that retail environments are optimally organized, products are well-presented, and promotions are effectively implemented to drive sales and enhance customer engagement. This category encompasses a broad range of activities tailored to maintain and elevate the retail experience, including: (i) resets and cut-ins, which involve the strategic rearrangement or introduction of products within the retail space to keep the store layout fresh and aligned with current marketing strategies or consumer trends, (ii) price and inventory audits, which ensures that pricing is accurate and inventory levels are properly maintained, providing valuable insights for inventory management and pricing strategies, (iii) stock replenishment and rotation services, which are essential for keeping shelves well-stocked and products fresh, especially for perishable goods, thereby enhancing customer satisfaction and minimizing waste, (iv) out of stock management, which focuses on minimizing the occurrence of stockouts and efficiently addressing them when they happen, thus reducing lost sales opportunities and maintaining customer trust, (v) promotional event setup, which entails the planning and execution of in-store events or displays to highlight specific products or sales promotions, creating an engaging shopping experience, and (vi) display management, which includes the design, setup, and maintenance of product displays to attract customer attention and promote featured items effectively. Together, these Merchandising & Marketing services are crucial for retail success, ensuring products are visible, accessible, and appealing to customers.

Category Management and Setup

Category Management and Setup is a comprehensive suite of services aimed at optimizing retail space and product presentation for enhanced customer experience and sales performance. This service category includes a variety of tasks such as (i) category and product resets, which involve reorganizing and refreshing product arrangements and categories in-store to maintain relevance and appeal; (ii) planogram maintenance, which ensures that the layout of products on shelves aligns with a strategic plan to optimize retail space and product visibility; (iii) display and shelf services, which focuses on the maintenance and arrangement of shelves and displays to ensure products are presented attractively; (iv) POP (Point of Purchase) installation and management, which involves setting up and managing marketing materials at the point of purchase to capture customer attention and encourage sales; and (v) display setup, which includes the assembly and arrangement of product displays to highlight new products or promotions, creating an engaging shopping environment. Together, these services work to maintain a coherent and appealing retail environment that enhances product visibility and shopper engagement.

Remodel and Retail Transformation

Remodel & Retail Transformation encompasses a range of strategic services designed to update and revitalize retail environments, ensuring they meet contemporary shopping expectations and trends. This category includes (i) store remodels, where retail spaces undergo comprehensive renovations to enhance aesthetics, functionality, and shopper experience, (ii) store department resets which involve the reorganization and updating of specific sections within a store to improve navigation and product presentation, (iii) fixture and banner installations, which contribute to refreshing the store's visual appeal and marketing communication, (iv) pop-up store services which offer temporary retail setups that can test new markets, products, or concepts in an agile and cost-effective manner and (v) store closings, managed with a focus on efficiency and minimal disruption, ensuring that transitions are smooth for both the retailer and its customers. Through these services, Remodel & Retail Transformation aims to keep retail environments dynamic, engaging, and aligned with brand identity and consumer expectations.

Assembly and Installation

Assembly and Installation services play a crucial role in enhancing the retail and consumer experience by ensuring that products are properly assembled and set up, whether in-store, in the office, or within the consumer's home. This category covers a broad spectrum of tasks that facilitate the ready-to-use delivery of products, improving convenience and satisfaction for both retailers and end-users. Services include (i) the assembly of merchandise in stores, such as furniture and desks, enabling customers to visualize the final product and making the shopping experience more engaging and efficient; (ii) in-store services, which extend to the maintenance of these products, ensuring they remain in optimal condition for display and use; (iii) office setup/down-sizing services, which cater to businesses undergoing changes in their physical workspace, providing expert assembly and installation support for a seamless transition; (iv) National In-Home Furniture Assembly services, which offer consumers the convenience of having furniture professionally assembled in their homes, eliminating the hassle and time commitment typically associated with DIY assembly; and (v) the assembly and installation of fitness equipment, whether it's in a commercial gym setting or a home fitness space, ensures that equipment is set up safely and correctly, maximizing functionality and user safety. Overall, Assembly and Installation services address a vital need in the post-purchase experience, ensuring products are fully functional and ready for use, thereby enhancing customer satisfaction and loyalty.

Business Analytics and Insights

Business Analytics and Insights services provide a critical foundation for informed decision-making and strategic planning in retail and merchandising environments. This suite of services leverages data analysis and visualization tools to deliver actionable insights that drive efficiency, sales, and customer satisfaction, including: (i) product dashboards, which offer a comprehensive view of product performance, inventory levels, and sales trends, enabling quick adjustments to product strategy and stock management, (ii) stock out reporting, which identifies and analyzes instances where products are unavailable on the shelves, allowing for rapid response to restock items and prevent lost sales opportunities, (iii) visit reporting, which tracks and evaluates the effectiveness and outcomes of merchandising visits, providing insights into operational efficiency and areas for improvement, (iv) real-time service insights, which delivers immediate feedback on the execution of merchandising and marketing initiatives, enabling dynamic adjustments to enhance in-store experiences and promotional effectiveness, (v) share of shelf analytics, which assesses the visibility and presence of products on the retail shelf compared to competitors, crucial for strategic positioning and market share growth, and (vi) photo analysis, which uses visual data to evaluate the compliance and appeal of product displays, ensuring that merchandising standards are met and that displays are engaging to customers. Together, these Business Analytics & Insights services empower businesses with the knowledge to optimize operations, tailor marketing efforts, and ultimately drive better business outcomes through data-driven strategies.

Fulfillment and Distribution

Fulfillment & Distribution is a critical service offering that encompasses a range of services including (i) Distribution Center Staffing, which provides the necessary workforce for the effective operation of distribution centers, including handling and sorting,(ii) POP (Point of Purchase) Fulfillment Services focus on the storage, assembly, and delivery of marketing and promotional materials directly to retail locations, ensuring that displays are ready and available for immediate use, (iii) Kiosk Prep, which involves preparing and equipping kiosks with the necessary products and promotional materials, tailored for specific marketing or sales campaigns, (iv) returns processing, which manages the flow of returned goods, ensuring they are efficiently processed, restocked, or disposed of according to the retailer's policies, (v) picking and packing services, which are crucial for order fulfillment, involving the selection of the correct products from inventory and packing them for shipment to the customer or retail outlet, and (vi) inventory services which provide comprehensive management of stock levels, including tracking, auditing, and reporting, to ensure inventory accuracy and availability. Together, these Fulfillment & Distribution services play an essential role in optimizing our customers' supply chain, enhancing their customers' satisfaction, and maintaining seamless operations from warehouse to consumer.

Our Customers

The Company currently represents numerous manufacturers and retail clients in a wide range of retail segments and stores, and its customers (which it refers to as "clients") include the following markets:

Retail segments served include:

• Mass Merchandisers
• Grocery
• HBA
• Pharmacies
• Discount
• Dollar
• Convenience
• Cash and Carry
• Home Improvement
• Consumer Electronics
• Automotive
• Office Supply
• Independents

Manufacturer segments served include:

• Personal Technology
• Consumer Electronics
• Beverage
• Household Products
• Consumables
• Financial Products
• Automotive Aftermarket

It is important to note that we also work across all channels: retail and online. Our services make it possible for clients to ensure the online orders can be filled from stores and that the pricing is competitive in individual markets.

