Practical Application of ASC 805 and Best Practices for Financial Reporting Engagements

Transcription

1 Practical Application of ASC 805 and Best Practices for Financial Reporting Engagements

2 Nathan DiNatale, CPA/ABV, CVA, ABAR Partner - SC&H Group Nathan has over 23 years of public accounting experience in financial statement audits, fraud investigations, business valuation, litigation support, expert testimony and economic damages. His practice includes financial reporting valuation and fair value engagements, marital dissolution and shareholder dispute cases. Currently serves as Chair of the AICPA Business Valuations Committee Member and Past-Chair of Maryland Society of CPAs FVS Committee Member of AICPA FVS Conference Committee since 2013 Frequent presenter for AICPA, ASA and NACVA

3 Terminology PFI Prospective Financial Information IRR Internal Rate of Return WARA Weighted Average Return on Assets BEV Business Enterprise Value TAB Tax Amortization benefit MPEEM Multi-Period Excess Earnings Method NCI Non-controlling Interest

4 Transaction Facts Fortune, Inc., a US based Company acquired Rocket Holdings on March 1, Rocket Holdings is a software implementation and consulting firm headquartered in the U.S. with overseas locations. Fortune paid $75,450,000 for the assets and liabilities of Rocket Holdings, Inc. Total purchase price was paid in cash. Contingent consideration was based on certain revenue and EBITDA targets Non-compete agreement was for a period 24 months subsequent to acquisition for primary shareholder. Customer relationships were identified as the primary asset due to their importance in the sales cycle The Company did not have significant technology that it relied upon for doing business.

5 Transaction Facts Practical Application: Do you have the experience and expertise to complete the engagement with professional competence? Will you require a subcontractor for specific parts of the engagement and has the client approved in writing? Does the engagement letter state the scope of work, intended use of the report, intended users and recipients, standard of value and measurement date for the valuation.

6 Identifiable Intangible Assets Through discussions with management, Fortune, Inc. identified the following intangible assets: Trade name Customer relationships Noncompete Fortune, Inc. also discussed the rationale for the acquisition and provided the PFI relative to their assumptions.

7 Identifiable Intangible Assets Practical Application: Thoroughly document discussions with the company and conclusions reached related to identifiable intangibles Document criteria in ASC 805 for each identifiable asset. Invite the audit team to be involved in the initial call and discuss methodologies and expectations. Identify technical expertise at the Company that may be needed to understand the valuation inputs (software, IPR&D, etc.)

8 Prospective Financial Information Summarized PFI is presented below: ($ in Thousands) 10 Months Year ended December 31, Revenues $ 64,771 $ 77,739 $ 92,050 $ 108,093 Growth 25.6% 20.0% 18.4% 17.4% EBITDA 16,917 19,976 22,442 25,344 EBITDA Margin 26.1% 25.7% 24.4% 24.4%

9 Initial Engagement steps Analyze Prospective Financial Information Prepare an enterprise value and calculate IRR Calculate WACC Valuation of Identifiable Intangibles Valuation of Contingent Consideration Putting it all together Calculation of WARA Adjustments and Reporting

10 Analyze PFI Practical Guidance: Analyze the reasonableness of PFI Consider applicable market participants assumptions of growth, expense savings and synergies Consider the purchase method, what is typical in the industry. Consider recalculating deprecation and amortization Adjust the projections, if necessary, to match the probability-weighted projections used in the contingent consideration calculation. Document understanding of management's approach to PFI Comparison to historical trends and industry expectations

11 Calculate IRR Determine the IRR of the acquisition using a discounted cash flow and the total purchase price. This step is performed in order to: Confirm that the purchase price is representative of fair value. Validate the reasonableness of the cash flow projections to be relied on in applying the income approach to value certain intangible assets Substantiate the reasonableness of the required rates of return applied in the valuation of the intangible assets Validate that the estimated fair values of the assets are reasonable relative to the business enterprise value of the acquired company

12 Calculate IRR Practical Guidance: Adjust the projections, if necessary, to match the probability-weighted projections used in the contingent consideration calculation. Consider an H-model to capture additional growth between the projection period and the terminal year. Use market participant tax rates and net working capital. Include a tax amortization benefit for intangible assets. Calculate the IRR so the PV of cash flows equals purchase price. It is a repetitive process.

