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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with our Financial Statements, which present our results of operations for the years ended December 31, 2023 and 2022, as well as our financial positions at December 31, 2023 and 2022, contained elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. You should review the “Special Note Regarding Forward Looking Statements” and “Risk Factors” sections of this Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. Additionally, we use a non-GAAP financial measure to evaluate our results of operations. For important information regarding the use of such non-GAAP financial measure, including reconciliations to the most comparable GAAP measure, see the section titled “Non-GAAP Financial Measure” below.

Recent Acquisitions

On May 1, 2022, the Company, through BAMKO, acquired substantially all of the assets of Guardian Products, Inc. (“Guardian”) based in Norcross, Georgia. Guardian is a branded merchandise company that is one of the leading providers of promotional products to automotive dealers nationwide. The purchase price for the acquisition consisted of the following: (a) $11.1 million in cash, (b) the issuance of 116,550 restricted shares of Superior’s common stock (the “Guardian Stock”) that vest ratably over a three-year period, and (c) estimated potential future payments of approximately $2.3 million in additional contingent consideration based on the results of the acquired business through April 2025. The Guardian Stock is subject to transfer restrictions over the three-year period following the closing of the acquisition.

Business Outlook

Superior is comprised of three reportable business segments: (1) Branded Products, (2) Healthcare Apparel and (3) Contact Centers. Beginning in the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. Prior to implementing the current segment reporting, the Company’s Uniforms and Related Products segment included both healthcare apparel and uniforms. As part of the change in reportable segments, the branded portion of the uniforms business was combined with the previous Promotional Products segment to form the Branded Products segment, the healthcare apparel business became its own segment named Healthcare Apparel and income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are no longer presented in segment results. The previous Remote Staffing Solutions segment was renamed Contact Centers segment. All prior period segment information has been recast to reflect this change in reportable segments.

Branded Products

In our Branded Products segment, we produce and sell customized merchandising solutions, promotional products and branded uniform programs to our customers. As a strategic branding partner, we offer our customers customized branding solutions and strategies that generate favorable brand impressions, bolster customer retention and enhance employee engagement. Our products are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, technology, transportation and other industries. Sales volumes in this segment are impacted by a number of factors, including marketing programs of our customers and turnover of our customers’ employees, often times driven by the opening and closing of locations. From a long-term perspective, we believe that synergies within this segment will create opportunities to cross-sell products to new and existing customers.

Healthcare Apparel

In our Healthcare Apparel segment, we manufacture (through third parties or in our own facilities) and sell a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns. We sell our brands of healthcare service apparel to healthcare laundries, dealers, distributors and retailers primarily in the United States. From a long-term perspective, we expect that demand for our signature marketing brands, including Fashion Seal Healthcare® and WinkTM, will continue to provide opportunities for growth and increased market share.

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Contact Centers

In our Contact Centers segment (also known as “The Office Gurus”), which operates in El Salvador, Belize, Jamaica, Dominican Republic, and the United States, we provide outsourced, nearshore business process outsourcing, contact and call-center support services to North American customers. These services are also provided internally to the Company’s other two operating segments. The Office Gurus has become an award-winning business process outsourcer offering inbound and outbound voice, email, text, chat and social media support. The nearshore call-center market has grown as businesses look to reduce operating costs while maintaining high-quality customer support. Nearshore operators are able to provide comparable service to their U.S. counterparts at a fraction of the price. With an environment and career path designed to attract and maintain top talent across all sites, we believe The Office Gurus is positioned well to continue growing this business.

Global Economic and Political Conditions

Economic and political events in recent years have altered the landscape in which we and other U.S. companies operate in a variety of ways. In response to inflationary pressures, the U.S. Federal Reserve repeatedly has raised interest rates, resulting in an increase in the cost of borrowing for us, our customers, our suppliers, and other companies relying on debt financing.

World events, such as the Russian invasion of Ukraine and the resulting economic sanctions, have impacted the global economy, including by exacerbating inflationary and other pressures. In addition, the threat of a wider war in the Middle East after the Hamas terrorist attacks on Israel could affect oil prices and have other effects on the global economy. Both crises have potentially far-reaching impacts on energy and food markets and global trade.

An escalating war in the Middle East, prolonged inflationary conditions, high and/or increased interest rates, additional sanctions or retaliatory measures related to the Russia-Ukraine crisis, or other situations, could further negatively affect U.S. and international commerce and exacerbate or prolong the period of high energy prices. At this time, the extent and duration of these economic and political events and their effects on the economy and the Company are impossible to predict, but the impact on the Company’s business could be material.

Summary of Results

Net Income (loss)

The Company generated net income of $8.8 million during the year ended December 31, 2023 and a net loss of $32.0 million during the year ended December 31, 2022. The increase in net income during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily due to goodwill and indefinite-lived intangible asset impairment charges of $51.5 million incurred in the prior year period, a decrease in inventory write-downs of $11.2 million, partially offset by increases in income tax expense, Contact Centers selling and administrative expenses and interest expense.

Adjusted EBITDA

Adjusted EBITDA (a non-GAAP financial measure) was $33.5 million and $27.9 million during the years ended December 31, 2023 and 2022, respectively. Adjusted EBITDA during the year ended December 31, 2023 compared to the year ended December 31, 2022 increased primarily due to a decrease in inventory write-downs, partially offset by an increase in Contact Centers selling and administrative expenses. For a reconciliation of Adjusted EBITDA to net income (loss), its most directly comparable financial measure calculated and presented in accordance with GAAP, please read “Non-GAAP Financial Measure” below.

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The Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022

Operations

The following table provides highlights of our financial performance (in thousands, except percentages):

For the Years Ended December 31,

Net sales:

Net intersegment eliminations (4,756 ) (6,639 ) (28.4 %)

Gross margin:

Net intersegment eliminations (2,509 ) (3,819 ) (34.3 %)

Selling and administrative expenses:

Intangible assets impairment charge - 5,581 (100.0 %)

Gain on sale of property, plant and equipment - 3,435 (100.0 %)

Net Sales

Net sales for the Company decreased 6.1% from $578.8 million for the year ended December 31, 2022 to $543.3 million for the year ended December 31, 2023. The decrease was primarily driven by a net sales decline in Branded Products, partially offset by an increase in Healthcare Apparel and Contact Centers net sales.

Branded Products net sales decreased 11.7%, or $45.3 million, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The decrease was primarily due to decreased demand during the first half of 2023 as a result of then-current market conditions that tightened our customers’ advertising spending, the timing of new branded uniform rollout programs for certain customers and a decrease of $6.3 million in net sales of personal protective equipment driven by the easing of the COVID-19 pandemic. These decreases were partially offset by an increase in net sales of $12.8 million attributable to the acquisition of Guardian in May 2022.

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Healthcare Apparel net sales increased 0.5%, or $0.6 million, for the year ended December 31, 2023 compared to the year ended December 31, 2022. The increase was primarily due to an increase in digital sales, including the launch of a direct-to-consumer website during the year ended December 31, 2023, partially offset by challenging market conditions as a result of saturated inventory levels in the industry post-COVID-19 pandemic that led to a decrease in demand for healthcare apparel during 2023.

Contact Centers net sales increased 8.6% before intersegment eliminations and 11.8% after intersegment eliminations for the year ended December 31, 2023 compared to the year ended December 31, 2022. These increases were primarily attributed to onboarding of new customers in 2023.

Gross Margin

Gross margin is defined as net sales less cost of goods sold. Cost of goods sold consists primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing costs, and inspection costs for our Branded Products and Healthcare Apparel segments. Cost of goods sold for our Contact Centers segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with out-bound freight are recorded in cost of goods sold. The cost of occupancy and operating the Company’s distribution centers are included in selling and administrative expenses. Gross margin rate is defined as gross margin divided by net sales.

Gross margin rate for the Company was 37.5% for the year ended December 31, 2023 and 33.4% for the year ended December 31, 2022. The rate increase was primarily due to a decrease in inventory write-downs of $11.2 million and an improvement in gross margin rate for our Branded Products segment, the Company’s largest segment. Inventory write-downs during the year ended December 31, 2022 included write-downs of $11.4 million on excess and obsolete inventory related to discontinued styles and personal protective equipment within our Healthcare Apparel segment.

Gross margin rate for our Branded Products segment was 33.5% for the year ended December 31, 2023 and 29.6% for the year ended December 31, 2022. The rate increase was primarily driven by a favorable shift in the mix of pricing and customers, lower supply chain costs and a decrease in inventory write-downs of $1.4 million.

Gross margin rate for our Healthcare Apparel segment was 37.1% for the year ended December 31, 2023 and 28.8% for the year ended December 31, 2022. The rate increase was primarily due to decrease in inventory write-downs of $9.8 million, partially offset by the impact of challenging market conditions and strategic efforts to right size inventory levels resulting in lower selling prices.

Gross margin rate for our Contact Centers segment was 53.7% for the year ended December 31, 2023 and 59.1% for the year ended December 31, 2022. The rate decrease was primarily due to increased employee related costs of our agents, partially offset by price increases.