We are proud to serve some of the world’s most exciting brands and leading retail businesses. In many cases, our clients cross over geographical boundaries and we provide services to support their business around the world.

The Company did not have any clients that represented 10% or more of the Company's net revenue for the years ended December 31, 2024 and 2023.

Trademarks and Technology Licensing

The Company has numerous registered trademarks. Certain of the Company's "SPAR" trademarks (the "Licensed Marks") are licensed: (i) for use by affiliated companies in the United States, royalty free, and in perpetuity pursuant to license agreements that commenced in 1999; (ii) for use by its wholly-owned subsidiaries worldwide royalty free and in perpetuity pursuant to informal license arrangements; (iii) for use by joint venture subsidiaries in their respective jurisdictions pursuant to license agreements for limited terms (executed contemporaneously with their respective joint venture agreements); and (iv) for use by the Independent Field Vendor providing field specialists to the Company domestically in the United States for limited terms and modest royalties pursuant to license agreements with (each as defined below). Portions of the Company's proprietary scheduling, tracking, coordination, reporting and expense software (the "Co-Owned Software") currently included in the Company's technology are co-owned by the Company, SPAR Business Services, Inc. ("SBS") and SPAR InfoTech, Inc. ("Infotech"), pursuant to a 1999 agreement. The Company's global technology systems (including the Co-Owned Software) were maintained and further developed and improved by the Company at its own expense at a cost of $1.0 million in 2024 and $1.0 million in 2023, respectively. Except for SBS and Infotech if they choose to use the Co-Owned Software on their own equipment (they do not need such software licenses because of their co-ownership), each subsidiary and field vendor trademark license and arrangement also licenses the Company's global technology systems (including portions of the Co-Owned Software) pursuant to their trademark license and arrangement.

Our Labor Force

As of December 31, 2024, the Company's labor force totaled approximately 3,425 including the services of field specialists and field administrators furnished by independent third parties. The Company employed in Americas a labor force of 249 full-time employees and 730 part-time employees engaged in operations. In the Company's Americas Division, the Company's merchandising, audit, assembly and other services for its clients are performed by field specialists, and the services of a significant portion of them (approximately 2,446) were supplied to the Company by an independent vendor (the "Independent Field Vendor").

The Company continues to evaluate its business model of using third-party independent contractors as field specialists (whether or not provided by others) in light of changing client requirements and legal and regulatory environments.

The Company considers its relations with its own employees and independent vendors to be generally good.

Our Competition

The marketing services industry is highly competitive. The Company's competition in all markets arises from a number of large enterprises. The Company also competes with a large number of relatively small enterprises with specific client, channel or geographic coverage, as well as with the internal marketing and merchandising operations of its existing and prospective clients. The Company believes that the principal competitive factors within its industry favoring the Company include the breadth and quality of its client services, its competitive costs, the development and deployment of its technology, its ability to execute specific client priorities rapidly and consistently over a wide geographic area, and its ability to conceive of ideas and operate as a business partner delivering value above basic services. The Company believes that its current structure favorably addresses these factors and establishes it as a leader in many retailer and manufacturer verticals. The Company also believes it has the ability to execute major initiatives and develop and administer manufacturer and retailer programs throughout the USA and Canada.

Corporate Website

The Company's website can be found at: http://www.sparinc.com, and the Company's SEC filings are available on that website under the Investors section.

Investing in SGRP's common stock ("SGRP Common Stock") is subject to a number of Risks that could cause the Company's actual results to differ materially from those projected or otherwise expected in any forward-looking statements or other information (see Forward-Looking Statements immediately preceding Part I, above).

You should carefully review and consider the following Risks, but you should not place undue reliance on any of them. All forward-looking statements and other information attributable to the Company or persons acting on its behalf are expressly subject to and qualified by all such Risks.

Those Risks reflect our expectations, views and assumptions only as of the date of this Annual Report, and the Company does not intend, assume any obligation, or promise to publicly update or revise any such Risk or information (in whole or in part), whether as a result of new information, new or worsening Risks or uncertainties, changed circumstances, future events, recognition, or otherwise.

Our potential going private transaction poses various risks

As previously announced, on August 30, 2024, the Corporation entered into an Agreement and Plan of Merger (the "Merger Agreement"), with Highwire Capital, LLC, a Texas limited liability company ("Highwire"), and Highwire Merger Co. I, Inc., a Delaware corporation and a wholly owned subsidiary of Highwire ("Merger Sub"), pursuant to which Highwire, in a cash merger and the closing of the transaction (the " Proposed Acquisition"), will acquire all of the stock of the Corporation for $2.50 per fully diluted share in cash, representing an aggregate purchase price of $58,000,000 (subject to certain adjustments).

The Proposed Acquisition involves various Risks, including (without limitation): the uncertainty of the closing of the Proposed Acquisition within the anticipated time period, or at all, due to any reason, including any failure to satisfy the conditions to the consummation of the Proposed Acquisition or to complete any necessary financing arrangements; the risk that the Proposed Acquisition disrupts our current plans and operations or diverts management's attention from its ongoing business; the impact of the news of the Proposed Acquisition or developments in it; the nature, cost and outcome of any legal proceedings related to the Proposed Acquisition; the impact of the Corporation's continued strategic review process, or any resulting action or inaction, should the Proposed Acquisition not occur.

While the Company and Highwire are working to complete the Proposed Acquisition, either party may terminate the Merger Agreement if the Merger is not completed by May 30, 2025.

The buyer may not be able to consummate the Proposed Acquisition pursuant to the Merger Agreement, and failure to complete the Proposed Acquisition could negatively impact our stock price and our business, financial condition and results of operations.

As previously announced, on August 30, 2024, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with Highwire Capital, LLC, a Texas limited liability company ("Highwire") and Highwire Merger Co. I, Inc., a Delaware corporation and a wholly owned subsidiary of Highwire ("Merger Sub"), pursuant to which Highwire will acquire the Company in a cash merger, with Merger Sub merging with and into the Company (the “Proposed Acquisition”). While the Company and Highwire are working to complete the Proposed Acquisition, either party may terminate the Merger Agreement if the Merger is not completed by May 30, 2025.

If the Proposed Acquisition is not consummated, the price of SGRP Common Stock may decline and our business, financial condition and results of operations may be impacted. In addition, we have incurred substantial costs planning and negotiating the Merger Agreement. These costs include, but are not limited to, costs associated with employing and retaining third-party advisors who performed the financial, auditing, and legal services required before we were able to enter into the Merger Agreement and which will continue as we seek to complete the Merger. We will be responsible for these costs in the event the Merger is not successful, which could adversely affect our liquidity and financial results.

The markets we operate in are cyclical and subject to the effects of economic downturns.

The markets in which the Company operates are cyclical and subject to the effects of economic downturns. The current political, social and economic conditions, including the impact of terrorism on consumer and business behavior, make it difficult for the Company, its vendors and its clients to accurately forecast and plan future business activities. Substantially all of the Company's key clients are either retailers, manufacturers or those seeking to do product merchandising at retailers. Should the retail or manufacturing industries experience a significant economic downturn, the resultant reduction in product sales could decrease the Company's revenues. The Company also has risks associated with its clients changing their business plans and/or reducing their third-party services' budgets in response to economic conditions, which could also decrease the Company's revenues. Such revenue decreases could have a material adverse effect on the Company or its performance or condition.