13 Enterprise Valuation ($ in Thousands) 10 Months Year ended December 31, Terminal Revenues $ 64,771 $ 77,739 $ 92,050 $ 108,093 $ 111,335 Growth 25.6% 20.0% 18.4% 17.4% 3.0% EBITDA 16,917 19,976 22,442 25,344 16,428 EBITDA Margin 26.1% 25.7% 24.4% 24.4% 14.8% Less: Depreciation and Amortization (319) (319) (319) (319) (324) EBIT 16,597 19,657 22,122 25,025 16,104 EBIT Margin 25.6% 25.3% 24.0% 23.2% 14.5% Taxes 33.8% (5,610) (6,644) (7,477) (8,459) (5,443) Net Operating Profits After Taxes 10,987 13,013 14,645 16,567 10,661 Plus: Depreciation and Amortization Gross Cash Flow 11,307 13,332 14,964 16,886 10,985

14 Enterprise Valuation ($ in Thousands) 10 Months Year ended December 31, Terminal Gross Cash Flow 11,307 13,332 14,964 16,886 10,985 Less: Net Change in Working Capital 6.0% (793) (778) (859) (963) (195) Less: Capital Expenditures (324) (324) (324) (324) (324) Invested Capital Net Cash Flow 10,189 12,229 13,781 15,599 10,466 Terminal Value 56,455 Growth Transition Period Value 18,210 Partial Year Factor Present Value Rate 21.5% ,848 9,432 8,745 9,899 47,381 Total Enterprise Value $ 83,304 Plus: Working Capital Adjustment 6,708 Total Purchase Price $ 90,012 Solve for PV Rate until TEV equals Purchase Price

15 Enterprise Valuation Why is the enterprise value different? $90,012 $75,450 Working Capital Adjustment Contingent Consideration

16 Contingent Consideration Based on EBITDA thresholds as detailed in the Agreement.

17 Payoff Payoff Contingent Consideration Methods and applicability Scenario-Based Method Best for linear payoff structure and nonfinancial in nature R&D events, regulatory approval, yes/no scenarios, etc. Metric Monte Carlo Best for nonlinear payoffs and payoffs based on financial metrics. Percentage of excess, payment cap. Metric Lognormal distribution

18 Monte Carlo Results

19 Contingent Consideration 1/1/ /31/2016 1/1/ /31/2017 Revenue Projections Conservative Growth 12.0% 12.0% Moderate Growth 17.2% 20.9% Aggressive Growth 22.3% 22.3% Monte Carlo Indicated Revenue Projection $ 64,475,843 $ 76,359,684 EBITDA Projections Conservative Margin 20.1% 20.1% Moderate Margin 26.0% 25.1% Aggressive Margin 29.7% 29.8% Monte Carlo EBITDA Projection $ 16,294,654 $ 19,098,794 Deferred Consideration Payment $ 5,500,000 $ 5,500,000 Present Value Factor 21.5% Present Value of Cash Flow $ 4,308,947 $ 3,545,318 Total Present Value of Cash Flows $ 7,854,265

20 Contingent Consideration Practical Application: Pay dates are important in present valuing contingent payments. Discuss the assumptions with management and document rationale. Adjust discount rate for risk inherent in cash flows. Reference Exposure Draft Valuation of Contingent Consideration (The Appraisal Foundation)

21 Tax Amortization Benefit Determine if applicable in enterprise valuation. AICPA White Paper authored by Robert Reilly addresses taxes. Concerning cost approach, They are expenditures that would be paid to create an alternative intangible asset. Therefore, it is not appropriate to tax affect (or not tax affect) such expenditures. However, they are frequently applied to the cost approach under the fair value standard of valuing intangibles.

22 Tax Amortization Benefit TAB = Int * (n/(n-{(pv(r,n,-1)*(1+r))^.05}*t))-1) Where: TAB = Tax amortization benefit Int = Intangible Value n = Number of years {(PV(r,n,-1)*(1+r)^.05} = Present Value of an annuity of $1 over 15 years, at the discount rate. t = Tax rate r = Discount rate

23 Weighted Average Cost of Capital Calculate the cost of equity using Rocket Holding s data. Be sure to select a company specific risk factor that coincides with the risk a market participant would face with Rocket Holdings. Calculate the cost of debt using market participant debt and tax assumptions. The WACC should be close to the IRR (typically within 1%).