Selling and Administrative Expenses

As a percentage of net sales, total selling and administrative expenses was 33.7% for the year ended December 31, 2023 and 30.5% for the year ended December 31, 2022. The rate increase was primarily attributed to expense deleverage resulting from the 11.7% decrease in Branded Products net sales, an increase in selling and administrative expenses for our Contact Centers segment and unrealized losses of $0.5 million recognized in 2023 compared to unrealized gains of $1.6 million recognized in 2022 on written put options, partially offset by a decrease in bad debt expense. For more information on the written put options, please refer to the disclosure in Note 1 to the Financial Statements, which is incorporated herein by reference.

As a percentage of net sales, selling and administrative expenses for our Branded Products segment was 25.7% for the year ended December 31, 2023 and 23.2% for the year ended December 31, 2022. The rate increase was primarily due to expense deleverage on the 11.7% decrease in net sales and costs incurred during 2023 to consolidate warehouse facilities related to promotional products inventory, partially offset by a decrease in bad debt expense of $2.3 million due to improved collection efforts.

As a percentage of net sales, selling and administrative expenses for our Healthcare Apparel segment was 33.6% for the year ended December 31, 2023 and 34.7% for the year ended December 31, 2022. The rate decrease was primarily driven by reductions in overhead costs.

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As a percentage of net sales, selling and administrative expenses for our Contact Centers segment was 43.4% for the year ended December 31, 2023 and 39.9% for the year ended December 31, 2022. The rate increase was primarily attributed to increased employee related expenses, including pay rate increases and costs associated with employees returning to the office, and an increase in depreciation expense.

Goodwill Impairment Charge

Intangible Assets Impairment Charge

In conjunction with the Company’s realignment of its reportable segments during the second quarter of 2022, the Company began an effort to centralize certain branding and go-to-market strategies under the BAMKO brand and determined that it would no longer use certain trade names associated with branded products. The Company’s rebranding efforts resulted in a $5.6 million impairment of indefinite-lived trade names related to its Branded Products segment during the year ended December 31, 2022.

Other Periodic Pension Plan Costs

Other periodic pension plan costs decreased to $0.9 million for the year ended December 31, 2023 from $2.1 million for the year ended December 31, 2022. This decrease was primarily due to a decrease in actuarial losses recognized on the supplemental executive retirement plan (“SERP”).

Gain on Sale of Property, Plant and Equipment

During the year ended December 31, 2022, the Company sold its corporate headquarters building and related assets for net proceeds of $4.8 million and realized a gain on the sale of $3.4 million. This sale was part of management’s plan to relocate the Company’s corporate headquarters to St. Petersburg, Florida.

Interest Expense

Interest expense increased to $9.7 million for the year ended December 31, 2023 from $4.9 million for the year ended December 31, 2022. This increase was primarily due to an increase in interest rates on our outstanding borrowings, partially offset by $0.5 million of expense relating to the write-off of unamortized debt issuance costs associated with our former senior secured credit facility in the third quarter of 2022 and a decrease in outstanding borrowings. The weighted average interest rate on our outstanding borrowings for the year ended December 31, 2023 was 7.0% compared to 2.4% for the year ended December 31, 2022.

Income Taxes

The effective income tax rate was 10.2% and 15.9% for the years ended December 31, 2023 and 2022, respectively. Income tax expense and the effective tax rate for the year ended December 31, 2023 was primarily impacted by the variability in the mix of earnings across the Company’s foreign and domestic operations subject to various statutory tax rates in those jurisdictions. Income tax expense and the effective tax rate for the year ended December 31, 2022 was impacted by a tax benefit of $7.0 million relating to the impairment of intangible assets and a nondeductible portion of the goodwill impairment charge totaling $21.1 million. For further discussion of changes in the effective tax rate, refer to Note 9 to the Financial Statements.

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Liquidity and Capital Resources

Overview

Management uses a number of standards in measuring the Company’s liquidity, such as: working capital, profitability ratios, cash flows from operating activities, and activity ratios. The Company’s balance sheet generally provides the ability to pursue acquisitions, invest in new product lines and technologies and invest in additional working capital as necessary. As of December 31, 2023, approximately $16.8 million of our cash was held in our foreign subsidiaries, of which $11.6 million of cash was held at foreign subsidiaries from which the Company plans to repatriate the funds as needed for liquidity.

The Company’s primary source of liquidity has been its net income and the use of credit facilities and term loans as described further below. The cost of borrowing increased in 2023, with the weighted average interest rate on outstanding borrowings under the revolving credit facility of 6.7% at December 31, 2023 compared to 6.2% at December 31, 2022. As of December 31, 2023, the Company had undrawn capacity of $100.0 million under the revolving credit facility.

In the future, the Company may continue to use credit facilities and other secured and unsecured borrowings as a source of liquidity. The Company may also begin relying on the issuance of equity or debt securities. There can be no assurance that any such financings would be available to us on reasonable terms. Any future issuances of equity securities or securities convertible into or exercisable for equity securities may be dilutive to our shareholders. Additionally, the cost of the Company’s future sources of liquidity may differ from the costs of the Company’s sources of liquidity to date.

Working Capital

Superior carries inventories of both raw materials and finished products, the practice of which requires substantial working capital, which we believe to be common in the industry.

Cash and cash equivalents increased by $2.2 million to $19.9 million as of December 31, 2023 from $17.7 million on December 31, 2022. Working capital decreased to $178.8 million at December 31, 2023 from $232.8 million at December 31, 2022. The decrease in working capital was primarily due to decreases in inventories, prepaid expenses and other current assets and contract assets and increases in other current liabilities and accounts payable. The decrease in inventories was primarily related to right-sizing inventory levels within our Healthcare Apparel and Branded Products segments. The decrease in prepaid expenses and other current assets was primarily related to a decrease in prepaid taxes. The decrease in contract assets was primarily related to the timing of shipments to customers and receipts from suppliers for finished goods with no alternative use within our Branded Products segment. The increase in other current liabilities was primarily related to increases in contract liabilities associated with deferred revenue within our Branded Products segment and new facility leases. The increase in accounts payable was primarily driven by the timing of payments for inventory purchases within our segments.

Material Short-Term Plans for Cash

For the next twelve months, our primary capital requirements are for capital to maintain our operations, meet the contractual obligations shown in the column titled “2024” in the contractual obligations table below, and to fund capital expenditures, dividends and other general corporate purposes. We currently anticipate that we will spend more in capital expenditures in 2024 than we spent in 2023. Management currently believes that the combination of our current cash level, cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the above requirements for the next twelve months.

Material Long-Term Plans for Cash

Beyond the next twelve months, our principal demand for funds will be for maintenance of our core business, to satisfy the requirements shown in the columns “2025-2026” and “2027-2028” in the contractual obligations table below, as well as the obligations described in footnote (3) to the table, and the continuation of the Company’s ongoing capital expenditure program designed to improve the effectiveness and capabilities of its facilities and technology. The Company at all times evaluates its capital expenditure program in light of prevailing economic conditions. Management currently believes that the combination of our current cash level, cash flows provided by operating activities and availability under the revolving credit facility will be sufficient to satisfy the above requirements.

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Contractual Obligations

The following table sets forth a summary of our material contractual obligations as of December 31, 2023 (in thousands):

Payments Due by Period

Debt:

Revolving credit facility(1) $ - $ - $ 25,000 $ -

Acquisition-related contingent liabilities(2) 1,403 557 - -

Cash Flows

Our cash flows from operating, investing and financing activities, as reflected in the statements of cash flows, are summarized in the following table (in thousands):

For the Years Ended December 31,

Net cash provided by (used in):

Effect of exchange rates on cash 369 (30 )

Net increase in cash and cash equivalents $ 2,174 $ 8,787

Operating Activities. The increase in net cash provided by operating activities during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to decreases in cash outflows for inventory, accounts payable and other current liabilities and an increase in cash inflows from contract assets, partially offset by a decrease in net sales and an increase in interest paid. Working capital cash changes during the year ended December 31, 2023 included a decrease of $24.7 million in inventory, an increase of $13.3 million in accounts payable and other current liabilities and a decrease of $4.3 million in contract assets. Working capital cash changes during the year ended December 31, 2022 included an increase of $15.9 million in inventories, an increase of $15.1 million in contract assets and a decrease of $14.6 million in accounts payable and other current liabilities.

Investing Activities. The decrease in net cash used in investing activities during the year ended December 31, 2023 compared to the year ended December 31, 2022 was attributable to $11.1 million of cash paid for the acquisition of Guardian in 2022 and a decrease in capital expenditures of $6.1 million primarily related to the expansion of our distribution facility in Eudora, Arkansas in the previous year. Additionally, the year ended December 31, 2022 included $4.8 million in net proceeds from the sale of the Company’s corporate headquarters building and related assets.

