SPAR Group, Inc. (SGRP) 2024 10-K Review

SPAR Group, Inc. (NASDAQ: SGRP) is a global retail merchandising and brand marketing services provider. With more than 50 years in the industry, SPAR executes programs to improve retail sell-through for consumer goods manufacturers and retailers across the globe. In 2024, the Company focused on the U.S. and Canada, exiting joint ventures in Mexico, Brazil, South Africa, China, Japan, and India. This review summarizes the most important aspects of SPAR’s 2024 Form 10-K and provides an investment outlook.

Warren.AI 💰 5.0 / 10

1. Business Overview

Corporate Profile

• Leading merchandising and brand marketing services company.
• Provides six key services: merchandising & marketing, category management, retail transformation, assembly & installation, business analytics, and fulfillment & distribution.
• Serves retailers and manufacturers in mass, grocery, pharmacy, convenience, apparel, home improvement, electronics, and other channels.
• Focused on “last two feet” of store execution—product presentation, display setup, and promotional events.

Strategic Priorities

1. Grow the Core Business
   • Deepen relationships with long-standing clients in the U.S. & Canada.
   • Win new contracts through RFPs, marketing, and industry events.
2. Expand Services
   • Test, acquire, or build adjacent capabilities: e-commerce execution, AI‐driven retail analytics, digital fulfillment.
3. Invest in Technology
   • Enhance SPARView platform for real‐time reporting, photo compliance, and inventory insights.
   • Explore AI/computer vision for automated store checks.

2. 2024 Financial Highlights

Consolidated Results

• Net revenues: $196.8 million, down 25.1% vs. $262.7 million in 2023.
– Americas: $177.2 M (–13.0%)
– Asia-Pacific: $11.3 M (–53.9%)
– EMEA: $8.3 M (–76.1%)

• Gross profit margin: 19.5% vs. 21.1% in 2023.
– Lower due to growth in lower‐margin remodeling and exit of international ventures.

• Operating income: $0.9 M vs. $9.4 M in 2023.
– Included a $1.3 M gain on Brazil JV sale (GAAP loss on sale after technical consolidation restatement).

• Net loss: $(2.7) million vs. net income $4.8 million in 2023.
– Restatement impact: sale of Brazil JV produced economic gain of ~$5.9 M but GAAP forced ~$(1.6) M loss.

• EBITDA: $2.5 million vs. $11.4 million in 2023.
• Adjusted EBITDA: $6.6 million vs. $13.0 million in 2023.

3. Segment Performance

Americas
• Established U.S. & Canada operations.
• Revenue (2024): $177.2 M
• Gross margin: 19.8%
• Operating income: $1.8 M

Asia-Pacific & EMEA
• Exited China, Japan, India, South Africa, Brazil, Mexico JV operations in 2024.
• Combined these international exits decreased complexity but trimmed revenue.

4. Cash Flow & Balance Sheet

Cash Flow (9M 2024)

• Operating cash flow: $(0.7) M
– Driven by reduced revenues and JV divestitures.

• Investing activities: $9.9 M net proceeds
– Sale of six joint ventures generated proceeds, net of transaction costs.

• Financing activities: $(1.7) M
– Debt repayments, JV earn-out payments, and stock repurchases.

• Cash at 12/31/2024: $18.2 M

Balance Sheet

• Total assets: $56.4 M (vs. $90.3 M at 12/31/2023).
• Debt: $18.3 M (lines of credit & short-term loans).
• Net debt position reduced after JV sales.
• Equity: $24.3 M (SGRP) + NCI $0M once all JVs closed.

5. Joint Venture Exits & M&A Activity

Brazil JV
• Completed sale of 51% stake in June 2024 for $10.7 M in proceeds.
• Economic gain: ~$5.9 M on cash basis, but GAAP technical consolidation reduced GAAP gain.

Other Divestitures
• South Africa JV sold for ~R144.6 M (~$7.7 M) in Q2 2024.
• China JV sold for $0.2 M in April 2024.
• Japan and India JVs sold (~$0.5 M each) in Q3 2024.
• Mexico JV sold for $0.4 M in Q4 2024.

Transaction Impact
• Streamlined operations and refocused on U.S./Canada.
• Total JV divestiture proceeds: ~$21 M before taxes and expenses.

6. Restatement & Controls

In 2024, SPAR identified misstatements in 2024 interim 10-Qs related to:

1. Revenue/Expense accrual reconciliations
2. Accounting for JV dispositions

These required restatement of Q2 and Q3 2024 (Form 10-Q) and delayed filing of annual 10-K by five weeks.
Material weaknesses in internal control over financial reporting were disclosed.
Remediation steps underway:
• Implemented new ERP system (Q4 2024 parallel run, go-live 1/1/2025).
• Hired Assistant Controller.
• Centralized accounting team.
• Simplified structure via JV exits.

7. Risk Factors

Key risks from Item 1A:

• Relisting risk: SPAR shares thinly traded. Risk of Nasdaq noncompliance and potential delisting.
• Reliance on JVs & Field Vendors: Material JVs sold; reliance on independent contractors (legal, quality risk).
• Economic sensitivity: Retail outsourcing services depend on consumer demand and margins.
• Control & Restatement: Going private transaction risks, restatement impacts credibility and investor confidence.
• Internal controls: Material weaknesses identified; remediation is in progress.
• Transaction outcome: Pending merger with Highwire (all-cash $2.50/share). Risk of non-consummation or delays.

8. Corporate Governance & M&A

Merger Agreement
• SPAR entered a definitive merger agreement with Highwire Capital LLC (an�$58 M all-cash acquisition at $2.50/share) on August 30, 2024.
• SGRPs Special Committee and Board approved the transaction; shareholder approval obtained October 25, 2024.
• Closing conditions include customary regulatory, shareholder, debt-financing, and working capital adjustments.
• Merger must close by May 30, 2025, or else can be terminated or extended subject to a break fee.

9. Investment Outlook & Valuation

Positives

• Market-leading U.S. & Canada operations with growing remodel & transformation margins.
• Simplified structure post-JV exits; technology investments in SPARView.
• Attractive all-cash buyout at $2.50/share represents ~30%+ premium to trading levels in 2024.

Negatives

• 2024 net loss $(2.7) M, downward revenue pressure from JV exits.
• Material weaknesses and restatement impair transparency.
• Dependence on large clients and independent contractors exposes SPAR to legal and operational risks.
• Thin public float and low liquidity expose stock to high volatility.

Valuation Considerations

• SPARs LTM revenue: ~$197 M. LTM Adj. EBITDA: ~$6.6 M.
• Post-close, SPAR becomes private at a $58 M EV, representing ~8.8x Adj. EBITDA.
• Private deal likely best outcome for minority shareholders in a multi-jurisdiction complexity environment.

Investment Score: 5.0 / 10
SPAR is a niche leader in retail execution with strong U.S./Canada franchises and attractive tech platform. However, 2024 operating losses, control issues, restatement, and transaction execution risks temper upside. The pending all-cash buyout at $2.50/share provides a clear path to value for shareholders, making it a balanced risk/reward opportunity at current trading levels, meriting a 5 of 10.

---

Net Loss (2024): $(2.7) million