24 Weighted Average Cost of Capital Practical Application: Document the methods used to calculate WACC. Consider various federal state and local tax rules in determining the tax rate. Understand and document the capital structure compared to MP data. Include a description of the various assumptions and inputs used to arrive at WACC. Document source of all variables used in the cost of equity. Document rationale for company specific risk premium

25 Weighted Average Cost of Capital Practical Application: The following summarizes the relationship between the IRR and WACC and the implications for the selection of PFI in the instance of a business combination: IRR = WACC Indicates that the PFI likely properly reflects market participant assumptions, and the transaction consideration is likely representative of the fair value IRR > WACC Indicates that the PFI may include some or all of the impact of entityspecific synergies, may reflect an optimistic bias, may reflect a bargain purchase, or all three IRR < WACC Indicates that the PFI may exclude some or all of the impact of market participant synergies, may reflect a conservative bias, may reflect an overpayment, or all three

26 Calculate WACC Example of WACC calculation: Tax Pretax Post-tax % of Capital Capital Rate Cost Cost Structure WACC Debt 33.8% 4.3% 2.8% 21.9% 0.6% Equity 26.8% 26.8% 78.1% 20.9% WACC 21.5% Practical Guidance: Calculate separate costs of capital for working capital and fixed assets 4.3% 26.8% After-tax Asset Debt Equity Return Working Capital 95% 5.0% 4.0% Fixed Assets 80% 20.0% 7.6%

27 Valuation of Intangible Assets

28 Identified Intangible Assets Trade name Customer relationships Non-compete agreement Assembled workforce (included in goodwill)

29 Trade Name Valuation Relief from Royalty Method Values the costs you save by owning the intangible instead of leasing Defensible position or actively used to produce PFI. Relies on PFI Remaining Useful life was based on lack of importance of trade name in the market and the Company s transition and defensive position.

30 Trade Name Practical Application: Consider the significance of the trade name to the success of the Company and its term. Document criteria to search for royalty rates Analyze the third party agreements and document support for selecting the rates Consider multiple databases Document discussions with management about the use and importance of the trade name in negotiations. Document rationale for excluding certain licensing agreements.

31 Trade Name Licensee License Description Contract Date Royalty Basis Royalty Rate Custravalca Brink's, C.A. Trademark: Business Service 1/1/2000 % of Revenue 3.0% Brink's Home Security Holdings, Inc. Trademark: Business Service 10/31/2008 % of Revenue 1.3% American Remodeling, Inc. Trademark: Business Service 10/17/1995 % of Revenue 3.0% First American Real Estate Solutions Trademark: Business Service 11/1/1997 % of Revenue 0.2% Midwest Medical Insurance Co Trademark: Business Service 1/1/1999 % of Revenue 1.25% % Airtouch Communications, Inc. Trademark: Business Service 4/14/2011 % of Revenue 1.0% - 3.0% Nextel Partners Trademark: Business Service 1/1/2004 % of Revenue 0.5% - 1.0% Self Change Corp Trademark: Business Service 9/2/1996 % of Revenue 1.0% Serif Holdings Limited Trademark: Business Service 10/1/2002 % of Revenue 3.0% Affiliates Trademark: Business Service 8/26/1992 % of Revenue 5.0% Storage USA, Inc. Trademark: Business Service 11/30/1999 % of Revenue 5.0% Virginia Media, Inc. Trademark: Business Service 2/1/2007 % of Revenue 0.3% Virgin Atlantic, Virgin Aviation Services Trademark: Business Service 1/1/1997 % of Revenue 0.25% - 0.5% NTL, Inc. Trademark: Business Service 5/24/2006 % of Revenue 0.3% Sichuan Time Share Advertising & Communication Co., LTD Trademark: Business Service (advertising related) 11/10/2006 % of Revenue 5.0% Chengdu Dayu Weiye Advertising Co., Ltd. Trademark: Business Service (advertising related) 12/25/2007 % of Revenue 5.0% Wimax EU, Ltd Trademark: Business Service (advertising related) 11/15/2004 % of Revenue 1.5% Beijing Vizeum Advertising Co., Ltd Trademark: Business Service (advertising related) 1/20/2010 % of Revenue 0.05% Petcare Television Network Inc Business/Commercial Services 3/13/2006 % of Revenue 10.0% Kiri Inc Business/Commercial Services 11/18/1999 % of Revenue 2.5% - 4% Triple-S Management Corp Business/Commercial Services 11/19/2009 % of Revenue 0.35% T-Mobile US, Inc. Business/Commercial Services 11/30/2012 % of Revenue 0.25% Beijing Airinbox Information Technologies Co., Ltd. Business/Commercial Services 4/1/2004 % of Revenue 5.0% Minimum 0.05% 1st Quartile 0.3% Median 2.3% Mean 2.7% 3rd Quartile 5.0% Maximum 10.0% [a] Selected Royalty Rate for Trademarks and Tradenames 1.0%