Financing Activities. The increase in net cash used in financing activities during the year ended December 31, 2023 compared to the year ended December 31, 2022 was primarily attributable to an increase in net payments of $61.8 million in debt in 2023 compared to net borrowings of $39.4 million in 2022. Excess cash generated from operating activities during the year ended December 31, 2023 was used to repay outstanding borrowings under the revolving credit facility.

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Credit Facilities (See Note 8 to the Financial Statements)

On August 23, 2022, the Company entered into a Credit Agreement (the “Credit Agreement”) among the Company, the domestic subsidiaries of the Company, as guarantors, the lenders party thereto (the “Lenders”), and PNC Bank, National Association, as administrative agent for the Lenders (the “Administrative Agent”), pursuant to which the Lenders are providing the Company senior secured credit facilities maturing in August 2027 consisting of a revolving credit facility in the aggregate maximum principal amount of $125.0 million and a term loan in the original aggregate principal amount of $75.0 million (collectively, the “Credit Facilities”), and the ability to request incremental revolving credit or term loan facilities in an aggregate amount of up to an additional $75.0 million, subject to obtaining additional lender commitments and satisfying certain other conditions.

As of December 31, 2023, the Company had $94.4 million in outstanding borrowings under its Credit Facilities, consisting of $25.0 million outstanding under the revolving credit facility and $69.4 million outstanding under a term loan.

Obligations outstanding under the Credit Facilities accrue interest at a variable rate equal to the secured overnight financing rate (“SOFR”) plus an adjustment between 0.10% and 0.25% (depending on the applicable interest period) plus a margin between 1.0% and 2.0% (depending on the Company’s net leverage ratio). The weighted average interest rate on our outstanding borrowings under the Credit Facilities was 6.7% at December 31, 2023. During the term of the revolving credit facility, the Company will pay a commitment fee on the unused portion of the revolving credit facility equal to between 0.125% and 0.250% (depending on the Company’s net leverage ratio). The available balance under the revolving credit facility is reduced by outstanding letters of credit. As of December 31, 2023, there were no outstanding letters of credit under the revolving credit facility. As of December 31, 2023, the Company had undrawn capacity of $100.0 million under the revolving credit facility.

Contractual principal payments for the term loan are as follows: 2024 - $4.6 million; 2025 - $5.6 million; 2026 - $6.6 million; and 2027 - $52.5 million. The term loan does not contain pre-payment penalties.

The Credit Facilities are secured by substantially all of the operating assets of the Company, and the Company’s obligations under the Credit Facilities are guaranteed by all of its domestic subsidiaries. The Company’s obligations under the Credit Facilities are subject to acceleration upon the occurrence of an event of default as defined in the Credit Agreement. The Credit Agreement contains customary events of default and negative covenants, including but not limited to those governing indebtedness, liens, fundamental changes, investments, restricted payments (including dividends and related distributions), liquidations, mergers, consolidations or acquisitions, affiliate transactions and sales of assets or subsidiaries. The Credit Agreement also requires the Company to comply with a fixed charge coverage ratio of at least 1.25 to 1.0 and a net leverage ratio not to exceed 4.0 to 1.0. The Company’s net leverage ratio (as defined in the Credit Agreement) is generally calculated as the ratio of (a) indebtedness minus unrestricted cash to (b) consolidated EBITDA for the four most recently ended fiscal quarters. As of December 31, 2023, the Company was in compliance with these ratios.

Dividends and Share Repurchase Program

During the years ended December 31, 2023 and 2022, the Company paid cash dividends of $9.2 million and $8.7 million, respectively. The Company anticipates that it will continue to pay dividends in the future as financial conditions permit.

On May 2, 2019, the Company’s Board of Directors approved a stock repurchase program of up to 750,000 shares of the Company’s outstanding common stock. There is no expiration date or other restriction governing the period over which the Company can make share repurchases under the program. All purchases under this program will be open market transactions. The Company did not reacquire and retire shares of its common stock under this program during the years ended December 31, 2023 and 2022. At December 31, 2023, the Company’s remaining repurchase capacity under its common stock repurchase program was 657,451 shares. Shares purchased under the common stock repurchase program are constructively retired and returned to unissued status. The Company considers several factors in determining when to make share repurchases, including among other things, the cost of equity, the after-tax cost of borrowing, the debt to total capitalization targets and its expected future cash needs.

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Non-GAAP Financial Measure

Adjusted EBITDA, which is a non-GAAP financial measure, is defined as net income (loss) excluding interest expense, income tax expense, depreciation and amortization expense, impairment charges and the other items described in the following sentence. The Company believes Adjusted EBITDA is an important measure of operating performance because it allows management, investors and others to evaluate and compare the Company’s core operating results from period to period by removing (i) the impact of the Company’s capital structure (interest expense from outstanding debt), (ii) tax consequences, (iii) asset base (depreciation and amortization), (iv) the non-cash charges from asset impairments and (v) gains or losses on the sale of property, plant and equipment. The Company uses Adjusted EBITDA internally to monitor operating results and to evaluate the performance of its business. In addition, the compensation committee has used Adjusted EBITDA in evaluating certain components of executive compensation, including performance-based annual incentive programs.

Adjusted EBITDA is not a measure of financial performance under GAAP and should not be considered in isolation or as an alternative to net income (loss), cash flows from operating activities or any other measure determined in accordance with GAAP. The items excluded to calculate Adjusted EBITDA are significant components in understanding and assessing the Company’s results of operations. The presentation of the Company’s Adjusted EBITDA may change from time to time, including as a result of changed business conditions, new accounting pronouncements or otherwise. If the presentation changes, the Company undertakes to disclose any change between periods and the reasons underlying that change. The Company’s Adjusted EBITDA may not be comparable to a similarly titled measure of another company because other entities may not calculate Adjusted EBITDA in the same manner.

The following table reconciles net income (loss) to Adjusted EBITDA (in thousands):

Years Ended December 31,

Income tax expense (benefit) 997 (6,065 )

Goodwill impairment charge - 45,918

Intangible assets impairment charge - 5,581

Gain on sale of property, plant and equipment - (3,435 )

Critical Accounting Policies and Estimates

Our discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with GAAP. Our accounting policies are more fully described in Note 1 to the Financial Statements included in this Form 10-K. The preparation of the financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate the estimates that we have made. These estimates are based upon our historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Our actual results may differ from these estimates under different assumptions or conditions.

Critical accounting estimates are those estimates made in accordance with generally accepted accounting principles that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on our financial condition or results of operations. We believe that the following critical accounting policies and estimates have a higher degree of inherent uncertainty and require our most significant judgments.

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Revenue Recognition

Revenue is measured at the amount of consideration we expect to receive in exchange for the goods or services. Variable consideration for estimated returns, allowances and other price variances is recorded based upon historical experience and current allowance programs. Contract termination terms may involve variable consideration clauses such as sales discounts and customer rebates, and revenue is adjusted accordingly for these provisions. Estimated amounts are included in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved.

Inventories

The Company at all times carries inventories of both raw materials and finished products. Inventories are stated at the lower of cost or net realizable value. Judgments and estimates are used in determining the likelihood that goods on hand can be sold to customers. Historical inventory usage, current revenue trends and market conditions are considered in estimating both excess and obsolete inventories. During the year ended December 31, 2023, the Company recognized a $2.4 million charge to cost of goods sold to write-down inventory to its net realizable value, of which $1.6 million related to our Healthcare Apparel segment and $0.8 million related to our Branded Products segment. During the year ended December 31, 2022, the Company recognized a $13.6 million charge to cost of goods sold to write-down inventory to its net realizable value, of which $11.4 million related to our Healthcare Apparel segment and $2.2 million related to our Branded Products segment. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required, which may be material. An additional write-down in value of 5% of inventories would result in additional expense of approximately $5.0 million.

Goodwill and indefinite-lived intangible assets

The Company has made acquisitions in the past that included goodwill and indefinite-lived intangible assets. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill and indefinite-lived intangible assets such as trade names are not amortized but are subject to an annual (or under certain circumstances more frequent) impairment test in the fourth quarter based on their estimated fair value. We test more frequently if there are indicators of impairment, or whenever such circumstances suggest that the carrying value of goodwill or trade names may not be recoverable. Examples of such events and circumstances that the Company would consider include the following:

An entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the impairment test is unnecessary. Goodwill and indefinite-lived intangible assets are tested at a level of reporting referred to as “the reporting unit.” The Company’s reporting units are defined as each of its three reporting segments.

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In conjunction with the re-segmentation during the second quarter of 2022, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the previous Uniforms and Related Products segment was lower than its carrying value primarily as the result of current market conditions, decline in expected cash flows and decrease in the Company’s stock price. During the third quarter of 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company’s common stock and corresponding significant decline in the Company’s market capitalization. As a result, the Company performed a goodwill impairment analysis and determined that the estimated fair value of the Branded Products segment was lower than its carrying value. Consequently, the Company recorded a non-cash goodwill impairment charge of $45.9 million during the year ended December 31, 2022. As of December 31, 2022, the Company had no remaining goodwill balance. The fair value of goodwill in each impairment test was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to their respective present values, and a market approach. The valuation methodology and underlying financial information included in the Company’s determination of fair value required significant judgments by management. The principal assumptions used in the Company’s discounted cash flow analysis consisted of (a) long-term projections of financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal assumption included an estimate of a control premium.