We can be adversely affected if governments pass legislation that mandates an increase in wages, changes labor laws or otherwise drives market behavior that negatively impacts the business or operations of SPAR Group or our clients.

The Company relies on independent contractors as well as other third-party providers to perform work. There is risk that any government legislation that restricts travel, changes labor laws, impacts wages or otherwise incentivizes behavior that negatively impacts our business or our clients could impact our business.

The Company continues to analyze various aspects of potential business impact driven by any legislation in all of the areas we operate. While we do not foresee any material impact in the short-term, the Company will continue to monitor and manage the business accordingly.

Our business depends on variable client projects that can shift from period to period, be delayed, be canceled or otherwise require us to assume higher costs to perform the work.

The Company has experienced and, in the future, may experience fluctuations in quarterly operating results and cash flow. Factors that may cause the Company's quarterly operating results and cash flow to vary from time to time and may result in reduced revenue and profits include: (i) the number of active client projects; (ii) seasonality of client products; (iii) client delays, changes and cancellations in projects; (iv) staffing requirements, indemnifications, risk allocations, primary insurance coverages, intellectual property claims and other contractual provisions and concessions demanded by clients that are unilateral, unreasonable and very time consuming to review and attempt to negotiate; (v) the timing requirements of client projects; (vi) the completion of major client projects; (vii) the timing of new engagements; (viii) the timing of personnel cost increases; (ix) service locations and conditions with higher than contemplated personnel costs (remote areas, weather and health closures, higher minimum wages, higher skill sets required, etc.); and (x) the loss of major clients. In addition, the Company is subject to revenue or profit uncertainties resulting from factors such as unprofitable client work and the failure of clients to pay. These revenue fluctuations could materially and adversely affect the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.

Our business could be adversely affected if retailers and manufacturers elect to perform merchandising and marketing services with their own resources or if they have less stores that need our services.

The business and growth of the Company depends in part on the continued outsourcing of merchandising and marketing services, which the Company believes has increased from the consolidation of retailers and manufacturers, as well as the desire to seek outsourcing specialists to reduce fixed operation expenses and concentrate internal staff on customer service and sales. There can be no assurance that this outsourcing will continue, as companies may elect to perform such services internally.

In addition, retailers with physical store locations are facing increasing consolidation and competition from eCommerce/virtual stores. The Company's business and growth depends in part on the continuing need for in-store merchandising of products and the continuing success of retailers with physical store locations. There can be no assurance that the in-store merchandising of products will increase or even continue at current levels or that retailers with physical store locations will continue to compete successfully in those stores, and some retailers are shifting their sales focus to their virtual online stores.

A significant decrease in such need for in-store merchandising or success of such physical stores could significantly decrease the Company's revenues and such decreased revenues could have a material adverse effect on the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.

We do work with furniture and other related assembly services at stores, in homes and in offices.

The Company's technicians assemble furniture and other products in the stores, homes and offices of customers. Working at a customer's store, home or office could give rise to claims against the Company for errors, omissions or misconduct by those technicians, including (without limitation) objectional behavior, harassment, personal injury, death, damage to or theft of customer property, or other civil or criminal misconduct by such technicians. Claims also could be made against the Company as a result of its involvement in such assembly services due to (among other things) product assembly errors and omissions, product defects, deficiencies, breakdowns or collapse, products that are not merchantable or fit for their particular purpose, products that do not conform to published specifications or satisfy customer expectations, or products that cause personal injury, death or property damage, in each case whether actual, alleged or perceived by customers, and irrespective of how much time may have passed since such assembly. If such claims are asserted and adversely determined against the Company, then to the extent such claims are not covered by indemnification from the product's seller or manufacturer or by insurance, they could have a material adverse effect on the Company or its performance or condition.

We depend upon third-party independent contractors and the services they provide.

The success of the Company's business in the USA is dependent upon the successful execution and administration of its domestic field services through the services of field specialists, and a significant portion of them are provided to the Company and are engaged by the Independent Field Vendor and located, scheduled, deployed and administered domestically through the services of field administrators. The inability to identify, engage and successfully administer its domestic field services through qualified field specialists and field administrators could have a material adverse effect on the Company or its performance or condition.

A significant portion of the services of the field specialists provided to the Company are supplied by the Independent Field Vendor. It is possible that the appropriateness of the treatment of those field specialists as independent contractors by the Independent Field Vendor will be periodically subject to legal review or challenge by various states and others. The Company, in its discretion, may review and decide each request by its Independent Field Vendor for reimbursement of its legal defense expenses on a case-by-case basis, including the relative costs and benefits to the Company of doing so, but the Company has no obligation to do so.

To the Company's knowledge, its Independent Field Vendor is not involved in any material proceeding involving the misclassification of its independent contractors. However: (i) if the Company approves its reimbursement of any material legal defense costs of the Independent Field Vendor; (ii) if the Company somehow becomes liable for any legal expenses incurred by the Independent Field Vendor, any related party or any third party in defending any claim or satisfying any judgment against such parties; (iii) if the Company somehow becomes liable through any judicial determination for any judgment against the Independent Field Vendor, or any related party or other vendor or service provider (in whole or in part); or (iv) if any such proceeding or matter causes: (A) any decrease in the Independent Field Vendor's performance (quality or otherwise); (B) any inability by the Independent Field Vendor to execute the services for the Company or to continue with its present business model; or (C) any increase in the Company's use of employees (rather than independent contractors) as its domestic field specialists; then any of the foregoing, in whole or in part, could have a material adverse effect on the Company or its performance or condition.

There can be no assurance that plaintiffs or someone else will not claim that the Company is liable (under applicable law, through reimbursement or indemnification, or otherwise) for any judgment or similar amount imposed against any provider of field specialists or field administrators to the Company, which the Company would defend vigorously if pursued. There can be no assurance that the Company would be able to successfully defend any such claim. Any imposition of liability on the Company for any such judgment or amount could have a material adverse effect on the Company or its performance or condition.

Additionally, the Company believes that its business model of executing a significant portion of its services domestically (other than in California and in performing its non-merchandising services elsewhere, where the Company is using its own employees) through independent contractors provided by others is equally effective but inherently less costly than doing so with employees, both under applicable tax and employment laws and otherwise. However, the Company continues to reevaluate its business model of using third party independent contractors as field specialists in performing merchandising services outside of California in light of changing client requirements and legal and regulatory environments.

We rely on our systems and third-party vendors.

The Company relies on its proprietary systems for (among other things) the scheduling, tracking, coordination and reporting of its merchandising and marketing services. In addition to proprietary software and applications of the Company, the systems use and rely upon software (including operating system, office, exchange, data base and server programs) licensed and hardware purchased or leased from third parties and telecommunication services provided by third parties, which third-party software, hardware and telecommunication services may not continue to be available at all or (if available) with the necessary access, uptime, speeds or bandwidth, at reasonable prices or on commercially reasonable terms. Any defect, error or other performance failure in such third-party software, hardware or service also could result in a defect, error or performance failure in our client services. Systems can experience excess traffic and related inefficiencies, from increased demand or otherwise, as well as increased cyberattacks by hackers and other saboteurs. To the extent that systems experience increased demands on current capacity and for additional capacity from (among other things) an increase in the numbers of users, frequency or duration of use, bandwidth requirements of software, applications and users (including the increasing demand from the Company's clients for data-intensive as-serviced pictures from the field specialists), or cyberattacks, there can be no assurance that the Company's technological systems and third-party software, hardware and telecommunication providers will continue to be able to support the demands placed on them by such increased demand or negative events.