32 Trade Name ($ in Thousands) 10 Months Year ended December 31, Net Revenue $ 34,692 $ 41,230 $ 48,239 $ 55,957 Pretax Relief from Royalty 1.0% Income Taxes 20.0% (69) (82) (96) (112) After-tax Royalty Partial Year Factor Present Value Factor 21.5% Present Value Relief from Royalty $ 214 $ 255 $ 245 $ 234 Sum of PV Relief from Royalty $ 947 Fair Value of Trade Name $ 1,694 Includes value of additional trade name

33 Non-Compete Agreement Consider Monte Carlo Analysis Used With or Without analysis Value of agreement is the PV of two sets of PFI, one with competition and one without. Under assumption of competition, seller could negatively impact sales volume, growth and/or cash flow.

34 Non-Compete Agreement Practical Guidance: Identify agreement terms Discuss the impact on existing customer, revenue growth and profitability with management. If there are multiple non-compete agreements, determine if they can be analyzed on a combined basis or if each agreement should be analyzed individually Estimate the probability of competition

35 Non-Compete Agreement With Noncompete Without Noncompete ($ in Thousands) 10 Months 2 Months 10 Months 2 Months Year ended December 31, Revenues, net $ 30,079 $ 36,509 $ 43,811 $ 52,135 $ 30,079 $ 36,509 $ 43,811 $ 52,135 Decline in Revenues Due to Competition n/a n/a n/a n/a (6,016) (9,127) (6,572) (2,607) Total Projected Revenues, net 30,079 36,509 43,811 52,135 24,063 27,382 37,239 49,528 EBITDA 9,378 10,759 11,829 13,034 7,502 8,070 10,055 12,382 Less: Depreciation and Amortization (53) (53) (53) (53) (48) (47) (49) (52) EBIT 9,325 10,706 11,776 12,980 7,454 8,023 10,005 12,330 Taxes 38.6% (3,599) (4,132) (4,545) (5,010) (2,877) (3,097) (3,862) (4,759) Net Operating Profits After Taxes 5,725 6,573 7,230 7,970 4,577 4,926 6,143 7,571 Plus: Depreciation and Amortization Gross Cash Flow 5,779 6,627 7,284 8,023 4,625 4,973 6,193 7,623 Less: Net Change in Working Capital 6.0% (385) (386) (438) (499) (24) (199) (591) (737) Less: Capital Expenditures (54) (54) (54) (54) (49) (48) (50) (53) Free Cash Flow 5,340 6,187 6,791 7,470 4,552 4,726 5,551 6,832 Partial Year Factor Present Value Rate 21.5% Present Value of Cash Flow 4,113 4,774 4, ,507 3,647 3, Probability of Competition n/a n/a n/a n/a 5.0% 5.0% 20.0% 30.0% Present Value of Cash Flow $ 30 $ 56 $ 158 $ 18 Sum of Present Value of Cash Flow $ 262 Amortization Benefit Rate of Return 21.5% Tax Rate 38.6% Tax Amortization Period 15 Amortization Benefit $ 37 Fair Value of Non-compete $ 300 Management s assumption of competition Fair Value of European Non-compete $296.