For the year ended December 31, 2023, the Company completed its testing of indefinite-lived intangible assets and determined that the fair value was more than its carrying value. As of December 31, 2023 and 2022, indefinite-lived intangible assets of $13.6 million and $14.2 million were included in the Branded Products segment and the Healthcare Apparel segment, respectively.

Income Taxes

The Company is required to estimate and record income taxes payable for federal, state and foreign jurisdictions in which the Company operates. This process involves estimating actual current tax expense and assessing temporary differences resulting from differing accounting treatment between tax and book that result in deferred tax assets and liabilities. In addition, accruals are also estimated for federal and state tax matters for which deductibility is subject to interpretation. Taxes payable and the related deferred tax differences may be impacted by changes to tax laws, changes in tax rates and changes in taxable profits and losses. The Tax Cuts and Jobs Act (“Tax Act”) enacted on December 22, 2017 imposes a U.S. tax on global intangible low taxed income (“GILTI”) that is earned by certain foreign affiliates owned by a U.S. shareholder. GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. The Company was impacted by GILTI relative to the earnings of its foreign subsidiaries, and is expected to be impacted in future periods, which may be material to our financial statements. Deferred income taxes are provided on undistributed earnings of foreign subsidiaries in the period in which the Company determines it no longer intends to permanently reinvest such earnings outside the United States. The Company expects to permanently reinvest the earnings from its wholly-owned Brazilian and UK subsidiaries, and accordingly, has not provided deferred taxes on the subsidiaries’ undistributed net earnings or basis differences. The Company believes that the tax liability that would be incurred upon repatriation of the earnings from its Brazilian and UK subsidiaries is immaterial at December 31, 2023.

Reserves are also estimated for uncertain tax positions that are currently unresolved. The Company routinely monitors the potential impact of such situations and believes that it is properly reserved. For the year ended December 31, 2023, there was no significant change in total unrecognized tax benefits. As of December 31, 2023, we had an accrued liability of $0.8 million for unrecognized tax benefits. We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in other long-term liabilities in our balance sheet.

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Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

We are subject to market risk exposure related to changes in interest rates on our debt. Interest on our Credit Facilities is based upon the secured overnight financing rate (“SOFR”). As SOFR is a relatively new reference rate with a limited history, there may or may not be more volatility than with other reference rates such as LIBOR, which may result in increased borrowing costs for the Company. A hypothetical increase in the SOFR of 100 basis points as of January 1, 2023 would have resulted in approximately $1.2 million in additional pre-tax interest expense for the year ended December 31, 2023. For further information regarding our debt instruments, see Note 8 to the Financial Statements.

Foreign Currency Exchange Risk

Sales to customers outside of the United States are subject to fluctuations in foreign currency exchange rates, which may negatively impact gross margin realized on our sales. Less than 5% of our sales contracts are denominated in foreign currencies. We cannot predict the effect of exchange rate fluctuations on our operating results. In certain cases, we may enter into foreign currency cash flow hedges to reduce the variability of cash flows associated with our sales and expenses denominated in foreign currency. As of December 31, 2023, we had no foreign currency exchange hedging contracts. There can be no assurance that our strategies will adequately protect our operating results from the effect of exchange rate fluctuations.

Financial results of our foreign subsidiaries in the Branded Products segment are denominated in their local currencies, which include the Hong Kong dollar, the Chinese renminbi, the British pound, the Indian rupee, the Brazilian real, Colombian peso and the Canadian dollar. These operations may also have net assets and liabilities not denominated in their functional currency, which exposes us to changes in foreign currency exchange rates that impact income. Excluding intercompany payables and receivables considered to be long-term investments, changes in exchange rates for assets and liabilities not denominated in their functional currency are reported as foreign currency transaction gains (losses) within selling and administrative expenses in our statements of comprehensive income (loss). During the years ended December 31, 2023 and 2022 foreign currency losses were not significant. We also have exposure to foreign currency exchange risk from the translation of foreign subsidiaries from the local currency into the U.S. dollar. Comprehensive income (loss) during the years ended December 31, 2023 and 2022, included a foreign currency translation adjustment gain of $0.7 million and a foreign currency translation adjustment loss of $0.2 million, respectively.

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Item 8. Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm (PCAOB ID 248) 33

Consolidated Balance Sheets as of December 31, 2023 and 2022 38

Notes to the Consolidated Financial Statements 41

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Superior Group of Companies, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Superior Group of Companies, Inc. (a Florida corporation) and subsidiaries (the “Company”) as of December 31, 2023 and 2022, and the related consolidated statements of comprehensive income (loss), shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 13, 2024 expressed an adverse opinion.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical audit matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Indefinite-lived Intangible Assets – CID Resources Trade name

As described further in note 6 to the financial statements, the Company has an indefinite-lived intangible asset related to the CID Resources trade name of approximately $14.2 million. This indefinite-lived intangible asset is reviewed at least quarterly by the Company for impairment assessment. The Company considers historical and projected financial performance as well as industry information. We identified the quantitative fair value assessment of the CID Resources trade name in the fourth quarter as a critical audit matter.

The principal considerations for our determination that the impairment assessment of this indefinite-lived intangible asset is a critical audit matter are that the impairment assessment requires the Company to utilize subjective assumptions to estimate the discounted cash flows attributable to the CID Resources trade name, such as royalty rate and discount rate. This estimation process required a high degree of auditor judgement and an increased extent of effort.

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Our audit procedures related to the CID Resources trade name included the following, among others.

/s/ GRANT THORNTON LLP

We have served as the Company's auditor since 2022.

Tampa, Florida

March 13, 2024

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Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Superior Group of Companies, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Superior Group of Companies, Inc. (a Florida corporation) and subsidiaries (the “Company”) as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, because of the effect of the material weakness described in the following paragraphs on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weakness has been identified and included in management’s assessment.

As of December 31, 2023, management identified a material weakness relating to segregation of duties, change management and user access within certain proprietary information technology systems of the Contact Centers segment. The Company determined that management’s review controls over these areas are not designed effectively to detect a material misstatement related to the completeness, accuracy, and presentation of the financial statements.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2023. The material weakness identified above was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report dated March 13, 2024 which expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Other information

We do not express an opinion or any other form of assurance on management’s remediation plans related to the currently reported material weakness in internal control over financial reporting as of December 31, 2023.

/s/ GRANT THORNTON LLP

Tampa, Florida

March 13, 2024

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except shares and per share data)

Years Ended December 31,

Costs and expenses:

Goodwill impairment charge - 45,918

Intangible assets impairment charge - 5,581

Other periodic pension costs 855 2,116

Gain on sale of property, plant and equipment - 3,435

Income (loss) before income tax expense 9,769 (38,035 )

Income tax expense (benefit) 997 (6,065 )

Net income (loss) per share:

Weighted average shares outstanding during the period:

Other comprehensive income (loss), net of tax:

Defined benefit pension plans:

Recognition of net losses included in net periodic pension costs $ 163 $ 1,276

Current period gain (loss) (172 ) 2,188

Loss on cash flow hedging activities - (47 )

Foreign currency translation adjustment 735 (215 )

Other comprehensive income 726 3,202

Comprehensive income (loss) $ 9,498 $ (28,768 )

Cash dividends per common share $ 0.56 $ 0.54

See accompanying Notes to the Consolidated Financial Statements.

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and par value data)

December 31,

ASSETS

Current assets:

Accounts receivable - other 307 3,326

Prepaid expenses and other current assets 8,881 14,166

Operating lease right-of-use assets 17,909 9,113

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Current portion of long-term debt 4,688 3,750

Current portion of acquisition-related contingent liabilities 1,403 736

Long-term acquisition-related contingent liabilities 557 2,245

Long-term operating lease liabilities 12,809 3,936

Commitments and contingencies (Note 12)

Shareholders’ equity:

Preferred stock, $.001 par value - authorized 300,000 shares (none issued) - -

Accumulated other comprehensive income (loss), net of tax:

Foreign currency translation adjustment (1,163 ) (1,898 )

Total liabilities and shareholders’ equity $ 422,450 $ 456,941

See accompanying Notes to the Consolidated Financial Statements.

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands, except shares and per share data)

Accumulated

Other

Additional Comprehensive Total

Common Common Paid-In Retained (Loss) Income, Shareholders’

Shares Stock Capital Earnings net of tax Equity

Performance based shares issued 11,707 - - - - -

Restricted shares issued, net of forfeitures 48,044 - - - - -

Share-based compensation expense - - 4,289 - - 4,289

Written put options - - (3,597 ) - - (3,597 )

Cash dividends declared ($0.54 per share) - - - (8,653 ) - (8,653 )

Comprehensive income (loss):

Cash flow hedges, net of taxes of $6 - - - - (47 ) (47 )

Performance based shares issued 2,981 - - - - -

Restricted shares issued, net of forfeitures 155,213 - - - - -

Share-based compensation expense - - 3,787 - - 3,787

Written put options - - 767 - - 767

Cash dividends declared ($0.56 per share) - - - (9,188 ) - (9,188 )

Comprehensive income (loss):

Pensions, net of taxes of $3 - - - - (9 ) (9 )

Change in currency translation adjustment, net of taxes of $0 - - - - 735 735

See accompanying Notes to the Consolidated Financial Statements.