The Company relies on third-party vendors to provide its telecommunication network access and other services used in its business, and the Company has no control over such third-party providers. Additionally, a cybersecurity breach that results in unauthorized access to sensitive consumer or corporate information contained in these systems may adversely affect the Company's reputation and lead to claims against it. Such claims could include identity theft or other similar fraud-related claims and claims related to violations of applicable data privacy laws. Any system failure, accident or security breach could result in disruptions to the Company's operations. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or results in inappropriate disclosure of confidential information, it could cause significant damage to the Company's reputation, affect its relationships with its customers, lead to claims against it and ultimately harm its business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

Any such software, hardware or service unavailability or unreasonable pricing or terms, defect, error or other performance failure in such third-party software, hardware or service, increased capacity demands, disruption in services, security breach or protective measures could increase the Company's costs of operation and reduce its efficiency and performance, which could have a material adverse effect on the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.

Our stock is subject to volatility and general market risk.

The market price of SGRP Common Stock has historically experienced and may continue to experience significant volatility. During the year ended December 31, 2024, the sale price of SGRP Common Stock fluctuated from $0.95 to $3.12 per share. The Company believes that its Common Stock is subject to wide price fluctuations due to (among other things) the following:

• The relatively small public float and corresponding thin trading market for SGRP Common Stock, attributable to (among other things) the large block of voting shares beneficially owned by the Company's Majority Stockholders (as defined below) and generally low trading volumes, and that thin trading market may cause small trades to have significant impacts on SGRP Common Stock price.
• The substantial beneficial ownership of the Company's voting stock and potential control by Mr. Robert G. Brown and Mr. William H. Bartels and related parties (the "Majority Stockholders"). Our significant stockholders may take actions, subject to the restrictions of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement”) and our By-Laws, Item 3 -- Legal Proceedings, below, Note 6 to the Company's Consolidated Financial Statements - Commitments and Contingencies, and Note 10 to the Company's Consolidated Financial Statements - Related Party Transactions, below.
• Any announcement, estimate or disclosure by the Company, or any projection or other claim or pronouncement by any of the Company's competitors or any financial analyst, commentator, blogger or other person, respecting: (i) any new service created or improved, significant contract, business acquisition or relationship, or other publicized development by the Company or any of its competitors; or (ii) any change, fluctuation or other development in the Company's actual, estimated or desired affiliates, assets, business, clients, capital, cash flow, credit, expenses, financial condition, income, legal costs, liabilities, liquidity, locations, marketing, operations, prospects, sales, strategies, taxation or other achievement, results or condition or in those of any of the Company's competitors, in each case irrespective of accuracy or validity and whether or not adverse or material.
• The general volatility of stock markets, consumer and investor confidence, and the general state of the economy (which often affect the prices of stock issued by the Corporation and many others without regard to financial results or condition).

If the Corporation issues (other than at fair market value for cash) or the Majority Stockholders sell a large number of shares of SGRP Common Stock, or if the market perceives such an issuance or sale is likely or imminent, the market price of SGRP Common Stock could decline.

The Corporation had in place a 2022 Stock Repurchase Program (as defined and described in Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, below), which ended on May 24, 2023 and a 2024 Stock Repurchase Program, under which 1,000,000 shares were repurchased on May 3, 2024. Repurchases by the Corporation could adversely affect the market liquidity of the SGRP Common Stock.

In addition, the volatility in the market price of SGRP Common Stock could lead to class action securities litigation that could in turn impose substantial costs on the Company, divert management's attention and resources from the day-to-day operations of the Company's business and harm the Corporation's stock price, the Company or its performance or condition.

As a small company with stock price volatility, our stock may be de-listed from NASDAQ.

There can be no assurance that the Corporation will be able to comply in the future with Nasdaq's Board Independence Rule, Audit Committee Composition Rule, Bid Price Rule or other Nasdaq continued listing requirements. See Our significant stockholders may take actions, subject to the restrictions of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement") and our By-Laws, below. If the Corporation fails to satisfy the applicable continued listing requirement again in the future, Nasdaq may commence delisting procedures against the Corporation (during which the Corporation may have additional time of up to six (6) months to appeal and correct its non-compliance). If the SGRP Common Stock shares were ultimately delisted by Nasdaq, trading of the SGRP Common Stock could be limited to "over-the-counter" trades and the market liquidity of the SGRP Common Stock could be adversely affected, which could result in a decrease in the market price of the SGRP Common Stock due to (among other things) the potential for increased spreads between bids and asks, lower trading volumes and reporting delays in over-the-counter trades and the negative implications and perceptions that could arise from such a delisting

In addition to the foregoing, if the SGRP Common Stock is delisted from Nasdaq and is traded on the over-the-counter market, the "penny stock" rules, if applicable, could adversely affect the market price of the SGRP Common Stock and increase the transaction costs to sell those shares. The SEC has adopted specific rules regulating "penny stock", including additional risk disclosure requirements by broker dealers. If applicable in the future, the penny stock rules may also restrict the ability of broker-dealers to sell the SGRP Common Stock and may adversely affect the ability of investors to sell their shares.

We have inherent risk of failure to maintain effective internal controls.

Establishing and maintaining effective internal control over financial reporting and disclosures are necessary for the Company to provide reliable financial and other reporting in accordance with accounting principles generally accepted and applicable securities and other laws in the United States and all other countries in which we operate. Because of its inherent limitations, internal controls over financial and other reporting are not intended to provide absolute assurance that the Company could prevent or detect a misstatement of its financial statements or other reports or any misconduct or fraud. Any failure to maintain an effective system of internal control over financial and disclosure reporting could limit the Company's ability to report its financial results and file its other reports accurately and timely or to detect and prevent misconduct or fraud. A significant financial or disclosure reporting failure or material weakness in internal control over financial or other reporting could cause a loss of investor confidence and a decline in the market price of the SGRP Common Stock. The Company's management is responsible for establishing and maintaining adequate internal controls over its financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act. As disclosed in Item 9A of Part II of this report, the Company identified material weaknesses in its internal controls as of December 31, 2024. This material weaknesses resulted in errors in revenue, expense, accrual accounts and prepaid accounts reconciliation at year end as well as a material error in the calculation over the sale of international components and the deconsolidation of one subsidiary.

Due to the material weaknesses in the Company's internal control over financial reporting, the Company also concluded that its disclosure controls and procedures were not effective as of December 31, 2024. Our inability to remediate the material weaknesses, our discovery of additional weaknesses, and our ability to achieve and maintain effective disclosure controls and procedures and internal control over financial reporting could affect our ability to ensure timely and reliable financial reports, and weaken investor confidence in our financial reporting. The Company is actively engaged in developing a remediation plan designed to address the material weaknesses, but cannot be certain as to when its remediation plans will be fully completed. If the remedial measures are insufficient to address the material weakness or if additional material weaknesses or significant deficiencies in the internal controls are discovered or occur in the future, the consolidated financial statements may contain material misstatements and the Company could be required to restate its financial results, which could materially and adversely affect the Company's business and results of operations or financial condition, restrict its ability to access the capital markets, require the Company to expend significant resources to correct the weaknesses or deficiencies, subject it to fines, lawsuits, penalties, judgements or other legal expenses, harm its reputation, create delays or the inability to meet future SEC reporting obligations or otherwise cause a decline in investor confidence.