36 Assembled Workforce Training Estimate the amount of time a replacement employee of comparable skills will need to be in training Estimate the replacement s employee s level of inefficiency during the training period Include fringe benefits in the calculation of training costs Recruiting Estimate the recruiting cost per employee Percentage of salary to be paid to an external recruiter (remember to exclude fringe benefits from the employee s salary, as recruiters are paid only a percentage of base salary) Cost of advertisement if recruiters are not typically used in the industry Be sure to include the cost associated with the company s HR staff interviewing and processing the new hire

37 Assembled Workforce Training Estimate the amount of time a replacement employee of comparable skills will need to be in training Estimate the replacement s employee s level of inefficiency during the training period Include fringe benefits in the calculation of training costs Recruiting Estimate the recruiting cost per employee Percentage of salary to be paid to an external recruiter (remember to exclude fringe benefits from the employee s salary, as recruiters are paid only a percentage of base salary) Cost of advertisement if recruiters are not typically used in the industry Be sure to include the cost associated with the company s HR staff interviewing and processing the new hire

38 Assembled Workforce Annual Salary Fringe and Total Salary 50% Total Expense Bonus Expense Training Recruitment Costs $ 17,455,025 $ 4,498,993 $ 21,954,019 $ 2,549,270 $ 2,155,013 $ 4,704,283 HR and interview expense $ 30,000 Total direct and indirect cost components $ 4,734,283 Developer's profit component, 10.0% $ 473,428 Total cost and profit components $ 5,207,711 Entrepreneurial Incentive Estimated total workforce replacement period: 6 months Estimated avg. workforce replacement cost investment $ 2,603,856 Required return on annual investment: 21.5% Required return for 6 month period: 10.8% $ 280,423 $ 280,423 Tax Effect Replacement cost of assembled workforce $ 5,488,134 Less: 33.8% (1,854,989) Costs Avoided, Net of Tax 3,633,145 FV of Assembled Workforce $ 3,633,145

39 Contributory Assets Contributory assets are secondary assets that are necessary to support the earnings associated with the subject intangible asset A contributory asset charge is deducted from cash flows for each asset valued with a MPEEM to cover a reasonable return on and of the asset Remaining customer revenue (after attrition) are allocated a percentage of contributory charges to total expected revenues. Prior to completing the contributory asset calculation, you need to calculate customer attrition.

40 Customer Attrition Customer attrition Analyze historical customer data trends to calculate the average attrition per year. Annual average attrition was determined to be 2.5% However, future attrition was not expected to be as low based on current business model. Selected 6% attrition based on management input and historical attrition at company. Attrition Analysis 2012 Total Lost in 2013 Attrition Revenue 6,796, % Count 3-0.0% Avg Size 2,265, Total Lost in 2014 Attrition Revenue 10,053, % Count 6-0.0% Avg Size 1,675, Total Lost in 2015 Attrition Revenue 14,970,887 1,143, % Count % Avg Size 1,871,361 Calculated Attrition Rate 2.5% Selected Attrition Rate 6.0%

41 Customer Attrition Practical Application: Attrition, while based on historical information, should represent future remaining useful life. Consider both customer based and revenue based analysis Consider industry studies in determination of attrition Document source and description of the data used to determine historical and future attrition estimates. Document reliance on information provided by management.

42 Customer Relationships Customers Relationships Utilize MPEEM Base projections on LTM revenue (not NTM), as we are interested only in revenue attributable to current customers Consider future attrition Discount with WACC Include tax amortization benefit, if applicable Extend analysis until PV of cash flows begins to be immaterial

43 Contributory Assets Make sure this matches projections Note: Average Annual Value Note: different rates

44 Contributory Assets Revenue Growth Rates Growth Rates 25.6% 20.0% 18.4% 17.4% 13.8% LT Growth 3.0% 2019 Growth Rate 17.4% Forecast Net Working Capital Balances estimated as follows: Beginning NWC Balance 14,726 15,519 16,297 17,156 18,119 Plus: Increase in NWC Equals: Ending NWC Balance 15,519 16,297 17,156 18,119 19,015 Note: forecasted Forecast Fixed Asset Balances Estimated as Follows: Beginning FA Value Plus: CapEx Less: Depreciation (319) (319) (319) (319) (324) Equals: Ending FA Value See - Fair Value of Assembled Workforce See - Fair Value of Trade Name See - Fair Value of Non-Compete Agreement Beginning balance Plus (less): change in value (166) (199) (199) (33) - Ending balance Note: amortization of Non-compete