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SUPERIOR GROUP OF COMPANIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

Years Ended December 31,

CASH FLOWS FROM OPERATING ACTIVITIES

Goodwill impairment charge - 45,918

Intangible assets impairment charge - 5,581

Provision for bad debts - accounts receivable 539 2,891

Share-based compensation expense 3,787 4,289

Deferred income tax benefit (1,635 ) (12,352 )

Gain on sale of property, plant and equipment - (3,435 )

Change in fair value of acquisition-related contingent liabilities (189 ) (450 )

Change in fair value of written put options 489 (1,565 )

Changes in assets and liabilities, net of acquisition of businesses:

Prepaid expenses and other current assets 5,496 5,225

Accounts payable and other current liabilities 13,310 (14,614 )

Payment of acquisition-related contingent liabilities (279 ) (3,346 )

Long-term pension liability 407 2,190

Other long-term liabilities 851 (434 )

Net cash provided by (used in) operating activities 78,929 (2,604 )

CASH FLOWS FROM INVESTING ACTIVITIES

Additions to property, plant and equipment (4,963 ) (11,018 )

Proceeds from disposals of property, plant and equipment - 4,795

Acquisition of businesses - (11,202 )

Other investments (545 ) -

Net cash used in investing activities (5,508 ) (17,425 )

CASH FLOWS FROM FINANCING ACTIVITIES

Debt issuance costs (300 ) (869 )

Payment of cash dividends (9,188 ) (8,653 )

Payment of acquisition-related contingent liabilities (553 ) (1,416 )

Proceeds received on exercise of stock options 175 728

Net cash provided by (used in) financing activities (71,616 ) 28,846

Effect of currency exchange rates on cash 369 (30 )

Net increase in cash and cash equivalents 2,174 8,787

Cash and cash equivalents balance, beginning of year 17,722 8,935

Cash and cash equivalents balance, end of year $ 19,896 $ 17,722

Supplemental disclosure of cash flow information:

Income taxes paid (refunded), net $ (978 ) $ 1,348

See accompanying Notes to the Consolidated Financial Statements.

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Superior Group of Companies, Inc. and Subsidiaries

Notes to the Consolidated Financial Statements

NOTE 1 – Description of Business, Basis of Presentation and Summary of Accounting Policies:

Description of business

Superior Group of Companies, Inc. (together with its subsidiaries, “the Company,” “Superior,” “we,” “our,” or “us”) was organized in 1920 and was incorporated in 1922 as a New York company under the name Superior Surgical Mfg. Co., Inc. In 1998, the Company changed its name to Superior Uniform Group, Inc. and redomiciled to Florida. Effective on May 3, 2018, Superior Uniform Group, Inc. changed its name to Superior Group of Companies, Inc.

Superior’s Branded Products segment, primarily through its signature marketing brands BAMKO® and HPI®, produces and sells customized merchandising solutions, promotional products and branded uniform programs. Branded products are manufactured through third parties or in Superior’s own facilities, and are sold to customers in a wide range of industries, including retail, hotel, food service, entertainment, technology, transportation and other industries. The segment currently has sales offices in the United States, Canada, Brazil, the United Kingdom and Colombia, with support services in China and India.

Superior’s Healthcare Apparel segment, primarily through its signature marketing brands Fashion Seal Healthcare®, WinkTM and CID Resources, manufactures (through third parties or in its own facilities) and sells a wide range of healthcare apparel, such as scrubs, lab coats, protective apparel and patient gowns. This segment sells healthcare service apparel to healthcare laundries, dealers, distributors, retailers and consumers primarily in the United States.

Superior’s Contact Centers segment, through multiple The Office Gurus® entities, including subsidiaries in El Salvador, Belize, Jamaica, Dominican Republic and the United States (collectively, “TOG”), provides outsourced, nearshore business process outsourcing, contact and call-center support services to North American customers.

Basis of presentation

The accompanying consolidated financial statements of Superior included herein have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) (“U.S.” or “United States”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company refers to the consolidated financial statements collectively as “financial statements,” and individually as “statements of comprehensive income (loss),” “balance sheets,” “statements of shareholders’ equity,” and “statements of cash flows” herein.

Reportable Segments

Beginning in the second quarter of 2022, the Company realigned its reportable segments to correspond with changes to its organizational responsibilities, management structure and operating model. Prior to implementing the current segment reporting, the Company’s Uniforms and Related Products segment included healthcare apparel, uniforms and corporate overhead. As part of the change in reportable segments, the branded portion of the uniforms business was combined with the previous Promotional Products segment to form the Branded Products segment, the healthcare apparel business became its own segment named Healthcare Apparel and income and expenses related to corporate functions that are not specifically attributable to an individual reportable segment are no longer presented in segment results. The previous Remote Staffing Solutions segment was renamed the Contact Centers segment. As a result of this re-segmentation, the Company performed a quantitative goodwill impairment test. Refer to Note 6 for additional information.

Use of estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue and expenses, as well as the disclosures of contingent assets and liabilities. Because of the inherent uncertainties in this process, actual future results could differ from those expected at the reporting date.

Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less at the time of purchase to be cash equivalents.

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Revenue recognition

Revenue is recognized when control of the promised goods or services are transferred to our customers, in an amount that reflects the consideration that we expect to receive in exchange for those goods or services. See Note 15 for further discussion on revenue recognition.

Accounts receivable and allowance for doubtful accounts

Judgments and estimates are used in determining the collectability of accounts receivable and in establishing allowances for doubtful accounts. The Company analyzes specific accounts receivable and historical bad debt experience, customer credit worthiness, current economic trends and the age of outstanding balances when evaluating the adequacy of the allowance for doubtful accounts. Changes in estimates are reflected in the period they become known. Charge-offs of accounts receivable are made once all collection efforts have been exhausted. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Cost of goods sold and shipping and handling fees and costs

Cost of goods sold for our Branded Products segment and our Healthcare Apparel segment consist primarily of direct costs of acquiring inventory, including cost of merchandise, inbound freight charges, purchasing, receiving and inspection costs. Cost of goods sold for our Contact Centers segment includes salaries and payroll related benefits for agents. The Company includes shipping and handling fees billed to customers in net sales. Shipping and handling costs associated with out-bound freight are recorded in cost of goods sold. The cost of occupancy and operating the Company’s distribution centers are included in selling and administrative expenses.

Inventories

Inventories are stated at the lower of cost (first-in, first-out method or average cost) or net realizable value. Judgments and estimates are used in determining the likelihood that goods on hand can be sold to customers. Historical inventory usage and current revenue trends are considered in estimating both excess and obsolete inventories. If actual product demand and market conditions are less favorable than those projected by management, additional inventory write-downs may be required.

Property, plant and equipment

Property, plant and equipment are stated at cost, less accumulated depreciation. Major renewals and improvements are capitalized, while replacements, maintenance and repairs which do not improve or extend the life of the respective assets are expensed in the period incurred. Costs of assets sold or retired and the related accumulated depreciation are eliminated from accounts and the net gain or loss is reflected in the statements of comprehensive income (loss) within selling and administrative expenses. During the year ended December 31,2022, the Company sold its corporate headquarters building and related assets for net proceeds of $4.8 million and realized a gain on the sale of $3.4 million. This sale was part of management’s plan to relocate the Company’s corporate headquarters to St. Petersburg, Florida. This sale is presented within our statements of comprehensive income (loss) as a separate line item titled “gain on sale of property, plant and equipment.”

Property, plant and equipment is recorded at cost and depreciated using the straight-line method over its estimated useful life as follows:

Buildings (in years) 20 to 40

Improvements (in years) 5 to 40

Machinery, equipment and fixtures (in years) 3 to 10

Leasehold improvements are depreciated over the terms of the leases to the extent that such improvements have useful lives of at least the terms of the respective leases.

Impairment of long-lived assets

Long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset maynot be recoverable. Recoverability of the asset is measured by comparison of its carrying amount to future net cash flows the asset is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds its fair value. There were no impairments of long-lived assets for the years ended December 31, 2023 and 2022.

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Goodwill and indefinite-lived intangible assets

For the year ended December 31, 2023, the Company completed its testing of indefinite-lived intangible assets and determined that the fair value of each indefinite-lived intangible asset was more than its carrying value. As of December 31, 2023 and 2022, indefinite-lived intangible assets of $13.6 million and $14.2 million were included in the Branded Products segment and the Healthcare Apparel segment, respectively.