Our business is dependent on client payments, business performance and broad economic shifts, and we may be at risk of liquidity constraints and not satisfying all of our credit facility covenants.

Our business and cash flow can be adversely affected by adverse changes in our client payments, our business performance and broad economic shifts. There can be no assurances that in the future the Company will not violate covenants of its current or future credit facilities; and if it does violate them, that the Company's lenders will waive any violations of such covenants affecting the Company's ability to maintain adequate lines of credit or sufficient availability under its lines of credit. Accordingly, minimal profitability by the Company, additional one-time charges and changes in the composition and quality of its borrowing base, as well as any failure to maintain sufficient availability or lines of credit from the Company's lenders (which may involve their subjective judgment), could have a material adverse effect on the Company or its performance or condition, whether actual or as planned, intended, anticipated, estimated or otherwise expected.

Our business and stock liquidity and market value could be adversely affected if we settle outstanding litigation by making payments or issuing stock.

The timing, size and success of litigation settlement efforts and any associated capital commitments cannot be readily predicted. Future litigation settlements may be financed by issuing shares of the SGRP Common Stock (directly or through convertible securities), cash or a combination thereof. If the SGRP Common Stock does not maintain a sufficient market value, or if potential litigants are otherwise unwilling to accept the SGRP Common Stock as part of the consideration for the settlement of their litigation, the Company may be required to obtain additional capital through debt or equity financings. To the extent the SGRP Common Stock is used for all or a portion of the consideration to be paid for legal settlements, dilution may be experienced by existing stockholders. In addition, there can be no assurance that the Company will be able to obtain the additional financing it may need for litigation settlements on terms that the Company deems acceptable. Failure to obtain such capital would materially and adversely affect the Company or its performance or condition. There also can be no assurance that the other parties in any settlement will abide by the terms or any settlement or any related releases. See Item 3 -- Legal Proceedings, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations; Overview, and Note 10 to the Company's Consolidated Financial Statements - Related Party Transactions, below.

Our business performance is connected to the experience and retention of key executives.

The business strategy, client relationships and operating knowledge are critical to the Company’s long-term success. We believe we have attracted and developed the most experienced and proven executive leadership team in the industry. However, we work in a competitive industry where talent is visible and other companies may approach and attract our key executives. We continuously review the terms and incentives for our executives to retain them and competitively compensate them to deliver industry leading results on behalf of all shareholders.

Our significant stockholders may take actions, subject to the restrictions of the Change of Control, Voting and Restricted Stock Agreement ("CIC Agreement") and our By-Laws.

The Company's co-founders, Mr. Robert G. Brown and Mr. William H. Bartels, are significant stockholders ("Significant Stockholders”) and Mr. Bartels is a Director of SGRP and together with certain related parties (collectively, the "Majority Stockholders") beneficially own approximately 46.6% of the SGRP Common Stock and could acquire more. That amount was calculated using their respective individual beneficial ownership, on December 31, 2024, which includes the amounts they represented in the CIC Agreement and subsequent Form 4 filings, the total outstanding ownership (23,449,701 shares) of the SGRP Common Stock on a non-diluted basis as of December 31, 2024. See Security Ownership of Certain Beneficial Owners and Management, in Part III below, Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities, and Note 10 to the Company's Consolidated Financial Statements- Related Party Transactions, below.

As significant stockholders, the Majority Stockholders can have an impact on the nomination and election of directors and the passage of other shareholder meeting proposals.

SPAR Group Inc. recognizes the increased global cybersecurity threats and sophisticated, targeted computer crime and the risk it poses to our operations. We rely on information technology and data to operate our business and develop, market and deliver our products and services to our customers.

Our cybersecurity risk management program is led by our Chief Information Officer (“CIO”), who is directly responsible for establishing cybersecurity strategies and structures and managing ongoing cybersecurity risk management activities. Our CIO is part of the executive management team, and updates our CEO and executive management on a monthly, or even more frequent, basis on cybersecurity enhancement and the development and implementation of our roadmap.

We have strategically embedded cybersecurity risk management within an enterprise-wide framework, ensuring that it permeates across various facets of our operations. This integrated approach encompasses administrative protocols, operational strategies, organizational structures, physical safeguards, and technical measures, all tailored to align with the scope and nature of our business.

Cybersecurity Risk Management and Strategy

We believe this integrated approach allows cybersecurity considerations to be an integral part of our decision-making processes. Our day-to-day cybersecurity work is led by our CIO and Head of Infrastructure. Both are highly experienced professionals. This group works closely with our executive management to continuously evaluate and address cybersecurity risks in alignment with our business and operational needs.

Cybersecurity risks related to our business, technical operations, privacy and compliance issues are identified and addressed through a combination of third-party assessments, internal audit, IT security, governance, risk and compliance reviews. To defend, detect and respond to cybersecurity incidents, we, among other things:

• Proactively review threat intelligence and other information obtained from governmental, public or private sources
• Perform network vulnerability scans, cyber-hygiene assessments, and continually evaluate and address perceived gaps.
• Conduct companywide cyber awareness training and on-going new employee cyber training.
• Deploy a wide array of industry leading 3rd party solutions to continuously monitor network and endpoints.
• On-going testing and evaluation of backup processes.
• Perform disaster recovery tabletop exercises to assess readiness for possible events.

As noted, to operate our business, we utilize certain third-party service providers to perform a variety of functions and provide certain security-related services, such as outsourced business critical functions, professional services, SaaS platforms, managed services, cloud-based infrastructure, data center facilities, content delivery to customers, encryption and authentication technology, corporate productivity services, and other functions; as well as third parties that assist us to identify, assess and manage cybersecurity risks, including professional services firms, threat intelligence service providers, cybersecurity software providers, penetration testing firms and other vendors that help to identify, assess or manage cybersecurity risks.

In addition, we have implemented an incident response and breach management plan which has four overarching and interconnected stages:

• Detection of a security incident,
• Identification and containment,
• Response, eradication and recovery,
• Post-incident analysis and future preparations.

The plan also provides the process and workflow of communication for escalation of incidents to executive leadership to determine incident classification, impact severity, and if and what further actions are warranted. Incident responses are overseen by leaders from our Software, Infrastructure Engineering, and Executive team.

Cybersecurity Governance

Cybersecurity holds a significant role within our risk management procedures and remains a focal point for our Board and management. Under the Board's oversight of general risk identification and management activities, the Audit Committee monitors cybersecurity risks. Committee members engage in comprehensive discussions with management regarding these risks, as well as the measures taken to safeguard the company's information systems and security, along with reviewing management's steps towards data privacy protection. Additionally, the Audit Committee receives annual cybersecurity updates from senior management, covering both existing and emerging risks, management's responses and mitigation efforts, any cybersecurity or data privacy incidents, and the status of key information security initiatives. Furthermore, our Board members regularly hold informal discussions with management about cybersecurity news events and any updates to our cybersecurity risk management and strategy programs.