45 Contributory Assets

46 Contributory Assets Practical Application: Determine the rate of return for each asset based on the WACC. Forecast asset balances for fixed assets, NWC, Assembled workforce non compete. Trade name is always extended as contributory asset regardless of RUL CAC may also capture the recovery of contributory assets, which is the return of contributory assets. One time adjustments for WC do not represent long term operating levels and should be excluded from ongoing levels of WC to calculate CAC s. Average Annual Balance and Level Payment methods for CAC s. Consider simultaneous application of MPEEM for multiple intangible assets that share the same benefit stream. Best Practices for Valuations in Financial Reporting: Intangible Asset Working Group - Contributory Assets

47 Customer Relationships Practical Application: Consider adjusting WACC for additional risk Determine if customers can be split into groups for ease of analysis and valuation. Consider the improvement in margin due to lack of sales force for current customers. Have sales and marketing expenses been identified and removed for purposes of determining ongoing EBIT.

48 Goodwill Goodwill is the difference between the PV of consideration transferred and the sum of all identifiable tangible and intangible assets Consideration Allocation Form of Consideration Amount Assets Acquired Amount Base Consideration $ 75,450,000 Working Capital Adjustment 6,707,829 Contingent Consideration 7,854,265 Fair Value of Total Consideration Transferred $ 90,012,094 Tangible Assets $ 15,459,802 Trade Name 1,693,911 Customer Relationships 35,946,158 Non-Competition Agreements 595,895 Assembled Workforce 3,633,145 Goodwill 32,683,183 Total Purchase Price $ 90,012,094

49 WARA, WACC, & IRR Reconciliation The WARA analysis is applied to the fair value of the assets to generate the implied rate of return on goodwill based on the IRR. The purpose of the WARA analysis is to determine the reasonableness of the returns for the identifiable intangible assets and the implied return on goodwill. Compare the WARA, WACC, and IRR Assists in assessing the reasonableness of the asset-specific returns for identified intangible assets and the implied return on goodwill These rates should be in alignment (within 1%) Except in the event of a bargain purchase

50 Value as of 3/1/2016 Cost of Capital Return WACC IRR Net Working Capital $ 14,726, % $ 595,240 Fixed Assets and Deposits $ 733, % $ 55,966 Trade Name $ 1,693, % $ 364,191 Customer Relationships $ 35,946, % $ 7,728,424 Non-Competition Agreements $ 595, % $ 128,117 Assembled Workforce $ 3,633, % $ 781,126 Goodwill $ 32,683, % $ 8,744,639 Total Assets $ 90,012,094 $ 18,397,704 Cost of Equity 20.44% 21.50% 21.54% Within 1.1% variance

51 Value as of 3/1/2016 Cost of Capital Return WACC IRR Net Working Capital $ 14,726, % $ 595,240 Fixed Assets and Deposits $ 733, % $ 55,966 Trade Name $ 1,693, % $ 364,191 Customer Relationships $ 35,946, % $ 7,728,424 Non-Competition Agreements $ 595, % $ 128,117 Assembled Workforce $ 3,633, % $ 781,126 Goodwill $ 32,683, % $ 9,734,699 Total Assets $ 90,012,094 $ 19,387,763 Solved to equal IRR 21.54% 21.50% 21.54% Approximate each other

52 Reporting Considerations Earn outs Are they considered purchase price or owner compensation? Additional consideration is considered employee compensation when it is contingent upon the employee being employed by the Company. Trade name limited life or infinite (RUL)? Consider the implications to the user and how to weigh those with the specific circumstances. Customer list consider marketing expenses to new customers Consider bifurcating customer list based on types of customers Consider backlog in contract valuation Shorter economic life Earn-Out - consider Monte Carlo simulation on future earnings WACC Consider different risk levels for different intangibles. Discuss the process of identifying intangibles Non-compete Consider dual projections for revenue and EBITDA.

53 Resources Fair Value Measurement, Second Edition, Mark Zyla, John Wiley & Sons, Inc. AICPA Quick Reference Guide to Valuing Assets in Business Combinations Valuation for Financial Reporting, Mard, Hitchner Hyden, John Wiley & Sons, Inc. Identification of Contributory Assets and Calculation of Economic Rents: Toolkit, The Appraisal Foundation Best Practices for Valuations in Financial Reporting: Intangible Asset Working Group - Contributory Assets, The Appraisal Foundation Big 4 Business Combination reference guides ASC 805 ASC 820

54 Questions? Nathan DiNatale, CPA/ABV, CVA, ABAR SC&H Group Sparks, MD