Contingent Consideration

Contingent consideration relating to consideration transferred in exchange for an acquired business is recognized at its estimated fair value at the acquisition date. The contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. Recognition of any changes in fair value are included in selling and administrative expenses in our statements of comprehensive income (loss).

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SERP

The Company is the sponsor of an unfunded supplemental executive retirement plan (“SERP”) which includes one active participant. In calculating our obligations and related expense, we make various assumptions and estimates, after consulting with outside actuaries and advisors. The annual determination of expense involves calculating the estimated total benefits ultimately payable to plan participants. Significant assumptions related to the calculation of our obligations include the discount rates used to calculate the present value of benefit obligations to be paid in the future. We review these assumptions annually based upon currently available information, including information provided by our actuaries.

Insurance

The Company self-insures for certain obligations related to employee health programs. The Company also purchases stop-loss insurance policies to protect it from catastrophic losses. Judgments and estimates are used in determining the potential value associated with reported claims and for losses that have occurred, but have not been reported. The Company’s estimates consider historical claim experience and other factors. The Company’s liabilities are based on estimates, and, while the Company believes that the accrual for loss is adequate, the ultimate liability may be in excess of or less than the amounts recorded. Changes in claim experience, the Company’s ability to settle claims or other estimates and judgments used by management could have a material impact on the amount and timing of expense for any period.

Taxes on income

Income taxes are provided for under the asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. The calculation of the Company’s tax liabilities also involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain income tax positions based on estimates of whether, and the extent to which, additional taxes will be required. The Company also accrues interest and penalties related to uncertain income tax positions as income taxes. Refer to Note 9 for additional details.

Share-based compensation

The Company awards share-based compensation as an incentive for employees to contribute to the Company’s long-term success. The Company grants options, stock-settled stock appreciation rights, restricted stock and performance shares. The Company recognizes share-based compensation expense for all awards granted to employees, which is based on the fair value of the award on the date of grant. Determining the appropriate fair value model and calculating the fair value of stock compensation awards requires the input of certain highly complex and subjective assumptions, including the expected life of the stock compensation awards and the Company’s common stock price volatility, risk free interest rate and dividend rate. The assumptions used in calculating the fair value of stock compensation awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a result, if factors change and the Company deems it necessary to use different assumptions, stock compensation expense could be materially different from what has been recorded in the current period.

Other comprehensive income (loss)

Comprehensive income (loss) includes net income (loss) and all other changes in equity during a period except those resulting from investments by or distributions to shareholders. Other comprehensive income (loss) consists of defined benefit pension plans activities, cash flow hedging activities and foreign currency translation adjustment. The related tax effects of these items are recorded in income tax expense (benefit) within the statements of comprehensive income (loss), upon reclassification from accumulated other comprehensive income (loss), net of tax.

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Foreign Currency Translations and Transactions

Assets and liabilities denominated in a foreign currency are translated into U.S. dollars at the current rate of exchange on the last day of the reporting period. Changes in the carrying values of these assets and liabilities attributable to fluctuations in spot rates are recognized in net foreign currency translation adjustment, a component of accumulated other comprehensive income (loss), net of tax. Monetary assets and liabilities denominated in a currency that is different from a reporting entity’s functional currency are remeasured from the applicable currency to the reporting entity’s functional currency. Gains or losses resulting from transactions denominated in other currencies are recognized in net income (loss) each period. The majority of the Company’s transactions are settled in U.S. dollars.

Risks and concentrations

Financial instruments that potentially subject the Company to concentrations of credit risk include cash in banks in excess of federally insured amounts. The Company manages this risk by maintaining all deposits in high quality financial institutions and periodically performing evaluations of the relative credit standing of the financial institutions. When assessing credit risk the Company considers whether the credit risk exists at both the individual and group level. Consideration is given to the activity, region and economic characteristics when assessing if there exists a group concentration risk. At December 31, 2023 and 2022, the Company had no customer with an accounts receivable balance greater than 10% of the total accounts receivable. At December 31, 2023 and 2022, the five largest customer accounts receivable balances totaled $17.9 million and $21.4 million, respectively, or approximately 17% and 20% of the respective total accounts receivable balances. The Branded Products segment has a substantial number of customers, none of which accounted for more than 10% of the segment’s 2023 net sales and no customer accounted for more than 10% of the Healthcare Apparel or Contact Center segment's 2023 net sales.

Principal raw materials used to manufacture the Company’s finished goods include cotton, polyester, spandex, cotton-synthetic, poly-synthetic blends, textiles, plastic, glass, fabric and metal. The majority of such fabrics are sourced in China, either directly by us or our suppliers. If we are unable to continue to obtain our raw materials and finished products from China or if our suppliers are unable to source raw materials from China, it could significantly disrupt our business. Further, the Company and the Company’s suppliers generally source or manufacture finished goods in parts of the world that may be affected by economic uncertainty, political unrest, logistical challenges (such as port strikes and embargos), foreign currency fluctuations, labor disputes, health emergencies, or the imposition of duties, tariffs or other import regulations by the United States, any of which could result in additional cost or limit our supply of necessary goods and raw materials.

Written Put Options

During the second quarter of 2022, the Company entered into written put options with a former employee that, if exercised by the former employee, requires the Company to repurchase up to 207,970 shares of its common stock at fair market value (as defined in the agreement), subject to certain limitations. The original fair value of the written put options upon entering into the agreement was $3.6 million. The written put options expire after twenty-four months and contain certain quarterly maximums. During the year ended December 31, 2023, a total of 75,046 written put options expired unexercised resulting in a $0.8 million reduction in other current liabilities with an offset to additional paid-in capital. The written put options are liabilities under ASC 480, Distinguishing Liabilities from Equity, because the options embody obligations to repurchase the Company’s shares by paying cash. As of December 31, 2023 and 2022, the fair value of the written put options was $1.8 million and $2.0 million, respectively. The fair value of the written put options is based directly on the Company’s stock price and included in other current liabilities in our balance sheets. We recognized unrealized losses of $0.5 million and unrealized gains of $1.6 million on written put options during the years ended December 31,2023 and 2022, respectively. Unrealized gains and losses from changes in the fair value of the written put options are included within selling and administrative expenses in our statements of comprehensive income (loss). At December 31, 2023, the Company’s remaining repurchase obligation under the written put options was 132,924 shares of its common stock.

Fair value of financial instruments

The carrying amounts of cash and cash equivalents, receivables and accounts payable approximated fair value as of December 31, 2023 and 2022, because of the relatively short maturities of these instruments. The carrying amount of the Company’s long-term debt approximated fair value as the rates are adjustable based upon current market conditions.

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Recent Accounting Pronouncements

We consider the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not listed below were assessed and determined to be not applicable.

Recently Issued Accounting Pronouncements Not Yet Adopted

In November 2023, the FASB issued ASU 2023-07,"Segment Reporting (Topic 280)—Improvements to Reportable Segment Disclosures". The ASU requires that an entity disclose significant segment expenses impacting profit and loss that are regularly provided to the chief operating decision maker ("CODM"). The update is required to be applied retrospectively to prior periods presented, based on the significant segment expense categories identified and disclosed in the period of adoption. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The adoption of this guidance will not affect the Company’s consolidated results of operations, financial position or cash flows and the Company is currently evaluating the effect the guidance will have on its disclosures.

In December 2023, the FASB issued ASU 2023-09,"Income Taxes (Topic 740)—Improvements to Income Tax Disclosures". The ASU requires that an entity disclose specific categories in the effective tax rate reconciliation as well as provide additional information for reconciling items that meet a quantitative threshold. Further, the ASU requires certain disclosures of state versus federal income tax expense and taxes paid. The amendments in this ASU are required to be adopted for fiscal years beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued. The amendments should be applied on a prospective basis although retrospective application is permitted. The adoption of this guidance will not affect the Company’s consolidated results of operations, financial position or cash flows and the Company is currently evaluating the effect the guidance will have on its disclosures.

NOTE 2 - Allowance for Doubtful Accounts Receivable:

Years Ended December 31,

Balance at the beginning of year $ 7,622 $ 6,393

Recoveries - 24

Balance at the end of year $ 4,237 $ 7,622

NOTE 3 - Reserve for Sales Returns and Allowances:

Years Ended December 31,

Balance at the beginning of year $ 2,090 $ 2,636

Provision for returns and allowances 4,678 4,512

Actual returns and allowances paid to customers (5,360 ) (5,058 )

Balance at the end of year $ 1,408 $ 2,090

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NOTE 4 - Inventories:

Inventories consisted of the following amounts (in thousands):

December 31,

NOTE 5 - Property, Plant and Equipment, Net:

Property, plant and equipment, net, consisted of the following (in thousands):

December 31,

Buildings, improvements and leaseholds 16,929 18,652

Property, plant and equipment, net $ 46,890 $ 51,392

Depreciation expense was $9.4 million and $7.9 million in 2023 and 2022, respectively.