The leadership of our cybersecurity risk management and strategy is guided by experts from our Software, Infrastructure Engineering, and Executive teams. With backgrounds spanning: information technology, security, systems, programming, and corporate strategy, these individuals are equipped to oversee prevention, detection, mitigation, and remediation of cybersecurity incidents. They actively engage in managing our cybersecurity risk processes, including executing our incident response plan, and regularly report relevant matters to the executive management and the Audit Committee.

We carry insurance that provides protection against the potential losses arising from a cybersecurity incident. However, there is no assurance that our insurance coverage will cover, or be sufficient to cover, all losses or claims that may result from a cybersecurity incident.

Last year

During the last fiscal year, 2024, the Company did not encounter any material cybersecurity incidents, nor did it incur any notable expenses as a result.

The Company does not own any real property. The Company leases certain office space and storage facilities for its corporate headquarters, and subsidiaries under various operating leases. These leases generally require the Company to pay rents at market rates, subject to periodic adjustments, plus other charges, including utilities, real estate taxes and common area maintenance. The Company believes its relationships with its landlords to be generally good. However, as these leased facilities generally are used for offices and storage, the Company believes that other leased spaces could be readily found and utilized on similar terms should the need arise.

The Company relocated its corporate headquarters from New York to its existing operations office in Auburn Hills, Michigan, in September of 2020. The Company also maintains its data processing center in Southfield, Michigan and its warehouse in Auburn Hills, Michigan, under an extended operating lease expiring October 31, 2025.

The following is a list of the headquarter locations for the Company and its domestic and international subsidiaries:

DOMESTIC:

Auburn Hills, Michigan (Corporate Headquarters) Southfield, Michigan (Data Center) Jacksonville, Florida (Resource Plus)

INTERNATIONAL:

Vaughan, Ontario, Canada

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.

Overview of Our Business

SPAR Group is a leading 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 retail services company that drives sales, margins and operating efficiency for our clients.

As of December 31, 2024, the Company operated in the United States and Canada. During 2024, the company strategically exited joint ventures in Mexico, Brazil, South Africa, China, Japan and India.

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.

Delayed Filing

In fiscal year 2024, the Company navigated an exceptionally complex set of transactions and operational changes. During the year, the Company divested six foreign joint ventures and acquired the remaining 49% ownership interest in another joint venture, significantly reshaping its corporate and consolidation structure. The Company also implemented a new enterprise resource planning (ERP) system, running it in parallel during the fourth quarter to transition from legacy financial systems. In addition, preparations for an anticipated acquisition of Highwire late in the year necessitated a delay in completing the year-end financial close and postponed the start of the annual audit. These events collectively created an unusually challenging financial reporting environment for 2024.

EBITDA and 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) restructuring expenses, (v) impairment, (vi) nonrecurring legal settlement costs and associated legal expenses unrelated to the Company's core operations, (vii) special items as determined by management, and (viii) review of strategic alternatives, which includes primarily legal, consulting, and investment bank fees. This metric is a supplemental measure of our operating performance that is neither required by, nor presented in accordance with, US GAAP.

We present Adjusted EBITDA because we believe it assists investors and analysts in comparing our operating performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our ongoing operating performance. You are encouraged to evaluate these adjustments and the reasons we consider them appropriate for supplemental analysis. In evaluating Adjusted EBITDA, you should be aware that in the future we may incur expenses that are the same as or similar to some of the adjustments in our presentation of Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by unusual or nonrecurring items. There can be no assurance that we will not modify the presentation of Adjusted EBITDA in future periods, and any such modification may be material. In addition, Adjusted EBITDA may not be comparable to similarly titled measures used by other companies in our industry or across different industries.

Our management believes Adjusted EBITDA is helpful in highlighting trends in our core operating performance compared to other measures, which can differ significantly depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate and capital investments. We also use Adjusted to supplement U.S. GAAP measures of performance in the evaluation of the effectiveness of our business strategies and to make budgeting decisions.

Adjusted EBITDA has its limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under US GAAP. Some of these limitations include:

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

Our Consolidated Net Income (loss) was approximately ($2.7) million and $4.8 million for the years ended December 31, 2024, and December 31, 2023. Our Consolidated EBITDA was approximately $2.5 million and $11.4 million for the years ended December 31, 2024 and 2023 respectively. The following is a reconciliation of our net income to Adjusted EBITDA for the periods presented:

(in thousands)

Results of Operations

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

17

Results of operations for the year ended December 31, 2024, compared to the year ended December 31, 2023.

Net Revenues

Consolidated net revenues for the year ended December 31, 2024, were $ 196.8 million compared to $ 262.7 million for the year ended December 31, 2023, a decrease of $ 65.9 million or 25.1%. This decrease in revenue was primarily driven by the sale of all international joint ventures during various times throughout the year.

The Americas net revenues totaled $ 177.2 million and $ 203.7 million for the years ended December 31, 2024 and 2023, respectively. The decrease of $ 26.5 million or 13.0% is the result of the sale of our Brazilian joint venture during the second quarter. The decline in revenues associated with the sale of Brazil were partially offset by 11% revenue growth in the United States and 15% revenue growth in Canada.

The Asia-Pacific net revenues totaled $ 11.3 million and $ 24.5 million for the years ended December 31, 2024 and 2023, respectively, a decrease of $ 13.2 million or 53.9%. The decline in revenues at Asia-Pacific is due to the exit of all joint ventures in the region in 2024, compared to a full year of revenues in the prior year.

The EMEA net revenues totaled $ 8.3 million and $ 34.6 million for the years ended December 31, 2024 and 2023, respectively, a decrease of $ 26.3 million or 76.1%. The decline in revenues is due to the exit of our South African joint venture in 2024.

Cost of Revenues

The Company's cost of revenues consists of its in-store labor and field management wages, related benefits, travel and other direct labor-related expenses and was 80.5% of net revenue for the year ended December 31, 2024 compared to 78.9% of net revenues for the year ended December 31, 2023. The decline in margin in 2024 was driven by significant growth in revenue from the remodel business, which is lower margin than the traditional merchandising business.

The Americas cost of revenue as a percent of net revenue was 80.2% and 79.8% for the years ended December 31, 2024 and 2023, respectively. The increase in cost of 0.4% was the result of higher costs in our owned U.S. business related to the high proportion of revenue growth in the remodel business. These higher costs were partially offset by a partial year impact of the exit of Mexico and Brazil, which are traditionally lower margin businesses than those in the U.S. and Canada.

The Asia-Pacific cost of revenue as a percent of net revenue was 80.7% and 74.7% for the years ended December 31, 2024 and 2023, respectively. Margins declined in Asia-Pacific due to lower margins in China and the full year impact of the sale of Australia, which had high margins in 2023. As of December 31, 2024, the Company has exited all business in Asia-Pacific.

The EMEA cost of revenue as a percent of net revenue was 84.6% and 76.3% for the years ended December 31, 2024 and 2023, respectively. This decrease in gross margin is due to (i) additional variable expenses in the cost of sales, (ii) government imposed wage increases (8.5%) ahead of inflation (5.3%) at a time when the economy is under pressure which forced margin reduction in contract renegotiations. The Company exited the EMEA region in the first quarter of 2024.