NOTE 6 - Goodwill and Intangible Assets:

Goodwill

Beginning in the second quarter of 2022, the Company realigned its reportable segments to Branded Products, Healthcare Apparel and Contact Centers. Refer to Note 17 for further information on the Company’s reportable segments. As a result of this re-segmentation, and in accordance with ASC 350, the Company performed a quantitative goodwill impairment test.

During the third quarter of 2022, the Company determined that a triggering event occurred in relation to the depressed market price of the Company’s common stock and corresponding significant decline in the Company’s market capitalization. As a result, the Company performed a quantitative goodwill impairment test.

The fair value of goodwill in each impairment test was determined using a combination of an income approach, which estimates fair value based upon projections of future revenues, expenses, and cash flows discounted to their respective present values, and a market approach. The valuation methodology and underlying financial information included in the Company’s determination of fair value required significant judgments by management. The principal assumptions used in the Company’s discounted cash flow analysis consisted of (a) long-term projections of financial performance and (b) the weighted-average cost of capital of market participants, adjusted for the risk attributable to the Company and the industry in which it operates. Under the market approach, the principal assumption included an estimate of a control premium.

Based on the goodwill impairment analysis performed, the Company determined that the estimated fair values of the previous Uniforms and Related Products segment and current Branded Products segment were lower than their carrying value primarily as the result of current market conditions, decline in expected cash flows and/or decrease in the Company’s stock price. Consequently, the Company recorded a non-cash goodwill impairment charge of $45.9 million during the year ended December 31, 2022.

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The following table presents the carrying amounts of goodwill attributable to each of the Company’s reportable segments (dollars in thousands):

Branded Products Healthcare Apparel Total

Accumulated impairment losses - - -

Foreign currency translation 21 - 21

Net goodwill, December 31, 2022 $ - $ - $ -

Net goodwill $ - $ - $ -

Intangible Assets

Trade names:

Public Identity Branded Products 470 (470 ) - -

Tangerine Branded Products 3,200 (3,200 ) - -

Gifts By Design Branded Products 1,170 (1,170 ) - -

Sutter’s Mill Branded Products 741 (741 ) - -

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Intangible assets as of December 31, 2023 and December 31, 2022 are summarized as follows (dollars in thousands):

Definite-lived intangible assets:

Indefinite-lived intangible assets:

Amortization expense for intangible assets for the years ended December 31, 2023 and 2022 was $4.6 million and $5.1 million, respectively.

Estimated future intangible amortization expense is as follows (in thousands):

NOTE 7 – Other Current Liabilities:

Other current liabilities consisted of the following (in thousands)

December 31,

Salaries, wages, commissions and other compensation $ 14,599 $ 14,316

Current operating lease liabilities 4,231 3,135

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NOTE 8 – Long-Term Debt:

Debt consisted of the following (in thousands):

December 31,

Credit Facilities:

Less:

Payments due within one year included in current liabilities 4,688 3,750

Long-term debt less current maturities $ 88,789 $ 151,567

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Debt Maturity Schedule

Contractual maturities of debt (excluding interest to be accrued thereon) at December 31, 2023 are as follows (in thousands):

Thereafter -

NOTE 9 – Income Tax Expense (Benefit):

The components of income (loss) before income tax expense are as follows (in thousands):

Years Ended December 31,

Income (loss) before income tax expense $ 9,769 $ (38,035 )

In 2022, the Company generated a loss before income tax expense of $38.0 million primarily due to goodwill and indefinite-lived intangible assets impairment charges totaling $51.5 million, these impairment charges were nonrecurring in 2023.

Aggregate income tax provisions consists of the following (in thousands):

Years Ended December 31,

Current:

Deferred Taxes:

Income tax expense (benefit) $ 997 $ (6,065 )

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The significant components of the deferred income tax asset (liability) are as follows (in thousands):

December 31,

Deferred income tax assets:

Operating reserves and other accruals 6,613 7,962

Book carrying value in excess of tax basis of intangibles 1,831 2,321

Capitalized research expenses 2,547 1,704

Disallowed interest 2,167 -

Deferred income tax liabilities:

Book carrying value in excess of tax basis of property (3,950 ) (4,183 )

Deferred expenses (430 ) (599 )

Net deferred income tax asset (liability) $ 12,356 $ 10,718

The difference between the total statutory Federal income tax rate and the actual effective income tax rate is accounted for as follows:

Years Ended December 31,

Statutory federal income tax rate 21.0 % 21.0 %

State and local income taxes, net of federal income tax benefit 2.5 % 3.4 %

Rate impacts due to foreign operations (12.8 %) 4.3 %

Compensation related 2.1 % (0.8 %)

Pension termination - (0.3 %)

R&D tax credits (2.7 %) 0.7 %

Impairment charge - (11.7 %)

Effective income tax rate 10.2 % 15.9 %

The effective tax rate is the result of a variety of factors, and is primarily dependent on our jurisdictional mix of earnings across the Company’s domestic and foreign operations as well as applicable statutory tax rates, the impact of goodwill and indefinite lived intangible impairments, and unrealized gains and losses associated with share-based compensation.

The Tax Cuts and Jobs Act of 2017 (“TCJA”) included certain provisions that continue to affect our income taxes, which, among other things, include interest deduction limitations and global intangible low taxed income regulations (“GILTI”).

The 2023 increase in the interest rates on our outstanding borrowings, along with the Company’s level of income resulted in a current year limitation of interest expense deductibility. The deferred tax assets associated with the disallowed interest expense have an indefinite life and do not expire. Management believes these deferred tax assets are more likely than not to be realized and therefore no valuation allowance has been recorded.

The TCJA imposed a U.S. tax on GILTI that is earned by certain foreign affiliates owned by a U.S. shareholder. The computation of GILTI is generally intended to impose tax on the earnings of a foreign corporation that are deemed to exceed a certain threshold return relative to the underlying business investment. In accordance with guidance issued by FASB, the Company made a policy election to treat future taxes related to GILTI as a current period expense in the reporting period in which the tax is incurred. Deferred income taxes are provided on undistributed earnings of foreign subsidiaries in the period in which the Company determines it no longer intends to permanently reinvest such earnings outside the United States. The Company expects to permanently reinvest the earnings from its wholly-owned Brazilian and UK subsidiaries, and accordingly, has not provided deferred taxes on the subsidiaries’ undistributed net earnings or basis differences. The Company believes that the tax liability that would be incurred upon repatriation of the earnings from its Brazilian and UK subsidiaries is immaterial at December 31, 2023.

Only tax positions that meet the more-likely-than-not recognition threshold are recognized in the financial statements. As of December 31, 2023 and 2022, we had $0.8 million of unrecognized tax benefits, all of which, if recognized, would favorably affect the annual effective income tax rate. We do not expect any significant amount of this liability to be paid in the next twelve months. Accordingly, the balance of $0.8 million as of December 31, 2023 is included in other long-term liabilities.

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Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):

December 31,

Balance at the beginning of year $ 807 $ 801

Additions for tax positions of prior years 105 129

Reductions due to lapse of statute of limitations (116 ) (123 )

Balance at the end of year $ 796 $ 807

We accrue interest and penalties related to unrecognized tax benefits in income tax expense, and the related liability is included in other long-term liabilities in our balance sheet. During the years ended December 31, 2023 and 2022 there was no significant reduction to the liability for interest and penalties due to any lapses in statute of limitations. At December 31, 2023 and 2022, we had $0.3 million and $0.2 million, respectively, accrued for interest and penalties, net of tax benefit.

We anticipate that it is reasonably possible that the total amount of unrecognized tax benefits could decrease by approximately $0.1 million within the next twelve months due to the closure of tax years by expiration of the statute of limitations and audit settlements related to various state tax filing positions.

As a global organization, we file a U.S. federal income tax return as well as income tax returns in various states, and in non U.S. jurisdictions. As of December 31, 2023, the statute of limitations for the U.S. federal tax years 2020 through 2022 remain open to examination. For U.S. state and local jurisdictions tax years 2017 through 2022 are open to examination. We are also subject to examination in various foreign jurisdictions for tax years 2017 through 2022.

NOTE 10 – Benefit Plans:

Defined Benefit Plans

The Company is the sponsor of an unfunded supplemental executive retirement plan (“SERP”) which includes one active participant. As of December 31, 2023, the Company’s projected benefit obligation under the unfunded SERP was $13.6 million. Contributions to the plan are made in accordance with statutory funding requirements and any additional funding that may be deemed appropriate.

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The following tables present the changes in the benefit obligations and the various plan assets, the funded status of the plans, and the amounts recognized in the Company’s balance sheetsat December 31, 2023 and 2022 (in thousands):

December 31,

Changes in benefit obligation:

Benefit obligation at beginning of year $ 12,993 $ 15,523

Changes in plan assets:

Fair value of plan assets at end of year - -

Funded status at end of year $ (13,600 ) $ (12,993 )

Amounts recognized in balance sheets:

Other current liabilities $ (316 ) $ (129 )

Amounts recognized in accumulated other comprehensive loss consist of:

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December 31,

Fair value of plan assets - -

Components of net periodic benefit cost related to the SERP were as follows (in thousands):

Years Ended December 31,

Service cost on benefits earned during the period $ 21 $ 203

Interest cost on projected benefit obligation 637 401

Net periodic pension cost after settlements $ 876 $ 2,319

The service cost component is included in selling and administrative expenses in our statements of comprehensive income (loss) and the other components of net periodic pension cost are included in other periodic pension costs in our statements of comprehensive income (loss). The estimated net actuarial loss for the SERP that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next fiscal year is $0.1 million.