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 $ 37.3 million, or 18.9% of net revenue, and approximately $ 43.7 million, or 16.6% of net revenue for the years ended December 31, 2024 and 2023, respectively. Selling, general and administrative expenses for the year-ended December 31, 2024 includes expenses of approximately $5.5 million related to our consideration of strategic alternatives, costs to execute sale of joint ventures, and transaction costs associated with the proposed merger with Highwire capital. Absent these costs, which are not on-going in nature, Selling, general and administrative expenses were 16.5% of net revenue in 2024.

The Americas selling, general and administrative expenses totaled $ 33.0 million and $ 32.2 million for the years ended December 31, 2024 and 2023, respectively. Costs were essentially flat to prior year as the impact of the sale of Brazil was offset by higher costs associated with the evaluation of strategic alternatives.

The Asia-Pacific selling, general and administrative expenses totaled $ 3.1 million and $ 6.5 million for the years ended December 31, 2024 and 2023, respectively. The decrease of $ 3.4 million, or 52.2% is primarily attributable to the exit of international joint ventures by the end of the third quarter of 2024.

The EMEA selling, general and administrative expenses totaled $ 1.1 million and $ 5.0 million for the years ended December 31, 2024 and 2023, respectively. EMEA was exited in second quarter of 2024.

Depreciation and Amortization

Depreciation and amortization expense was approximately $ 1.6 million and $ 2.0 million for the years ended December 31, 2024 and 2023, respectively.

Interest Expense

The Company's interest expense was $ 2.2 million and $ 1.9 million for the years ended December 31, 2024 and 2023, respectively.

The America interest expense was $ 2.1 million and $ 1.4 million for the years ended December 31, 2024 and 2023, respectively. The increase was due to higher debt balances resulting from, among other factors, the legal obligation to have balance sheet cash of no less than $14.2 million at the closing date of the Highwire merger.

Other Expense, Net

Other expense, net was $ 0.2 and $ 0.3 million for the years ended December 31, 2024 and 2023, respectively.

Income Tax Expense

The Company had income tax expense of $ 1.2 million, with an effective tax rate of -82.9%, and $ 2.4 million, with an effective rate of 33.0%, for the years ended December 31, 2024 and 2023, respectively. For the year ended December 31, 2024, our effective income tax rate of -82.9% varied from the U.S. federal statutory rate of 21% primarily as a result of foreign rate differential, the sale of foreign entities primarily as a result of the sale of the Brazilian JV qualifying as a gain in Brazil and subject to foreign withholding tax but being characterized as a loss under US GAAP, and permanent differences.

Net income attributable to non-controlling interest

Net income attributable to noncontrolling interest was $ 0.5 million and $ 0.9 million for the years ended December 31, 2024 and 2023, respectively.

Critical Accounting Policies and Estimates

The Company’s critical accounting policies, including the assumptions and judgments underlying them, are disclosed in Note 2 to the Company’s consolidated financial statements included elsewhere in this Annual Report on Form 10-K. These policies have been consistently applied in all material respects and address matters such as impairment of long-lived assets, intangible assets, and goodwill, revenue recognition, allowance for credit losses, and internal use software. While the estimates and judgments associated with the application of these policies may be affected by different assumptions or conditions, the Company believes the estimates and judgments associated with the reported amounts are appropriate under the circumstances.

Impairment of Long-Lived Assets, Intangible Assets, and Goodwill

The Company continually monitors events and changes in circumstances that could indicate that the carrying amounts of the Company’s property and equipment and may not be recoverable. When indicators of potential impairment exist, the Company assesses the recoverability of the assets by estimating whether the Company will recover its carrying value through the undiscounted future cash flows generated by the use of the asset and its eventual disposition. Based on this analysis, if the Company does not believe that it will be able to recover the carrying value of the asset, the Company records an impairment loss to the extent that the carrying value exceeds the estimated fair value of the asset. If any assumptions, projections or estimates regarding any asset change in the future, the Company may have to record an impairment to reduce the net book value of such individual asset.

When facts and circumstances indicate that the carrying value of definite-lived intangible assets may not be recoverable, the Company assesses the recoverability of the carrying value by preparing estimates of sales volume and the resulting profit and cash flows expected to result from the use of the asset or asset group and its eventual disposition. If the sum of the expected future cash flows (undiscounted and without interest charges) is less than the carrying amount, the Company recognizes an impairment loss. The impairment loss recognized is the amount by which the carrying amount of the asset or asset group exceeds the fair value. The Company uses a variety of methodologies to determine the fair value of these assets, including discounted cash flow models, which are consistent with the assumptions hypothetical marketplace participants would use.

Goodwill is subject to annual impairment tests and interim impairment tests if impairment indicators are present. The Company performs the annual impairment test during the third quarter each year. The impairment tests require the Company to first assess qualitative factors to determine whether it is necessary to perform a quantitative goodwill impairment test. The Company is not required to calculate the fair value of a reporting unit unless it determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. If it is determined that it is more likely than not, or if the Company elects not to perform a qualitative assessment, the Company proceeds with the quantitative assessment. Under the quantitative test, if the fair value of a reporting unit exceeds its carrying amount, then goodwill of the reporting unit is considered to not be impaired. If the carrying amount of the reporting unit exceeds its fair value, then an impairment loss is recognized in an amount equal to the excess, up to the value of the goodwill.

Revenue Recognition

The Company generates its revenues by providing merchandising services to its clients. Revenues are recognized when the Company satisfies a performance obligation by transferring services promised in a contract to a customer and in an amount that reflects the consideration that the Company expects to receive in exchange for those services. Performance obligations in the Company’s contracts represent distinct or separate services that we provide to the Company’s customers; generally, the Company’s contracts have a single performance obligation. If, at the outset of an arrangement, the Company determines that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met.

The Company’s merchandising services are provided over time, generally on a daily, weekly, or monthly basis, and transaction price is based on the contractually-specified rate-per-driver metric (i.e., rate per hour, rate per store visit, or rate per unit stocked). The Company recognizes revenues for its contracts based on the contractually-specified rate-per-driver metric(s) utilizing the right-to-invoice practical expedient because the Company has a right to consideration for merchandising services completed to date. All of the Company’s contracts have a duration of one year or less and over 90% of the Company’s contracts are completed in less than 30 days.

Customer deposits, which are considered advances on future work, are deferred and recorded as revenue in the period in which the services are provided.

Allowance for Credit Losses

The Company continually monitors the collectability of its accounts receivable based upon current client credit information and financial condition. Balances that are deemed to be uncollectible after the Company has attempted reasonable collection efforts are written off through a charge to the bad debt allowance and a credit to accounts receivable. Accounts receivable balances, net of any applicable reserves or allowances, are stated at the amount that management expects to collect from the outstanding balances. The Company provides for probable uncollectible amounts through a charge to earnings and a credit to bad debt allowance based in part on management’s assessment of the current status of individual accounts.

Based on management’s assessment, the Company established an allowance for credit losses of $0.4 million and $1.5 million at December 31, 2024 and 2023, respectively. Credit loss expense was $0.1 million and $0.3 million for the years ended December 31, 2024 and 2023, 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 $1.0 million of costs related to software developed for internal use for the years ended December 31, 2024 and 2023, respectively, and recognized approximately $1.4 million and $1.3 million of amortization of capitalized software for the years ended December 31, 2024 and 2023

Recent Accounting Pronouncements

See the sections titled "Summary of Significant Accounting Policies— Recently Adopted 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, 2024, 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, 2024 and 2023

Net cash used in operating activities was $ (0.7) million for the year ended December 31, 2024 and net cash provided by operating activities was $ 6.8 million for the year ended December 31, 2023. The year-over-year decrease in net cash provided by operating activities was primarily due to the sale of Brazil & South Africa, which both generated strong operating cash flows in 2023. This impact was partially offset by improved working capital management in the US.

Net cash provided by investing activities for the year ended December 31, 2024 was $ 9.9 million, compared to cash used in investing activities of $ (2.3) million for the year ended December 31, 2023. The net cash provided by investing activities was primarily attributable to the sale of international joint ventures, net of transaction costs.

Net cash used in financing activities for the year ended December 31, 2024 was approximately $ (1.7) million compared to $ (3.0) million used in financing activities in 2023. The year-over-year decrease in cash from financing activities was driven by payment of notes to the sellers of Resource Plus, the purchase of treasury stock, and distributions to non-controlling investors.

For the year ended December 31, 2024, the Company experienced a net increase in cash and cash equivalents amounting to approximately $ 7.5 million, net of the impact of foreign exchange rate fluctuations of $(0.1) . The overall increase in cash was driven by proceeds from the sale of international joint ventures as well as improved working capital management.

Brazil Joint Venture Sale and Non-GAAP EPS Impact

Economic Substance of the Transaction

In June 2024, SPAR Group completed the sale of its 51% ownership stake in its Brazilian joint venture. The total consideration was $10.7 million, consisting of $9.7 million in cash received by SPAR and $1.0 million withheld for Brazilian tax purposes. SPAR’s carrying value for its investment in the Brazilian joint venture was roughly $4.8 million before the sale. Based on these figures, the transaction generated an economic pre-tax gain of approximately $5.9 million (i.e. the excess of the $10.7 million proceeds over the $4.8 million carrying value).

To facilitate this purchase, the buyer largely financed the payment at the joint venture level, rather than using entirely new funds. The funding was achieved through two components:

• a new $7.5 million loan incurred by the Brazilian joint venture in March 2024, and
• $3.5 million paid by the minority (49%) joint venture partner.

As a result, the joint venture obtained the necessary $10.7 million to complete the acquisition of SPAR’s shares. SPAR received the $9.7 million in cash proceeds (net of Brazilian withholding tax) before deconsolidating the Brazilian entity from its financial statements.

U.S. GAAP Accounting Treatment and Impact

Under U.S. GAAP, the accounting result of this sale differed from the economics described above. When SPAR deconsolidated its Brazilian joint venture upon sale, it removed all the joint venture’s assets and liabilities from the consolidated balance sheet. As a consequence of the mechanics of the joint venture financing, namely the payment originating from the joint venture qualifying as a capital distribution (instead of consideration for sale) SPAR was required to reclassify approximately $7.5 million into the income statement as part of the gain/loss calculation. This non-cash reclassification effectively reduced the gain on the sale by $7.5 million. Consequently, instead of recording the $5.9 million gain that the transaction economically produced, SPAR’s financial statements reflect a $1.6 million loss on the sale of the Brazilian joint venture under GAAP. In other words, the $5.9 million economic gain was offset by this $7.5 million accounting adjustment, yielding a net loss in the reported results. It is important to note that this $1.6 million loss is purely a technical accounting/consolidation outcome and not reflective of the underlying economics of the transaction. The loss resulted from the required equity reclassification entry, rather than any actual operational or cash loss on the sale. Had the economic substance been reflected in our accounting (i.e. had we been able to record the approximately $5.9 million true gain on the sale instead of a loss), our pre-tax income for 2024 would have been higher by about $7.5 million. After applying taxes, this difference would have significantly increased our net income and earnings per share.

For perspective, earnings per share (EPS) would have been materially higher if the $5.9 million gain were included - on such a basis, EPS for 2024 would have been $0.19 per share compared to the reported GAAP result of ($0.13).

This adjusted EPS measure adds back the after-tax impact of the reduction of the economic gain on the sale by $7.5 million (approximately $0.32 per share) to our GAAP EPS. This adjustment would have turned our reported net loss for the year into a net profit, underscoring the positive economic impact of the Brazil joint venture sale.

In summary, while our official results are reported in accordance with U.S. GAAP (and thus include the $1.6 million accounting loss on the Brazil sale), we believe it is helpful to provide investors with the economic context of this transaction. Excluding the technical accounting adjustment, the sale of our Brazilian joint venture was a highly accretive disposition that added substantial economic value. The adjusted gain and related EPS impact discussed above are supplemental, non-GAAP figures provided to illustrate the true economic outcome. Management emphasizes that the GAAP financial statements remain the authoritative source of our results, but the additional context is intended to clarify that the GAAP loss on the sale was driven by accounting requirements rather than an economic loss.

(in thousands)

Restatement of Quarterly Financial Data

The Company has restated its previously issued unaudited interim financial statements for the three and six months ended June 30, 2024 and the three and nine months ended September 30, 2024 (the “Non-Reliance Periods”). Detailed restatements of the Company's condensed consolidated quarterly financial statements are provided in Note 16 – Restatement (Unaudited) in the accompanying notes to the consolidated financial statements.

The following unaudited quarterly statements of operations data for the quarter ended June 30, 2024 and for the quarter ended September 30, 2024 have been prepared on a basis consistent with our audited annual financial statements included in this Annual Report on Form 10-K and include, in our opinion, all normal recurring adjustments necessary for the fair presentation of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following should be read in conjunction with our audited financial statements and the related notes included in this Annual Report on Form 10-K.

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.

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 not effective as of such date due to material weaknesses in internal control over financial reporting, described below.

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, 2024. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2024. In connection with the preparation of our consolidated financial statements for the year ended December 31, 2024, we identified two material weaknesses 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 did not maintain effective controls related to the financial statement close process to ensure the completeness and accuracy of certain amounts and disclosures, specifically related to the preparation and review of balance sheet account reconciliations. This material weakness resulted in errors in revenue, expense, accrual accounts and prepaid accounts at year end.

Management did not design and implement effective controls used in the financial close process over non-recurring transactions, including accounting for the deconsolidation and sale of the international components. This material weakness resulted in errors around the calculation over the sale of international components and the deconsolidation of one subsidiary.

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:

1. Implemented a modern and more efficient ERP system which went live January 1, 2025 with a parallel run in Q4 2024, and which includes modern and inherent controls and reduces the need for manual adjustments and likelihood of errors;

2. Hiring of an Assistant Controller as of January 1, 2025, who is an experienced CPA, and will provide necessary support to the existing Controller and ensure proper reconciliations are performed in a timely manner;

3. Consolidation of the finance and accounting team in one office (versus different offices and home offices), in a transition that started January 1, 2025, centralizing processes and ensuring more consistent application of controls across the Company

4. Simplified the organizational structure by divesting six foreign joint venture operations, thereby reducing the complexity of the Company’s financial reporting and oversight processes.

Management 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

Other than the material weaknesses described above, there were no changes in the Company's internal controls over financial reporting that occurred during the Company's quarter ended December 31, 2024, that materially affected, or are reasonably likely to materially affect, the Company's internal controls over financial reporting.