The following table presents the weighted-average assumptions used to determine benefit obligations as of December 31, 2023 and 2022:

Discount Rate Long Term Rate of Return Salary Scale

The following table presents the weighted-average assumptions used to determine net periodic benefit cost for years ended December 31, 2023 and 2022:

Discount Rate Long Term Rate of Return Salary Scale

The following table includes projected benefit payments for the years indicated (in thousands):

Year Projected Benefit Payments

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Rabbi Trust

In connection with the Company’s unfunded SERP, we have life insurance contracts on the lives of designated individuals. The insurance contracts associated with the SERP are held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the SERP. The cash surrender value of the life insurance contracts was $4.5 million and $3.9 million at December 31, 2023 and 2022, respectively. The cash surrender value of these policies is included in other assets in the balance sheets. During the years ended December 31, 2023 and 2022 we recognized an investment gain of $0.6 million and an investment loss of $0.8 million, respectively, on the cash surrender value of these life insurance contracts.

In 2013, we initiated a Non-Qualified Deferred Compensation Plan, and we have purchased life insurance contracts on the lives of designated individuals. The insurance contracts associated with the Non-Qualified Deferred Compensation Plan are also held in a Rabbi trust. The trust is the owner and beneficiary of such insurance contracts. The policies are being utilized to help offset the costs and liabilities of the Non-Qualified Deferred Compensation Plan. The cash surrender value of the life insurance contracts was $9.2 million and $7.7 million at December 31, 2023 and 2022, respectively. The cash surrender value of these policies is included in other assets in the balance sheets. The liability for participant deferrals was $7.9 million and $7.7 million as of December 31, 2023 and 2022, respectively, and is included in other long-term liabilities in the balance sheets.

Defined Contribution Plan

The Company provides a defined contribution plan covering qualified employees. The plan includes a provision that allows employees to make pre-tax contributions under Section 401(k) of the Internal Revenue Code. The plan provides for the Company to make a guaranteed match equal to 25% of each employee’s eligible contributions. The plan also provides the Company with the option of making an additional discretionary contribution to the plan each year. The Company expensed employer matching contributions of $0.5 million and $0.6 million during the years ended December 31, 2023 and 2022, respectively.

NOTE 11 – Leases:

The Company primarily leases factories, warehouses, call centers, office space and equipment for various terms under long-term, non-cancelable operating lease agreements. A right-of-use asset represents the Company’s right to use an underlying asset for the lease term and a lease liability represents the Company’s obligation to make lease payments arising from the lease. The Company’s leases generally have expected lease terms of one to eight years. In the normal course of business, it is expected that the Company’s leases will be renewed or replaced by leases on other properties. Options to renew lease terms are included in determining the right-of-use asset and lease liability when it is reasonably certain that the Company will exercise that option. Certain of the lease agreements include rental payments adjusted periodically for inflation and generally require the Company to pay real estate taxes, insurance, and repairs. The Company’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants. As of December 31, 2023, the Company had $17.0 million of operating lease liabilities ($4.2 million in other current liabilities and $12.8 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $17.9 million of operating lease right-of-use assets, which includes prepaid rent of $1.6 million. As of December 31, 2022, the Company $7.0 million of operating lease liabilities ($3.1 million in other current liabilities and $3.9 million in long-term operating lease liabilities), which represents the present value of the remaining lease payments, and $9.1 million of operating lease right-of-use assets, which includes prepaid rent of $2.0 million. The depreciable-life of right-of-use assets is generally limited by the expected lease term. The Company does not have any material leases, individually or in the aggregate, classified as a finance leasing arrangement.

The components of lease cost were as follows (in thousands):

Years Ended December 31,

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Cash flow and noncash information related to our operating leases were as follows (in thousands):

Years Ended December 31,

Operating cash flows – cash paid for operating lease liabilities $ 3,368 $ 2,996

Other supplemental information related to our operating leases was as follows:

Years Ended December 31,

Weighted-average remaining lease term (in years) 4.6 2.5

Weighted average discount rate 6.57 % 5.66 %

Maturities of operating lease liabilities as of December 31, 2023 were as follows (in thousands):

Operating Leases

Total lease payments 20,230

Less imputed interest 3,190

Present value of lease liabilities $ 17,040

NOTE 12 – Contingencies:

The purchase price to acquire substantially all of the assets of Sutter’s Mill Specialties, Inc. (“Sutter’s Mill”) in December 2021 included contingent consideration based on varying levels of Sutter’s Mill’s EBITDA in each measurement period from 2022 to 2024. In July 2023, management agreed to settle the remaining contingent consideration obligation associated with this acquisition for $0.5 million payable in the first quarter of 2024. The purchase price to acquire substantially all of the assets of Guardian Products, Inc. (“Guardian”) in May 2022 included contingent consideration based on varying levels of Guardian’s EBITDA in each measurement period through April 2025. The estimated fair value of Guardian acquisition-related contingent consideration payable as of December 31, 2023 was $1.4 million, of which $0.9 million is expected to be paid in the third quarter of 2024. During the year ended December 31, 2023 $0.8 million was paid for the 2022 measurement period. The total estimated undiscounted remaining payment related to this contingent consideration payable is between $1.9 million and $2.2 million. The Company will continue to evaluate the Guardian liability for remeasurement at the end of each reporting period and any changes will be recorded in the Company’s statements of comprehensive income (loss). The carrying amount of the liability may fluctuate significantly and actual amounts paid may be different from the estimated value of the liability.

The Company is involved in various legal actions and claims arising from the normal course of business. In the opinion of management, the ultimate outcome of these matters is not expected to have a material impact on the Company’s results of operations, cash flows, or financial position.

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NOTE 13 – Share-Based Compensation:

In May 2013, the shareholders of the Company approved the 2013 Incentive Stock and Awards Plan (the “2013 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and other stock based compensation. In May 2022, the shareholders of the Company approved the 2022 Equity Incentive and Awards Plan (the “2022 Plan”), authorizing the granting of incentive stock options, non-qualified stock options, stock appreciation rights (“SARs”), restricted stock, performance shares and other stock based compensation. A total of 2,000,000 shares of common stock have been reserved for issuance under the 2022 Plan. All options and SARs have been or will be granted with exercise prices at least equal to the fair market value of the shares on the date of grant. At December 31, 2023, the Company had 1,262,209 shares of common stock available for grant of share-based compensation under the 2022 Plan. The 2022 Plan replaced the 2013 Plan. No new awards will be granted under the 2013 Plan, but outstanding awards granted under the 2013 Plan will continue unaffected.

Share-based compensation is recorded in selling and administrative expense in the statements of comprehensive income (loss). The following table details the share-based compensation expense by type of award and the total related tax benefit for the periods presented (in thousands):

Years Ended December 31,

Performance shares (52 ) 219

Total share-based compensation expense $ 3,787 $ 4,289

Related income tax benefit $ 767 $ 804

Stock Options and Stock Appreciation Rights (“SARs”)

The Company grants stock options and stock-settled SARs to employees that allow them to purchase shares of the Company’s common stock. Stock options are also granted to outside members of the Board of Directors of the Company. The Company determines the fair value of stock options and SARs at the date of grant using the Black-Scholes valuation model. Assumptions regarding volatility, risk-free interest rate, expected term and dividend yield are required for the Black-Scholes model. The risk-free interest rate is based on the yield of a U.S. treasury bond with a similar maturity to the award’s expected life. The expected life for awards granted is based on the historical exercise patterns experienced by the Company when the award is made. The determination of expected stock price volatility for awards is based on historical Superior common stock prices over a period commensurate with the expected life. The dividend yield assumption is based on the history and expectation of the Company’s dividend payouts.

The following table summarizes significant assumptions utilized to determine the fair value of stock options and SARs:

Years Ended December 31,

Stock Options:

Risk free interest rate 3.5% - 4.9% 1.6% - 3.8%

Expected award life (years) 3-10 3-10

Expected dividend yield 4.7% - 7.1% 2.4% - 5.6%

Weighted average fair value per share at grant date $ 4.14 $ 5.39

SARs:

Risk free interest rate 4.0 % 1.6% - 3.8%

Expected award life (years) 3 3-4

Expected dividend yield 4.7 % 2.4% - 5.6%

Weighted average fair value per share at grant date $ 4.58 $ 6.34

Superior Group of Companies, Inc. SGC US Equity

SGC · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Superior Group of Companies, Inc. SGC US Equity☆

SGC · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

Superior Group of Companies, Inc. SGC US Equity